Netflix is the dominant force in streaming entertainment today, with over 200 million subscribers worldwide. However, the company started as a very different business back in 1997. At that time, Netflix was primarily a DVD rental service that shipped physical discs to customers through the mail.
So what was the very first version of Netflix like? To understand the origins of the company, we need to go back to 1997 and the early days of co-founders Reed Hastings and Marc Randolph.
The Creation of Netflix
In 1997, Reed Hastings and Marc Randolph had the idea to start an online DVD rental service. This was at a time when DVDs were still a new technology and most people rented VHS tapes from physical store locations.
Hastings and Randolph saw the potential for an online company that would allow customers to easily rent DVDs through the mail, without ever having to visit a store. This would provide much more convenience and selection compared to traditional video rental stores.
The co-founders tested their idea by creating a simple website where customers could search for movie titles and place orders. The DVDs would then be mailed to the customer’s home in special Netflix envelopes that allowed for returns via regular mail.
This was the very beginnings of Netflix in 1997 – a company focused purely on mail-order DVD rentals through an easy-to-use website.
The Launch of Netflix.com
Netflix officially launched to the public on April 14, 1998 with the domain Netflix.com. The Netflix website allowed customers to create personalized movie recommendation profiles and then rent DVDs a la carte without any late fees.
At the time, there was no subscription model or streaming. Customers simply paid per DVD rental, with pricing starting at $4 per rental plus postage. The Netflix selection at launch was only about 1000 DVD titles, compared to over 100,000 movie and TV show titles available today.
To spread the word about the new Netflix service, the company marketed primarily through promotional giveaways and partnerships with electronics stores. One of their key partnerships was with Best Buy, which helped market Netflix in its stores and offered discounts on DVD players to Netflix subscribers.
While Netflix saw steady growth in its early days, the DVD-by-mail business model was still unproven. It would take several years before Netflix transitioned to a subscription model and achieved exponential growth.
Netflix’s DVD-by-Mail Subscription Model
In 1999, Netflix introduced its DVD rental subscription program, which would become the core of the company’s business going forward. For a flat monthly fee, Netflix subscribers could rent unlimited DVDs and keep exchanging titles for new ones as often as they wished.
The introduction of subscriptions was a major innovation that helped fuel Netflix’s growth. No longer did customers have to pay a la carte each time they wanted to rent a DVD. With a subscription, they could watch more movies for a lower monthly cost.
At launch, Netflix offered two subscription plans:
- $4.99 per month – 1 DVD out at a time
- $7.99 per month – 4 DVDs out at a time
Subscribers created a queue of movie titles they wanted to watch. When returning one DVD, the next film in the queue would be sent out automatically. This allowed customers to continuously enjoy Netflix rentals without having to log in and place one-off orders.
The Netflix subscription model aligned well with customers’ desire for convenience and unlimited access. No longer limited by how many movies they could rent a la carte each month, subscribers could now indulge their appetite for movies.
Netflix’s Rapid Growth
Netflix’s subscription model drove rapid growth in just a few short years. By 2000, Netflix had launched in the San Francisco Bay Area with 300,000 titles. Within 3 years, Netflix subscribers grew to 1 million.
Several factors fueled Netflix’s early growth into a DVD-by-mail juggernaut:
- Aggressive marketing of free trial offers – many new customers were hooked after their first free month.
- Increasing Internet penetration in the early 2000s – allowing more households to take advantage of an online service.
- Wide DVD selection – over 200,000 titles by 2005, satisfying even the most voracious movie buffs.
- Fast shipments – specialized warehouses could turn around DVD shipments extraordinarily quickly.
By 2005, Netflix had grown to over 4.2 million subscribers who were renting 1 million DVDs per day. The company’s annual revenue reached $682 million.
This remarkable growth proved that the Netflix model was revolutionary in changing movie rental behavior. Subscribers were more than happy to wait a day or two for DVDs to arrive if it meant access to a massive selection and the convenience of home delivery.
Netflix’s growth was just getting started. But it needed to expand beyond DVDs to continue thriving.
The Introduction of Streaming
As high-speed Internet grew more ubiquitous in the late 2000s, Netflix saw the opportunity to expand into instantly streaming movies over the web. This would allow Netflix to become a hybrid DVD-by-mail and streaming service.
Netflix launched its video on demand streaming in early 2007, starting with a small selection of 1000 titles. To stream titles, customers needed a minimum Internet connection speed of 1.5 megabits per second.
The launch of streaming was a major milestone, allowing Netflix to offer instant gratification and even more convenience. Subscribers could now watch movies right away on their computers, while still relying on DVDs for newer releases and higher quality.
Netflix chose to run streaming as an add-on service for DVD subscribers instead of a standalone offering. This encouraged DVD subscribers to try streaming while ensuring they maintained their higher-revenue DVD plans.
The limited streaming catalog and technical challenges of streaming over slow Internet connections meant DVDs still dominated in Netflix’s early streaming days. But streaming represented the future, and Netflix was leading the charge.
The Transition to Streaming
By 2010, streaming was gaining tremendous momentum for Netflix. The rise of smartphones, tablets, smart TVs and faster broadband created a perfect environment for instant on-demand video.
Recognizing the opportunity, Netflix began to shift focus to rapidly expanding its streaming catalog and improving streaming quality. With streaming, there were no shipping costs so Netflix could offer much more content.
Key milestones that boosted Netflix’s streaming growth:
- 2010 – Streaming available on Apple iOS devices and game consoles
- 2011 – Launches streaming in Latin America and the Caribbean
- 2012 – Introduces streaming profiles and launches original series House of Cards
- 2014 – Streaming available in over 50 countries
By 2015, Netflix streaming was offered worldwide aside from China. And for the first time, streaming surpassed DVD-by-mail as Netflix’s primary business. Netflix ended 2018 with over 139 million streaming subscribers compared to just 2.7 million DVD subscribers.
Streaming had taken over and was driving exponential subscriber growth. DVDs were now an afterthought for Netflix’s business.
The Rise of Original Content
As Netflix shifted to streaming, it recognized that subscribers demanded more than just a library of old movies and TV shows. To differentiate itself, Netflix began heavily investing in original content.
Highlights of Netflix’s original content milestones:
- 2013 – House of Cards and Orange is the New Black launch exclusively on Netflix
- 2016 – Netflix launches over 600 hours of original programming
- 2018 – Over 140 Netflix originals released including Bird Box
- 2019 – Stranger Things 3 sets new viewership record with 64 million households
Netflix originals allowed the company to differentiate itself from rivals while also owning the exclusive rights to prestigious content. Shows like Stranger Things have become pop culture sensations and given millions of consumers a reason to subscribe to Netflix.
Today, Netflix spends over $17 billion annually developing original movies, series, documentaries, and specials in multiple international markets. Original content is now one of the core strategies fueling Netflix’s continued expansion.
International Expansion
Another major strategic shift for Netflix has been its focus on international markets. Whereas Netflix started as a U.S.-focused service, global expansion has driven some of the company’s most impressive growth.
Some key facts about Netflix’s international expansion:
- 2010 – Launches streaming in Canada
- 2011 – Launches across Latin America and the Caribbean
- 2012 – Launches in Europe starting with the U.K. and Ireland
- 2016 – Launches service in over 130 new countries simultaneously
- 2018 – Over 77 million international streaming subscribers, compared to 58 million U.S. subscribers
Netflix pursued an aggressive international expansion strategy to drive subscriber growth by entering new markets. It invested heavily in international content and licensing to tailor Netflix to local tastes across continents.
This worldwide focus has made Netflix into a truly global streaming company. By the end of 2020, only 11% of Netflix subscribers were located in the United States. International markets offer fresh untapped potential for growth, while the U.S. is closer to saturation.
Business Model Innovations
As Netflix has evolved, it has continually innovated on its business model:
- Partnerships – Early on, Netflix partnered with electronics brands to promote its service. It is now bundled with cable packages and on smart TVs.
- Pricing plans – Netflix has continually optimized its pricing, offering discounted multi-stream packages and premium plans.
- Device support – Netflix apps are widely available across thousands of devices from phones to game consoles.
- Personalization – Powerful algorithms tailor the Netflix interface and recommendations to each subscriber’s tastes.
Relentless testing and innovation around promotions, partnerships, and the overall user experience have helped fuel Netflix’s rise. The company is always trying new approaches to reduce friction, retain subscribers, and maximize growth opportunities.
What Does the Future Hold?
While Netflix started out shipping DVDs in the mail, it is now one of the most dominant players in global entertainment. The company has innovated across every aspect of its business to get where it is today.
Some key questions about the future trajectory of Netflix:
- Can Netflix fend off competition from new streaming rivals like Disney+, HBO Max and others?
- Will the growing costs of content production and licensed content eventually slow down growth?
- Can Netflix maintain its cultural relevance and appeal to new generations with so much choice?
- How will emerging markets like Africa, India and the Middle East shape Netflix’s growth?
- Does Netflix need to expand into new product categories and revenue streams beyond video streaming?
The coming years will show how much more room Netflix has to grow within the streaming industry it pioneered. Increased competition is all but guaranteed. But with over 200 million global subscribers, Netflix remains the leader and will likely continue innovating to maintain that position.
Stay tuned to see how the Netflix story unfolds in this dynamic age of streaming entertainment. The next era likely holds even more binge-worthy developments.
Conclusion
Netflix has come an incredibly long way since its start as a DVD-by-mail rental service in 1997. Netflix successfully pivoted its business model multiple times – embracing subscriptions, streaming, original content, and global expansion early on. This constant willingness to adapt and take risks allowed Netflix to become the dominant force in streaming entertainment it is today.
While the DVD-by-mail business seems quaint now, it was an important first chapter in Netflix’s history. The foundations of convenience, unlimited access, and using technology to connect consumers with a vast world of content were established right from the beginning. Reed Hastings and Marc Randolph’s original vision of using the internet to transform the movie rental experience ended up changing entertainment forever. Not bad for an idea that started out focused on mailing DVDs in little red envelopes.
