Netflix is a global video streaming service, media and film production company with more than 137 million subscribers. The Los Gatos, Calif.,-based company was started in 1997 by Reed Hastings and Marc Randolph. While working together at a Silicon Valley startup, the two brainstormed the initial idea for Netflix (NFLX) during their morning commutes. Combining Randolph's direct marketing skills and Hastings' discipline and mathematical prowess, they created what would become one of the world's most successful internet businesses.
Cost of Netflix Today
Netflix is far from being just the DVD mail order service of its infancy. Though the company still offers DVD rentals by mail, its streaming service operates in 190 countries and CEO Reed Hastings hopes to expand into China someday.
U.S. streaming customers can choose from three monthly subscription plans - Basic for $7.99, Standard for $10.99 and Premium for $13.99 for unlimited access to video content from from several different countries. The basic plan lets viewers stream TV shows and movies from Netflix's digital library on only one internet-connected device at a time in Standard Definition (SD). The standard plan allows customers to watch on two screens and offers high definition (HD) picture quality, while the premium plan offers four screens, and HD and Ultra HD quality are available. This price is around the same level as other streaming services, such as Hulu.
Accessible via mobile app, set-top box, gaming consoles like the X-Box, or streaming players like Roku and Amazon Fire TV Stick, as well as on smart-TVs that come equipped with the app, Netflix offers dozens of original series, documentaries, specials and movies that are only available on its platform.
What Content Does Netflix Have?
Netflix has three major content sources: licensed non-first-window content like Showtime's "Shameless," licensed original first-window content such as "Orange is the New Black," which is owned and developed by Lionsgate, and owned original first-window content from the Netflix studio, such as "Stranger Things." First-window content means that it airs on Netflix first.
"Orange Is the New Black," is among Netflix's most-watched series and has won four Emmy awards. Netflix original content includes "Big Mouth," "The Ranch," "Bright," "Godless," "The Kissing Booth," "3%," "Dark, Sacred Games" and "Nailed It."
The company has said it plans to continue to grow its exclusive content offerings, both through partnerships and original content. Netflix is sharpening its focus on original content because it gives the company creative control and savings on licensing other studios' content while allowing it to retain lifetime licensing control over its own films.
Netflix original content hit a milestone when it tied HBO in Emmy wins. Netflix, which -- unlike network TV -- doesn't use ratings to decide which shows to air, points to this critical success to justify increasing its investment in original content. The company plans to increase the percentage of its spending on original series, recently releasing more than 600 hours of original content.
One downside: the company sees its huge investment in its production studio, with a new hub planned for Albuquerque, causing significantly deeper cash flow deficits for this year and next compared with previous years.
Netflix expects its spending on original content to generally replace its other content deals, justifying the move with its better-than-expected subscriber growth since shifting its focus away from external content licensing and carrying more titles.
History of Netflix
Netflix began as a DVD mail-order sales service when co-founders Hastings and Randolph realized they could affordably ship the lightweight plastic discs that had recently come on the market in 1997. As the story goes, the idea was born of Hastings' frustration with a $40 fee for losing a VHS video tape he'd rented.
The two worked together at Pure Altria, a software debugging tool startup Hastings had co-founded.
The entrepreneurs wanted to give customers the ability to easily find the movies they love, and it's that vision that has guided the company throughout its evolution.
Selling DVDs soon became too unwieldy, so the Netflix founders shifted to offering DVD rentals. Inspired by the health club model that allows customers to use the gym at any time for a monthly fee, the company adopted the current subscription plans for customers to rent unlimited DVDs for a set monthly fee with no late fees.
Initially, it was Randolph who helmed the internet company. Unlike competitor Blockbuster, Netflix operated from a website rather than brick-and-mortar stores. The online model had, at the time, proven successful for Amazon (AMZN) and would give Netflix the flexibility to change, grow or shrink its business more easily depending on market conditions - an advantage that became clearer as the internet era advanced.
Netflix subscribers could order up to three movies at a time from the site which were then mailed to their homes. The next movie on in a subscriber's list, or "queue" would be mailed out when the previous movie was returned. It arrived in Netflix's signature red paper envelope inside a white sleeve, and the movie returned to Netflix in the same postage-paid envelope. Roughly the same model is still in place for DVD rentals.
Randolph had designed Netflix's name, logo and web interface, while Hastings was Netflix's first angel investor. Randolph conducted tests on the live website, with user and market data he collected guiding his changes and tweaks to the site. Using an algorithm called Cinematch, he guided subscribers to other movies they might like and away from new releases Netflix didn't carry.
The ease of the transactions and Netflix's knack for finding customers helped drive Netflix's early success. Nearly a year and a half after beginning the venture, Hastings returned to help run the company. In 1999 Randolph handed the reins to Hastings and focused instead on product development. Hastings took over as CEO.
What You Need to Know About Netflix Stock
Dealt a one-two punch with the dot-com bubble bursting and Sept. 11, 2001 terror attacks, the weak economy forced Netflix to slash a third of its employees. The company was able to rebuild its DVD business fairly swiftly, however, amid rising demand.
Shortly afterwards, in 2002, the company went public, issuing 5.5 million shares under the symbol NFLX on the Nasdaq at $15 a share.
A year later, Netflix had 1 million subscribers. Blockbuster, which had earlier rejected Netflix's offer to sell itself to the video store chain for $50 million, realized it had missed a golden opportunity by 2004, and too late launched Blockbuster online movie rental subscription service for $19.99 a month. By then, it was difficult to compete with Netflix's innovative, big data-driven platform and the company ultimately failed.
Netflix shares puttered along for half the decade, with critics expecting the DVD rental space to be yanked out from under Netflix by competitors like Amazon or Walmart (WMT) . Then, months after Amazon debuted its movie streaming service, Netflix followed suit.
Shares began to take off when Reed Hastings joined Steve Jobs onstage at the iPhone 4 launch to showcase Netflix's first iOS app for digital video streaming on the wildly popular smart phone. Netflix announced its international expansion shortly afterward, further bolstering shares.
Then, the FCC's Open Internet Order of December 2010 lifted another veil of doubt from Netflix's business model, making it illegal for cable companies to block or slow the sites of competitors like Netflix, adding to the stream of good news buoying shares.
The stock climbed steadily higher until the company, which had been offering its streaming service for free and now facing growing competition from Amazon, Vudu and Hulu, decided to begin charging subscribers for it.
Netflix's 2012 Price Hike/Qwikster Debacle
Netflix shares lost some hard-earned territory when it clumsily announced, via blog post, that it would jack up its rates for subscribing to its DVD rental and streaming service to about $16 from $10 a month. The company also said it planned to separate its DVD business from its movie streaming service, spinning it into a separate company called "Qwikster."
Investors were not happy about the move, and Hastings promptly scrapped the Qwikster plan. But he stuck to his guns on the price hike which he needed to fund licensing agreements to expand the popular streaming business as the DVD rentals business shrank.
The jarring move, decried by shareholders, customers and the media alike as a major blunder, caused 800,000 subscribers to defect. Netflix's shares, which had surged nearly 1,000% since releasing its streaming service slid 25%.
But the company posted higher profits, and, although it took the stock two years to recover, the long-term plan proved correct: investing in streaming and content would lead to growth. That has been good news for top shareholders - chief among them Hastings, who holds 5.5 million shares through a trust and 5.2 million in stock options. Hastings has beneficial ownership of about 2.48% of the company.
The key to Hastings' overall success as Netflix chief seems to be his ability to keep an unclouded vision of the company's purpose and growth drivers, and to act accordingly. Perhaps it is his background in education, or his willingness to correct course and make painful cuts like dropping less effective business lines and employees. He's done it even when it meant taking a chance and enduring short-term pain -- like losing 97% of the company's revenue stream when Netflix moved out of DVD sales - and it has proven to be a great strength.
With help from Patty McCord, Netflix's former Chief Talent Officer who had been the head of human resources at Pure, Hastings created a manifesto called "Freedom and Responsibility" delineating the keys to that success. Hastings called them guidelines for a high-performance culture designed to create a "dream team" - attracting top talent and keeping less suitable candidates from applying.
Displayed on its jobs page, Netflix culture is to "avoid rules." With no set limits on sick and vacation time and no performance reviews, it's up to each employee to determine how much time to take off and still be an effective member of the team. There is also no limit on maternity leave.
Balancing all that leeway is the fact the company only keeps highly effective people. Ineffective employees are promptly identified and paid handsomely to leave, thereby liberating hiring managers from guilt associated with laying people off. The thinking is that ineffective employees are a bigger drain on the company if kept on long-term than is a generous severance package.
"Treating people like adults," encourages independent decision-making by employees and sharing information "openly, broadly, and deliberately," according to the Netflix coda.
Netflix has employees view one another as a team, not a family, with the company's - not the individual's - best interest at heart.
While they're encouraged to be "extraordinarily candid with each other," the company doesn't tolerate "brilliant jerks" - and offers specifics on how ideal team members communicate and interact as well as qualities they should bring to the table, such as innovation, courage, curiosity and integrity.
Netflix and the Movie Industry
When Netflix began to stream content and made it available on TV, it was a turning point -- not only for the company, but also for the cable and movie industries.
With Netflix offering movies, TV series, miniseries, children's programming, comedy specials and licensed content from cable providers like HBO, consumers who longer wanted to pay for cable and didn't mind losing access to live TV, or who sought ways to access it online - began to leave cable behind.
The "cable cutting" movement was born, as subscribers sought to replace pricey cable with lower-cost movie streaming services. Now able to binge-watch entire series on TV through streaming sites, viewers lost the patience to wait for new episodes of network TV series.
That was good for Netflix, but content providers then wanted a bigger cut of the company's success, boosting licensing fees on Netflix.
Content providers have caught on and decided to create their own streaming services, and it has become a crowded arena. With movie studios like Warner Brothers' DC Universe and Disney (DIS) beginning to roll out their own platforms, Netflix sees that original content is key to differentiating its offerings and reducing costs long-term.
Critics say its release of movies straight to Netflix or simultaneously with their theatrical debuts have hurt the film industry for directors who prefer their films be shown to large groups in theaters and go through the customary channels. Steven Spielberg has said he doesn't feel that Netflix movies - even those that are shown in theaters but don't honor the typical three-month theatrical window - shouldn't be eligible for Oscars because they're TV movies. Netflix's manner of releasing movies, without regard for traditional conventions, may not be to the industry's liking, however, some see Netflix as a good thing for the movie business.
With blockbuster films, special effects and animation making up a growing portion of major studios' offerings, Netflix is making films that ordinarily would be skipped over as major releases. Using data it collects on its site, it finds out what viewers are looking for and then produces it or finds a company that will. And that's filling a void left by Hollywood, which is ever leaning toward tried and true franchises and epic action hero films.
If Netflix has attracted respected directors like Alfonso Cuarón and Martin Scorsese - perhaps it's because, as "Set it Up" actor Glen Powell has said, of the Netflix culture: it treats them like adults, they don't have to follow the old school rules and the company treats its talent as experts - encouraging them to exercise creative freedoms which the major studios may feel are too risky.