0: When I get home from a long day of

1: work, there's nothing I love more than

3: relaxing on the couch and binge watching.

5: My favorite shows on Netflix.

7: Netflix has become such a

8: vital part of our daily lives.

10: and its founding story is often

12: celebrated or even fantasized by the.

14: Whether it was the idea that Netflix was

17: inspired by a late fee or the incredible power

19: of big data and making content decisions.

22: Netflix has etched its place in history as one

24: of the biggest success stories of our time.

27: But in reality, Netflix is founding story

29: is far more humbled than many might imagine

32: phasing stiff competition from Bibles like

34: Amazon and blockbuster, The company was on

37: the verge of bankruptcy several times in its

39: early years before finally hitting on the

41: streaming model that cemented its success.

43: So how did Netflix get started in the first

46: place and why did it make such a dramatic

48: shift from DVD rentals to streaming content?

50: In today's video, we'll dive into the fascinating

53: story behind Netflix and explore some key

55: moments that shape this iconic company. The origin of Netflix

58: When it comes to start-up stories

59: about Netflix, one particular popular

62: version goes something like this.

63: One day in the late nineties, CEO, Reed

66: Hasting was renting a movie from a local

68: DVD rental company, but because he forgot

71: to return the movie on time, he ended up

73: having to pay a hefty late fee of $40.

76: It was such a bad customer experience, but Hasting

78: realized that the lay fees were actually a huge

81: source of revenue for these DVD rental companies.

84: Hasting felt that there's something

85: wrong with this business model

87: and he could probably do better.

88: And so the idea for Netflix.

91: Although, this sounds like

92: a classic success story.

93: Perfect for a Hollywood movie.

95: The reality is that launching a business is rarely

98: as simple as just coming up with a great idea.

100: So what is the true story behind Netflix?

102: Let's take a trip back in time to the early

104: days of the internet, boom, in the 1990s,

107: back in the day, any company with dotcom

110: and its name could easily find investors

112: willing to pour millions of dollars into it

114: as there was a lot of hype and excitement

116: around the potential of the internet and

118: among all these people trying to strike it.

120: Rich we're Reed Hastings and Marc Randolph,

123: the two co-founders of Netflix at the

125: time Reed Hasting was running a software

127: development tool company called pure atria.

130: And after Hastings company acquired Marc

132: Randolph, startup integrity, QA, the two

135: became friends and often taking turns,

137: driving to work together on their way to work.

140: They would often talk about

141: new potential business ideas.

142: With 15 years of experience in marketing,

145: Mark Randolph wanted to combine his past

147: marketing experience with the new medium of the.

150: So he came up with ideas like selling custom

153: baseball bats online or selling custom

155: dog food or custom surf boards as Mark

158: Randolph recalls, these products seem so

160: unrelated, but they have two commonalities.

163: First.

163: There are also an online second, the

166: products are all subscription base.

168: It seems like from the very beginning, Netflix

170: has buried the online and subscription genes

173: After thinking of nearly a hundred ideas.

175: They came up with the video rental

177: business, through Reed Hastings SPAD

178: experience as veteran entrepreneurs.

181: they knew they needed to validate the

183: idea with research and experiment.

185: So that's what the. DVD rental

186: Back then the common videotapes on the market

189: were called VHS tapes and almost every family

192: had a blockbuster video tape rental store

194: within a five to 15 minute drive hastings and

197: Randolph knew they had to do something different

199: in order to stand out from their competitors.

201: So there were thinking, can we do a

202: videotape rental through an e-commerce

204: model, like users order online, and then

207: Netflix would mail the tapes directly to

209: their homes instead of going to the stores?

211: Well, after some calculation, the two

213: co-founders found that they would have to rent

215: a videotape 80 times to reach, break even point.

217: But the problem is the VHS tapes were expensive

220: and prone to damage during shipping more

222: over when you rent a movie that many times

225: to make money, it's no longer trending,

226: which means nobody wants to watch it anymore.

229: That's a bit discouraging, but just when

231: they were about to give up, they found out

233: about this new technology called DVD at

235: the time DVDs were fairly new and hadn't

238: quite hit the market yet, but Hasting and

240: Randolph recognize its massive potential as

242: it would be perfect for their budding company.

244: There are much lighter than being.

246: Which means ultra low shipping

247: costs and wear and tear.

249: So Hastings and Rudolf did a trial run, uh, DVD

252: cost about $20 and it takes 32 cents to mail one.

255: And sure enough, when Reed received

257: the test copies of their first sent DVD

259: rentals in his mailbox, he knew that they

261: had made the right choice in April, 1998. Netflix vs Amazon

264: Netflix officially went live.

266: However things took an unexpected turn soon

269: after its launch, rather than using the

271: site to rent movies and TV shows as intended,

274: many customers choose to purchase DVDs.

276: Instead at the time 99% of Netflix's revenue

280: came from DVD sales and things were looking

282: even more uncertain when major e-commerce

284: giant, Amazon announced that they would

286: begin selling DVDs online a few months later,

289: This meant that Netflix was going head to head

291: with Amazon in the DVD rental space, a battle.

295: They were almost certainly destined to lose given

297: their relative small size compared to Amazon

300: with their back against the wall read

302: Hasting and Marc Randolph had no choice,

304: but to approach Jeff Bezos, CEO of Amazon

307: and negotiate a potential acquisition deal

310: while Bezos was interested in buy Netflix.

312: They couldn't agree on the right price.

314: And ultimately the deal fell through as the

316: two co-founders left Amazon on their way out.

319: They were more convinced that there's no way

320: Netflix could compete against Amazon after seeing

323: how dark and dingy yet powerful Amazon's office.

327: Although the company's rental business

329: was still very small and couldn't

331: support the company's operations.

333: They knew they had to put their limited

334: resource into one of the businesses.

337: Or both of them would fail doing both

339: rental and retail at the same time, not

341: only confused customers, but also made

343: operations more difficult to this end.

346: The two finally made a bold decision

348: to reject Amazon's acquisition and

350: Bandon the retail business which

352: accounted for 99% of the total revenue.

355: The two veteran entrepreneurs were convinced

358: that the only way to beat the giant is to

360: focus on one thing and only pay attention to

362: business that makes them different from others.

365: That is DVD rental business, of course,

368: at such critical moment Hastings and.

371: Also tried their best to keep the company alive.

373: For example, Netflix made a deal with Sony

376: that everyone who purchased a Sony DVD

378: player could rent three DVDs for free on

380: Netflix, which bought Netflix, it considerable

383: amount of new customers, and also helps

385: Sony's customers to find more DVD content. Netflix vs Blockbuster

388: After Hasting and Randolph began to

390: focus on the DVD rental business.

392: They came up with a new payment method

394: subscription-based monthly plan, so that

396: users would never have to worry about late

398: fees again, Though we're all familiar and

400: comfortable with subscription service.

402: Now, 20 years ago, it was a very novel

405: business model and it took casing

407: and Randolph, countless brainstorming

408: sessions, and arguments to come up with it.

410: So now Netflix face another tough choice,

413: much like the decision to sell or rent before

415: the two founders were debating whether to

417: put the resources into subscription model

419: or the mainstream single rental by rental.

422: The subscription model had more future

424: potential, but didn't generate enough

426: income to cover expenses currently.

428: And they were also worried that many

430: users wouldn't accept a pure subscription

432: models and status show that even with the

434: subscription, many users was still rent one

436: disc at a time based on their usage habits.

439: When faced with this situation,

440: how would you choose for them?

442: You might have guessed the answer already.

444: They eventually canceled their single rental

446: payment method and focused on subscription model.

448: Only.

449: It's often said that you should focus on

451: one thing, but it's easier said than done

453: especially for a startup that might not have

456: the luxury of focusing on the thing they want.

458: If it cannot generate enough

459: money to support its operations.

461: And for Netflix, the company's prospects

464: are indeed far from optimistic.

466: The company has been on the

467: brink of bankruptcy several times

469: In 2000, Netflix had around 300,000 users and

473: was losing 57 million a year while its main

475: competitor blockbuster was generating 5 billion

478: in revenue and had a net margin of over 10%.

481: At this point, Netflix hardly stood a chance.

484: Reed Hastings even proposed selling 49% of

487: the company to blockbuster and renaming it.

489: blockbuster.com At first, the

491: negotiations seemed to be going well.

493: Both sides actually were

495: interested in reaching the steel.

497: Netflix was losing money and badly needed

499: external financing while blockbuster wanted

502: to get into the online business and saw

504: Netflix as the best acquisition target

506: However, all of this momentum came

508: to a crashing halt when active

510: investor Carl, I can enter the scene.

512: He brought up large amounts of blockbuster

514: stock and took a seat on its board of directors,

517: introducing a host of cost cutting ideas that

519: conflicted with its plans for online expansion.

522: So after the deal failed, Netflix was

524: faced with an uphill battle to stay afloat.

526: They had to cut costs dramatically by laying

529: off 40% of their workforce and were forced

531: to turn to outside investors for funding.

534: despite these setbacks, Netflix

536: managed to preserve through sheer

537: determination and savvy connections

539: established by its founder, Reed Hastings

541: through these investments

543: and strategic partnerships,

544: netflix was able to continue building up its

547: service and making improvements that would

549: help it stay competitive over the long term.

551: For example, they realized that one of the

553: major sources of customer churn was due to

555: delays in shipping times to solve this problem.

558: They began investing in their own distribution

560: center so that DVDs could be delivered more

563: quickly to customers throughout the day. The Importance of Innovation

565: Netflix.

565: A success is actually a great example

568: of the importance of innovation.

569: Remember the story of Kodak 30 years ago,

572: Kodak was the leader in the film industry and

574: had essentially been unchallenged for decades.

577: So when digital cameras began to

579: emerge as a viable alternative to

581: conventional film cameras, Kodak failed

583: to pivot to embrace its new technology.

585: The problem was that adapting, this new technology

588: meant they had to abandon their long established

590: advantages in the film market advantages

592: that they simply couldn't afford to lose the

594: profits from selling films, made it difficult

596: for Kodak to make truly disruptive innovation.

599: And ultimately there were forced

600: to put an incremental improvements

602: rather than disruptive innovation.

604: Just like the camera manufacturer.

606: Netflix was one struggling to keep up with

608: the changing technological trends that might

610: disrupt their preexisting business model.

612: They gave up the retail business to focus on

615: rentals, even if it meant losing 99% of the sales.

618: They also had to take a leap of faith

620: in the subscription payment plan, even

621: if it was against the shopping norm.

624: And that's not all of it.

625: In 2007 Reed Hasting invested 40 million

628: to create a streaming product called watch.

630: Now

631: at the time streaming technology was

633: still quite rudimentary with insufficient

635: bandwidth to support it effectively.

637: But despite these challenges, Reed

639: remained steadfast in his belief.

641: That streaming is the future of media consumption.

643: By 2011.

645: Reed had again, made an unorthodox

647: decision that proved to be truly visionary.

649: He had split off Netflix as lucrative DVD

652: sales business into its own entity, dedicating

654: the Netflix brand, exclusively to streaming

657: the move proved to be incredibly successful

659: with Netflix as user base rapidly growing

661: from 20 million in 2010 to over 44 million,

665: just two years later in less than two years,

667: Netflix has once again shifted its focus this

670: time away from third-party content and towards

673: creating its own exclusive original content.

675: For many years prior, Netflix had relied on

678: movies and shows produced by third-party partners.

681: However, as the prices for

683: these movies continued to climb.

684: Netflix was forced to look elsewhere for

686: quality content By investing in original content

689: creation itself, Netflix was able to ensure

692: long-term growth and success for the company.

695: Nobody can ever know for sure what ideas would

697: be successful and what ideas would fail As

700: the co-founder Randolph mentioned in his book,

703: When he first pitched the idea of renting DVDs

705: to his wife, she replied that will never work.

708: And yet here we are today.

710: If you're interested in finding

711: out more about Netflix's story, be

713: sure to check out the link below.

715: This is money therapy, a channel dedicated

717: to helping you become a millionaire.

719: Stay tuned for our next video.