From DVD in the mail to Streaming from the Cloud

1. Netflix: From DVD in the mail to Streaming from the Cloud1

2. Netflix Business Strategy
2
Remove
Late Fee
Provide
Choice from
Long Tail
Ubiquitous
Anytime
access

3. Incumbents in 1997
¨ Blockbuster, Hollywood
Videos, Movie Gallery
¤ Rented DVDs out from
prime locations
¤ Kept inventory of about
2000 titles with 3 to 4
copies of each
¤ Mostly expensive DVDs
with new movies and some
long time hits
¨ New movies typically
release to big screen and
then release via DVD
¨ DVDs rent while its new
¨ DVD availability window
is relatively small
¨ Charged late fee to
maximize turns
3
Must impose steep rental fees and steeper late fees

4. The Red Envelope (1999-2008)
¨ Removed late fee as they
saw opportunity in long tail
of DVDs
¨ Stocked 120,000 movies
mailed out from 50 hubs
¨ Matched renter interest
with a low cost movie from
the long tail
¨ Announced $1M prize:
Help find a better
recommendation algorithm
¨ 4 years and a team of
10+ PhDs solved that
¨ In 8 years, Blockbuster,
Hollywood video et. Al.
are almost out of business
4
Recommend movies in the long tail, personalized to the customer, lowering costs

5. Streaming Movies – 2008 and beyond
¨ Netflix lets users manage their DVD
queue for what they would rent next
¨ Netflix had their own problems
¤ DVD theft
¤ DVD piracy
¤ FBI involved in the US
¤ Could not grow internationally with DVD
renting model
¨ Streaming model looked very appealing
¨ Cost to stream out DVD via CDN was a
few pennies but postage is 10-100 times
more
¨ Streaming lets them grow
internationally
¨ 20M US subscribers
¨ Started streaming to US subscribers
from their datacenter
¨ Datacenter faced cooling issues and
downtime
¨ They issued customer refunds which
directly impacted their bottom line
¨ Netflix at that time was making
about 1.6 billion in revenue and had
400 employees
5

6. Netflix Decisions
6
¨ Who will manage the streaming backend?
¨ What devices will users watch streaming content on?
¨ On the client end
¤ What should be the client experience?
¤ Should Netflix create their own device?
¤ Should Netflix partner with device makers?
¤ If so, which device makers should Netflix
pursue?
¤ What about DRM to prevent piracy and
honor IP?
¨ On the cloud end
¤ Who will manage the streaming backend?
¤ Who will maintain and upkeep the data
center?
¤ How to deal with data center growth?

7. 7
Thank you.

8. Decided against creating own device
8
¨ HDMI ports on household TVs were already
occupied by a variety of devices
¨ Introducing one more Netflix device wasn’t the best

9. Partnerships with Device makers
9
¨ Grew subscribers 2008-2010 by partnering with
device makers
¤ Game Consoles
n Xbox 360, Wii, PS3
¤ Mobile Devices
n Apple iPad, iPhone, iPod Touch, Windows Phone 7
n Android (later)

10. 10
¨ What happened to NFLX a few years after the
transition?