Netflix transitioned from mailing DVDs to online streaming between 2008-2010. This transition was driven by issues with DVD mailing like theft, piracy, and inability to expand internationally. Netflix decided against creating its own streaming device and instead partnered with existing device makers like Microsoft, Sony, and Apple to reach subscribers. By partnering with these companies on game consoles, tablets, and smartphones, Netflix was able to rapidly grow its subscriber base between 2008-2010 as it transitioned from DVDs by mail to online streaming.

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?