How Did Netflix Become So Popular?

How Did Netflix Become So Popular? It may seem unbelievable, but Netflix started in 1997. At the time, founders Reed Hastings and Marc Randolph had the revolutionary idea of mailing DVDs directly to members instead of forcing people to go to video rental stores.

Instead of paying for attractive stores and face-to-face customer service representatives, they lowered their overhead by storing DVDs in slim plastic cases and organizing them in warehouses.

Today, the company looks very different, with its role as a production company and streaming platform. As other companies gain market share and attract subscribers, many investors are left wondering, “are the glory days gone for Netflix stock?” and “how did Netflix become so popular in the first place?”

Here’s how the company has evolved and how its competitors could potentially knock it off the pedestal as the undisputed leader in the video streaming industry.

How Netflix Got Started

Like many revolutionary businesses, Netflix grew from a single question. Reed Hastings and Marc Randolph, two serial entrepreneurs working in Scotts Valley, California, wanted to know how they could disrupt the DVD rental industry.

At the time, Blockbuster dominated nearly every market in the United States. Most cities still had a few local stores that rented to discerning customers. More often than not, though, people just went to Blockbuster to rent movies.

Netflix DVD Era

Keep in mind that internet technology in the late 1990s did not offer the speed of today’s service. People were starting to share music online, but even small files could take hours to download. It’s hard to imagine that Hastings and Randolph thought much about moving their products to online servers. Instead, they wanted to target brick-and-mortar stores like Blockbuster.

Over the next decade, Netflix established warehouses in a growing number of locations. Even people in medium-sized cities could often order and receive DVD rentals within one or two days. Despite rapid delivery and an enormous selection – movies not available in a local warehouse could always get shipped in from a different location – few saw the end drawing near for DVD stores.

Today, nearly everyone thinks of Netflix as a video streaming platform. In 1999, Netflix started using the internet, but not to stream movies and television shows. Instead, it used its website to give members access to its giant library of DVDs.

Members could reserve DVDs, which would get sent to them through the mail in post-paid envelopes. Members didn’t have to pay to return their rentals, and they could keep the movies for as long as they wanted.

Netflix offered several membership options that determined how many DVDs someone could rent at a time. Paying a highly monthly price meant that members could check out up to three movies simultaneously.

Netflix didn’t need to worry about returns, which pleased members because they didn’t need to worry about paying the late fees that stores charged. As long as someone kept their membership, they could keep their DVDs. Realistically, Netflix would make more money when people kept movies for extended periods of time because the company would spend less money on postage and customer services.

Originally, Netflix also sold movies. The company dropped that option, though, to concentrate on rentals. At its peak, Netflix operated more than 100 warehouses throughout the United States.

How Netflix Conquered Blockbuster

Netflix wasn’t always confident that it could defeat Blockbuster. While Netflix knew that their approach to renting DVDs through the postal system appealed to some people, the company also knew that it was hard to break consumer habits.

Going to Blockbuster and similar stores had become something people did when they wanted to watch a movie—especially a new release—at home. Blockbuster also had the advantage of letting people handle movies in their stores.

Netflix doubted its future so much that it extended an offer to Blockbuster in 2000. For $50 million, Blockbuster could purchase the entire company, including its stock and shipping infrastructure. 

This offer might sound more than a little crazy now. At the time, though, Blockbuster was a $6 billion company. Netflix was still struggling to attract revenues and was losing millions of dollars per year trying to expand, attract members, and hone its business model.

The founders of Netflix felt that the offer would protect their company from a slow death against such a big competitor. Blockbuster declined. Blockbuster didn’t know it, but it had signed its death warrant by turning down the deal.

Blockbuster still looked like the dominant movie rental service for years. It even started its own version of unlimited rentals and rent-by-post. Interestingly, Blockbuster didn’t even list Netflix as a significant competitor in 2003. (Netflix had gone public the previous year.) In 2004, Blockbuster finally entered the online business, but it was starting to show signs of weakness.

Over the next few years, Blockbuster failed to acquire Hollywood Video, purchased the failed MovieLink content service, and watched its business dwindle. 

During these years, Netflix was growing rapidly. It established the industry’s first major online streaming platform for video content, expanded its reach to other countries, and started producing its own projects.

In 2010, Blockbuster filed for bankruptcy. Netflix shares sold for about $9, but things were looking up for the company.

Netflix Growth Years: The Glory Days

During Netflix’s greatest growth years, it didn’t have any significant competitors. It dominated the industry so much that it attracted millions of new subscribers each quarter in the early 2010s.

Worldwide Netflix subscribers by year:

2013: 41.43 million

2014: 54.48 million

2015: 70.84 million

2016: 89.09 million

2017: 110.64 million

2018: 139.26 million

2019: 167.09 million

2020: 203.66 million

The U.S. and Canada make up about a third of Netflix’s subscriber base. 

Globally, Netflix generated $8.62 per user in 2016, $9.43 in 2017, $10.31 in 2018, and $10.82 in 2019. The company generated about $25 billion in revenue in 2020.

A few years ago, other companies started adopting Netflix’s business model. Now that the company has serious competitors, it cannot command as much of the market or establish industry prices. In response, Netflix moved away from licensing content and started to produce its own movies and series. 

Disney+ Takes on Netflix

Disney+ doesn’t have as much name recognition as Netflix in the streaming industry. It does have some significant advantages that make it a fierce competitor, though, including a lengthy backlog of titles that include popular movies made by Disney, Pixar, Marvel Studios, and Star Wars. 

Families tend to like the service because it offers a mixture of content for children and adults. Memberships cost more than they do with Netflix, but plenty of households are willing to pay the premium. Within a short period, Disney+ attracted more than 100 million subscribers. 

Apple Takes on Netflix

Apple has tried to take on Netflix with its Apple TV service. It has some interesting movies and TV shows, including in-house content only available through the streaming service. So far, Apple hasn’t been able to attract as many viewers as Netflix or Disney+.

Seeing as how Apple practically created the music downloading industry, though, it would be foolish to deny the possibility of success.

Consider that Apple has considerable control over its hardware. Anyone who owns an Apple device can only choose from the available apps. Apple could potentially stop offering the Netflix app on its devices – although that move would certainly upset a lot of customers.

It’s more likely that Apple will gently shift attention toward its products by placing the Netflix app lower on its list of recommendations. Something as simple as making Netflix a little harder to access could motivate some people to adopt Apple’s streaming service. 

Can Netflix Beat Disney and Apple?

Disney and Apple aren’t the only companies that have and will continue to enter the market. Netflix probably cannot beat all of them, but it can remain competitive by keeping its prices affordable while offering a growing library of content.

Will Netflix stock fall?

Expect to see erratic movements as it faces more competitors and decides how it will respond.

Are the Glory Days Gone for Netflix Stock?

More than likely, Netflix stock is a buy, but there is no way to tell how high Netflix stock will go. The company performed well throughout 2020, likely because so many people wanted easy access to home entertainment as they avoided public areas.

Are the glory days gone for Netflix stock? That seems unlikely since the stock price has grown so much over the last few years. Eventually, though, Netflix stock will fall or find a more consistent price point.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.