Get in touch with technology with tech Stuff from how stuff Works dot com. Hey there, and welcome to tech Stuff. I'm your host, Jonathan Strickland. I'm an executive producer with How Stuff Works and I love all things tech. And we are now entering part three of our series about Netflix. The next episode, we'll kind of combine all the stuff that's been going on in ten years with uh, you know that kind of thing. That'll be the next episode. They'll be sort of where we are today. But this episode is all about Netflix is fight for survival when it was going up against some pretty big opponents in the world of video rental. So in our last two episodes, I looked at the founding of Netflix up to the departure of one of the co founders, Mark Randolph, the guy who actually wanted to build a web site that would be the Amazon dot Com of video rental. In this episode, I'll look at how the company began to usher in the era of digital delivery and fight off competitors. So to be fair, first of all, Netflix did not invent digital delivery of video. Video on demand experiments had begun in the mid nineties a few years before read Hastings and Mark Randolph co founded Netflix, so they did not invent this technology. Cable television had led the way, largely because cable could deliver the bandwidth required to uh to send video in the first place. During the nineties, many people access the Internet using dial up services, and that lacked the bandwidth to deliver real time video, so it wasn't the right time to use the Internet to deliver video services. Yet. It really wasn't until broadband internet slowly began to become a real thing in the early two thousands here in the United States that it was seen as a viable delivery mechanism for video content at all. But more about that in a little bit. In the spring of two thousand three, Netflix was a totally different company from a talent perspective than what the initial Netflix was all about. None of the original team members were still at the company. Read Hastings, who had provided the seed money for Netflix but who was not initially involved in the day to day operations of the company, was now running the show, and in March two thousand three, the company hit the landmark of one million subscribers that had long been seen as the turning point that this would be the moment when Netflix would turn into a profitable company. Blockbuster, meanwhile, I was trying to get into the game late and the end of two thousand three, they were looking to launch their own online the DVD rental service called Blockbuster on Line. Now. Originally the vision for Blockbuster Online was to be an online and in store hybrid service, but delays and changes and political shifts within Blockbuster ment that when the service finally debuted, it was an online rental subscription model, not that different from what Netflix was doing, but the nature of Blockbusters business with franchise owners opposing the very idea of online options. They were afraid that the online stores would cannibalize their own stores traffic. They argued to the CEO, John Antiocho, that this is a terrible, terrible choice. Don't do this. You're going to ruin our businesses. And so Antiocho in a way kind of capitulated a bit. He denied the online team any chance to leverage blockbusters established assets and relationships. So Blockbuster had relationships with movie studios. They were able to get really good deals on VHS titles for rental through these movie studios. None of that was available to the online team. They were not allowed to leverage any of the customer data that Blockbuster had gathered over the years of being in business, and it really put this initiative at a disadvantage. And if you listen to my episodes about Blockbuster, you know that this eventually doesn't work out so well for the company. But they were Despite these disadvantages, the team behind Blockbuster Online was still able to create a credible threat to Netflix. As for Netflix, it was going through a serious growth phase. By two thousand four of the company's share price had risen dramatically, quadrupling at one point and going beyond that to to quite high from its original opening amount. About three thousand new customers were signing up every day, a revenue growth was more than one year over year, and Hastings announced to investors than the company planned to introduce a movie download service at some point in two thousand five, which would then mean the company was dipping its toe into digital delivery, though in this case we're talking about digital delivery and that you would purchase a movie and download it to a device, uh, not digital delivery in the sense of streaming movies that still was in the future. Netflix began to advertise on television in two thousand four, and they saw subscription numbers skyrocket. That sounds great, except there was one tiny problem, which was that to entice customers, new subscriptions would include a free trial for a month, so for the first month of a customer would have free rentals. And that meant that while you saw customer numbers increasing dramatically, the revenues weren't because people were taking advantage of that one month of free service. So the company actually posted a dramatic quarterly loss in two thousand four because so many people had signed up and we're using that free month and uh, it's kind of funny to think about, but in a way, Netflix was suffering such a big loss because they were so successful because they had so many new customers signing up. But the adoption of the service was helping Netflix more than it was hurting it. In the long run, the stock price had grown significantly. It led Netflix to split the stock in February two thousand four. I've talked about stock splits in the past. Typically it's when a company uh decides to create new shares, awarding those new shares to people who already hold shares in the company, and by increasing the number of shares, they reduced the cost per share, because you can't magically make a company more valuable this way, right, So if you have a hundred thousand shares and they're ten dollars a share, and then you decide to double the number of shares, you have to half the price per share. So you have two hundred thousand shares now, but now they're five dollars per share because overall the value of the company has to remain the same. The value of the company can increase as the market values it more, but you can't make it increased just by splitting the stock. And the whole point behind splitting stocks tends to be the philosophy that by having a lower per share price, you increase the liquidity within the market. People trade more readily, which is seen as or it can be seen as a way of measuring company health. Uh And you can you can encourage smaller investors to invest in your company this way because on a per share basis, the price isn't prohibitive. Right If if every share costs a hundred and fifty dollars, you're not going to get a love small investors, So they split the stock into thousand four. Later that same year, Netflix raised the fee for having three films out at a time. The fee had been nineteen dollars ninety nine cents per month, and they raised it to twenty one dollars nine cents per month. This initially gave Blockbuster a boost of confidence because they had their online service planned which had not yet launched, and they had already priced it to be the same as Netflix. So now when Netflix new prices, the Blockbuster offering would actually be cheaper. This would give Blockbuster the chance to undercut Netflix, which was seen as a very valuable tool. So the Blockbuster service entered into a test phase on July two thousand four, which happened to be the same day that Netflix was holding an earnings call, and this timing was not coincidental. Blockbuster was targeting the earnings call specifically in order to essentially send Netflix a message essentially saying watch your back. Netflix stock took a sharp dive in price as investors started to get nervous because Blockbuster had already proven to be a giant in video rentals, and if the company was really behind this this service, it could mean that they would price Netflix out. Of business. Even if Blockbuster were to take a loss in the short term, if they could outlast Netflix, if they could sap away enough customers so the Netflix isn't making enough money, then they could stand triumphant. And then once Netflix is gone, they could increase prices or even get rid of the service entirely if they wanted to. So this was not a great move, and the dive in price meant Netflix lost about sixty percent of its market value in a week. Market value is that measurement we use when we we take the number of outstanding shares in the company and we multiply it by the price per share, then you get the market value of a company. If it hadn't been for Blockbusters other problems which were largely driven by the investor, Carl Icon and his attempts to steer the company in a particular direction. Specifically, he wanted a Blockbuster to buy up a rival, major UH competitor, Hollywood Video. All of those machinations going on in the background, we're really taking up a lot of of corporate focus, and the senior staff over at Blockbuster we're trying to fight off Icon. If that had not happened, Blockbuster Online might have posed a much larger threat to Netflix, but at the time it was probably a scary competitor, but it was small potatoes compared to another potential threat that appeared to be on the horizon, which was Amazon dot Com, which was rumored to be getting ready to launch its own DVD online rental service, and that seemed to be the real threat because again, Netflix originally was supposed to be the Amazon dot Com of renting videos online. If Amazon got into it, it would by definition be the Amazon dot Com of doing that. So to ward off Amazon, Hastings made the decision to cut the subscription price. They had raised it not that long ago. They decided, let's cut it too as low as we can possibly go without taking too big of a hit, and ultimately they cut the price by eight percent, down to seventeen dollars cents per month. Netflix had been buying properties in the United Kingdom. They were anticipating expanding internationally and launching the service over in the UK, but Hastings decided that they were going to have to put that on hold for a short while until late two thousand five at the earliest, because he wanted the company's full focus on competing against Amazon. Now, that was complicated by the fact that Amazon had already launched a net based DVD rental service in the UK. They had not launched one US, but they used the UK as sort of a testing ground. So Hastings told investors that Blockbuster wasn't something to worry about. He said that company has doomed itself. They said, if online rental is going to continue in its trajectory, it's going to increasingly pull business out of brick and mortar stores. That you're gonna see fewer and fewer people going to the stores to rent movies, and that if Blockbuster is putting effort behind this, then they're going to cannibalize their own business. They're going to take customers away from those brick and mortar stores, and so they're not ultimately going to come out ahead. They're gonna shift customers from one model to another. But ultimately, since the company itself was built upon the foundation of video rental stores, they would be marking themselves for their own destruction. And they said that Netflix would actually be in a really good position too to weather all of that, that it would be strong on the other side, whereas Blockbuster would end up taking the ground out from underneath itself, but waiting for this to happen was really hard. Blockbuster ran an ad during the two thousand five Super Bowl, and during that ad they dropped the price for their online service for video rental to fourteen dollars nine cents per month for a service that was very similar and essentially the same thing as Netflix's three out subscription base, which was three dollars more expensive per month. The CFO of Netflix argued they should hold firm. They should not drop their price again, and the reason was, he said, Blockbusters bleeding itself out. It is purposefully losing money per subscriber on this deal in the hopes that they will be able to put us under siege. Not the Steven Seagal film, and wait until we're out of money, and we should not try and get into a price war. That's just going to make it harder for us if we do that. By the end of two thousand five, Netflix posted a profit in three of the four quarters, which was good news. The company launched a download service in which customers could purchase a digital copy of a movie. At least they had that in a limited rollout, and in April two thousand five, Hastings set on a conference call that Blockbuster had thrown everything they had at him except the kitchen sink, and the very next day he found an enormous package waiting for him. It was from Blockbuster and inside was, of course, a kitchen sink. So what would come next? Well, I'll tell you, but first let's take a quick break to thank our sponsor. Now, on all of Netflix's woes were coming from outside the company, They weren't all external threats. One policy that landed Netflix into some trouble had to do with its algorithms that decided who would get the next available copy of a particular DVD. Not. On a previous episode, you heard how the algorithm was supposed to work, which is that you would create a queue, and you would put the movies in order in your queue, in the order you wanted to get them, and at least the idea was you would get the next available version of that title as soon as possible. That the higher ranked the movies were, the more likely you were going to get one of those titles, assuming there was any availability, And obviously new releases would be the hardest to get initially because everybody wants to see them. Now, you would think this would all be by the order in which users had placed a title into their cues, adjusted by the ranking within the queues themselves. So in other words, let's say that you and I both want to see Big Trouble in Little China, because, as we know, it's one of the greatest movies ever made. I put it in my queue. But in my queue, I put it in the fifteen spot. Uh, because I've seen the movie before. I love it, but there are other movies I want to see more at the at the time, so it's number fifteen in my queue. The following day, you add Big Trouble in Little China to your queue, but you put it at the number one spot. You know, I really want to see this movie. Well, based upon what we understood the algorithm to do at the time, we would have thought the algorithm would essentially say, well, Jonathan added it first, but he's also marked it at a lower priority by its place on the queue, So I'm gonna send it to the other person. This other person who has impeccable taste in movies, They're going to get the movie first because they ranked it higher. That's how we all understood the algorithm to work. But that's not how it actually worked, and Netflix admitted as much. They were forced to in the face of a class action lawsuit. The company revealed that it would give preferential treatment to people who had rented fewer DVDs when there was a high demand for certain titles. So why would people who aren't renting as many DVDs get their choice earlier than people who were loyal customers. Well, the corporate logic was that the people who were renting just a few DVDs were the most likely to leave the service. They were the least anchored to it, and Netflix would call those customers birds, and to prevent the birds from flying off, they would make sure the birds got what they wanted as quickly as possible. But on the flip side, that meant the loyal customers, the ones who would rent frequently and who were more likely to stick with Netflix, they got passed over more frequently. It didn't matter if they had assigned the title to a higher spot on their queue, or if they had added the title months before the birds had done so, and that seemed inherently unfair. Netflix would settle that lawsuit and a lot of claimants ended up getting free rentals as compensation, so that was something, but it was a message that a lot of people mark down as saying read Hastings doesn't necessarily take customer uh desires into account when he makes decisions, and that would be a feeling that would get reinforced multiple times over the next several years. Hastings incorporated a feature called Friends in the Netflix website experience. This would allow users to share their movie que selections with each other if they chose to. It's kind of like a social platform. They could say, all right, well, my friend Susie is also using Netflix, so I'm going to share my cue with Susie. Not not to share it across where Susie is going to get my movies, but that Susie can see which movies I am looking forward to watching. Netflix could not do that automatically because there are federal privacy laws in the United States that had previously established. Video stores were not allowed to publish what a customer had rented their rental history. That would be a violation of privacy. However, Netflix could create the opportunity for users to opt in and choose to share the information Netflix just couldn't do it automatically on its own. Another thing that the developers over at Netflix introduced was a concept called Profiles that would allow a single user account to create separate profiles within a household. So let's say that you know, it's it's a couple of spouses, some kids. Everyone could get their own profile with their own cues. That way, if one person favored action movies, someone else likes rom coms, someone else is really into, you know, deep thinking science fiction, they could each maintain their separate cues and they could get separate suggestions for films they might want to rent based upon their individual preferences and not have it just all filter into one big, messy que. Read Hastings actually did not like this feature at all. He did not want to implement it. He felt that it was going to make it harder to program changes because it added unnecessary complications. He just viewed this as being very messy, very human, not very efficient. But customers were actually calling for this feature, and as it turned out, both Profiles and Friends features would set off some more warning flags that would reinforce this idea that read Hastings did not necessarily consider. Customer wants and needs and desires to be very high among the priority lists of things that the company needed to focus on. Back on the block but sster warfront. Netflix won a victory when Walmart decided, after a failed attempt to get uh the online DV rent toll business going, that it was going to pull out of that business entirely. Walmart said, you know, we tried. This isn't working for us. It doesn't fall into our business plan. And the the agreement between Walmart and Netflix was that Walmart would instead direct customers to Netflix and even have a deal where people who had been customers of Walmart's online DVD rental business could become members over at Netflix for a reduced membership fee for a year. So that was a big deal in that this competitor and not not only was getting out of the market, they were handing over their customers to Netflix. Blockbuster did not like that. They also ended up having to raise prices to seventeen dollars nine for the three DVD at a time service. They had been at fourt but now they brought it up in line with Netflix, just as people and Netflix had predicted. They said, well, Blockbuster was going to have to do this because they were losing so much money on a per subscription basis that it was not something that could be supported indefinitely. Even better news for Netflix, it looked like Amazon was actually not going to get into the DVD rental space in the United States at all. So at the end of two thousand five, Netflix had a market value of about one and a half billion dollars. It also had eliminated its debt, and it had four point two million subscribers. Blockbuster, on the other hand, was more than a billion dollars in debt and had a market value of six four million dollars. So the fortunes had changed dramatically for both companies. But Blockbuster, though knocked down, wasn't out. It was still fighting, and there was another trick up Blockbusters giant sleeve that would cause Netflix more grief. Just a little later in two thousand six, the world was looking at the Internet as a possible delivery mechanism for long form video. So YouTube had launched in two thousand five that was already becoming a popular place for short form user generated video. But as for the studio backed stuff, that was a different story. For one thing, the landscape was really messy from an industry perspective, most movie and television studios were part of larger conglomerates, and those conglomerates also included distribution channels like cable networks or other cable distributors and Internet service providers were starting to buy up media companies to or get acquired by those same sort of conglomerates, and this thing made things really messy. You add lines of distribution content all getting bubbled up with each other, and an independent company like Netflix was put kind of outside of all that. Meanwhile, you had entrenched entities like HBO or Showtime, these premium channels that would pay enormous amounts of money to studios in order to get exclusive cable rights to different properties, so there were very few incentives in place on that side to change things up now. Originally the plan for Netflix was to roll out a wider download service like the one it had tested in two thousand five, but the company scrapped those plans, so instead there was a more bold idea in the works. It would involve a media player that would be uh that would run on a computer device, maybe a computer, desktop, laptop, maybe a portable device, and it would be allowed to play streaming video content, so instead of downloading something, you would stream it from a server. This was in contrast to a strategy that a company like Disney was trying to employ. Disney had introduced a proprietary set top box and a download service called movie Beam. Hastings felt that it made more sense to create a lightweight media player that could be installed on numerous types of hardware owned by other companies. So hardware manufactured by different companies and sold by different companies could also include this media player as part of the installation rather than producing their own hardware, and that would bring price down for development and more importantly, for adoption. You wouldn't have to have, you know, a brand new set top box sold by Netflix for a couple hundred bucks. This was super important because it was clear Netflix was going to have to spend a lot of money to get into this digital distribution world, because it was going to cost a huge amount to get the rights to serve up streaming media from the various content creators. Netflix wasn't creating its own content yet in those days, so it was gonna have to pay licensing fees to all the different creators out there. That were making the stuff that people wanted to see. The licensing fees were going to be an incredible expense, so there had to be a way to convince a large number of people to enroll in the service to offset these huge costs that the company was going to encounter as it built out a streaming inventory of TV shows and movies. Meanwhile, Netflix and Blockbuster Online traded lawsuits with each other. Netflix alleged that Blockbuster Online was infringing upon trademarks, and Blockbuster Online said Netflix was suing them in order to try and force a competitor out of an industry and create an effective monopoly. Eventually, the company settled both lawsuits, and one of the terms of the settlement allegedly because this has never been publicly acknowledged, but as far as I can tell, UH, one of the terms was that read Hastings would no longer be allowed to tell his story that Netflix was the creation that was inspired by a late fee from Blockbuster, and it was around this time that if read Hastings did tell that story, the identity of the video store in question would no longer be a Blockbuster, but rather a mom and pop video rental store in California that had long since gone out of business. So uh, this was another indication that that story of Netflix's origin was apocryphal. Now I have a bit more to say about what Netflix and Blockbuster did toward the end of the first decade of two thousand, but first let's take a quick break to thank our sponsor. In two thousand seven, on January, Netflix announced it would launch a streaming video service online, and the initial library was limited to one thousand titles. So whenever you get on Netflix then you say there's nothing to watch. Just imagine back when it was only a thousand titles total. So why would you launch a service with so few titles in the first place. The general consensus was that Netflix's hand was sort of forced because it was still trying to fight off Blockbuster, and Blockbuster had launched a service called Total Access that ended up being incredibly popular and was rapidly siphoning away customers who would have signed up to Netflix and instead they were signing up with Blockbuster. Now here's the funny thing. Total Access was a hybrid DVD rental service, and it was what Blockbuster Online was intended to be years earlier. It was supposed to be this combination of online and brick and mortar stores. UH. It was supposed to leverage the strengths of Blockbuster along with this new online delivery model and UH or at least online rental model, I should say, because the the delivery was still in DVD format. So here's how it was going to work. In fact, here's how it did work. If you signed up for the service, then you could create a queue very similar to what you would do on Netflix of different movies you wanted to watch, and based upon the level that you had subscribed to, you would get a number of DVDs from that queue sent to you. After you watched it, you could do one of two things. You could PLoP the the viewed DVD back into an envelope and mail it back to Blockbuster, whereupon, once it was processed, they would send you the next one on your list. Or you could actually take that DVD and return it to a Blockbuster store. And if you return it to a Blockbuster store, that DVD would also act as if it were a free rental coupon. You could immediately rent any movie in that Blockbuster store for free, and meanwhile, the Blockbuster store would scan in your return, which would immediately indicate to the distribution center to send you the next movie on your queue. So not only were you getting a free rental that didn't have to be on your queue at all, the next movie under queue, at least the next available movie on your queue, would then get sent to you. So this was a very attractive proposition. It was something that Netflix could not offer because they didn't have those brick and mortar stores and Blockbuster had that. You know, that was an established, entrenched model for Blockbuster. So this was an opportunity for Blockbuster to really put the hurt on Netflix. Their service attracted more than two million customers in just a few short months, uh and it really posed another big threat to Netflix. Now, the problem for Blockbuster was that the way they were pricing this model was unsustainable. They could not do it indefinitely. They were losing money on every transaction, especially since these returned disks to the Blockbuster stores were resulting in free rentals that took away the opportunity for the business to rent that to someone else, so there was lost revenue. It was seen as valuable in the sense that Blockbuster was trying to catch up and overtake Netflix. But there was no way it could keep doing this forever. So the question was could Netflix stick around long enough to outlast Blockbusters attempt to run them out of business. John Antiocho would not get the chance to find out this answer. He was the CEO of Blockbuster at that time, but he had a really big fight with Carl Icon, who owned a significant percentage of Blockbuster and controlled the vote of a lot of shareholders in Blockbuster and had a lot of power as a result. So Antiocho would resign as CEO. Uh This was largely after a dispute he had with the board of directors based on his bonuses that he had earned that year he was those bonuses were cut in half despite an agreement that had been arrived at earlier in the year. So he leaves and the news incoming CEO was a guy named James Keys. I talked all about this in the Blockbuster episodes, but Keys wanted to refocus on the brick and mortar stores and he saw the online stuff as being unnecessary and distracting, and it was a huge blow to Blockbusters strategy that was actually working, at least in the sense that it was having a big impact on Netflix's business, so pretty much, Keys is a rival at Blockbuster, spelled the eventual doom of Blockbuster Online, and ultimately you could argue the company as a whole. So when Hastings announced that they were going to do this inner streaming service, some people were skeptical that it would ever succeed because there are people who are saying, who the heck wants to watch a movie on a small screen? Who wants to watch a movie on their laptop or on a desktop or on a portable device when they have a big screen television and home theater sound system. Because the prevailing wisdom at the time was that the quality of the experience mattered more than the convenience. But we've seen time and time again that convenience matters a whole lot. I mean, the MP three compression format proves convenience matters a lot because a lot of people are willing to listen to formats that are lossy, that where you literally lose information you don't have the full sound file represented there, and they're willing to do it because the convenience of the form factor was more than it seemed to compensate for the decline in quality the streaming form at would essentially prove the same sort of thing, but for video. And one thing that would really help Netflix in the long term would also debut later in two thousand seven. That would be Apple's iPhone. Now, the iPhone did not initially support video, it did not natively support Netflix when it launched, but it would create a new market for consumers, a new category in the industry, which would be the consumer smartphone. There were smartphones before the iPhone, but they were largely the domain of business executives. But the iPhone made smartphones more consumer friendly and attractive, and the form factor would set the stage for mobile viewing of content. And it would take some time before the iPhone would support video, and more time for a Netflix app to be available, but even more time for cellular technology to actually support streaming video to a mobile device. But this was setting the groundwork, and there's no doubt that the smartphone in general helps submit streaming videos place. Two thousand and eight was a great year for Netflix because Blockbuster Online was essentially a non factor. Now they no longer really had a competitor, at least in the online space. Um Blockbuster had abandoned the total access service Keys had had argued for that customers who had opted for Blockbuster over Netflix, now we're coming back over to Netflix because Blockbuster no longer had a product there. Netflix's instant streaming service was gaining in popularity faster than even Hastings had anticipated. And Hasting saw online video is belonging to three categories. You would have the download category, where you purchase a piece of content and you get to download it to a device, and he said, Apple owns that space. We are not going to be able to compete with Apple. That's their domain. Then you had free user generated content which you would watch in streaming format, and YouTube was clearly the destination for that. So Netflix was not going to own that space either. But Netflix could be the home of the third branch of online video, which was a subscription based service providing streaming premium content. And it was also two thousand and eight when Netflix began a strategy that would end up being incredibly successful. The company signed an agreement with l G which was creating a set top box with some smart TV capabilities. So the agreement meant that Netflix is streaming software that video Player would get installed directly onto the set top box. So it became a native application on this hardware device, and it allowed customers to watch their streaming content directly on their television sets without having to hook up a PC to the entertainment system, which was a barrier for a lot of people. For a lot of people, the idea of trying to hook up a computer to a television was intimidating. It didn't seem as intuitive as setting up a cable box or VCR, a DVD player some other set top bucks that was made specifically for that purpose, and this marked the beginning of a movement for Netflix to try and make sure that it's video player was as was available on as many different platforms as was possible. The idea was go to where the people are, and the Roku box, which followed later in that year was another big example. In fact, Roku had started off as a fledgling company within Netflix itself. It was incubated by Read Hastings and then a guy named Anthony Wood, and the original Roku was a small set top box that was easy to set up and would give customers access to more than ten thousand movie titles, mostly through Netflix, and all it required to access those would be a Netflix subscription, so it was very intuitive to use, it was easy to set up, it was so it was reasonably priced, and it was a very popular uh uh electronic divi ice in two thousand eight, and so much so that they sold out frequently and would have to you know, restock and go through another manufacturing run several times in order to meet demand. That was followed by Netflix being included as a service you could access through Microsoft's Xbox three sixt console that was announced at E three and two thousand eight, So again it was about get in front of people where the people are. Those deals open up more opportunities with hardware manufacturers, from Blu ray players to smart TV companies, to laptops to mobile devices. So from two thousand eight to two thousand eleven, Netflix would end up being incorporated directly into two hundred different Internet enabled devices, so it really was everywhere. In two thousand eight, Hastings decided to get rid of that profile's feature that he had resisted a few years earlier, and there was considerable backlash among Netflix users at that announcement, so in a rare remove, Netflix would actually reverse course and reinstate the feature about a week and a half after they took it out, at least for the time being. They would remove it again a couple of years later. As two thousand eight came to a close. The United States was entering a recession, but that actually helped Netflix. So how could that be? While people were turning to Netflix as a source of affordable entertainment compared to going out to the movies or going to an expensive restaurant. You could stay in and you could watch Netflix, you could order a pizza. The fact that you could get Netflix on so many different devices with the streaming service, coupled with the fact that you could still rent DVDs through their online service gets sent through the mail. All of that was still around two and meant that Netflix was in a pretty strong position despite the recession. So the battle with Blockbuster was pretty much over. By mid two thousand eight. They were already removed rumors that Blockbuster was going to have to declare bankruptcy. That would not happen until but at that point, Netflix had sort of changed it's it's crosshairs. They no longer consider Blockbuster to be their big threat. Now their biggest competitor, according to Hastings, was red Box, which, of course was founded by a former Netflix executive, and they also we're running into more problems between movie studios and television studios. A lot of those companies resented Netflix's dominant position in online delivery, and before long, new digital services would soon arise to challenge Netflix in that arena, and Netflix itself would also make some pretty notable mistakes in the next couple of years, some of which would end up being the basis for some some extensive jokes at Netflix's expense. So in our next episod, we'll look at how Netflix transitioned to focus primarily on streaming and and the DVD became a less important part of its business, and how a little move called quickxter blew up and read Hastings face. That wraps up this episode. However, if any of you out there have suggestions for future episodes of tech Stuff. Maybe it's a company, maybe it's a technology, maybe it's a person in tech. 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Get in touch with technology with tech Stuff from how stuff Works dot com. Hey there, and welcome to tech Stuff. I'm your host, Jonathan Strickland. I'm an executive producer with How Stuff Works and I love all things tech. And we are now entering part three of our series about Netflix. The next episode, we'll kind of combine all the stuff that's been going on in ten years with uh, you know that kind of thing. That'll be the next episode. They'll be sort of where we are today. But this episode is all about Netflix is fight for survival when it was going up against some pretty big opponents in the world of video rental. So in our last two episodes, I looked at the founding of Netflix up to the departure of one of the co founders, Mark Randolph, the guy who actually wanted to build a web site that would be the Amazon dot Com of video rental. In this episode, I'll look at how the company began to usher in the era of digital delivery and fight off competitors. So to be fair, first of all, Netflix did not invent digital delivery of video. Video on demand experiments had begun in the mid nineties a few years before read Hastings and Mark Randolph co founded Netflix, so they did not invent this technology. Cable television had led the way, largely because cable could deliver the bandwidth required to uh to send video in the first place. During the nineties, many people access the Internet using dial up services, and that lacked the bandwidth to deliver real time video, so it wasn't the right time to use the Internet to deliver video services. Yet. It really wasn't until broadband internet slowly began to become a real thing in the early two thousands here in the United States that it was seen as a viable delivery mechanism for video content at all. But more about that in a little bit. In the spring of two thousand three, Netflix was a totally different company from a talent perspective than what the initial Netflix was all about. None of the original team members were still at the company. Read Hastings, who had provided the seed money for Netflix but who was not initially involved in the day to day operations of the company, was now running the show, and in March two thousand three, the company hit the landmark of one million subscribers that had long been seen as the turning point that this would be the moment when Netflix would turn into a profitable company. Blockbuster, meanwhile, I was trying to get into the game late and the end of two thousand three, they were looking to launch their own online the DVD rental service called Blockbuster on Line. Now. Originally the vision for Blockbuster Online was to be an online and in store hybrid service, but delays and changes and political shifts within Blockbuster ment that when the service finally debuted, it was an online rental subscription model, not that different from what Netflix was doing, but the nature of Blockbusters business with franchise owners opposing the very idea of online options. They were afraid that the online stores would cannibalize their own stores traffic. They argued to the CEO, John Antiocho, that this is a terrible, terrible choice. Don't do this. You're going to ruin our businesses. And so Antiocho in a way kind of capitulated a bit. He denied the online team any chance to leverage blockbusters established assets and relationships. So Blockbuster had relationships with movie studios. They were able to get really good deals on VHS titles for rental through these movie studios. None of that was available to the online team. They were not allowed to leverage any of the customer data that Blockbuster had gathered over the years of being in business, and it really put this initiative at a disadvantage. And if you listen to my episodes about Blockbuster, you know that this eventually doesn't work out so well for the company. But they were Despite these disadvantages, the team behind Blockbuster Online was still able to create a credible threat to Netflix. As for Netflix, it was going through a serious growth phase. By two thousand four of the company's share price had risen dramatically, quadrupling at one point and going beyond that to to quite high from its original opening amount. About three thousand new customers were signing up every day, a revenue growth was more than one year over year, and Hastings announced to investors than the company planned to introduce a movie download service at some point in two thousand five, which would then mean the company was dipping its toe into digital delivery, though in this case we're talking about digital delivery and that you would purchase a movie and download it to a device, uh, not digital delivery in the sense of streaming movies that still was in the future. Netflix began to advertise on television in two thousand four, and they saw subscription numbers skyrocket. That sounds great, except there was one tiny problem, which was that to entice customers, new subscriptions would include a free trial for a month, so for the first month of a customer would have free rentals. And that meant that while you saw customer numbers increasing dramatically, the revenues weren't because people were taking advantage of that one month of free service. So the company actually posted a dramatic quarterly loss in two thousand four because so many people had signed up and we're using that free month and uh, it's kind of funny to think about, but in a way, Netflix was suffering such a big loss because they were so successful because they had so many new customers signing up. But the adoption of the service was helping Netflix more than it was hurting it. In the long run, the stock price had grown significantly. It led Netflix to split the stock in February two thousand four. I've talked about stock splits in the past. Typically it's when a company uh decides to create new shares, awarding those new shares to people who already hold shares in the company, and by increasing the number of shares, they reduced the cost per share, because you can't magically make a company more valuable this way, right, So if you have a hundred thousand shares and they're ten dollars a share, and then you decide to double the number of shares, you have to half the price per share. So you have two hundred thousand shares now, but now they're five dollars per share because overall the value of the company has to remain the same. The value of the company can increase as the market values it more, but you can't make it increased just by splitting the stock. And the whole point behind splitting stocks tends to be the philosophy that by having a lower per share price, you increase the liquidity within the market. People trade more readily, which is seen as or it can be seen as a way of measuring company health. Uh And you can you can encourage smaller investors to invest in your company this way because on a per share basis, the price isn't prohibitive. Right If if every share costs a hundred and fifty dollars, you're not going to get a love small investors, So they split the stock into thousand four. Later that same year, Netflix raised the fee for having three films out at a time. The fee had been nineteen dollars ninety nine cents per month, and they raised it to twenty one dollars nine cents per month. This initially gave Blockbuster a boost of confidence because they had their online service planned which had not yet launched, and they had already priced it to be the same as Netflix. So now when Netflix new prices, the Blockbuster offering would actually be cheaper. This would give Blockbuster the chance to undercut Netflix, which was seen as a very valuable tool. So the Blockbuster service entered into a test phase on July two thousand four, which happened to be the same day that Netflix was holding an earnings call, and this timing was not coincidental. Blockbuster was targeting the earnings call specifically in order to essentially send Netflix a message essentially saying watch your back. Netflix stock took a sharp dive in price as investors started to get nervous because Blockbuster had already proven to be a giant in video rentals, and if the company was really behind this this service, it could mean that they would price Netflix out. Of business. Even if Blockbuster were to take a loss in the short term, if they could outlast Netflix, if they could sap away enough customers so the Netflix isn't making enough money, then they could stand triumphant. And then once Netflix is gone, they could increase prices or even get rid of the service entirely if they wanted to. So this was not a great move, and the dive in price meant Netflix lost about sixty percent of its market value in a week. Market value is that measurement we use when we we take the number of outstanding shares in the company and we multiply it by the price per share, then you get the market value of a company. If it hadn't been for Blockbusters other problems which were largely driven by the investor, Carl Icon and his attempts to steer the company in a particular direction. Specifically, he wanted a Blockbuster to buy up a rival, major UH competitor, Hollywood Video. All of those machinations going on in the background, we're really taking up a lot of of corporate focus, and the senior staff over at Blockbuster we're trying to fight off Icon. If that had not happened, Blockbuster Online might have posed a much larger threat to Netflix, but at the time it was probably a scary competitor, but it was small potatoes compared to another potential threat that appeared to be on the horizon, which was Amazon dot Com, which was rumored to be getting ready to launch its own DVD online rental service, and that seemed to be the real threat because again, Netflix originally was supposed to be the Amazon dot Com of renting videos online. If Amazon got into it, it would by definition be the Amazon dot Com of doing that. So to ward off Amazon, Hastings made the decision to cut the subscription price. They had raised it not that long ago. They decided, let's cut it too as low as we can possibly go without taking too big of a hit, and ultimately they cut the price by eight percent, down to seventeen dollars cents per month. Netflix had been buying properties in the United Kingdom. They were anticipating expanding internationally and launching the service over in the UK, but Hastings decided that they were going to have to put that on hold for a short while until late two thousand five at the earliest, because he wanted the company's full focus on competing against Amazon. Now, that was complicated by the fact that Amazon had already launched a net based DVD rental service in the UK. They had not launched one US, but they used the UK as sort of a testing ground. So Hastings told investors that Blockbuster wasn't something to worry about. He said that company has doomed itself. They said, if online rental is going to continue in its trajectory, it's going to increasingly pull business out of brick and mortar stores. That you're gonna see fewer and fewer people going to the stores to rent movies, and that if Blockbuster is putting effort behind this, then they're going to cannibalize their own business. They're going to take customers away from those brick and mortar stores, and so they're not ultimately going to come out ahead. They're gonna shift customers from one model to another. But ultimately, since the company itself was built upon the foundation of video rental stores, they would be marking themselves for their own destruction. And they said that Netflix would actually be in a really good position too to weather all of that, that it would be strong on the other side, whereas Blockbuster would end up taking the ground out from underneath itself, but waiting for this to happen was really hard. Blockbuster ran an ad during the two thousand five Super Bowl, and during that ad they dropped the price for their online service for video rental to fourteen dollars nine cents per month for a service that was very similar and essentially the same thing as Netflix's three out subscription base, which was three dollars more expensive per month. The CFO of Netflix argued they should hold firm. They should not drop their price again, and the reason was, he said, Blockbusters bleeding itself out. It is purposefully losing money per subscriber on this deal in the hopes that they will be able to put us under siege. Not the Steven Seagal film, and wait until we're out of money, and we should not try and get into a price war. That's just going to make it harder for us if we do that. By the end of two thousand five, Netflix posted a profit in three of the four quarters, which was good news. The company launched a download service in which customers could purchase a digital copy of a movie. At least they had that in a limited rollout, and in April two thousand five, Hastings set on a conference call that Blockbuster had thrown everything they had at him except the kitchen sink, and the very next day he found an enormous package waiting for him. It was from Blockbuster and inside was, of course, a kitchen sink. So what would come next? Well, I'll tell you, but first let's take a quick break to thank our sponsor. Now, on all of Netflix's woes were coming from outside the company, They weren't all external threats. One policy that landed Netflix into some trouble had to do with its algorithms that decided who would get the next available copy of a particular DVD. Not. On a previous episode, you heard how the algorithm was supposed to work, which is that you would create a queue, and you would put the movies in order in your queue, in the order you wanted to get them, and at least the idea was you would get the next available version of that title as soon as possible. That the higher ranked the movies were, the more likely you were going to get one of those titles, assuming there was any availability, And obviously new releases would be the hardest to get initially because everybody wants to see them. Now, you would think this would all be by the order in which users had placed a title into their cues, adjusted by the ranking within the queues themselves. So in other words, let's say that you and I both want to see Big Trouble in Little China, because, as we know, it's one of the greatest movies ever made. I put it in my queue. But in my queue, I put it in the fifteen spot. Uh, because I've seen the movie before. I love it, but there are other movies I want to see more at the at the time, so it's number fifteen in my queue. The following day, you add Big Trouble in Little China to your queue, but you put it at the number one spot. You know, I really want to see this movie. Well, based upon what we understood the algorithm to do at the time, we would have thought the algorithm would essentially say, well, Jonathan added it first, but he's also marked it at a lower priority by its place on the queue, So I'm gonna send it to the other person. This other person who has impeccable taste in movies, They're going to get the movie first because they ranked it higher. That's how we all understood the algorithm to work. But that's not how it actually worked, and Netflix admitted as much. They were forced to in the face of a class action lawsuit. The company revealed that it would give preferential treatment to people who had rented fewer DVDs when there was a high demand for certain titles. So why would people who aren't renting as many DVDs get their choice earlier than people who were loyal customers. Well, the corporate logic was that the people who were renting just a few DVDs were the most likely to leave the service. They were the least anchored to it, and Netflix would call those customers birds, and to prevent the birds from flying off, they would make sure the birds got what they wanted as quickly as possible. But on the flip side, that meant the loyal customers, the ones who would rent frequently and who were more likely to stick with Netflix, they got passed over more frequently. It didn't matter if they had assigned the title to a higher spot on their queue, or if they had added the title months before the birds had done so, and that seemed inherently unfair. Netflix would settle that lawsuit and a lot of claimants ended up getting free rentals as compensation, so that was something, but it was a message that a lot of people mark down as saying read Hastings doesn't necessarily take customer uh desires into account when he makes decisions, and that would be a feeling that would get reinforced multiple times over the next several years. Hastings incorporated a feature called Friends in the Netflix website experience. This would allow users to share their movie que selections with each other if they chose to. It's kind of like a social platform. They could say, all right, well, my friend Susie is also using Netflix, so I'm going to share my cue with Susie. Not not to share it across where Susie is going to get my movies, but that Susie can see which movies I am looking forward to watching. Netflix could not do that automatically because there are federal privacy laws in the United States that had previously established. Video stores were not allowed to publish what a customer had rented their rental history. That would be a violation of privacy. However, Netflix could create the opportunity for users to opt in and choose to share the information Netflix just couldn't do it automatically on its own. Another thing that the developers over at Netflix introduced was a concept called Profiles that would allow a single user account to create separate profiles within a household. So let's say that you know, it's it's a couple of spouses, some kids. Everyone could get their own profile with their own cues. That way, if one person favored action movies, someone else likes rom coms, someone else is really into, you know, deep thinking science fiction, they could each maintain their separate cues and they could get separate suggestions for films they might want to rent based upon their individual preferences and not have it just all filter into one big, messy que. Read Hastings actually did not like this feature at all. He did not want to implement it. He felt that it was going to make it harder to program changes because it added unnecessary complications. He just viewed this as being very messy, very human, not very efficient. But customers were actually calling for this feature, and as it turned out, both Profiles and Friends features would set off some more warning flags that would reinforce this idea that read Hastings did not necessarily consider. Customer wants and needs and desires to be very high among the priority lists of things that the company needed to focus on. Back on the block but sster warfront. Netflix won a victory when Walmart decided, after a failed attempt to get uh the online DV rent toll business going, that it was going to pull out of that business entirely. Walmart said, you know, we tried. This isn't working for us. It doesn't fall into our business plan. And the the agreement between Walmart and Netflix was that Walmart would instead direct customers to Netflix and even have a deal where people who had been customers of Walmart's online DVD rental business could become members over at Netflix for a reduced membership fee for a year. So that was a big deal in that this competitor and not not only was getting out of the market, they were handing over their customers to Netflix. Blockbuster did not like that. They also ended up having to raise prices to seventeen dollars nine for the three DVD at a time service. They had been at fourt but now they brought it up in line with Netflix, just as people and Netflix had predicted. They said, well, Blockbuster was going to have to do this because they were losing so much money on a per subscription basis that it was not something that could be supported indefinitely. Even better news for Netflix, it looked like Amazon was actually not going to get into the DVD rental space in the United States at all. So at the end of two thousand five, Netflix had a market value of about one and a half billion dollars. It also had eliminated its debt, and it had four point two million subscribers. Blockbuster, on the other hand, was more than a billion dollars in debt and had a market value of six four million dollars. So the fortunes had changed dramatically for both companies. But Blockbuster, though knocked down, wasn't out. It was still fighting, and there was another trick up Blockbusters giant sleeve that would cause Netflix more grief. Just a little later in two thousand six, the world was looking at the Internet as a possible delivery mechanism for long form video. So YouTube had launched in two thousand five that was already becoming a popular place for short form user generated video. But as for the studio backed stuff, that was a different story. For one thing, the landscape was really messy from an industry perspective, most movie and television studios were part of larger conglomerates, and those conglomerates also included distribution channels like cable networks or other cable distributors and Internet service providers were starting to buy up media companies to or get acquired by those same sort of conglomerates, and this thing made things really messy. You add lines of distribution content all getting bubbled up with each other, and an independent company like Netflix was put kind of outside of all that. Meanwhile, you had entrenched entities like HBO or Showtime, these premium channels that would pay enormous amounts of money to studios in order to get exclusive cable rights to different properties, so there were very few incentives in place on that side to change things up now. Originally the plan for Netflix was to roll out a wider download service like the one it had tested in two thousand five, but the company scrapped those plans, so instead there was a more bold idea in the works. It would involve a media player that would be uh that would run on a computer device, maybe a computer, desktop, laptop, maybe a portable device, and it would be allowed to play streaming video content, so instead of downloading something, you would stream it from a server. This was in contrast to a strategy that a company like Disney was trying to employ. Disney had introduced a proprietary set top box and a download service called movie Beam. Hastings felt that it made more sense to create a lightweight media player that could be installed on numerous types of hardware owned by other companies. So hardware manufactured by different companies and sold by different companies could also include this media player as part of the installation rather than producing their own hardware, and that would bring price down for development and more importantly, for adoption. You wouldn't have to have, you know, a brand new set top box sold by Netflix for a couple hundred bucks. This was super important because it was clear Netflix was going to have to spend a lot of money to get into this digital distribution world, because it was going to cost a huge amount to get the rights to serve up streaming media from the various content creators. Netflix wasn't creating its own content yet in those days, so it was gonna have to pay licensing fees to all the different creators out there. That were making the stuff that people wanted to see. The licensing fees were going to be an incredible expense, so there had to be a way to convince a large number of people to enroll in the service to offset these huge costs that the company was going to encounter as it built out a streaming inventory of TV shows and movies. Meanwhile, Netflix and Blockbuster Online traded lawsuits with each other. Netflix alleged that Blockbuster Online was infringing upon trademarks, and Blockbuster Online said Netflix was suing them in order to try and force a competitor out of an industry and create an effective monopoly. Eventually, the company settled both lawsuits, and one of the terms of the settlement allegedly because this has never been publicly acknowledged, but as far as I can tell, UH, one of the terms was that read Hastings would no longer be allowed to tell his story that Netflix was the creation that was inspired by a late fee from Blockbuster, and it was around this time that if read Hastings did tell that story, the identity of the video store in question would no longer be a Blockbuster, but rather a mom and pop video rental store in California that had long since gone out of business. So uh, this was another indication that that story of Netflix's origin was apocryphal. Now I have a bit more to say about what Netflix and Blockbuster did toward the end of the first decade of two thousand, but first let's take a quick break to thank our sponsor. In two thousand seven, on January, Netflix announced it would launch a streaming video service online, and the initial library was limited to one thousand titles. So whenever you get on Netflix then you say there's nothing to watch. Just imagine back when it was only a thousand titles total. So why would you launch a service with so few titles in the first place. The general consensus was that Netflix's hand was sort of forced because it was still trying to fight off Blockbuster, and Blockbuster had launched a service called Total Access that ended up being incredibly popular and was rapidly siphoning away customers who would have signed up to Netflix and instead they were signing up with Blockbuster. Now here's the funny thing. Total Access was a hybrid DVD rental service, and it was what Blockbuster Online was intended to be years earlier. It was supposed to be this combination of online and brick and mortar stores. UH. It was supposed to leverage the strengths of Blockbuster along with this new online delivery model and UH or at least online rental model, I should say, because the the delivery was still in DVD format. So here's how it was going to work. In fact, here's how it did work. If you signed up for the service, then you could create a queue very similar to what you would do on Netflix of different movies you wanted to watch, and based upon the level that you had subscribed to, you would get a number of DVDs from that queue sent to you. After you watched it, you could do one of two things. You could PLoP the the viewed DVD back into an envelope and mail it back to Blockbuster, whereupon, once it was processed, they would send you the next one on your list. Or you could actually take that DVD and return it to a Blockbuster store. And if you return it to a Blockbuster store, that DVD would also act as if it were a free rental coupon. You could immediately rent any movie in that Blockbuster store for free, and meanwhile, the Blockbuster store would scan in your return, which would immediately indicate to the distribution center to send you the next movie on your queue. So not only were you getting a free rental that didn't have to be on your queue at all, the next movie under queue, at least the next available movie on your queue, would then get sent to you. So this was a very attractive proposition. It was something that Netflix could not offer because they didn't have those brick and mortar stores and Blockbuster had that. You know, that was an established, entrenched model for Blockbuster. So this was an opportunity for Blockbuster to really put the hurt on Netflix. Their service attracted more than two million customers in just a few short months, uh and it really posed another big threat to Netflix. Now, the problem for Blockbuster was that the way they were pricing this model was unsustainable. They could not do it indefinitely. They were losing money on every transaction, especially since these returned disks to the Blockbuster stores were resulting in free rentals that took away the opportunity for the business to rent that to someone else, so there was lost revenue. It was seen as valuable in the sense that Blockbuster was trying to catch up and overtake Netflix. But there was no way it could keep doing this forever. So the question was could Netflix stick around long enough to outlast Blockbusters attempt to run them out of business. John Antiocho would not get the chance to find out this answer. He was the CEO of Blockbuster at that time, but he had a really big fight with Carl Icon, who owned a significant percentage of Blockbuster and controlled the vote of a lot of shareholders in Blockbuster and had a lot of power as a result. So Antiocho would resign as CEO. Uh This was largely after a dispute he had with the board of directors based on his bonuses that he had earned that year he was those bonuses were cut in half despite an agreement that had been arrived at earlier in the year. So he leaves and the news incoming CEO was a guy named James Keys. I talked all about this in the Blockbuster episodes, but Keys wanted to refocus on the brick and mortar stores and he saw the online stuff as being unnecessary and distracting, and it was a huge blow to Blockbusters strategy that was actually working, at least in the sense that it was having a big impact on Netflix's business, so pretty much, Keys is a rival at Blockbuster, spelled the eventual doom of Blockbuster Online, and ultimately you could argue the company as a whole. So when Hastings announced that they were going to do this inner streaming service, some people were skeptical that it would ever succeed because there are people who are saying, who the heck wants to watch a movie on a small screen? Who wants to watch a movie on their laptop or on a desktop or on a portable device when they have a big screen television and home theater sound system. Because the prevailing wisdom at the time was that the quality of the experience mattered more than the convenience. But we've seen time and time again that convenience matters a whole lot. I mean, the MP three compression format proves convenience matters a lot because a lot of people are willing to listen to formats that are lossy, that where you literally lose information you don't have the full sound file represented there, and they're willing to do it because the convenience of the form factor was more than it seemed to compensate for the decline in quality the streaming form at would essentially prove the same sort of thing, but for video. And one thing that would really help Netflix in the long term would also debut later in two thousand seven. That would be Apple's iPhone. Now, the iPhone did not initially support video, it did not natively support Netflix when it launched, but it would create a new market for consumers, a new category in the industry, which would be the consumer smartphone. There were smartphones before the iPhone, but they were largely the domain of business executives. But the iPhone made smartphones more consumer friendly and attractive, and the form factor would set the stage for mobile viewing of content. And it would take some time before the iPhone would support video, and more time for a Netflix app to be available, but even more time for cellular technology to actually support streaming video to a mobile device. But this was setting the groundwork, and there's no doubt that the smartphone in general helps submit streaming videos place. Two thousand and eight was a great year for Netflix because Blockbuster Online was essentially a non factor. Now they no longer really had a competitor, at least in the online space. Um Blockbuster had abandoned the total access service Keys had had argued for that customers who had opted for Blockbuster over Netflix, now we're coming back over to Netflix because Blockbuster no longer had a product there. Netflix's instant streaming service was gaining in popularity faster than even Hastings had anticipated. And Hasting saw online video is belonging to three categories. You would have the download category, where you purchase a piece of content and you get to download it to a device, and he said, Apple owns that space. We are not going to be able to compete with Apple. That's their domain. Then you had free user generated content which you would watch in streaming format, and YouTube was clearly the destination for that. So Netflix was not going to own that space either. But Netflix could be the home of the third branch of online video, which was a subscription based service providing streaming premium content. And it was also two thousand and eight when Netflix began a strategy that would end up being incredibly successful. The company signed an agreement with l G which was creating a set top box with some smart TV capabilities. So the agreement meant that Netflix is streaming software that video Player would get installed directly onto the set top box. So it became a native application on this hardware device, and it allowed customers to watch their streaming content directly on their television sets without having to hook up a PC to the entertainment system, which was a barrier for a lot of people. For a lot of people, the idea of trying to hook up a computer to a television was intimidating. It didn't seem as intuitive as setting up a cable box or VCR, a DVD player some other set top bucks that was made specifically for that purpose, and this marked the beginning of a movement for Netflix to try and make sure that it's video player was as was available on as many different platforms as was possible. The idea was go to where the people are, and the Roku box, which followed later in that year was another big example. In fact, Roku had started off as a fledgling company within Netflix itself. It was incubated by Read Hastings and then a guy named Anthony Wood, and the original Roku was a small set top box that was easy to set up and would give customers access to more than ten thousand movie titles, mostly through Netflix, and all it required to access those would be a Netflix subscription, so it was very intuitive to use, it was easy to set up, it was so it was reasonably priced, and it was a very popular uh uh electronic divi ice in two thousand eight, and so much so that they sold out frequently and would have to you know, restock and go through another manufacturing run several times in order to meet demand. That was followed by Netflix being included as a service you could access through Microsoft's Xbox three sixt console that was announced at E three and two thousand eight, So again it was about get in front of people where the people are. Those deals open up more opportunities with hardware manufacturers, from Blu ray players to smart TV companies, to laptops to mobile devices. So from two thousand eight to two thousand eleven, Netflix would end up being incorporated directly into two hundred different Internet enabled devices, so it really was everywhere. In two thousand eight, Hastings decided to get rid of that profile's feature that he had resisted a few years earlier, and there was considerable backlash among Netflix users at that announcement, so in a rare remove, Netflix would actually reverse course and reinstate the feature about a week and a half after they took it out, at least for the time being. They would remove it again a couple of years later. As two thousand eight came to a close. The United States was entering a recession, but that actually helped Netflix. So how could that be? While people were turning to Netflix as a source of affordable entertainment compared to going out to the movies or going to an expensive restaurant. You could stay in and you could watch Netflix, you could order a pizza. The fact that you could get Netflix on so many different devices with the streaming service, coupled with the fact that you could still rent DVDs through their online service gets sent through the mail. All of that was still around two and meant that Netflix was in a pretty strong position despite the recession. So the battle with Blockbuster was pretty much over. By mid two thousand eight. They were already removed rumors that Blockbuster was going to have to declare bankruptcy. That would not happen until but at that point, Netflix had sort of changed it's it's crosshairs. They no longer consider Blockbuster to be their big threat. Now their biggest competitor, according to Hastings, was red Box, which, of course was founded by a former Netflix executive, and they also we're running into more problems between movie studios and television studios. A lot of those companies resented Netflix's dominant position in online delivery, and before long, new digital services would soon arise to challenge Netflix in that arena, and Netflix itself would also make some pretty notable mistakes in the next couple of years, some of which would end up being the basis for some some extensive jokes at Netflix's expense. So in our next episod, we'll look at how Netflix transitioned to focus primarily on streaming and and the DVD became a less important part of its business, and how a little move called quickxter blew up and read Hastings face. That wraps up this episode. However, if any of you out there have suggestions for future episodes of tech Stuff. Maybe it's a company, maybe it's a technology, maybe it's a person in tech. Maybe there's someone I should interview or have on as a guest, send me an email and let me know about it. The address for the show is tech Stuff at how stuff works dot com, or drop me a line on Facebook or Twitter. The handle at both of those is text stuff H s W. Don't forget to check out our merchandise store over at T public dot com slash tech stuff. That's T E e public dot com slash tech stuff. You can get your tech stuff T shirt, you can get your I Heart Tech T shirt, our tote bag or coffee mug, whatever it may be. You can get the proof You're not a robot capsution T shirt. All of those are available at our store and more. We're adding new designs all the time, so go check that out. And also don't forget to follow us on Instagram and I'll talk to you again really soon for more on this and thousands of other topics because it how staff works dot com