Netflix: From DVD in the mail to Streaming from the Cloud 1

Netflix Business Strategy 2

Remove Late Fee

Provide Choice from Long Tail

Ubiquitous Anytime access

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

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

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

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

Thank you.

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

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

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