In August of 1997, Reed Hastings (CEO) began the initial steps to make Netflix a success. Hastings incorporated Netflix on the idea of a conventional rental business with online services. Netflix’s internet store opened in April 1998, but did not offer the subscription option until September of 1999. The speedy growth of Hastings’s Netflix can be linked to two things: relationships and marketing ploys. The critical relationships with home theater and DVD player manufactures such as Sony, Toshiba, Pioneer, and Panasonic served as a foundation for success. Similarly, marketing ploys built a strong brand association with the consumer base. Netflix made a monumental move for their company in December 1999 by eliminating due dates, late fees, and shipping fees. Two years later in, on May 22nd, 2002, the initial public offering for $15 a share at 5.5 million, was made.
In the fiscal year of 2003, Netflix reported its record revenues of $272.2 million, also the first profitable year. This was a 78% increase from 2002. A new service was added, an instant streaming service named “Watch Now” in January 2007. In February 2007, Netflix delivered its one billionth DVD. They celebrated by awarding a lifetime subscription to Netflix. On January 14th, 2008, Netflix rewarded its subscribers with unlimited streaming on their computers with no additional charge. In July 2008, Netflix entered a partnership with Microsoft to integrate Netflix into the Xbox 360. This was the first gaming system with this feature and within seven months had a million users. Ironically, within the month, LG Electronics entered a deal with Netflix to integrate the same system into their Blu-ray player. The next month, Netflix integrated with the social networking giant Facebook to allow members to share their movie experiences. In April 2009, Netflix delivered its two billionth movie, and again celebrated with a lifetime subscription. In 2010, membership reached 15 million and GAAP net income elevated to $115.9 million.
The competition Netflix faces has shifted since its beginning. When Netflix launched in 1998, the two main competitors were Blockbuster and Movie Gallery which operated under the traditional movie rental business model. By 2010, video-on-demand (VOD) and ad supported competition had evolved. VOD is primarily run through television providers and dot-com companies. The ad supported segment is anchored by Hulu and YouTube. Also, kiosk services such as Redbox have recently exploded onto the scene.
Blockbuster was the largest rental retail chain with 9,040 stores. It launched in 1982 and the only competitors were family owned operations. Blockbuster saw exponential growth in 1988, 1989, and 1990 with 114, 93, and 48 percent in earnings. Blockbuster Online launched in 2004, and Netflix filed a suit against Blockbuster in 2006. The suit claimed Blockbuster violated Netflix’s patent on video game rental systems. In 2007, in an effort to focus on online revenue streams, Blockbuster closed 280 stores. In March of 2009, Blockbuster hired Kirkland & Ellis law firm to investigate restructuring of debt and bankruptcy options. The downfall continued in third quarter of 2009, with a loss of $39.7 million. Closing of stores continued with over 800 of 3,750 stores being closed in 2010. The New York Stock Exchange delisted Blockbuster on July 7th, 2010. Finally, on August 26th, Blockbuster filed...