The Incredible Story of Netflix

How Netflix Started

You may not find another example quite like Netflix when it comes to building a successful business. When Netflix started its business, its biggest competitor, Blockbuster, had more than 60,000 employees and over 9,000 stores across the world. In terms of sales, Blockbuster was generating around $6 billion every year.

Netflix, on the other hand, was so short on money that it could barely afford to buy a new sofa for its own office. Frustrated by their situation, Netflix’s founders eventually decided that perhaps the best option was to sell the company to Blockbuster.

But when they approached Blockbuster’s CEO with the idea, he laughed at them. History, however, tells a completely different story.

The company that once stood in front of Netflix like an enormous concrete mountain eventually found itself struggling to survive. Just a few years later, Netflix had completely transformed the entertainment industry, while Blockbuster was forced to shut down almost all of its stores.

Today, Netflix is one of the world’s biggest entertainment companies. But how did all of this actually happen?

The Idea Behind Netflix

Ladies and gentlemen, this story begins in 1997, at a time when interest in internet businesses was growing rapidly. Jeff Bezos was already selling books online through Amazon, and the business was growing at an impressive pace.

Marc Randolph also wanted to start an internet business. The problem was that he simply could not decide what kind of business he should start. For several months, wherever Marc went, he carried a notebook with him. He would write down new business ideas and later discuss them with his friend, Reed Hastings.

Marc had countless ideas. He considered selling everything from pet food to baseball bats over the internet. But Reed Hastings did not like any of them.

Reed wanted to build an internet business where a customer would find the company once and then continue generating revenue for the company again and again. For months, the two continued sharing and discussing different ideas. Eventually, they came across an idea that seemed worth pursuing: 

Video rentals.

The Problem With Video Tapes

At that time, video tapes were one of the most popular forms of home entertainment. People would visit their local Blockbuster store on weekends, spend a considerable amount of time choosing a movie, rent the video tape, and take it home. If they failed to return the tape on time, they had to pay a late fee.

Interestingly, when Reed Hastings came up with the idea, he himself had recently been hit with a $40 late fee for returning a Blockbuster video tape late. Reed believed that the video rental industry desperately needed a change. He thought renting movies over the internet could become a successful business. But there was one major problem. Video tapes were relatively heavy, which meant shipping them through the mail could be expensive. There was also the risk of tapes being damaged during delivery, creating additional costs for the company.

This was a serious problem. Marc and Reed were beginning to feel that their new internet business might fail before they even had the chance to properly launch it.

The Discovery of DVDs

Then, a few weeks later, they came across an article in a technology magazine about a new technology called DVD. DVDs were much smaller, lighter, and cheaper to ship than traditional video tapes. That immediately gave Reed an idea. What if, instead of renting movies on video tapes, they delivered movies on DVDs through the mail? This would make the entire business much cheaper and more practical. And that was the moment when the basic idea behind Netflix began to take shape.

Building the Netflix Business

Their business model was quite simple.

Netflix would display a huge collection of DVDs on its website. Whenever a customer placed an order, the DVD would be delivered to their doorstep within a couple of days. Inside the package, Netflix would also include a prepaid return envelope, making it easy for customers to send the DVD back. The idea was simple, but turning it into reality required money. And Marc and Reed did not have much money to invest.

They somehow managed to set up a small, low-budget office. They used cheap folding tables and second-hand furniture to furnish the place. Employees were hired at relatively low salaries, with the promise that if the business became successful, they would receive shares in the company. The small Netflix team spent the next few months building a website and purchasing DVDs.

Finally, after months of hard work, Netflix was ready for its official launch.

Netflix’s First Day

Before launching the website, they arranged interviews with several news outlets so that they could receive media coverage as soon as the service went live. Then came the historic day. On August 29, 1997, at exactly 9:00 a.m., Netflix made its website publicly available.

Inside the office, they had also installed a small bell that would ring every time a new order came in. Marc placed the very first order himself. The bell rang for the first time. Just one minute later, it rang again. This time, the order came from a real customer. The Netflix team also posted comments on different internet forums, pretending to be ordinary users while introducing people to Netflix’s DVD-by-mail service. This helped attract even more movie fans to the website. For the first fifteen minutes, the bell kept ringing almost continuously. Then something unexpected happened. The Netflix website crashed.

The First Major Challenge

At that time, companies did not rely on large cloud-hosting platforms like they do today. Servers were often physically kept inside the company’s own office.

The website crashing was a clear sign that Netflix’s existing server could not handle the sudden amount of traffic. The team immediately went to a local store, purchased eight additional servers, and brought the website back online. By the end of the first day, Netflix had received 137 orders. That was far more than the founders had expected.

And because the website had been down for several hours due to the heavy traffic, the actual number of potential orders could have been even higher. Netflix now had another problem to solve. They needed to fix the technical issues and make sure their website could handle growing traffic without constantly crashing.

Netflix’s First Month

The first month of Netflix’s business was actually quite successful. But the results were not what Marc and Reed had expected. Netflix generated approximately $94,000 in sales during its first month, but surprisingly, only around $1,000 came from DVD rentals. Most customers were not renting DVDs. They were buying them outright. Netflix had given customers both options. They could either purchase a DVD for around $25, or rent one for around $4. But Marc and Reed wanted customers to use the rental service.

The reason was simple. If a customer bought a DVD, Netflix earned money from that DVD only once. But if the same DVD was rented out repeatedly, the company could earn money from it again and again until the DVD was eventually damaged or became unusable.

Netflix and Amazon

Marc and Reed also understood something very important. The reason Netflix was able to sell so many DVDs in the beginning was largely because there was no major online competitor offering the same service. But then, a very big name entered the picture. A few weeks later, Netflix received a phone call from Jeff Bezos, the founder of Amazon. Bezos had already established Amazon as a major online bookstore, and he was now interested in entering the DVD market. He wanted to acquire Netflix because doing so would give Amazon an existing online DVD business that was already up and running. But Marc and Reed had a different vision. They did not really want to build a business around selling DVDs. Their real goal was to create a successful DVD rental service. So they decided to take a different approach.

Netflix shared its DVD-selling business with Amazon. In return, when Amazon customers were interested in renting DVDs, they could be directed to Netflix. In the short term, this meant giving up an important source of revenue. But Marc and Reed believed it could benefit Netflix in the long run.

Netflix’s Failed Promotional Campaigns

Sixth, the revenue that we were earning for them, they gave it to Amazon. But even if they had not given it to Amazon, Amazon would have built its own new business, which would then have come into direct competition with Netflix. Now Marc and Reed put all their focus on renting DVDs. They started promotional campaigns, but they completely failed. Netflix contacted famous companies that made DVD players, such as Toshiba and Sony, and made a deal with them. The deal was that whoever bought their DVD player would receive a Netflix coupon code, which they could use to rent ten free DVDs.

But this promotion failed because the coupon code was stuck outside the DVD player box rather than being placed inside the box. This meant that even if someone did not buy a DVD player, they could still see the Netflix coupon code from the outside. As a result, in the beginning Netflix had to give away a huge number of DVDs for free, and on top of that, only five percent of these new customers became regular Netflix customers. In other words, it was a very loss-making deal. On top of that, in the deal that had been made with Amazon, they were sending customers to Amazon to buy DVDs, but very few customers were coming from Amazon to Netflix to rent DVDs.

The Bill Clinton Incident

After this, an incident happened in American politics that Netflix could have completely cashed in on, but here too, something happened that Netflix had absolutely no idea about. At that time, American President Bill Clinton had a love affair with a White House intern named Monica, and the secret of this story was revealed. Hearings were being held in court regarding the matter, where Bill Clinton’s affair was proven and Bill Clinton was removed from the presidency. At that time, the entire America was looking for videos of this court trial. Netflix tried to take advantage of the opportunity and hit a six by putting the trial video on its website through DVDs.

Then the shot had landed perfectly, and Netflix received countless orders. But the funny thing was that the company that was writing this video onto DVDs was also involved in making adult movies, and by mistake, instead of the trial video, they wrote adult movie DVDs and sent them to Netflix. And unfortunately, Netflix dispatched all these DVDs to its customers without checking them. When the matter was revealed, Netflix apologized to all the customers, but by then the damage had already been done. The promotion caused even more damage than the benefit Netflix had expected from it.

Netflix’s Subscription Idea

So far, Netflix’s idea of renting DVDs was not making money, and every promotional campaign they launched was failing badly. Then an idea came to Marc’s mind, an idea that was perhaps going to change everything. Netflix was doing exactly the same thing that Blockbuster was doing, which was renting DVDs. But there was one difference: Netflix was doing it through the internet, while Blockbuster was doing the same thing through physical stores.

Marc got an idea: why not start a subscription-based service in which customers would have to pay a fixed amount every month, and in return, they would get four DVDs for free. Then what would happen was that the four DVDs would remain with the customers all the time, and whenever they wanted, they could choose a DVD of their choice and return the old one. Obviously, this would reduce the pressure of late fees on customers. After some time, this idea worked. On the very first day, among the people who saw this promotion, 90 percent subscribed. These were the customers for whom Marc and Reed had worked so hard.

Because of the subscription, Netflix’s revenue started increasing rapidly, and they started earning a fixed amount from each customer every month.

Netflix vs. Blockbuster

On the other hand, Blockbuster, their biggest competitor, was operating more than 9,000 physical stores, and they were earning $800 million annually just from late fees, while at that time Netflix’s total sales were only $5 million.

This was a very big difference.

It is said that if there was anyone behind Netflix’s success, it was their own competitor, Blockbuster. Because if Blockbuster had wanted to, it could have easily defeated Netflix. But Blockbuster’s fate was simply unlucky. Blockbuster was taking the internet business very lightly, and because their own physical stores were running, they did not feel the need for a small internet business.

Netflix Tried to Sell the Company

Netflix’s owners knew very well that their business would only continue until Blockbuster also started a DVD-by-mail service. Therefore, they made a plan: why not sell their entire running business to Blockbuster itself? This would give them a good amount of money, and they would also continue working in the same business, obviously on Blockbuster’s payroll. So they had a meeting with Blockbuster’s CEO.

At first, Blockbuster’s CEO quietly listened to their offer and then heard their demand. Reed Hastings immediately said, $60 million. As soon as he heard this, Blockbuster’s CEO started laughing. Marc and Reed clearly understood that Blockbuster had no interest in buying Netflix, and they had to get up and leave empty-handed.

Blockbuster Finally Enters the DVD-by-Mail Business

Time passed and Netflix’s subscriptions continued to increase, but Blockbuster remained stubborn that there was no such thing as an internet business that could become very successful.

But then, in 2004, Blockbuster realized for the first time that customers were leaving them one after another and signing up for Netflix, where they could receive their preferred DVDs at home. At this point, Blockbuster started its own DVD-by-mail service, but by then it was already too late. Netflix had spent years understanding the behavior of its customers. They installed algorithms on their website that showed customers only those movies in which they were interested. And obviously, Blockbuster could not do all of this so quickly.

Netflix Moves Toward Streaming

In 2007, when Blockbuster was promoting its DVD-by-mail service, Netflix was preparing to launch a video-on-demand service, meaning movie streaming directly over the internet. There would be no hassle of DVDs. Just come directly, watch the movie, and that’s it.

For the first time in the world, a streaming site was doing something like this, which allowed Netflix to start getting customers from outside America as well, because DVD-by-mail could only be posted within America. On the other hand, Blockbuster was becoming trapped in its own problems. They started taking steps in every branch that affected their business significantly, such as removing late fees or forgiving video store service fees.

The Fall of Blockbuster

Blockbuster was taking its last breath, and in a hurry, they started taking steps that badly affected their business. For example, removing late fees like Netflix or even waiving the rewind fees for video tapes.

When a customer returned a video tape without rewinding it, Blockbuster would charge them separately for rewinding it. In other words, Blockbuster had been squeezing customers and taking money from them for years, while Netflix was focused on improving the customer experience.

Eventually, more and more customers started signing up for Netflix, and in 2010, Blockbuster went bankrupt and filed for bankruptcy. Blockbuster took too long to change itself with technology, and this decision ultimately brought down its billion-dollar empire.

The Lesson From Blockbuster’s Failure

In reality, what Blockbuster did is a part of human psychology. When our business is running successfully, we want it to continue running in the same way, and we become afraid of changing ourselves.

Meanwhile, someone else comes along, takes advantage of this situation, and fills the gap in the market.

Something similar happened with Nokia mobile phones and Kodak photography. They also failed to change themselves with technology, and other companies moved ahead of them.

Netflix Today

Today, Netflix has 13,000 employees spread across the world, the company’s value is more than $80 billion, and it generates around $19 billion in annual sales.

In other words, Netflix’s sales in just the previous year were 380 times greater than the price at which the entire company was offered to Blockbuster.

The Last Blockbuster Store

This is the last Blockbuster store located in Oregon, which was actually one of those 9,000 stores. All of the company-operated stores have closed, but this last store still rents DVDs. Today, people visit it less to rent DVDs and more as a tourist spot to relive their memories.

Netflix Netflix Started Story of Netflix

Last modified: September 11, 2026