Netflixed: The Epic Battle for America's Eyeballs

by Gina Keating

Blockbuster and Hollywood Video, correctly viewing the new format as a threat, refused to stock it in stores, ceding the field to Netflix throughout the summer of 1998. Every factor that could have tripped Netflix up had instead fallen exactly the right way.

While Randolph and Bezos hit it off immediately, trading launch-day stories, Hastings was less than impressed with Amazon’s $12 million offer.

marketing team discovered an undeniable correlation between one-day delivery in the San Francisco Bay Area and the rate of new customers signing up. One-day delivery seemed like magic, and people started telling their friends about it. To test the one-day theory in a new market, they created a “hub” in Sacramento, in 2000 by driving the mailers there and back each day from the San Jose distribution center, and the sign-up rate bounced up dramatically. The discovery fundamentally changed Netflix’s distribution and marketing plans. The costs of attracting new customers came down as people in the overnight delivery zones recommended the service to their friends; Dillon had to rethink his distribution system. Dillon used data he hacked from a post office compact disk that contained delivery data for all U.S. zip codes and designed a software program that pinpointed the best locations for Netflix distribution centers. The program plugged in customer addresses and arranged them all within the overnight delivery radius of the closest post office. Then Dillon sited the distribution center as close as possible to the post office’s Area Distribution Centers, where each zip code’s mail was sorted and sent out.

Dillon once accidentally ordered the system to deliver every disk in customers’ queues simultaneously. Some delighted subscribers received as many as three hundred disks in a space of a few days.

They weren’t surprised when Stead essentially laughed at Hastings’s alternate proposal—that Blockbuster buy Netflix for $50 million.

By the time the company reached one million subscribers, Hastings added, independent filmmakers would probably bypass the movie studios and distribute their films online through Netflix.

they had it on good authority, in the form of a report by media industry analyst Kagan Research, that the universe of online rental contained 3.6 million users, tops. In light of Blockbuster’s now 65 million U.S. account holders (and 100 million worldwide renters), Stead and Antioco thought the online market was not worth considering.

When it became clear that corporate headquarters’ benign neglect would not kill the online business, Blockbuster’s franchisees threatened to sue to stop it from going live. It seemed to Cooper that the store operations wanted the online service to fail as quickly as possible

Netflix investor pointed out to Dillon that Blockbuster Online assigned sequential account numbers to each new subscriber, and those numbers appeared in the bar codes on its mailers. By having Netflix employees and their family members sign up for Blockbuster Online on a regular schedule—say, once a week—and noting down their customer numbers, Kirincich could calculate how effective its spending on marketing was, how quickly its base was growing, and how many movies the service had to ship. All of this data added up to the burn rate—how fast the online business was going through the budget provided to it by the store business. Kirincich believed that at the rate Blockbuster Online was growing, Antioco would be forced to back off, or possibly suspend marketing activities, by the second quarter of 2005.

HASTINGS HAD REMARKED on a conference call in April that Blockbuster had thrown everything at Netflix “but the kitchen sink.” When he arrived at the University Drive headquarters the next day, a giant box from a home improvement store was waiting. Inside was a kitchen sink, courtesy of Ed Stead and the executives at Blockbuster.

“I continue to believe that online rentals are a niche business that will appeal to only about 5 percent of the market.

More shocking—because it displayed a lack of understanding of digital video technology—was Keyes’s contention that someday consumers would make it a habit to drop by Blockbuster stores to load movies and games onto flash drives or video-enabled devices at in-store kiosks, instead of simply using their home broadband lines.

The retreat was so disastrous that a number of senior-level executives—among them Evangelist, Shepherd, and Zine, who had announced his retirement—phoned in sell orders on most or all of their Blockbuster shares during the next “open” period when they could legally do so. Several, including Evangelist, Zine, and Antioco, when he heard of Keyes’s plan, plowed the proceeds into Netflix stock.

Keyes’s plan to profit from new DVD releases that Netflix and Redbox could not obtain in bulk from the studios or wholesalers backfired. Predictably, Redbox and Netflix flouted the studios’ rules and bought the disks from big-box retailers like Walmart, which discounted them heavily over the holidays.

Swasey had had the unenviable task of downplaying the price difference to angry consumers as the size of “a latte a month,” rather than making the common sense explanation he had pushed Hastings to make: Netflix was losing money on DVD by mail as a result of the escalating costs of postage and shipping. The “latte” remark infuriated recession-weary subscribers, one of whom posted Swasey’s cell phone number in the comments section of Netflix’s blog. He patiently responded to the hundreds of calls and vitriolic voicemails by returning them personally and admitting to the surprised callers that the comment had been thoughtless and insensitive.

“[W]hat is truly mindblowing is that when I was CEO trying to screw up my nerve to walk away from selling DVDs, I risked alienating tens of thousands of customers. Reed is showing that he has courage and conviction to do the right thing despite having tens [of] millions of them,” Randolph wrote