In the 1980s and 1990s, consumers who wanted to watch movies at home headed to their neighborhood movie rental store. Blockbuster was the clear leader in the market. Consumers were able to rent a movie for a flat fee of several dollars, but late fees were steep. In 1997, California entrepreneur Reed Hastings incurred a $40 late fee at Blockbuster. “It was six weeks late,” he admits. “I had misplaced the cassette [and] I didn’t want to tell my wife.… I was embarrassed about it.” After locating the Apollo 13 movie that he had rented several weeks before, he dropped off the VHS cassette and paid the late fee on his way to the gym. As it turns out, his itinerary for the day was quite opportune: In the middle of his workout, he recalls, “I realized [the gym] had a much better business model. You could pay $30 or $40 a month and work out as little or as much as you wanted.”

Thus, the idea for Netflix was born. But Hastings knew he needed to start slowly. So, when Netflix was launched in 1997, its only innovations involved the convenience of ordering movies over the Internet and receiving and returning them by mail; Netflix merely rented movies for $4 apiece plus $2 for postage (and, yes, it charged late fees). Basically, the customer base consisted of people who wanted to watch movies without having to leave the house. But Hastings and co-founder Marc Randolph quickly decided to test a subscription-based model, unlimited rentals by mail for a flat fee and, perhaps most important, no due dates (and thus no late fees). Current customers were first offered the opportunity to shift from their pay-per-rental plans to subscription plans on a free-trial basis and then given the chance to renew the subscription plan on a paid basis. “We knew it wouldn’t be terrible,” says Hastings, “but we didn’t know if it would be great.” In the first month, however, 80 percent of Netflix users who’d tried the no-cost subscription plan had renewed on a paid basis.

“Having unlimited due dates and no late fees,” said Hastings back in 2003, “has worked in a powerful way and now seems obvious, but at that time, we had no idea if customers would even build and use an online queue.” The “queue,” as any Netflix user will tell you, is the list of movies that the customer wants to watch. Netflix maintains your queue, follows your online directions in keeping it up to date, and automatically sends you the next movie you want each time you send one back.

The essence of queuing—and of the Netflix business model—is clearly convenience. Although the ability to enhance customer convenience, even when combined with cost savings, often gives a company a competitive advantage in its industry, it doesn’t always have the industry-wide effect that it’s had in the case of Netflix. Not only did the Netflix subscriber model improve the service provided by the industry in an unexpected way but ultimately it also weakened the competitive positions of companies already doing business in the industry—notably, Blockbuster. By 2010, Blockbuster had declared bankruptcy, and Dish Network acquired the company the following year. In the years since, all of Blockbuster’s retail stores have been closed as well as its DVD rental-by-mail operation, although Dish Network still retains rights to the name. Investors who had purchased a share of Netflix stock in early 2009 for $36 found that their stock had grown to more than $440 by the beginning of 2015.

How had Hastings’s upstart company managed to put itself in such an enviable position? For one thing, it got off to a fast start. In 1997, when DVDs were just being test-marketed in the United States, Hastings and Randolph decided that the new medium would eventually overtake videocassettes as the format of choice for both the home-movie industry and the home-movie renter. They were right, of course, and by 2002, one in four U.S. households owned a DVD player. As the first company to rent movies by mail, Netflix was the first to establish a rental-by-mail customer base. At first, says Hastings, “people thought the idea was crazy. But it was precisely because it was a contrarian idea that [it] enabled us to get ahead of our competitors.” As Netflix continued to expand and nurture its subscriber base, it also generated both brand recognition and brand loyalty. “Netflix has customer loyalty. It’s a passion brand,” explains Hastings, who hastens to add that keeping customers happy is crucial “because the more someone uses Netflix, the more likely they are to stay with us.”

More importantly, Netflix continues to be at the forefront of innovation. After the fizzling demise of Blockbuster, Redbox became the rental kiosk of choice, but as streaming video became more and more common, Redbox faced the same fate as its predecessors. Netflix, on the other hand, evolved, offering more streaming content, including an ever-increasing array of high-quality original content. Despite competition from companies such as Dish Network, Apple, HBO, CBS, and Amazon, the company saw a 47 percent increase in international streaming revenues in 2016 while the domestic subscription base added 10 million new users, nearing the 50 million mark.² In addition, the company garnered 54 Emmy nominations for the 2016 season. According to Hastings, the company plans to continue to focus on movies and TV on a global basis for the foreseeable future.³ Perhaps the next conquest for Netflix will be the eclipse of cable networks like HBO and FX. And beyond that, only Hastings and time will tell. (After studying this chapter, you should be able to respond to the set of discussion questions found at the end of the chapter.)