The Netflix story: from rentals to the Emmys

Given the ease with which we pump high-definition video from the internet on to our computer screens and televisions, it is easy to forget that for a decade Netflix was a service for renting DVDS over the internet.

It was not until January 2007 that the company announced that subscribers would be able to “instantly watch movies on their PCS” with a restricted catalogue of 1,000 titles.

At the time, Reed Hastings, its chief executive, told The New York Times that the market for on-demand streaming would at first be “microscopic” and said: “DVD is going to be a very big market for a very long time.”

He was partially right. Despite the reputation that Netflix has earned as a streaming pioneer, and the collapse of Blockbuster and others, its DVD delivery business is still going strong.

It seems baffling in the instant gratification culture that Netflix itself has helped to create, but around 4m people still use the website to rent DVDS online, wait a couple of days for them to arrive, then send them back when they are done. DVDS still account for 15pc of Netflix profits with margins of 50pc.

But streaming has exploded faster than anyone thought. In April, it announced that 100m people now subscribe to its video on-demand service. Around 50m of these are in the US, where its service is in more than half of all households. The figures will be confirmed when it reports secondquarter results tonight.

The company’s success was never guaranteed. In Netflix’s early years as a streaming service, logging-in felt like rolling the dice. Shows and films would appear and disappear on a monthly basis, depending on what licences it had signed with studios. This changed in 2013 when Netflix’s first original show, House of Cards, appeared. Now, it is one of America’s premier distributors of original content. When it garnered 14 Emmy nominations in 2013, it was a surprise; last week it received 93.

Its wealth of original content has allowed it to bypass having to sign local deals in every market it enters. Last year, Netflix was switched on in 130 new countries instantly, giving it a global reach that few tech companies can boast. Subscribers now pay for Netflix’s original shows, such Orange is the New Black and Stranger Things, because they can’t get them anywhere else. The service is so stuffed with Netflix’s own material that it is possible to watch nothing else: in less than half a decade since House of Cards was released, the company has become a content behemoth that undercuts established networks: how else do you explain the recent inflation in the cost of live sports rights – one of the few things Netflix does not offer?

Netflix now appears so entrenched that few seem to believe its dominance could be threatened. It has the financial muscle to outbid the biggest television networks for content, with a fraction of the distribution costs and a wealth of data on its customers. It is now valued at almost $70bn – more than 21st Century Fox.

Its growth, and advantage against incumbents, has been built on investors being willing to forgo profits for the sake of investment. Shares have risen by 1,200pc in five years and are valued at 200 times earnings.

The elephant in the room for Netflix has always been direct competition, but the launch of rival internet video services such as Amazon Instant Video and Sky’s Now TV have done little to dent it – many consumers appear willing to pay for multiple services, which still add up to less than the cost of a traditional television subscription. Attempts from Apple and Youtube to enter the industry have floundered.

One of Netflix’s main strengths is that despite not locking users into long-term contracts, they are famously reluctant to leave. Less than 5pc of users are believed to cancel subscriptions in the space of a year.

There is no better illustration of loyalty to Netflix than the millions who still subscribe to its old-fashioned DVD service. Indeed, its biggest scare over the past couple of years came when a national overhaul of credit cards in the US led subscribers to cancel accounts by mistake.

There are still potential stumbling blocks that could put pressure on its mega valuation. Subscriber growth could slow; its parade of hits could encounter a rough spot, a big player such as Apple could finally get serious about competing with it. But it has seen off these doubts before.

When asked about competition recently, Mr Hastings said one of the main threats to Netflix’s growth was sleep, which was eating into how much time people could spend watching it. If that is Netflix’s biggest concern, it doesn’t have much to worry about.

‘Netflix is now one of America’s premier distributors of original content’