The Rise of Netflix (and Downfall of Blockbuster) : It's Been a Minute with Sam Sanders One of the few companies doing well during this pandemic is Netflix. In the last few months, the streaming service has seen a huge uptick in new subscribers. Sam talks to Peter Kafka and Rani Molla, co-hosts of the podcast Land of the Giants, about the Netflix effect — how it got to where it is today, its win over Blockbuster, and the one TV show that launched a thousand binges (figuratively speaking).
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The Rise of Netflix

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The Rise of Netflix

The Rise of Netflix

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SAM SANDERS, HOST:

A long, long time ago, before you could stream "Hamilton," before anybody had heard of "Tiger King" or "Love Is Blind," way before this whole pandemic thing started - I know, hard to imagine - but before all that, there was a place you had to physically go to rent what you wanted to watch.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED PERSON #1: Imagine the perfect video store. It would have a great selection, right? Right. Over 10,000 videos...

SANDERS: For most of us, that place was Blockbuster.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED PERSON #2: Welcome to Blockbuster Video.

UNIDENTIFIED PERSON #1: ...Is popping up all over the country.

SANDERS: Blockbuster was the end-all, be-all for movies. There was no other competitor that could top it.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED SINGERS: (Singing) Blockbuster Video - wow, what a difference.

SANDERS: If you were a kid in the '90s or early aughts, chances are you were at a Blockbuster on a Friday night with your friend trying to figure out what movie to watch. At its peak, the rental chain had thousands of stores globally, and it earned billions of dollars in revenue. But that all kind of came to an end when...

(SOUNDBITE OF NETFLIX SOUND EFFECT)

SANDERS: ...Netflix came along, a competitor without your typical brick-and-mortar store that was suddenly mailing DVDs to your house and eventually streaming movies on your laptop. And, well, we all know how that turned out for Blockbuster.

RANI MOLLA: The takeaway, at least that Netflix took from it, was that they had to focus on one little thing. And the one little thing was, like, their one main business - at the time, getting DVDs to you as fast as possible is what they'd say - whereas, like, you know, Blockbuster had its - it had too many things going on. It was trying to do an online business and do physical stores. And you couldn't, like, do that - both of those things right.

PETER KAFKA: There was a great anecdote, too, about - this came from Gina Keating, who covered Netflix for a long time and talked to us - said at one point the investors were asking Blockbuster to sell jeans in the store, which we both really enjoyed.

SANDERS: I love it. I love it.

MOLLA: Yeah, you just imagine these, like, older investors being like, you know what the kids want? They want jeans.

SANDERS: They want jeans.

MOLLA: Put the jeans in the store.

SANDERS: JoorDash Jeans (ph) - JoorDash (ph).

KAFKA: You get a Tom Cruise movie and some cool, stonewashed jeans.

(SOUNDBITE OF MUSIC)

SANDERS: You're listening to IT'S BEEN A MINUTE from NPR. I'm Sam Sanders. And today, we're talking about the rise of Netflix with the two guests you just heard there, Rani Molla...

MOLLA: Oh, hey, Sam. This is Rani.

SANDERS: ...And Peter Kafka.

KAFKA: Yeah, I have just hit the recording button.

SANDERS: They are the co-hosts of the podcast "Land Of The Giants." That's a podcast from Vox Media. And it's all about how the biggest tech companies got their start and changed the world. This season, they have been diving deep into Netflix.

In this chat, we'll talk about a few things - the early days of Netflix, what TV show actually helped propel Netflix to what it is now - spoiler alert, it might not be what you think - and why Wall Street keeps giving the company money, even though today, in 2020, Netflix still isn't super profitable. All right, there's a lot in here. Let's get to it. Enjoy.

(SOUNDBITE OF MUSIC)

SANDERS: You know, I want to get into some of that Netflix history...

KAFKA: Sure.

SANDERS: ...That y'all unpack in the podcast. But first, I want to talk about Netflix's present. For two quarters in a row now, it seems as if the pandemic has been really, really good for this company. Like, how good has coronavirus been for Netflix?

KAFKA: Netflix won't ever say the coronavirus has been good for them because that'd be in bad taste.

SANDERS: Yeah, but...

KAFKA: But it's been really good for them.

SANDERS: ...Have you seen some of their shows? They do bad taste. Anyway, go ahead.

(LAUGHTER)

KAFKA: They do. They do. They contain multitudes. What I've been saying is they're sort of - in retrospect, they seem to have been sort of purpose-built for a pandemic, where everyone has to go home, where everyone can't get out, they're watching a ton of video, everyone else is running out of video. They've got this giant stockpile of stuff. They're relatively cheap - about 13 bucks a month, I think, in the U.S. - different pricing around the world, but affordable enough that if you hadn't gotten Netflix prior to the pandemic and you got sent home anywhere around the world, you might go, I think I want to spend a few bucks a month and get some more video. And Netflix is happy to take that money.

They don't have any advertising, so the hit that all the ad-dependent businesses have taken doesn't affect them. And because they are spending so much on content and because Wall Street is allowing them to spend more money than they actually bring in, they're able to even buy stuff from other media companies, all of which to say is, yes, they've done very well. They added 26 million subscribers in the first half of the year. And to put that in context, the same time last year, they did about 12 million.

SANDERS: Wow.

KAFKA: So they definitely saw a huge spike in people going home and signing up for Netflix. And Netflix - their argument is, well, it's not all great because everyone's already signed up for us this year. And if you haven't signed up for us in the first six months of the pandemic, you're probably not going to do it the rest of the year.

SANDERS: You know, this is one of those things where it's like, especially after hearing the podcast, so much of Netflix's trajectory has been them just being lucky, them having the right thing at the right time and their opponents doing the wrong thing at the wrong time. And they're just lucky. Is this pandemic another example of Netflix being lucky - not so much better than the others, just lucky? Like, Disney+ is there. Hulu is there. The other streamers are there with a lot of content, too. Why is this company going so gangbusters and those aren't right now in this moment?

MOLLA: I mean, I think they are just lucky. You know, I don't think they created coronavirus (laughter). You know, like, this is just everything - all the stars have aligned in their favor for this. But, I mean, obviously, like, they've created a good business, but they couldn't have anticipated all the things that sort of went right for them.

KAFKA: There is a bit of sort of residue of design though, right? Like, they got into streaming way ahead of everybody else. Everyone else would've been catching up to them anyway, would've been far behind them anyway. So to be ahead in streaming during a pandemic, you're both lucky that you happened to be ahead at that time, but the reason you're ahead is because you went much earlier than everyone else, so it's kind of both sides of the same coin.

MOLLA: Right, and they've been building up their content slate forever, so they have tons of stuff for people who are stuck at home to keep watching.

SANDERS: Yeah. So, you know, looking at this moment for Netflix, where they're pretty much on top of the world and they've entirely changed TV as we know it, looking back at that company 10 years ago, do you think anyone at Netflix thought that the company would end up this level of juggernaut?

KAFKA: Yes.

(LAUGHTER)

SANDERS: OK.

KAFKA: The - one of the - I sort of knew this, but was one of the benefits of going back and doing this reporting. Reed Hastings has been talking about becoming a Internet-delivered entertainment company since he started the company, when they were in the DVD business, when their business was taking other people's movies and TV shows and putting them in envelopes and bringing those envelopes literally down to the post office and sending them off in the mail. He was telling everyone that one day, all this was going to happen on the Internet.

And a lot of people said that in the late '90s 'cause that was the dot-com boom, but no one really took it seriously. And he did, and he pushed them into streaming early. And I think he has seen this trajectory for a long time that the world was going to be delivered over the Internet to your home, that entertainment was going to delivered that way and that they could do that.

SANDERS: All right, time for a break. When we come back, we'll talk more about how that showdown between Netflix and Blockbuster really went down and why Netflix might actually be the greatest or most terrible place to work - but mostly terrible. OK, BRB.

(SOUNDBITE OF MUSIC)

SANDERS: That Blockbuster episode was just a series of wow moments for me because I had forgotten until your podcast episode just how dominant Blockbuster was when Netflix kind of knocked them over. And it just feel - it was so David and Goliath. And it seemed like it shouldn't have worked out, but Netflix ended up beating Blockbuster Video. I don't want you to have to give the whole story 'cause we want folks to go back and listen. But what about that story surprised you most, the way Netflix really just took down this juggernaut of Blockbuster?

MOLLA: I guess for me, it was - you know, it sort of becomes, like, the story you get used to writing about tech now - like, the nimble, little startup comes in and beats the old giant corporation that didn't know how to move fast enough. But when we looked back at what Blockbuster did, you know, when they had a competitor come in, they did sort of everything right. They started investing in their own version of Netflix. They actually copied everything about Netflix's website, even, like, copied the code for the website - everything except the colors. They also had, like, people go into Netflix's warehouses pretending to be fans of Netflix and, like, take pictures of their distribution model in order to see how, like...

SANDERS: Yeah.

MOLLA: ...They were able to send DVDs so quickly around the country. You know, and they started putting a lot of money into the service. So they had this big, dominant business that didn't need to, you know, even acknowledge that Netflix was there - this tiny, little company. And yet, they did. They pivoted. They started spending a lot of money on their online presence. So they did everything right and still lost.

SANDERS: Well, this is what's so weird about it. You know, hearing you now and hearing the episode, in my mind, the lore around Blockbuster had just been that they were slow and dumb and couldn't keep up and before they knew it, this new platform emerged around them that they couldn't keep up with. But, in fact, Blockbuster had, for a while, its own DVD delivery service. Why do you think we remember this story differently?

KAFKA: I think partly because they lost, right? And there's that aphorism - right? - history's written by the winners.

SANDERS: Yeah.

KAFKA: And also because Blockbuster Online, while it did actually take off and it was working and if it had given it a little more time, it would've eclipsed Netflix, the plug got pulled by basically one investor. Carl Icahn said, nope, don't want to do this. Costs too much money. We need to make money now. And one thing you often see with a lot of successful Internet companies is they don't make any money for a long time, and then eventually, they do. And that's sort of now an article of faith if you're running an Internet company is you're going to lose a lot of money initially as you grow, and then eventually, you'll make a lot.

But Carl Icahn didn't want any part of that. He said, stop that thing that's losing us money; keep doing the same thing that we want to do now. And to be fair to Carl Icahn - it's a hard thing to say - you know, the Internet around the time that he was playing around with Blockbuster, there'd been a bubble, and it burst. And I think a lot of folks who were used to sort of more traditional companies said, oh, the Internet was a fad, and we don't really need to worry about it, and we keep running businesses the same way we ran.

SANDERS: Speaking of DVDs and Blockbuster and beating Blockbuster, does Netflix still do its DVD rental service?

MOLLA: Yes, you could go to - was it dvd.com? They changed the name of it. We have a whole story about Qwikster, which was their original split DVD service. But, yeah, I think they still have millions of subscribers or something like that.

KAFKA: Yeah.

SANDERS: Who?

KAFKA: Some people still want DVDs. And, I mean, I will point out that there's a reason to get a DVD sometimes because you can get literally pretty much any DVD that's ever been made, but you can't stream any movie that's ever been made. You need to stream it from a company that has the rights to stream it. Netflix certainly, even at its peak, never had everything. And they certainly have a lot less now. But in theory, if something has been pressed and made on a DVD, Netflix can get its hands on it and store it in a warehouse and eventually ship it to you.

MOLLA: Right, and the argument's it has wider selection. It's better quality, people think, if it's on a DVD. And then there's some parts of the U.S. where they don't have, you know, a great Internet connection, so then you need it.

SANDERS: Oh. You know, so you mentioned Qwikster. I want to talk about that. It's probably one of its - one of the company's biggest and most visible mistakes. This is when Netflix made this weird DVD spinoff called Qwikster. And it was such an embarrassment for the company, late-night ended up making fun of it.

(SOUNDBITE OF TV SHOW, "SATURDAY NIGHT LIVE")

JASON SUDEIKIS: (As Reed Hastings) To make it better, we split it into two separate, slightly more confusing sites - Netflix for streaming video and Qwikster, which will handle DVD rentals.

FRED ARMISEN: (As Andy Rendich) Did we spell Qwikster in a normal way? No, we didn't.

SUDEIKIS: (As Reed Hastings) No.

ARMISEN: (As Andy Rendich) Q-W-I-K, annoying but easier.

SUDEIKIS: (As Reed Hastings) Right.

SANDERS: But out of a failure of Qwikster, Netflix survived. And also, Netflix acquired this business practice in the aftermath of that debacle. What was it, is it? They still do it, right?

MOLLA: Oh, yeah. So the idea is that their takeaway from this giant screw-up was that no one at Netflix was willing to tell Reed Hastings he was wrong. And Reed Hastings doesn't actually believe that he was wrong in trying to split his business into DVD business and a streaming business. He knew that streaming was the future. He was like, let's do this ahead of time. And everyone got very upset 'cause they ended up having to pay more if they wanted to get both their DVDs and the streaming service. But from this giant debacle, he says that employees at his company should've been able to criticize him. I think - is it called radical transparency or...

SANDERS: Yeah.

KAFKA: Farming - yeah, radical transparency, yes.

MOLLA: ...And farming for dissent. The idea was that now they've implemented this practice where if you want to take a big swing, if you want to take a chance and you're, you know, some executive or just some lowly employee, you're allowed to do that. But before you do it, you kind of have to ask everyone - like, everyone in your team or even larger, depending on the decision, like, what they think about it. And people are supposed to tell you this is a bad idea. And the idea is that you take that feedback and you say, OK, well, I'm going to do it anyway, or, well, oh, I'll change my idea. And you're supposed to be able to do this all the way up. If Reed Hastings has a bad idea, you're supposed to be able to tell him, and you're supposed to be celebrated for that. In practice, I don't know if that actually happens.

SANDERS: Well, also, it's like - it sounds like it's a good idea, but it also seems like it could lead to a workplace in which everyone is scared to death and people are kind of using this tool to maybe backstab and climb. I mean, you can read this tactic as a way that Netflix is embracing this transparent, kind culture, or you can read it as a way that Netflix is just really, really cutthroat. Which is true? Y'all all have an episode where you talk about the culture of Netflix, and it seems in some ways cutthroat.

KAFKA: Yeah, I think this is the sort of discussion Rani and I would have constantly. Do we like Netflix? Do we want to work at Netflix, or do we really not want to work at Netflix? And I think the answer is yes.

MOLLA: Right. A lot of this sort of stuff sounded really good in theory. And, like, if it worked out perfectly, it might feel - and a lot of it boils down to, like, what kind of person you are and, like, how you want your boss or your co-workers to be able to talk to you and criticize you. But I think the one that really kind of seemed, like, scariest to me is the keeper test. Basically, your boss is supposed to be constantly trying to figure out if there's someone better than you that they should be employing. So it's like if you're not constantly on top of your game, you know, you have to be worried about losing your job. And, like, that sounds terrifying to me.

SANDERS: Time for another break. When we come back, how the churn of content is real, and the limit does not exist. BRB.

(SOUNDBITE OF MUSIC)

SANDERS: In the show, y'all highlight these, you know, great moments in Netflix history. And I think the one that stood out the most for me was kind of the moment when Netflix became or began to become Netflix as we know it. You know, there are a few big shows that helped kind of make Netflix a big part of the culture, shows like "Orange Is The New Black," shows like "House Of Cards." But y'all point out in one episode the thing that really changed everything for Netflix and changed the way that we watched Netflix and watched TV, it was actually "Breaking Bad" hitting Netflix. Talk about that - how it happened and how important "Breaking Bad" was for this platform 'cause I didn't realize that it was actually really important for Netflix until the podcast.

MOLLA: Right. This podcast is actually called the, you know, "Land Of The Giants: The Netflix Effect." And with "Breaking Bad," it's describing the so-called Netflix effect. And this was when before Netflix made their own content, they would rent other people's stuff. And "Breaking Bad" was from AMC. And it was sort of - you know, it wasn't doing that well. But then once they put it on Netflix and people could do things that you do on Netflix, like, you know, watch all the whole season in one sitting and without ads and whenever you wanted, it became really, really popular. And by the time that "Breaking Bad" had new seasons coming out, the show on AMC had become much more popular. So it was sort of this, like, circular relationship...

SANDERS: Oh, yeah.

MOLLA: ...Where Netflix made regular TV....

SANDERS: A hit.

MOLLA: ...More popular - yeah. But in turn, it also taught people that, like, watching stuff on Netflix was way better.

SANDERS: Yeah. Well, I mean, like, with "Breaking Bad," the numbers are insane. So the Season 4 finale of "Breaking Bad" on AMC had less than 2 million viewers. But after it hit Netflix and became a streaming hit, the series finale two years later had an audience of 10 million people. That's, like, bananas.

KAFKA: Yeah. It also happens to be a really good show. And it's a show that sort of rewarded you for watching it. But there's lots of shows that are good. And traditionally, TV shows start with an audience of a certain size, and then they go down.

And the folks at AMC were always funny about this. They would always, I think for obvious reasons, not want to credit Netflix with helping them make their show a huge hit. They would say, oh, we also have - we have marathons we run on AMC. You can get it on demand. And that's all true. But you could see, for obvious reasons, why they didn't want to say, Netflix made our show a giant success and without it, we wouldn't be successful - because they didn't want to set themselves up in a place where their success was dependent on this other company that they didn't control.

SANDERS: OK. You know, so flash forward from "Breaking Bad" to now, and Netflix is this juggernaut. And they've basically changed TV as we know it. Like, I think about TV 10 years ago and TV now, it's totally different. Like, Netflix has essentially killed the commercial break. They've basically ended the traditional TV season schedule. They're changing what it means to watch a movie and where. They're changing how long shows are. Shows used to have 23, 26 episodes a season. Now they might have eight. And there's no kind of schedule about when this stuff gets released. With all those big changes, many of which were led by Netflix, which of those changes do you think has been most significant for Television with a capital T?

MOLLA: I think the sheer amount of stuff that Netflix is making.

SANDERS: Yeah.

MOLLA: I think we had some stat in there for Netflix now is making more than, like, all the different studios combined, you know, back in the 2000s...

SANDERS: Wow.

MOLLA: ...You know, more TV shows. And it's just for, you know, regular people for viewers. That's great. We have so much variety and so much diversity and so many different types of shows. Like, it's a good time to watch TV and movies.

SANDERS: Yeah. Well, it's also this reality in which they get to make a little bit of everything because they don't follow the normal rules of, like - I don't know - profit. This company has yet to turn a profit. They spend billions every year to make stuff. They've never made that back. How long can they keep that up? Their investors love them. But, like, at what point do they have to, like, make more money?

KAFKA: I want to briefly fact-check you. They have made a profit before.

SANDERS: OK.

KAFKA: And they're technically profitable now. But they are spending billions of dollars more. If you ran your household finances like Netflix does, you'd be in big trouble, you'd have a lot of debt. And it is a big concern on Wall Street. And the Netflix answer is, trust us; we're going to grow real fast and, one day, it's all going to work out. But it has...

SANDERS: But do they bring in more than they spend?

KAFKA: They spend more than they bring in for now.

SANDERS: OK.

KAFKA: Last year, they burnt $3 billion. They were $3 billion in the hole, so they had to borrow more money. And they're saying that one day, this is all going to work out.

SANDERS: Why is that allowed? I don't get to do that. Sorry, it's one of my pet peeves.

(LAUGHTER)

KAFKA: Basically, what Wall Street is saying is, that's cool; you keep spending more than you make. We've seen this playbook before. We saw it with Amazon. Amazon was Amazon.bomb in 2000, and they were burning all this money. And you get to a certain scale, and you kind of wave your hands and it all works out. And there's a little bit more logic to it, and there's some accounting stuff. I won't go into any of that. But the idea is all this stuff they're spending money on is stuff they're keeping. If you haven't watched "Bird Box" and you finish this interview and you go, oh, this terrible movie "Bird Box," I'd like to check it out, you can go check it out. It's still worth something to them.

SANDERS: It wasn't the worst movie of all time. It wasn't the worst.

KAFKA: I haven't seen it. So at some point, it's still of value to them. And everyone else in Hollywood complains and says they don't get to run their business the way Netflix does. And it's quite fascinating, at least to me, they get away with this.

SANDERS: How different would the content landscape look if Netflix had been forced to turn a profit years ago and keep doing so? There'd be a lot less stuff to watch, right? I mean, the reason that they can oversaturate the market with so much kind of content and so many different genres is because they spend more than they make. What would the TV landscape look like if that weren't allowed?

MOLLA: Yeah, you're absolutely right. There'd just be a lot, lot less stuff out there. But, like, because there is more stuff, the idea is that they think that they could reach more and more people and they'll be of value to more and more people. One thing I want to point out was, like, the just, like, the international stuff, them growing internationally. Like, I think they're making content in something, like, more than 30 different countries. So I think they're hoping that that pays off and that people keep subscribing to them.

KAFKA: And back on your last question, Sam, it's not just Netflix, right? They have kicked off an arms race. So it's - so they're...

SANDERS: Yeah. Now everyone makes too much content.

KAFKA: Everyone is making too much stuff. And, you know, some of these other companies have deeper pockets, amazingly, than Netflix. So, you know, Apple can throw around money. Amazon's going to spend hundreds of millions of dollars on a new "Lord Of The Rings" series. They're going to start filming it in New Zealand.

SANDERS: I didn't even know that.

KAFKA: Exactly.

SANDERS: God, they should stop. Please stop.

KAFKA: No, they're going to keep going, and because Netflix has set this example of, we have a ton of stuff; we're going to make more of it. And everyone else has to sort of follow suit.

SANDERS: What is the big moral of the story of the Netflix story in terms of what it says about America and the American economy? Like, if this is one of the most dominant and innovative companies on the American economic landscape right now, what does it say about our country and our economy that a company like them, who really doesn't make money yet, can still change everything?

MOLLA: Yeah, I don't know. Peter?

KAFKA: I wanted Rani to go 'cause I think Rani - Rani's much more of a socialist than I am.

(LAUGHTER)

MOLLA: We're all doomed (laughter). No, I don't know.

KAFKA: I mean, one of the things that Rani and I, I think, both liked about making this series is that this is in some ways a pretty straightforward company. It's cutthroat and aggressive. But they kind of say what they want to do, and they do it. And they're delivering people a product for a certain amount of money, and you can buy it or not. And it's not fraught in the way that Google and Facebook and some of the other big tech companies that have come out the last 20 years are.

You can imagine negative consequences. You know, what happens if Netflix fully wins and sort of owns entertainment, and what does that mean? And I think the idea of what does it mean to be a programmer for the world, which we have never seen before, is pretty interesting. And the episode we're making now talks about what happened when Saudi Arabia had Netflix take down the Hasan Minhaj show that talked about the killing of Khashoggi. But I think this is kind of the best version of the American Internet economy that we've seen.

SANDERS: OK.

KAFKA: 'Cause I don't think there are - there are always unintended consequences. But unlike their peer set, I don't think you can point to Netflix and say they have been a net negative on the world. And I'll take that.

(SOUNDBITE OF MUSIC)

SANDERS: Thanks again to Peter Kafka and Rani Molla. They're co-hosts of "Land Of The Giants: The Netflix Effect."

All right, listeners, don't forget; we are back this Friday with another episode. And for that, we want to hear the best things that have happened to you all week. Just record yourself on your phone and send that file to me at samsanders@npr.org - samsanders@npr.org. All right, till Friday, thank you for listening. I'm Sam Sanders. We'll talk soon.

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