Netflix's DVD business almost didn't exist. Twenty-five years on, it has transformed the media industry
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In 1997 – a decade before the first movie was streamed on Netflix – Marc Randolph enclosed a disk in an envelope and dropped it off at his local post office in Santa Cruz, California.
The Netflix co-founder was testing a theory: could a DVD rental service even work?
If it wasn't for a stroke of blind luck, he might've abandoned the idea for Netflix that same day.
25 years – and 5.2 billion red envelopes – on, the final batch of the company's DVDs are winding their way through the US postal system.
Friday marked the final day of its rental service, and the milestone has had Randolph reflecting on the role of fortune in the company's early days.
"So much of it is being in the right place at the right time," he told ABC News. "Having things break your way."
In the intervening years, Netflix has inspired and then crushed Australia's Quickflix, assembled the largest film catalogue ever, taken down a corporate giant and ushered in the era of streaming.
Not bad for an almost failed experiment.
If the idea of posting DVDs feels anachronistic in 2023, it's a testament to the disruptions Netflix has engineered in the last two and half decades – and the luck they've enjoyed along the way.
When Randolph and his co-founder Reed Hastings hatched their revolutionary idea, neither of them had even seen a DVD before.
He'd heard there was a "thin light disc that might actually fit into a first class mailing envelope".
Even though few Americans even owned a DVD player at that point, it was enough to convince the pair to explore the idea.
This is what triggered Randolph to make that trip to the Santa Cruz post office in 1997 – he wanted to test whether a disk would survive a trip through the US postal system.
It did, and the rest is history. At least that's what he believed for a while.
On revisiting the same Santa Cruz post office months later, he found out that it was only the proximity of the delivery address that saved the disk from being mangled.
If they had tried posting it further away, a post office employee explained, the disk would've likely been crushed by a sorting machine – along with their nascent business idea.
"We dodged a bullet there," says Randolph.
And this was only the first in a series of near misses that defined Netflix's ascent to becoming the second-largest media company in the world.
In a famous incident in 2000, Blockbuster declined an offer to acquire the fledgling startup for a reported $US50 million ($77 million).
The dotcom bubble had just popped, and, desperate for funding, Netflix made their pitch to Blockbuster CEO John Antioco at the video store franchise's Dallas headquarters.
According to Randolph, Antioco was so unimpressed he had to stop himself laughing in the meeting (Antioco disputes this characterisation of events).
Regardless of how the interaction played out, the short-sightedness of Blockbuster's decision became clear in a matter of years.
Soon, Netflix was lending over a million DVDs a week, and bringing in over $US1 billion a year in revenue.
At its peak, Netflix was the US Postal Service's fifth-largest corporate customer, operating 58 shipping facilities and 128 shuttle locations across the country, according to a Netflix spokesperson.
Blockbuster's fortunes couldn't have been more different.
Less than a decade on from the opening of their 9,000th store, the company collapsed into bankruptcy after failing to adapt to the changing market.
Miraculously, a lone Blockbuster store in Perth's suburbs managed to survive until 2019, before it too closed down.
"You can't underestimate how challenging it is to change an incumbent business," says Amanda Lotz, a professor of Digital Media and Communication at QUT.
"It was in Blockbuster's interest to try and not have the world change. Blockbuster had a business that was working really well."
It's a familiar story to Stephen Langsford, who founded Australian DVD rental company Quickflix in 2004.
"There were some 3,500 video stalls on the corner streets around Australia [when Quickflix launched]," he told ABC News.
"By the time we finished, there were almost none."
Because Netflix never brought their DVD rental service to Australia, there were "three fairly organised, funded competitors, including ourselves having a shot in this nascent market," recalls Langsford.
Less than a decade after launching, Quickflix had acquired one of those competitors and boasted more than 41,000 Australian subscribers.
"We had millions and millions and millions of DVDs swirling around the country," he says.
Langsford attributes Quickflix's success partly to customer dissatisfaction with brick-and-mortar stores, specifically around late fees, and limited range.
"We saw an opportunity [to] provide a greater range, credit, convenience, late fees, and change the game."
He recalls visiting a Netflix warehouse in Los Angeles with Netflix's then-CEO Hastings.
"I saw their largest distribution centre and the automation that they had put in place and robotics that were involved in unpacking the DVD and repackaging.
"That was a bit more sophisticated than where Quickflix was at."
But dominating the DVD rental market was never Netflix's ultimate goal.
From the start, Randolph had always had one eye on what he saw as the holy grail – streaming.
"I don't think either of us really thought [DVD rentals were] going to last more than five or six years," he said.
Sure enough, in 2007, almost a decade after sending its first DVD in the mail, Netflix launched its streaming service.
Through the early years of streaming, it was the DVD service that paid the bills.
"We were the cash cow that was propping up streaming," a former Netflix DVD director of engineering told The Verge.
"Every dollar we could save was a dollar that would go to pay [for] House of Cards."
Only five years later, streaming was generating double as much revenue as the DVDs were.
By 2015, the DVD service was accounting for less than 1 per cent of the company's total revenue.
This decline meant meant its days were numbered, explained Lotz.
"We remain in this space, especially in the US, where if there isn't potential for growth, it's not going to be something Wall Street values," she said.
With Netflix's streaming business booming, Quickflix once again followed its lead.
This time round, though, the proposition was different. Without geographic and physical constraints, Netflix could take its service global without dramatic increases in its distribution costs.
Boasting the reach of a global empire, a stable of original content and a huge technological head start, Netflix was a formidable competitor.
"When Netflix arrived, it was nuclear warfare," says Langsford.
Netflix entered the Australian market in 2015, a year in which it generated annual revenue of $US6.7 billion compared to $US11 million for Quickflix.
Quickflix closed down the next year, having failed to capture a significant segment of Australia's streaming market.
"Maybe we should have stuck to online DVD rental," laughs Langsford.
"It's very, very difficult for an Australian player with a population of 26 million or so to be able to compete."
A confluence of factors largely outside its control led to Quickflix's demise – a reminder of the importance of luck and good timing.
"I'm a huge believer that luck plays a tremendous role in success," says Randolph.
"We bet on DVD at a time when there were less than a quarter [of a] million DVD players sold in the entire United States."
Against all odds, this bet came off.
"They did something that is largely impossible, which is, enter an existing industry with very high barriers to entry and change the way that industry operates," notes Lotz.
While few will mourn having to pick up DVDs from Blockbuster – or the mailbox – the switch to streaming has resulted in the breaking up of the largest film catalogue in history.
With over 100,00 titles once available to rent through Netflix, US customers had access to an unprecedented range of options.
Quickflix's catalogue was half as big at its peak, but that's still many times more than any of today's streaming platforms.
"It's not a small thing, the loss of diversity of content and range of content," says Lotz.
"If we want to have those libraries I don't think we can expect them to come from for-profit entities.
"I think these come back to the questions of who is responsible for these things and what is the role of public libraries in an environment of digital assets.
"We spend quite a bit on supporting Australian production, but it's also recognising that we now have opportunities to create access for Australians to digital libraries."
As for the now-defunct library, a Netflix spokesperson told ABC News it will be recycling the majority of its DVDs, with a portion of them being donated to organisations focused on film and media.
It's a reflective moment for Randolph, who admits he hasn't watched a DVD in a couple of years.
But that doesn't mean there's nothing to mourn.
"Maybe we are saying goodbye to the world's largest content library that will ever exist," he says.
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