Today we’re going to cover what many of you do with your evenings: Netflix.
Now, the story of Netflix comes in a few stages that I like to call the founding and pivot, the Blockbuster killer, the streaming evolution, and where we are today: the new era of content. Today Netflix sits at more than a 187 billion dollar market cap. And they have become one of the best known brands in the world. But this story has some pretty stellar layers to it. And one of the most important in an era of eroding (or straight up excavated) consumer confidence is this thought. The IPOs that the dot com buildup created made fast millionaires. But those from the Web 2.0 era made billionaires. And you can see that in the successes of Netflix CEO Reed Hastings.
Hastings founded Pure Software in 1991. They made software that helped other people make… software. They went public in 1995 and merged with Atria, and were acquired the next year by Rational Software - making he and Netflix founder Marc Randolph, well, obsolete. Hastings made investors and himself a lot of money. Which at that point was millions and millions of dollars. So he went on to sit on the State Board of Education and get involved in education.
Act I: The Founding and Pivot
He and Marc Randolph had carpooled to worked while at Pure Atria and had tossed around a lot of ideas for startups. Randolph landed on renting DVDs by mail. Using the still somewhat new Internet. Randolph would become CEO and Hastings would invest the money to get started. Randolph brought in a talented team from Pure Atria and they got to work using an initial investment of two and a half million dollars in 1997.
But taking the brick and mortar concept that video stores had been successfully using wasn’t working. They had figured out how to ship DVDs cheaply, how to sell them (until Amazon basically took that part of the business away), and even how to market the service by inking deals with DVD player manufacturers. The video stores had been slow to adopt DVDs after the disaster they found with laser disk and so the people who made the DVDs saw it as a way to get more people to buy the players. And it was mostly working. But the retention numbers sucked and they were losing money.
So they tinkered with the business model, relentlessly testing every idea. And Hastings came back to take the role of CEO and Randolph stepped into the role of president. One of those tests had been to pivot from renting DVDs to a subscription model. And it worked. They gave customers a free month trial. The subscription and the trial are now all too common. But at the time it was a wildly innovative approach. And people loved it. Especially those who could get a DVD the next day. They also gave Netflix huge word of mouth. In 1999 they were at 110,000 subscribers. Which is how I first got introduced to them in 2000, when they were finally up to 300,000 subscribers. I had no clue, but they were already thinking about streaming all the way back then.
But they had to survive this era. And as is often the case when there’s a free month that comes at a steep cost, Netflix was bleeding money. And running out of cash. They planned to go IPO. But because the dot com bubble had burst, cash was becoming hard to come by. They had been well funded, taking a hundred million dollars by the time they got to a series E. And they were poised for greatness. But there was that cash crunch. And a big company to contend with: Blockbuster. With 9,000 stores, $6b in revenue, tens of thousands of employees, and millions of rentals being processed a month, Blockbuster was the king of the video rental market.
The story goes that Hastings got the Netflix idea from a late fee. So they would do subscriptions. But they had sold DVDs and done rentals first. And really, they found success because of the pivot, wherever that pivot came from. And in fact, Hastings and Randolph had flown to Texas to try and sell Netflix to Blockbuster. Pretty sure Blockbuster wishes they’d jumped on that.
Which brings us to Act II: The Blockbuster Killer.
Managing to keep enough cash to make it through the growth, they managed to go public in 2002 and finally got profitable in 2003. Soon they would be shipping over a million DVDs every single day. They quickly rose through word of mouth. That one day shipping was certainly a thing. They pumped money into advertising and marketing. And they continued a meteoric growth.
They employed growth hacks and they researched a lot of options for the future, knowing that technology changes were afoot. Randolf investigated opening kiosks with Mitch Lowe. Netflix wouldn’t really be interested in doing so, and Randolph would leave the company in 2002 on good terms. Wealthy after the companies successful IPO. And Lowe took the Video Droid concept of a VHS rental vending machine to DVDs after Netflix abandoned it, and went to Redbox, which had been initially started by McDonalds in 2003. Many of the ideas he and Randolf tested in Vegas as a part of Netflix would be used and by 2005 Redbox would try to sell to Netflix and Blockbuster.
But again, Blockbuster failed to modernize. They didn’t have just one shot at buying Netflix, Reed Hastings flew out there four times to try and sell the company to Blockbuster. Blockbuster launched their own subscription service in 2004 but it was flawed and there was bad press around late fees and other silly missteps. Meanwhile Netflix was growing fast.
Netflix shipped the billionth DVD in 2007. And by 2007, there were more Reboxes than Blockbusters and by 2011 the kiosks accounted for half of the rental market. Blockbuster was finally forced to file for bankruptcy in 2010, after being a major name brand for 25 years.
Netflix was modernizing though. Not with Kiosks but they were already beginning to plan for streaming. And a key to their success, as in the early days was relentless self improvement and testing every little thing, all the time. They took their time and did it right.
Broadband was on the rise. People had more bandwidth and were experimenting with streaming music at work. Netflix posted earnings of over a hundred million dollars in 2009. But they were about to do something special.
And so Act III: The Streaming Revolution
The streaming world came online in the early days of the Internet when Severe Tire Damage streamed the first song out of Xerox PARC in 1993. But it wasn’t really until YouTube came along in 2005 that streaming video was getting viable. By 2006 Google would acquire YouTube, which was struggling with over a million dollars a month in bandwidth fees and huge legal issues with copywritten content. This was a signal to the world that streaming was ready. I mean, Saturday Night Live was in, so it must be real!
Netflix first experimented with making their own content in 2006 with a film production division they called Red Envelope Films. They made over a dozen movies but ultimately shut down, giving Netflix a little focus on another initiative before they came back to making their own content.
Netflix would finally launch streaming media in 2007, right around the time they shipped that billionth DVD. This was the same year Hulu launched out of AOL, Comcast, Facebook, MSN, and Yahoo. But Netflix had a card up it’s sleeve. Or a House of Cards, the first show they produced, which launched in 2013. Suddenly, Netflix was much, much more than a DVD service. They were streaming movies, and creating content. Wildly popular content. They’ve produced hundreds of shows now in well over a dozen languages. 2013 also brought us Orange is the New Black, another huge success. They started off with a whole Marvel universe in 2015 with Daredevil, followed by Jessica Jones, Luke Cage, Iron Fist, and tied that up with The Defenders. But along the way we got The Crown, Narcos and the almost iconic at this point Stranger Things. Not to mention Bojack Horseman, Voltron, and the list just goes on and on.
That era of expansion would include more than just streaming. They would finally expand into Canada in 2010, finally going international. They would hit 20 million subscribers in 2011. By 2012 they would be over 25 million subscribers. By 2013 they would exceed 33 million. In 2014 they hit 50 million. By the end of 2015 they were at almost 70 million. 2016 was huge, as they announced an expansion into 130 new international territories at CES. And the growth continued. Explosively. At this point, despite competition popping up everywhere Netflix does over 20 billion a year in revenue and has been as instrumental in revolutionizing the world as anyone.
That competition now includes Disney Plus, Apple, Hulu, Google, and thousands of thousands of podcasts and home spun streamers, even on Twitch. All battling to produce the most polarizing, touching, beautiful, terrifying, or mesmerizing content.
Oh and there’s still regular tv I guess…
So Y2K. The dot com bubble burst. And the overnight millionaires were about to give way to something new. Something different. Something on an entirely different scale.
As with many of the pre-crash dot com companies, Netflix had initially begun with a pretty simple idea. Take the video store concept, where you payed per-rental. And take it out of brick and mortar and onto the internets. And if they had stuck with that, we probably wouldn’t know who they are today. We would probably be getting our content from a blue and yellow box called Blockbuster. But they went far beyond that, and in the process, they changed how we think of that model. And that subscription model is how you now pay for almost everything, including software like Microsoft Office.
And Netflix continued to innovate. They made streaming media mainstream. They made producing content a natural adjacency to a streaming service. And they let millions cut the cord from cable and get into traditional media. They became a poster child for the fact that out of the dot com bubble and Great Recession, big tech companies would go from making fast millionaires to a different scale, fast billionaires!
As we move into a new post COVID-19 era, a new round of change is about to come. Nationalism is regrettably becoming more of a thing. Further automation and adoptions of new currencies may start to disrupt existing models even further. We have so much content we have to rethink how search works. And our interpersonal relationships will be forever changed from these months in isolation. Many companies are about to go the way of Blockbuster. Including plenty that have been around much, much longer than they were. But luckily, companies like Netflix are there for us to remind us that any company can innovate like in a multi-act play.
And we owe them our thanks, for that. - and because what the heck else would we do stuck in quarantine, right?!?! So to the nearly 9,000 people that work at Netflix we 167 million plus subscribers thank you. For revolutionizing content distribution, revolutionizing business models, and for the machine learning and other technological advancements we didn’t even cover in this episode. You are lovely.
And thank you listeners, for abandoning binge watching Tiger King long enough to listen to this episode of the History of Computing Podcast. We are so lucky to have you. Now get back to it!
Today we’re going to cover an essay Bill Gates wrote in 1996, a year and change after his infamous Internet Tidal Wave memo, called Content is King, a term that has now become ubiquitous. It’s a bit long but perfectly explains the Internet business model until such time as there was so much content that the business model had to change.
See, once anyone could produce content and host it for free, like in the era of Blogger, the model flipped. So here goes:
“Content is where I expect much of the real money will be made on the Internet, just as it was in broadcasting.
The television revolution that began half a century ago spawned a number of industries, including the manufacturing of TV sets, but the long-term winners were those who used the medium to deliver information and entertainment.
When it comes to an interactive network such as the Internet, the definition of “content” becomes very wide. For example, computer software is a form of content-an extremely important one, and the one that for Microsoft will remain by far the most important.
But the broad opportunities for most companies involve supplying information or entertainment. No company is too small to participate.
One of the exciting things about the Internet is that anyone with a PC and a modem can publish whatever content they can create. In a sense, the Internet is the multimedia equivalent of the photocopier. It allows material to be duplicated at low cost, no matter the size of the audience.
The Internet also allows information to be distributed worldwide at basically zero marginal cost to the publisher. Opportunities are remarkable, and many companies are laying plans to create content for the Internet.
For example, the television network NBC and Microsoft recently agreed to enter the interactive news business together. Our companies will jointly own a cable news network, MSNBC, and an interactive news service on the Internet. NBC will maintain editorial control over the joint venture.
I expect societies will see intense competition-and ample failure as well as success-in all categories of popular content-not just software and news, but also games, entertainment, sports programming, directories, classified advertising, and on-line communities devoted to major interests.
Printed magazines have readerships that share common interests. It’s easy to imagine these communities being served by electronic online editions.
But to be successful online, a magazine can’t just take what it has in print and move it to the electronic realm. There isn’t enough depth or interactivity in print content to overcome the drawbacks of the online medium.
If people are to be expected to put up with turning on a computer to read a screen, they must be rewarded with deep and extremely up-to-date information that they can explore at will. They need to have audio, and possibly video. They need an opportunity for personal involvement that goes far beyond that offered through the letters-to-the-editor pages of print magazines.
A question on many minds is how often the same company that serves an interest group in print will succeed in serving it online. Even the very future of certain printed magazines is called into question by the Internet.
For example, the Internet is already revolutionizing the exchange of specialized scientific information. Printed scientific journals tend to have small circulations, making them high-priced. University libraries are a big part of the market. It’s been an awkward, slow, expensive way to distribute information to a specialized audience, but there hasn’t been an alternative.
Now some researchers are beginning to use the Internet to publish scientific findings. The practice challenges the future of some venerable printed journals.
Over time, the breadth of information on the Internet will be enormous, which will make it compelling. Although the gold rush atmosphere today is primarily confined to the United States, I expect it to sweep the world as communications costs come down and a critical mass of localized content becomes available in different countries.
For the Internet to thrive, content providers must be paid for their work. The long-term prospects are good, but I expect a lot of disappointment in the short-term as content companies struggle to make money through advertising or subscriptions. It isn’t working yet, and it may not for some time.
So far, at least, most of the money and effort put into interactive publishing is little more than a labor of love, or an effort to help promote products sold in the non-electronic world. Often these efforts are based on the belief that over time someone will figure out how to get revenue.
In the long run, advertising is promising. An advantage of interactive advertising is that an initial message needs only to attract attention rather than convey much information. A user can click on the ad to get additional information-and an advertiser can measure whether people are doing so.
But today the amount of subscription revenue or advertising revenue realized on the Internet is near zero-maybe $20 million or $30 million in total. Advertisers are always a little reluctant about a new medium, and the Internet is certainly new and different.
Some reluctance on the part of advertisers may be justified, because many Internet users are less-than-thrilled about seeing advertising. One reason is that many advertisers use big images that take a long time to download across a telephone dial-up connection. A magazine ad takes up space too, but a reader can flip a printed page rapidly.
As connections to the Internet get faster, the annoyance of waiting for an advertisement to load will diminish and then disappear. But that’s a few years off.
Some content companies are experimenting with subscriptions, often with the lure of some free content. It’s tricky, though, because as soon as an electronic community charges a subscription, the number of people who visit the site drops dramatically, reducing the value proposition to advertisers.
A major reason paying for content doesn’t work very well yet is that it’s not practical to charge small amounts. The cost and hassle of electronic transactions makes it impractical to charge less than a fairly high subscription rate.
But within a year the mechanisms will be in place that allow content providers to charge just a cent or a few cents for information. If you decide to visit a page that costs a nickel, you won’t be writing a check or getting a bill in the mail for a nickel. You’ll just click on what you want, knowing you’ll be charged a nickel on an aggregated basis.
This technology will liberate publishers to charge small amounts of money, in the hope of attracting wide audiences.
Those who succeed will propel the Internet forward as a marketplace of ideas, experiences, and products-a marketplace of content.”
Whirlwind Welcome to the History of Computing Podcast, where we explore the history of information technology. Because by understanding the past prepares us to innovate the future! Today we’re going to look at a computer built at the tail end of World War II called Whirlwind. What makes Whirlwind so special? It took us from an era of punch card batch processed computing and into the era of interactive computing. Sometimes the names we end up using for things evolve over time. Your memories are a bit different than computer memory. Computer memory is information that is ready to be processed. Long term memory, well, we typically refer to that as storage. That’s where you put your files. Classes you build in Swift are loaded into memory at runtime. But that memory is volatile and we call it random-access memory now. This computer memory first evolved out of MIT with Whirlwind. And so they came up with what we now call magnetic-core memory in 1955. Why did they need speeds faster than a vacuum tube? Well, it turns out vacuum tubes burn out a lot. And the flip-flop switching they do was cool for payroll. But not for tracking Intercontinental Ballistic Missiles in real time and reacting to weather patterns so you can make sure to nuke the right target. Or intercept one that’s trying to nuke you! And in the middle of the Cold War, that was a real problem. Whirlwind didn’t start off with that mission. When MIT kicked things off, computers mostly used vacuum tubes. But they needed something… faster. Perry Crawford had seen the ENIAC in 1945 and recommended a digital computer to run simulations. They were originally going to train pilots in flight simulation and they had Jay Forrestor start working on it in 1947 ‘cause they needed to train more pilots faster. But as with many a true innovation in computing, this one was funded by the military and saw Forrestor team up with Robert Everett to look for a way to run programs fast. This meant they needed to be stored on the device rather than batch modes run off punch cards that got loaded into the system. They wanted something really wild at the time. They wanted to see things happening on screens. It started with flight simulation, which would later become a popular computer game. But as the Cold War set in, the Navy didn’t need to train pilots quite as fast. Instead, then they wanted to watch missiles traveling over the ocean, and they wanted computers that could be programmed to warn that missiles were in the air and potentially even intercept them. This required processing at speeds unheard of at the time. So they got a military grant for a million bucks a year, brought in 175 people and built a 10 ton computer. And they planned to build 2k of random-access memory. To put things in context, the computer we’re recording on today has 16 gigs of memory, roughly 8,000,000 times more storage. And almost immeasurably faster. Also, cheaper. The Williams Tubes they used at first would cost them $1 per bit per month. None of the ways people usually got memory were working. Flip-flopping circuits took to long, other forms of memory at the time were unreliable. And you know what they say about necessity being the mother of invention. By the end of 1949 the computer could solve an equation and output to an oscilloscope, which were used as monitors before we had… um… monitors. An Wang had researched using magnetic fields to switch currents and Forrester ended up trying to do the same thing, but had to manage the project and so he brought in William Papian and Dudley Buck to test various elements until they could find something that would work as memory. After a couple of years they figured it out, and built a core that was 1024 cores, or 32 x 32. They filed for a patent for it in 1951. Wang also got a patent, as did Jan Rajchman from RCA, although MIT would later dispute that Buck had leaked information to Rajchman. Either way they had the first real memory, which would be used for decades to come! The tubes used for processing in the Whirlwind would end up leading Ken Olson to transistors, which led to the transistorized TX-O (the love of many a tech model railroad clubber) and later to Olson founding DEC. Suddenly, the Whirlwind was the fastest computer of the day. They also worked on the first pointing devices used in computing. Light sensing vacuum tubes had been introduced in the 1930s, so they introduced a pen that could interact with the tubes in the oscilloscopes people used to watch objects moving on the screen. There was an optical sensor in the gun that took input from the light shown on the screen. They used light pens to select an object. Today we use fingers. Those would evolve into the Zapper so we could play Duck Hunt by the 80s but began life in missile defense. Whirlwind would evolve into Whirlwind II, and Forrester would end up fathering the SAGE missile defense system on the technology. SAGE, or Semi-Automatic Ground Environment, would weight 250 tons and be the centerpiece of NORAD, or North American Aerospace Defense Command. Remember the movie War Games? That. Dudley Buck would end up giving us content-addressable memory and helium cooled processors that almost ended up with him inventing the microprocessor. Although many of the things he theorized and built on the way to getting a functional “cryotron” as he called superconductors, would be used in the later production of chips. IBM wanted in on these faster computers. So they paid $500,000 to Wang, who would use that money to found Wang Laboratories, which by the 80s would build word processors and microcomputers. Wang would also build a tablet with email, a phone handset, and a word processing tool called Wang Office. That was the 1990 version of an iPad! After SAGE, Forrester would go on to teach for the Sloan School of Management and come up with system dynamics, the ultimate “what if” system. Basically, after he pushed the boundries of what computers could do, helping us to maybe not end up in a nuclear war, he would push the boundaries of social systems. Whirlwind gave us memory, and tons of techniques to study, produce, and test transistorized computers. And without it, no SAGE, and none of the innovations that exploded out of that program. And probably no TX-0, and therefore PDP-1, and all of the innovations that came out of the minicomputer era. It is a recognizable domino on the way from punch cards to interactive computers. So we owe a special thanks to Forrester, Buck, Olson, Papian, and everyone else who had a hand in it. And I owe a special thanks to you, for tuning into this episode of the History Of Computing Podcast. We’re so lucky to have you. Have a great day!