Netflix and the self-inflicted demise of major media

By James Robinson , written on February 3, 2014

From The News Desk

Ken Auletta’s profile of Netflix founder and CEO Reed Hastings in the latest edition of the New Yorker starts with a revealing tidbit.

Back in the heady days of 2000, Netflix had 300,000 subscribers. Hastings had a vision even then that films would one day be streamed cheaply over the Internet. But that future was not there yet. The company was losing money. Hastings flew to Dallas and met with Blockbuster, offering them 49 percent of the company. Netflix would become and be Blockbuster’s online video division.

Blockbuster weren’t interested. At that time, they didn’t see a threat from digital media.

The previous year Blockbuster’s IPO valued the company at $4.8 billion. Two years after turning down Netflix it posted a $1.6 billion loss. Netflix posted its first profit in 2003, the year before Blockbuster entered into the online DVD market. While Netflix became a cultural behemoth, Blockbuster flagged in value: worth $500 in million in 2006, $24 million in 2010 when it filed for bankruptcy.

Oh, how things could’ve been different. No "House of Cards"! No "Orange is the New Black"! (Maybe.) And while in 2000, the dot-com bubble had just burst it wasn’t like the Internet wasn’t already a thing. Video over the Internet was not a user-friendly proposition but it if you looked around the cultural landscape and projected out current technological trends, it wasn’t inconceivable.

For one, the music industry and Napster were already engaged in what would become a 12-round bare knuckle brawl over peer-to-peer music sharing. Blockbuster weren’t alone in its staggering short-sightedness.

Radio stations began streaming transmission over the Internet in 1994. RealAudio launched in 1995, signalling the birth of online music streaming. Scour, Winamp, Hotline and were around by 1997. All of course, leading into the advent of Napster in 1999.

While this was happening, the music industry was lobbying to have the Digital Millenium Copyright Act passed and taking part in the Secure Digital Music Initiative, all in the name of having a legal framework to punish copyright violators and having a universal standard for digital rights management.

Of course, while they were doing that, the situation with Napster and the proliferation of file sharing got so far past the industry that it has spent over a decade playing catch up.

There’s a great scene in Brad Stone’s book The Everything Store about Jeff Bezos and the rise of Amazon. It’s a version of Hastings’ story, but from the opposite angle.

In 1997 then Barnes & Noble CEO Len Riggio called Bezos and asked for a meeting. His company had $2 billion in annual revenue, Amazon had $16 million. Riggio flew out from New York to Seattle and over steaks told Bezos that his company was going to launch a website soon and crush Amazon, but because he respected what Amazon had done to date they might consider partnering up. Bezos declined, so Barnes & Noble did set about launching its own site - which was allegedly going to be called Book Predator until colleagues convinced Riggio otherwise - but it took too many months to launch, allowing Amazon to innovate right past it.

Today, Blockbuster is done. Barnes & Noble’s market dominance is gone and the company bled money in 2013 while Jeff Bezos contemplated a fleet of drones delivering his books to consumers. The American music industry has lost almost 50 percent of its value in 15 years. When the situation got away from them all and the future happened, they were all too quick to turn around and complain about it. The wounds were self inflicted. In the last half of the 90s, the very executives tasked with protecting and preparing their companies looked out at what was coming for them and failed to see the threat to their dominance.

Hastings’ story in the New Yorker serves as another reminder that the major media companies who’ve struggled bitterly to adapt to doing business in the digital era weren’t felled by an unseen force, they dropped the ball and innovation happened without them.

In Auletta’s New Yorker profile of Hastings, the Netflix CEO says that if Blockbuster had set up online even two years earlier than it had it would have put his company under.

So to hear Dish CEO Joseph Clayton - the head of Blockbuster’s new corporate owner -  say in November 2013 that closing the chain was hard but “consumer demand is clearly moving to digital distribution of video entertainment” it is like seeing someone state the obvious five years too late. The price of this clumsiness was obsolescence and bankruptcy. Deservedly so.

[illustration by Brad Jonas for Pando]