Netflix (NFLX) is now a household name, with millions of new subscribers joining each month to enjoy streaming movies and television on their computers or internet-connected devices. Netflix streaming now takes up over 35% of all peak internet traffic in the United States, making it a force to be reckoned with. But Netflix had humble beginnings, starting out as a pay-per-rental, mail-in service in 1997 to compete with traditional brick-and-mortar video rental stores.
Netflix currently commands a market capitalization of nearly $29 billion, is a member of the S&P 500 Index, and employs over 2,200 people worldwide.
Netflix and its rise to dominance
It is because Netflix has been so quick to adapt its business model that it has been able to stay a dominant player. In 1999 it introduced a subscription service where customers could keep DVDs for any length of time without late fees for one low monthly cost. In 2000, Blockbuster Video turned down an offer to acquire Netflix for $50 million and instead launched its own competing by-mail subscription DVD service alongside its retail locations. Blockbuster filed for bankruptcy and shuttered all of its stores in late 2013; Dish Network (DISH) purchased its remaining assets. Other competitors have also fallen by the wayside, including Hollywood Video and Redbox.
In the mid- to late-2000s, digital streaming media and downloadable music and video file services began stealing market share from Netflix as more and more people started watching media online. The company took notice and pivoted to offer streaming video services as well. By 2010, Netflix had rebranded its by-mail DVD service as a subsidiary called Qwikster and started to focus solely on digital distribution. Meanwhile, it began losing subscribers at a rapid rate and reported an 88% drop in quarterly profits in 2012.
Netflix once again adapted and lowered its subscription fees while, at the same time, undertaking production and exclusive distribution of its own original television series, including the critically-acclaimed House of Cards and a re-boot of cult favorite Arrested Development. By the end of 2014, the company boasted over 57 million subscribers in almost 50 countries. Netflix and other streaming services have grown while pay TV continues to lose subscribers.
New Potential Threats to Netflix
Netflix has proven adaptable and able to successfully overcome competition, a fickle customer base, and an ever-changing technological landscape for media. The new competitive dynamics may again force Netflix to adapt.
The streaming television space seems to be the fastest growing sector for competitors to grab market share from Netflix. Traditional television companies have entered the fray with a large, loyal viewer base. Time Warner (TWX) debuted its HBO GO app in 2014, free for subscribers to its cable channel, and a day later CBS (CBS) announced its own streaming service, CBS All Access. Online streaming service Hulu began producing and distributing its own original programming through its website and mobile app, and Amazon (AMZN) is developing original content alongside traditional streaming with Amazon Prime.
Publicly, Netflix does not consider streaming services by television providers to be a threat because these providers cannot air Netflix's own original content, and television is simply a complementary service to its primary movie streaming product. However, HBO, CBS, and Amazon could all begin to compete with streaming movies of their own at a moment's notice. (For more, see: Will Hulu and Netflix Replace Cable?)
There are also new threats in the form of streaming movies over torrent networks, a legal grey area, from services like Popcorn Time. Unlike traditional torrent applications which allow users to download and share media files, Popcorn Time features an integrated media player so that the viewer need not ever participate in an illegal download. That said, the company was met with legal resistance from numerous countries and industry groups and shut down in 2014.
Nevertheless, there have been clones of Popcorn Time, such as popcorntime.io, Time4Popcorn, and Cuevana (which is targeted to a Spanish-speaking audience). Because of the potential for distributing content illegally, stream-over-torrent services are not yet a viable threat to Netflix and viewers should do so only at their own risk. That's not to say a peer-to-peer (P2P) video streaming system that can function legally will not be developed down the road, along the lines of what Spotify has done for P2P streaming music. (See also: Spotify Makes Internet Music Make Money.)
One potential threat to Netflix may come from movie studios themselves. In the wake of the Sony Pictures hack surrounding The Interview, many theaters and distribution channels refused to take the perceived risk and dropped the movie. Sony, after some deliberation, decided to self-release the movie digitally through a limited number of outlets – a move that was well received by viewers. The apparent success of self-distribution of movies over digital media may be an unforeseen force that could quickly grow to dominate the market.
The Bottom Line
Netflix has become a household name by being able to quickly adapt and shift focus to serve an ever-changing market full of increasing competition. What began as a humble direct-by-mail DVD rental company has grown to dominate 35% of all downstream peak internet traffic in streaming video content to users.
Now that most of Netflix's revenues are generated via digital distribution, new rivals have entered the field, including Amazon Prime and Hulu, as well as entry-by-traditional television media such as HBO and CBS. While illegal streaming and downloading will always exist to some degree, attempts to normalize it though Popcorn Time have largely failed, keeping it from seriously impacting Netflix's bottom line. However, movie studio self-distribution through digital channels – an unanticipated accident resulting from the Sony Pictures hack – may prove to be a real threat in the future.