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R EV: February , 2017
FRANK T. ROT H A E RME L
AUST IN GU E N T H E R
Netflix, Inc.
It’s not Netflix that’s making the changes. It’s the Internet.
– Reed Hastings, Netflix CEO1
At the 2017 Golden Globe awards, Netflix CEO Reed Hastings applauded from his front row
seat as he watched screenwriter Peter Morgan approach the podium. Netflix content executives Ted
Sarandos and Cindy Holland were seated beside Hastings. Peter Morgan’s Netflix-produced original
series “The Crown” had just won the award for best television drama. The biographical series about
Queen Elizabeth II prevailed over formidable competitors including HBO’s “Westworld” and “Game of
Thrones.” With a budget of 100 million British pounds, “The Crown” was also one of the most expensive dramas ever made.2 This fact was not lost on Hastings. Standing behind the microphone, Morgan
looked out into the audience for the Netflix executives. “Ted, Reed, Cindy–Thank you,” he began the
acceptance speech.3
After returning to his hotel that evening, Hastings reflected on the career that had taken him, a
former vacuum cleaner salesman, onto the red carpet. His thoughts quickly wandered back to Netflix’s
business matters. The annual report would be released in two weeks. With Netflix’s stock trading at
record highs, investors were looking for numbers to justify Netflix’s $55 billion market capitalization. Winning Golden Globes is noteworthy, but Netflix lived as much on Wall Street as it did in
Hollywood and Silicon Valley. Netflix had a negative free cash flow of $1.7 billion in 2016.4 How could
Netflix ensure that it was spending money on the right content? Netflix was now operating its streaming service in 190 countries worldwide and needed to cater its licensed and original content to a much
more diverse audience than ever before. Also on Hastings’ mind was Netflix’s sometimes contentious
relationship with internet service providers (ISPs). Netflix relied on ISPs to deliver its high-bandwidth
content to subscribers. How could Netflix ensure that the ISPs would provide the high-speed connections required to deliver streaming content to its subscribers? Finally, Netflix was facing tougher
competitors. Amazon, HBO, and Hulu were investing heavily in streaming content too. As Netflix
approached its twentieth year, how could Netflix keep subscribers loyal and acquire new ones?
Professor Frank T. Rothaermel and Research Associate Austin Guenther prepared this case from public sources. Research assistance by Hassan
El-Majidi is gratefully acknowledged. This case is developed for the purpose of class discussion. This case is not intended to be used for any
kind of endorsement, source of data, or depiction of efficient or inefficient management. All opinions expressed, and all errors and omissions, are
entirely the author’s. © by Rothaermel and Guenther, 2017.
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Netflix, Inc.
A Brief History of Netflix
I got the idea for Netflix after my company was acquired. I had a big late fee for “Apollo 13.” It was six
weeks late and I owed the video store $40. I had misplaced the cassette. It was all my fault. I didn’t want
to tell my wife about it. And I said to myself, “I’m going to compromise the integrity of my marriage over
a late fee?” – Reed Hastings, Netflix CEO5
Reed Hastings late fee story may include a bit of corporate legend and marketing exaggeration.
In an interview, Netflix’s other founder and former CEO, Marc Randolph stated that Hastings’ late fee
story “never happened.”6 Instead, Netflix’s DVD rental-by-mail business was a carefully planned enterprise made possible by advances in video-on-demand and home internet technologies.
Video-on-Demand
Through the 1980s most television shows were commissioned and carried by major networks such
as ABC, CBS, and NBC. The networks had started in radio and followed the same business model with
the arrival of television. Using licenses granted by the Federal Communications Commission (FCC),
networks broadcast to viewers free of charge and earned money by selling advertising spots.7
With the advent of cable television, themed channels like Nickelodeon, CNN, ESPN, and HBO
emerged. Cable companies and channels made money by charging viewers monthly subscription fees
and selling advertising. The broadcasters’ advertising revenues declined, but they were able to compensate by charging cable companies for carrying their content.8
With the introduction of the video cassette recorder (VCR) in the 1980’s, viewers gained the ability
to watch video content on their own schedule. They could either purchase prerecorded cassettes or
make their own tapes from television broadcasts. Instead of being locked into the broadcasters’ schedules, viewers could now consume content at their convenience and skip commercials.9
Prerecorded cassettes initially retailed for around $50, spurring mom-and-pop retailers to form
local video rental clubs. The retailers purchased the tapes and rented them to customers to recover
purchase costs and earn a profit.10 By 1988, video rental revenue was $5.15 billion, surpassing movie
box office receipts.11 In the mid-1990s, the DVD (digital versatile disc) was co-developed by several
electronics companies. DVD discs delivered better video quality than VHS tapes and did not require
rewinding after viewing.
Home Internet
On December 1, 1996, internet service provider America Online abandoned its pay-by-the-hour
billing system. Instead, its seven million customers were offered unlimited internet access for a flat
$19.95 monthly fee. Other internet service providers quickly followed suit. The “all you can eat” pricing freed customers from hourly usage fees, but quickly clogged telephone lines with dial-up modem
traffic.12
2
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Netflix, Inc.
In 1997, 37 percent of US households owned a computer, and 18 percent of U.S. adults used the
Internet at home.13 The 56-kilobit dial-up modem was introduced in January 1997, potentially doubling users’ connection speeds. Most connections, however, were limited to 40 kilobits per second
by telephone line quality.14 At the turn of the millennium, Internet service providers began offering substantially faster broadband service through digital subscriber lines (DSL) and cable modems.
Broadband technology enabled streaming of high-quality video. By 2005, broadband adoption had
surpassed dial-up Internet service (Exhibit 1).15
Reed Hastings and Marc Randolph
After high school, Reed Hastings spent a year selling Rainbow vacuum cleaners door-to-door
before enrolling in Bowdoin College where he majored in mathematics. He followed college with a
Peace Corps assignment teaching math in Swaziland before returning to school again, this time earning a master’s degree in computer science from Stanford.
In 1991, Hastings founded Pure Atria Software to commercialize a software debugging program he
had written. The company grew quickly under Hastings’ leadership and acquired Integrity QA, where
Marc Randolph was the Vice President of Marketing. After the acquisition, Hastings and Randolph
began working and commuting together.
Marc Randolph began his career fulfilling mail orders for songbooks at the Cherry Lane Music
Company. The job allowed him to experiment with different catalog designs and order forms to determine which generated the most sales. He moved on to designing software for managing Cherry Lane’s
music magazine subscriptions. In 1984, he helped start MacUser magazine which eventually led to his
career in software marketing.
In late 1996, Pure Atria’s board decided to sell the company to Rational Software for $585 million.16
Randolph, knowing that his job would likely be cut after the merger was completed, began planning
a new venture. Based on his prior experience in direct mail sales, Randolph realized that the recently
released DVD format would dramatically change the movie distribution. Unlike VHS tapes, the new
DVD discs were thin and easy to mail. In 1997 with funding from Hastings, Randolph began developing a business based on mailing DVDs.17
Building Subscribers
Netflix’s website went live on April 14, 1998. Netflix built an underground following before launch
by seeking out technology writers in Internet Usenet groups (an early form of blogging). Netflix
offered them the chance to be the first to write about Netflix after it launched in return for beta testing their rental system. This provided Netflix with the opportunity to work out operational issues and
granted it immediate access to tech-savvy customers on launch day.18
To attract new subscribers with the requisite DVD player, Netflix convinced electronics manufacturers to package a Netflix coupon with new DVD players. The coupon was mutually beneficial. DVDs
were still not commonly available, but with the coupon, manufacturers could provide their customers
access to a library of hundreds of rental DVDs.19
3
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Netflix, Inc.
Personalized Website
Netflix’s website was designed to duplicate the best parts of the video store experience. Netflix’s
personalized recommendation engine replaced store clerk suggestions. It also pushed customers to
older, in-stock movies instead of suggesting new releases. This enabled Netflix to fulfill demand with
cheaper inventory and gave Netflix a reputation for having rare niche and foreign films.20
One day we hope to get so good at suggestions that we’re able to show you exactly the right film or TV
show for your mood when you turn on Netflix. – Reed Hastings, Netflix CEO21
Christina Kish, Netflix’s head of marketing, was inspired to create the Netflix Queue based on her
frugal reading habits. Kish often visited bookstores to find new books, making a list of the titles she
liked for later use at the library. Similarly, Netflix’s Queue allowed users to designate films that interested them and mark them for later viewing.22
Business Model Evolution
Netflix’s early business model mirrored that of brick-and-mortar video stores. Netflix customers
could browse through DVDs on Netflix’s website and have them mailed directly to their homes. DVDs
rented for $4 each, plus an additional $2 shipping fee. If the renter wanted to keep the DVD they
could purchase it at a discount.23 Initially, Netflix was also one of the few places where customers
could buy DVDs, making sales a primary source of revenue. However, this income stream was under
threat as retailers like Amazon and Walmart began stocking DVDs.24 Randolph and Hastings met with
Amazon’s Jeff Bezos and agreed to a cross promotion deal with Amazon. Netflix would direct DVD
buyers to Amazon in exchange for ad placement on Amazon’s website.25
In 1999, Netflix began testing different ways to increase rentals and drive customer loyalty. Netflix’s
Home Rental Library concept sent customers six DVDs at a time for a $20 per month subscription. After returning all the discs, customers could select six more DVDs to rent. Netflix’s Serialized
Delivery concept continued using Netflix’s per disc rental pricing but allowed customers to create a
short list of future movie rentals. As soon as the customer returned a DVD, Netflix would send another
movie from their list. Customers in the market test groups liked both concepts, so Randolph decided
to combine them into a concept called the Marquee Plan. Customers were offered four movies for a
$15.99 per month subscription. Hastings labeled the program “near DVD-on-Demand” and positioned
it as an alternative to Blockbuster’s due dates and late fees.26 Within six months the program tripled
rentals to more than 100,000 per week. Netflix announced a change to the Marquee Program in
February 2000 to allow unlimited rentals with up to four DVDs out at a time.27
Imagine watching whatever DVD movies you want, keeping them for as long as you want, and watching
as many as you want, all for a flat fee of $19.95 per month…Similar to AOL’s transformation of the Internet
with its unlimited access plan for a flat fee, Netflix is changing the rules of the movie rental market. –
Reed Hastings, Netflix CEO28
Netflix Takes On Blockbuster
David Cook founded Blockbuster in the mid-1980s. Cook owned a Texas-based software company
catering to customers in the oil and gas industry. When the 1980s glut in the oil market began taking a toll on his software business, Cook decided to shift his focus to the video rental market. Using
4
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Netflix, Inc.
his experience with databases, he created an automated video rental tracking system. He opened the
first Blockbuster store in 1985 and used the tracking system to optimize video availability. By 1992,
Blockbuster was opening a new store every 24 hours and acquiring rival video store chains domestically and internationally.29
To improve the availability of new releases, Blockbuster established revenue sharing agreements
with studios. Instead of buying videos outright, Blockbuster negotiated steep discounts for videos and
gave studios 40 percent of rental revenue.30 The DVD was introduced in March 1997, and although
it was a consumer success, with nearly 400,000 DVD players sold in the first six months, Blockbuster
viewed the format as a threat to its VHS-based business and refused to stock it in stores until late
1998.31
By 2000, Blockbuster had grown to 7,700 stores and generated $535 million in earnings on $4.96
billion in revenue.32, 33 In contrast, Netflix had 300,000 subscribers and was expecting losses of $57
million.34, 35 Running low on cash, Netflix’s Hastings proposed an equity alliance to Blockbuster:
We offered to sell a forty-nine-percent stake and take the name Blockbuster.com. We’d be their online
service – Reed Hastings, Netflix CEO36
Blockbuster declined the offer. Blockbuster’s management believed that spontaneity drove the video
business; it doubted that Netflix’s mail-based business would succeed.37 Furthermore, Blockbuster was
already working on a product that would potentially make VHS and DVD rentals obsolete. In partnership with Enron Broadband, Blockbuster was creating a video-on-demand movie streaming system.38
During a trial launch of the system, customers were able to purchase a $100 device that allowed them
to watch rented movies without a trip to a Blockbuster store.39 However, within months, Blockbuster’s
attempt to create a video-on-demand service with Enron fell apart. In 2001, Blockbuster took a $450
million charge to replace obsolete VHS inventory with DVDs.40
Netflix’s continued growth astounded Blockbuster and analysts alike. A report from Kagan Research
indicated a maximum of 3.6 million potential users for online rental services, paling in comparison to
Blockbuster’s 65 million members. One Gartner analyst described Netflix as, “a good niche business.”41
By 2002, however, Netflix was profitable and had launched an initial public offering (Exhibit 2).42
Netflix, McDonald’s, and Redbox
While Blockbuster continued to ignore Netflix, the online-movie rental business experimented
with physical retail locations. Netflix’s Marc Randolph and Mitch Lowe wanted to give Netflix users
the same instant gratification that Blockbuster customers received when visiting stores by using selfservice kiosk machines.43 Lowe had in fact attempted this idea unsuccessfully years earlier with VHS
tape rentals after becoming frustrated with his own video store’s employees and overhead expenses.44
Due to the high cost of the machines, however, Randolph and Lowe decided to test the idea with a
Netflix counter operated by a single employee inside a Las Vegas grocery store. This ‘Netflix Express’
concept tested well. McDonald’s contacted Netflix and was interested in using the rental kiosk idea
to draw more customers into their restaurants. Despite its promise, Netflix’s Reed Hastings shelved
the idea. The video business appeared to be heading towards online distribution and the self-service
kiosks looked like a step backward. Not ready to give up on the idea, Lowe quit his job at Netflix and
went to work for McDonald’s Ventures, where he helped create McDonald’s Redbox DVD rental kiosk
business.45 Randolph left Netflix in 2003 and was replaced by Hastings as CEO. By 2004, McDonald’s
had installed Redbox kiosks in all 50 states.46
5
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Netflix, Inc.
Blockbuster Goes Postal
Blockbuster finally acknowledged Netflix’s threat to their business in 2004:
…in August 2004 we jumped into the online business in a big way. A few months later we made a dramatic
change by eliminating late fees, which had been a major customer irritant. Those moves put Blockbuster
back into growth mode…We were planning to spend $200 million to launch Blockbuster Online and
another $200 million to eliminate late fees. – John Antioco, Blockbuster CEO47
Blockbuster Online launched in August 2004 at $19.99 per month undercutting Netflix’s $22
per month rate for new customers. Blockbuster Online subscribers could select DVDs to rent on
Blockbuster’s website instead of visiting stores. The subscription included unlimited DVD rentals by
mail, and customers were allowed to have up to three DVDs out at a time. Two free in-store movie
rentals per month were included with the subscription as well.48 Netflix responded by cutting its
three-out subscription price to $17.99.49 Not to be outdone, Blockbuster then dropped their price to
$14.99.50 Blockbuster advertised the new service heavily with television commercials and in-store
coupons. Within four months Blockbuster achieved 750,000 subscribers, a number that had taken
Netflix four years to reach.51 In April 2005, Hastings commented on an investor conference call
that Blockbuster had thrown everything at them except the kitchen sink. Blockbuster’s management
obliged and shipped Hastings a kitchen sink from a hardware store the next day.52
In November 2006, Blockbuster announced a hybrid mail and in-store rental model dubbed
Blockbuster Total Access. Total Access allowed Blockbuster Online subscribers to exchange their
DVDs at store locations as well as by mail. The program also offered subscribers a shorter shipping
cycle. If they returned their online rental to a Blockbuster store, it would automatically release the
next movie in their queue for shipment.53
Customers shouldn’t have to choose between renting online versus in-store, and they should never have
to be without a movie. Now thanks to Blockbuster Total Access, they don’t have to. – John Antioco,
Blockbuster CEO54
Blockbuster’s success with Total Access crippled Netflix’s subscriber growth. Wall Street analyst
Michael Pachter declared, “I don’t know how Netflix can win this thing. The only way they can get
back to growth is if Blockbuster goes away.”55
Leadership Changes at Blockbuster
A compensation dispute between Blockbuster’s CEO, John Antioco and billionaire activist shareholder Carl Icahn resulted in Antioco’s departure from Blockbuster in July 2007.56 Jim Keyes, a former
chief executive from 7-Eleven replaced Antioco. Keyes was renowned for his data-driven decision
making. He extended this practice even to 7-Eleven’s doughnut orders, which were adjusted daily
based on historic sales data and weather forecasts. When Keyes left 7-Eleven, he had overseen 36 consecutive quarters of revenue growth. His retail success was badly needed at Blockbuster. The chain had
closed 9 percent of its stores in 2006 and was planning to close an additional 242 in 2007.57
The opportunity for Blockbuster is to provide true total access whether in the form of physical stores or
mail delivery or digital distribution. – Jim Keyes, Blockbuster CEO 58
6
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Netflix, Inc.
During a July 2007 corporate retreat, Keyes presented a store-focused strategy. Stores would be
transformed into entertainment destinations with prepared foods, retail electronics, and kiosks where
customers could load rented movies and games onto flash drives.59 In April 2008, Keyes made an
unsolicited offer to buy Circuit City for $1 billion in an attempt to transform Blockbuster into an
electronics retailer. Circuit City’s board rejected the offer, doubting Blockbuster’s ability to finance
such the deal.60
The company announced a big price increase for online customers, cut way back on marketing, and
decided to intensify the focus on the store-based business… I sold my stock and bought a bunch of
Netflix shares… – John Antioco, former Blockbuster CEO 61
Streaming
In January 2007, Netflix launched an on-demand streaming service. A new Netflix website feature
allowed subscribers to watch one thousand titles instantly on their computers.62 Blockbuster acquired
similar capabilities that August by purchasing Movielink, a streaming service backed by Universal,
Paramount, Sony Pictures, MGM, and Warner Brothers. The move resulted in an 8 percent gain of
Blockbuster’s stock price.
In May 2008, Roku, a company incubated at Netflix’s headquarters, launched a set-top box that
allowed Netflix subscribers to watch streaming content on their televisions. Later that year, Microsoft
and Netflix announced that the streaming software would be included in an upgrade to the Xbox
360. Over the next three years Netflix made deals to incorporate their software on over two hundred
internet-connected devices.63
Let everybody fight it out, kill each other, and spend lots of money on set-top boxes tethered to big screen
TVs. – Jim Keyes, Blockbuster CEO 64
Acquiring streaming content was a challenge for Netflix. The film industry had long-term contracts
in place with the cable subscription channels. In 2008, Netflix struck a deal with Starz to license content Starz had previously acquired. Content providers, however, soon recognized that Netflix offered
them not only a good way to generate revenue from old content, but also the ability to generate interest for current shows. For example, by providing past seasons of “Breaking Bad” on Netflix, AMC was
able to increase ratings of the current season.65 Moreover, “Breaking Bad” drew many more viewers on
Netflix than when shown originally on AMC. One reason is that Netflix allowed binge watching (of
all 62 episodes), without any advertising interruptions.
The television business is based on managed dissatisfaction. You’re watching a great television show you’re
really wrapped up in? You might get 50 minutes of watching a week and then 18,000 minutes of waiting until the next episode comes along. I’d rather make it all about the joy. – Ted Sarandos, Netflix Chief
Content Officer66
Blockbuster Kiosks
Blockbuster and other traditional video stores were feeling the effects of Redbox’s rapid expansion
across the U.S. The machines were drawing customers away from brick-and-mortar establishments
7
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Netflix, Inc.
with more convenient locations and lower prices. “These machines are to the video industry what
the Internet was to the music business – disaster,” commented Video Buyers Group’s Ted Engen.67 In
August 2008, Blockbuster announced a partnership with NCR to develop its own DVD rental kiosks as
it continued to close unprofitable stores. “We’re actually adding points of service rather than deleting,”
Keyes stated about the move to kiosks.68
The End for Blockbuster
Blockbuster filed for bankruptcy in September 2010. Dish Network acquired Blockbuster’s remaining 1,700 operating stores in 2011 at auction. After the acquisition, Dish continued closing stores and
finally pulled the plug on physical locations in 2013.69 Fittingly, the last movie rented at a Blockbuster
was Seth Rogen’s apocalyptic comedy “This is the End.”70 Dish operated a Blockbuster branded streaming service until it launched Sling TV in 2015.
Blockbuster turned out to be the worst investment I ever made. – Carl Icahn71
Qwikster
While Netflix triumphed over Blockbuster, it was not immune to missteps. In 2011, Netflix announced
that it would split DVD and streaming subscriptions with a new entity, Qwikster, handling DVD by
mail. For customers subscribing to both services, prices would jump 60 percent. “I was obsessed with
not getting trapped by DVDs the way AOL got trapped, the way Kodak did…” explained Hastings.72
Upset over the sudden price increase, 800,000 subscribers abandoned the service causing a massive
drop in Netflix’s stock price (Exhibit 3). Realizing the mistake, Netflix quickly reversed the decision
a few weeks later.
It is clear from the feedback over the past two months that many members felt we lacked respect and
humility in the way we announced the separation of DVD and streaming, and the price changes. That was
certainly not our intent, and I offer my sincere apology. – Reed Hastings, Netflix CEO73
Original Content
Netflix released its first original series, “House of Cards,” in 2013. Netflix commissioned two seasons
upfront for $100 million, a bold move that was enabled by Netflix’s detailed knowledge of their customers. Directed by David Fincher, the American adaptation of a British political drama by the same
name, stars Kevin Spacey and Robin Wright. Netflix’s data indicated that the original British production of “House of Cards” was popular with Netflix users, as were director David Fincher’s films like
“Fight Club” and films starring Kevin Spacey.74 Ted Sarandos, Netflix’s Chief Content Officer remarked,
“I didn’t use data to make the show, but I used data to determine the potential audience.”75
Netflix was the only network that said, ‘We believe in you. We’ve run our data and it tells us that our
audience would watch this series. We don’t need you to do a pilot. How many [episodes] do you wanna
do?’ – Kevin Spacey76
Netflix followed “House of Cards” with other hits including “Orange is the New Black” and “Stranger
Things.” By 2016, Netflix had 30 films or shows in production and planned to release 600 hours of
original content, doubling its 2015 output.77
8
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Netflix, Inc.
Netflix and Internet Service Providers
Netflix accounts for 35 percent of peak internet traffic, delivering over 125 million hours of video
per day.78, 79 This heavy network usage has sometimes led to strained relationships with the Internet
service providers (ISPs) that carry Netflix’s data. To help alleviate traffic on ISP infrastructure, Netflix
has moved streaming content storage closer to customers. In 2011, Netflix developed its Open Connect
system. Netflix locates Open Connect content servers near or inside ISPs’ facilities to make interconnection with the ISPs’ infrastructure simpler. Netflix distributes new content to select Open Connect
servers during off-peak times. The content is then automatically duplicated onto additional adjacent
Open Connect Servers. This provides the ISPs with several local copies of streaming content and considerably reduces Netflix’s use of ISP infrastructure.80
Throughout 2013 and into 2014, Netflix customers that used Comcast’s Internet service experienced
noticeably reduced video streaming quality. Comcast publically blamed Netflix for the slow speeds
stating, “The only company who decides how Netflix traffic is delivered to us is Netflix. They choose
the path the traffic takes to us. They can choose to avoid congestion or inflict it.” In the spring of
2014, Netflix agreed to pay Comcast a carriage fee for handling its traffic. The payment resulted in
an almost immediate speed increase for the affected Netflix customers. Other ISPs including Time
Warner Cable, AT&T, and Verizon negotiated similar payment arrangements with Netflix.81
Netflix prevailed over the ISPs in 2015 when the Federal Communications Commission voted to
regulate broadband as Title II telecommunications service under the 1934 Communications Act. This
“net neutrality” decision eliminated ISPs leverage over Netflix by requiring ISPs to treat all Internet
traffic equally. ISPs would no longer be permitted to throttle data or create paid fast lanes.82
In the fourth quarter of 2016, Netflix launched offline viewing. The new feature allows users to
watch downloaded content on iOS and Android devices where broadband access is limited such as
subways, airplanes, and emerging market countries.83
Competitors
Redbox
Redbox rents new-release DVDs, Blu-ray discs, and video games from self-service kiosks located
near the entrances of grocery and drug stores. Devised as a way to increase traffic to McDonald’s
restaurants, Redbox thrived as bricks-and-mortar video stores floundered. Redbox parent company,
Outerwall (formerly Coinstar), runs several other kiosk-based businesses including coin counting and
electronics recycling. Redbox’s success has been attributed to their low rental prices, low cost structure, and providing newer releases than streaming services.84
Redbox’s meteoric rise flattened in 2014. In a move towards managing for efficiency, Redbox
removed 500 of its over 40,000 kiosks. Analyst Steven Frankel commented, “Redbox has definitely
reached full maturity. The only question is: how steep is the decline?”85 Redbox ceased Canadian
operations in 2015 to focus on the US market, “where demand for physical media remains strong.”86
In April 2016, Redbox reported that rentals for the quarter had dropped to 137.7 million from 173
million the previous quarter and that quarterly revenues had fallen to $421.5 million from $519.5 million.87 Apollo Global Management took Outerwall private in September 2016.
9
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Netflix, Inc.
HBO Now
In 1972, Home Box Office (HBO) launched its service in Wilkes-Barre, Pennsylvania.88 The pay-TV
channel split revenues with local cable affiliates to provide them an incentive to promote the service.
Three years later, HBO was transmitting to cable affiliates by satellite and had over 275,000 subscribers.89 In 1976, HBO began financing films in return for distribution rights to satisfy its growing appetite for content at prices it could control.90 In the 1990s, HBO decided to compete based on quality
content resulting in award-winning series such as “The Sopranos.” This focus on content has continued
with current series like “Game of Thrones” and “Westworld.”
HBO entered the streaming market in 2008 with HBO Broadband. Access to the service, however,
was limited to HBO cable subscribers.91 In April 2015, HBO launched HBO Now, a stand-alone streaming service. The move was announced during investor presentation for HBO’s parent company, Time
Warner. “It is time to remove all barriers to those who want HBO,” declared HBO chairman and chief
executive Richard Plepler.92 By February 2016, HBO Now counted over 800,000 subscribers, representing a growing portion of HBO’s 50 million U.S. subscribers.93 HBO budgeted about $2 billion for
content in 2015, with about half going towards originals.94
We have a pretty hefty [content] budget, a couple of billion dollars. We’re not spending our programming
money on library product. We’re doing original shows….We’ve been increasing it, and we’ll keep increasing
it. – Jeff Bewkes, Time Warner CEO95
Hulu
In 2007, NBC and Fox teamed up to create Hulu. Hulu’s online service allows viewers to stream current and past television shows as well as original content such as “The Awesomes.” Initially, Hulu was
free and supported
