PSound
09-24-09, 10:31 PM
Incredibly in depth article.
It had taken the better part of a decade, but Reed Hastings was finally ready to unveil the device he thought would upend the entertainment industry. The gadget looked as unassuming as the original iPod—a sleek black box, about the size of a paperback novel, with a few jacks in back—and Hastings, CEO of Netflix, believed its impact would be just as massive. Called the Netflix Player, it would allow most of his company's regular DVD-by-mail subscribers to stream unlimited movies and TV shows from Netflix's library directly to their television—at no extra charge.
The potential was enormous: Although Netflix initially could offer only about 10,000 titles, Hastings planned to one day deliver the entire recorded output of Hollywood, instantly and in high definition, to any screen, anywhere. Like many tech romantics, he had harbored visions of using the Internet to rout around cable companies and network programmers for years. Even back when he formed Netflix in 1997, Hastings predicted a day when he would deliver video over the Net rather than through the mail. (There was a reason he called the company Netflix and not, say, DVDs by Mail.) Now, in mid-December 2007, the launch of the player was just weeks away. Promotional ads were being shot, and internal beta testers were thrilled.
But Hastings wasn't celebrating. Instead, he felt queasy. For weeks, he had tried to ignore the nagging doubts he had about the Netflix Player. Consumers' living rooms were already full of gadgets—from DVD players to set-top boxes. Was a dedicated Netflix device really the best way to bring about his video-on-demand revolution? So on a Friday morning, he asked the six members of his senior management team to meet him in the amphitheater in Netflix's Los Gatos offices, near San Jose. He leaned up against the stage and asked the unthinkable: Should he kill the player?
Three days later, at an all-company meeting in the same amphitheater, Hastings announced that there would be no Netflix Player. Instead, he would spin off the device, letting developer Anthony Wood take the technology and his 19-person team to a small company Wood had founded years earlier called Roku. But Netflix, which had already begun streaming movies to users' PCs, was hardly giving up on the idea of streaming them to televisions as well. Instead, the company would take a more stealthy—and potentially even more ambitious—approach. Rather than design its own product, it would embed its streaming-video service into existing devices: TVs, DVD players, game consoles, laptops, even smartphones. Netflix wouldn't be a hardware company; it would be a services firm. The crowd was stunned. In half an hour, Hastings had completely reinvented Netflix's strategy.
Today, nearly 3 million users access Netflix's instant streaming service, watching an estimated 5 million movies and TV shows every week on their PCs or living room sets.
By the end of 2009, nearly 10 million Netflix-equipped gadgets will be hanging on walls and sitting in entertainment centers. And Hastings says this is just the beginning: "It's possible that within a few years, nearly all Internet-connected consumer electronics devices will include Netflix."
And the devices won't just be streaming remaindered basic-cable or art-house fare: Already, Netflix customers can call up just about any episode of SpongeBob SquarePants, The IT Crowd, or Lost whenever they like. They can watch recent releases like WALL-E and Pineapple Express. In other words, they can get unlimited access to the kinds of programming that previously required a cable subscription. (One visitor to the Netflix blog was particularly pleased to see that they could stream old episodes of Dora the Explorer: "We couldn't cancel cable until more kids' shows were available to watch instantly. Thanks for saving us another $400/year.") Netflix has taken the boldest step yet toward a world in which consumers, not programmers, determine not only what they watch but when, where, and how. The dream of routing around cable companies just may be in sight.
Since starting the company in 1997, Hastings' goal has always been the same: to deliver the right content in the fastest and most economical way. Obsessed with designing the perfect algorithm for helping viewers discover new movies, he has packed the place with mathematicians and engineers. They test everything, from the recommendations engine to the Web site's design. But if Hastings uses geeky number-crunching to help customers find their movies, his process of delivering them has been decidedly low tech: sending DVDs in red envelopes via the US Postal Service, which costs him roughly a quarter of his $1.4 billion in annual revenue.
Hastings has wanted to move beyond the silver discs for years, but his early attempts to deliver movies over the Net were slow and kludgy. In 2000, his engineers came up with a service that took 16 hours to download a two-hour movie. Hastings killed the project and disbanded the team. In 2003, a new group of engineers built a small, TV-connected Linux PC that could pull in movies. It cost $300 and took two hours to download a film. Again he wielded his ax. Hastings' decisions may have seemed coldhearted, but ultimately they were proven correct. Other competitors like Akimbo brought similar boxes to market—and failed.
It wasn't until 2006 that he tried again. By this time, the long-download problem had been solved by widespread adoption of broadband among consumers. Meanwhile, the spread of YouTube had gotten users used to the idea of streaming content rather than downloading and saving it. So Hastings put together another team of engineers, who developed a way to navigate unreliable home networks, allowing bitrates to shift midstream to maintain the best picture quality with the least amount of buffering.
But the technology was the easy part. Once Hastings decided not to release his own player, he encountered a different challenge: finding devices beyond Roku that would agree to host Netflix's streaming service. One of the first companies he turned to was Microsoft. Practically since releasing its Xbox in 2001, the company had dreamed of making the console into more than just a gaming machine for teenage boys. It offered more than 17,000 movies and TV shows over Xbox Live, but consumers mostly ignored them; apparently they still saw the console as a Halo delivery device. Providing unlimited access to Netflix's streaming library could change that. Microsoft executives were won over, but even they were surprised at the service's success: Within three months of the late 2008 launch, more than 1 million people had signed on, a huge percentage of whom had never touched an Xbox before. "There's a whole demographic—women—that we now pick up," says Robbie Bach, president of Microsoft's entertainment and devices division. "They always thought of Xbox as a hardcore gaming machine. It belonged in the kid's bedroom or the den or some place where 'my husband cocooned when he wanted to play games.' Now its front and center in the house because everyone wants to stream a movie."
Since then, a full Netflix pandemic has broken out. Microsoft incorporated the service into its Windows Media Center software, meaning anyone with Vista can stream Netflix to their TV. Hastings inked deals with Sony and Samsung to put the service into Bravia TVs and Blu-ray players, respectively. The service started showing up in TVs made by Vizio, the largest seller of LCD televisions in the country. And Broadcom began baking the software into some of its flatscreen chips, making it easy for any TV maker to offer sets pre-loaded with Netflix. (As an extra incentive, Netflix pays manufacturers a bounty for any new subscribers that sign up via their products.) Investment bank Piper Jaffray estimates that 25 percent of Netflix's 2.4 million new subscribers this year will come through one of the streaming devices.
Then they discovered a loophole: Why couldn't Starz sell Netflix the right to air its movies, just as it did with Comcast? Starz had the pay-TV rights to newer titles, exactly what Netflix lacked. Netflix had nearly 9 million (now almost 11 million) subscribers; if it were a cable company, it would be number three, bigger than Cablevision and Charter combined. "We looked at our contract rights and saw that they were an aggregator of content just like the other distributors," says Starz CEO Robert Clasen.
In October 2008, the two companies announced a deal that would add 2,500 fresh titles to Netflix's service. The studios were stunned. "This is the last thing you want," moaned one studio executive. "More eyeballs with no incremental revenue."
Hastings' window probably won't stay open forever. Unhappy studios or cable companies could easily renegotiate their contract with Starz to discourage it from working with Netflix. Still, the deal kicked off what Hastings hopes will be an unstoppable virtuous cycle. If Netflix can use the Starz offerings to sign up more subscribers, those subscription fees will generate more revenue. And with more revenue, Netflix can afford to pay more studios for rights to more films—which will draw in still more subscribers. And so on. Ultimately, if Netflix can grow and maintain a big enough library by working directly with the studios, it won't need the likes of Starz. Sure, it could potentially overturn the way Hollywood has done business, but as long as the studios are getting paid, why should they mind? "Think of all things in Hollywood as 'money talks,'" Hastings says. "If we can generate enough money for studios, we can get any content we want."
http://www.wired.com/techbiz/it/magazine/17-10/ff_netflix?currentPage=all
It had taken the better part of a decade, but Reed Hastings was finally ready to unveil the device he thought would upend the entertainment industry. The gadget looked as unassuming as the original iPod—a sleek black box, about the size of a paperback novel, with a few jacks in back—and Hastings, CEO of Netflix, believed its impact would be just as massive. Called the Netflix Player, it would allow most of his company's regular DVD-by-mail subscribers to stream unlimited movies and TV shows from Netflix's library directly to their television—at no extra charge.
The potential was enormous: Although Netflix initially could offer only about 10,000 titles, Hastings planned to one day deliver the entire recorded output of Hollywood, instantly and in high definition, to any screen, anywhere. Like many tech romantics, he had harbored visions of using the Internet to rout around cable companies and network programmers for years. Even back when he formed Netflix in 1997, Hastings predicted a day when he would deliver video over the Net rather than through the mail. (There was a reason he called the company Netflix and not, say, DVDs by Mail.) Now, in mid-December 2007, the launch of the player was just weeks away. Promotional ads were being shot, and internal beta testers were thrilled.
But Hastings wasn't celebrating. Instead, he felt queasy. For weeks, he had tried to ignore the nagging doubts he had about the Netflix Player. Consumers' living rooms were already full of gadgets—from DVD players to set-top boxes. Was a dedicated Netflix device really the best way to bring about his video-on-demand revolution? So on a Friday morning, he asked the six members of his senior management team to meet him in the amphitheater in Netflix's Los Gatos offices, near San Jose. He leaned up against the stage and asked the unthinkable: Should he kill the player?
Three days later, at an all-company meeting in the same amphitheater, Hastings announced that there would be no Netflix Player. Instead, he would spin off the device, letting developer Anthony Wood take the technology and his 19-person team to a small company Wood had founded years earlier called Roku. But Netflix, which had already begun streaming movies to users' PCs, was hardly giving up on the idea of streaming them to televisions as well. Instead, the company would take a more stealthy—and potentially even more ambitious—approach. Rather than design its own product, it would embed its streaming-video service into existing devices: TVs, DVD players, game consoles, laptops, even smartphones. Netflix wouldn't be a hardware company; it would be a services firm. The crowd was stunned. In half an hour, Hastings had completely reinvented Netflix's strategy.
Today, nearly 3 million users access Netflix's instant streaming service, watching an estimated 5 million movies and TV shows every week on their PCs or living room sets.
By the end of 2009, nearly 10 million Netflix-equipped gadgets will be hanging on walls and sitting in entertainment centers. And Hastings says this is just the beginning: "It's possible that within a few years, nearly all Internet-connected consumer electronics devices will include Netflix."
And the devices won't just be streaming remaindered basic-cable or art-house fare: Already, Netflix customers can call up just about any episode of SpongeBob SquarePants, The IT Crowd, or Lost whenever they like. They can watch recent releases like WALL-E and Pineapple Express. In other words, they can get unlimited access to the kinds of programming that previously required a cable subscription. (One visitor to the Netflix blog was particularly pleased to see that they could stream old episodes of Dora the Explorer: "We couldn't cancel cable until more kids' shows were available to watch instantly. Thanks for saving us another $400/year.") Netflix has taken the boldest step yet toward a world in which consumers, not programmers, determine not only what they watch but when, where, and how. The dream of routing around cable companies just may be in sight.
Since starting the company in 1997, Hastings' goal has always been the same: to deliver the right content in the fastest and most economical way. Obsessed with designing the perfect algorithm for helping viewers discover new movies, he has packed the place with mathematicians and engineers. They test everything, from the recommendations engine to the Web site's design. But if Hastings uses geeky number-crunching to help customers find their movies, his process of delivering them has been decidedly low tech: sending DVDs in red envelopes via the US Postal Service, which costs him roughly a quarter of his $1.4 billion in annual revenue.
Hastings has wanted to move beyond the silver discs for years, but his early attempts to deliver movies over the Net were slow and kludgy. In 2000, his engineers came up with a service that took 16 hours to download a two-hour movie. Hastings killed the project and disbanded the team. In 2003, a new group of engineers built a small, TV-connected Linux PC that could pull in movies. It cost $300 and took two hours to download a film. Again he wielded his ax. Hastings' decisions may have seemed coldhearted, but ultimately they were proven correct. Other competitors like Akimbo brought similar boxes to market—and failed.
It wasn't until 2006 that he tried again. By this time, the long-download problem had been solved by widespread adoption of broadband among consumers. Meanwhile, the spread of YouTube had gotten users used to the idea of streaming content rather than downloading and saving it. So Hastings put together another team of engineers, who developed a way to navigate unreliable home networks, allowing bitrates to shift midstream to maintain the best picture quality with the least amount of buffering.
But the technology was the easy part. Once Hastings decided not to release his own player, he encountered a different challenge: finding devices beyond Roku that would agree to host Netflix's streaming service. One of the first companies he turned to was Microsoft. Practically since releasing its Xbox in 2001, the company had dreamed of making the console into more than just a gaming machine for teenage boys. It offered more than 17,000 movies and TV shows over Xbox Live, but consumers mostly ignored them; apparently they still saw the console as a Halo delivery device. Providing unlimited access to Netflix's streaming library could change that. Microsoft executives were won over, but even they were surprised at the service's success: Within three months of the late 2008 launch, more than 1 million people had signed on, a huge percentage of whom had never touched an Xbox before. "There's a whole demographic—women—that we now pick up," says Robbie Bach, president of Microsoft's entertainment and devices division. "They always thought of Xbox as a hardcore gaming machine. It belonged in the kid's bedroom or the den or some place where 'my husband cocooned when he wanted to play games.' Now its front and center in the house because everyone wants to stream a movie."
Since then, a full Netflix pandemic has broken out. Microsoft incorporated the service into its Windows Media Center software, meaning anyone with Vista can stream Netflix to their TV. Hastings inked deals with Sony and Samsung to put the service into Bravia TVs and Blu-ray players, respectively. The service started showing up in TVs made by Vizio, the largest seller of LCD televisions in the country. And Broadcom began baking the software into some of its flatscreen chips, making it easy for any TV maker to offer sets pre-loaded with Netflix. (As an extra incentive, Netflix pays manufacturers a bounty for any new subscribers that sign up via their products.) Investment bank Piper Jaffray estimates that 25 percent of Netflix's 2.4 million new subscribers this year will come through one of the streaming devices.
Then they discovered a loophole: Why couldn't Starz sell Netflix the right to air its movies, just as it did with Comcast? Starz had the pay-TV rights to newer titles, exactly what Netflix lacked. Netflix had nearly 9 million (now almost 11 million) subscribers; if it were a cable company, it would be number three, bigger than Cablevision and Charter combined. "We looked at our contract rights and saw that they were an aggregator of content just like the other distributors," says Starz CEO Robert Clasen.
In October 2008, the two companies announced a deal that would add 2,500 fresh titles to Netflix's service. The studios were stunned. "This is the last thing you want," moaned one studio executive. "More eyeballs with no incremental revenue."
Hastings' window probably won't stay open forever. Unhappy studios or cable companies could easily renegotiate their contract with Starz to discourage it from working with Netflix. Still, the deal kicked off what Hastings hopes will be an unstoppable virtuous cycle. If Netflix can use the Starz offerings to sign up more subscribers, those subscription fees will generate more revenue. And with more revenue, Netflix can afford to pay more studios for rights to more films—which will draw in still more subscribers. And so on. Ultimately, if Netflix can grow and maintain a big enough library by working directly with the studios, it won't need the likes of Starz. Sure, it could potentially overturn the way Hollywood has done business, but as long as the studios are getting paid, why should they mind? "Think of all things in Hollywood as 'money talks,'" Hastings says. "If we can generate enough money for studios, we can get any content we want."
http://www.wired.com/techbiz/it/magazine/17-10/ff_netflix?currentPage=all