Reed Hastings founded Netflix in 1997 as a home movie service that used the U.S. Postal Service to deliver DVD’s to subscribers. This alternative to the local movie rental store was inspired by Reed’s own experience with extended rental and late fees typically imposed by retail movie rental outlets. While Netflix initially used a similar pricing model, the easily mailed DVD’s appealed to customers at a time when DVD players were gaining popularity and movie rental outlets were still primarily renting VHS cassettes. By 2006 Netflix achieved revenue of nearly $1 billion, offered 70,000 titles on 55 million DVD’s through its 44 distribution centers with a 90% of its subscribers receiving rentals within 1 day.
As DVD’s were quickly adopted into American households and retail movie rental outlets, Netflix’s slower delivery service at the same pricing model began to offer less of a service to customers. In response Netflix shifted its business model to a no-late-fee subscription in 1999. Customers were allowed to have multiple movies at any given time and to receive up to four new movies a month. This quickly changed to unlimited rentals. They also developed their distribution network and worked with the USPS to assure quick turnaround time for movies.
Netflix core competency is providing home entertainment personalized to the subscribers taste. Netflix’s proprietary recommendation system serves as a merchandising system. Through the use of an initial customer survey and the movie ratings of similar customers, movie recommendations are made based on customer preferences and movie inventory. Recommendations are often made for movies other than the high-demand new releases. In doing so, Netflix increased utilization of its movie library. By 2006, 30% of Netflix’s rentals were new releases, versus 70% for traditional movie rental outlets.
The progression of