Netflix didn’t disrupt Hollywood, Hollywood disrupted Netflix

A screenwriter and former Netflix employee on Hollywood's missed triumph

Every good TV show is about a family: either literally or figuratively. While the worlds of various shows can be vastly different, the underlying key ingredients are the same: 1) compelling principal characters, 2) who have complex relationships with one another, 3) navigating heightened conflicts that propel them forward through several episodes and hopefully seasons.

Narrative storytelling is hardly exclusive to Hollywood TV shows, of course. The mainstream commentariat, from business journalists to Wall Street analysts, describes Netflix’s rise through a very familiar narrative refrain: a scrappy new entrant disrupts and defeats the behemoth incumbents through innovation and agility as the incumbents look on, helplessly outmatched. That Netflix has disrupted Hollywood has been repeated so often this decade, one in which the streaming giant has grown in size by over 65x, it has become accepted as canon. And from popularizing the subscription-driven streaming model, to introducing the binge-friendly format of releasing entire seasons at once, to becoming a cultural touchstone through “Netflix and Chill”, to achieving global rocket-ship growth, it’s easy to see why this story has taken root. 

But it’s not totally true. There’s a deeper story, one that isn’t told. A story that’s not only more accurate, but dare I say features more compelling principal characters, with more complex relationships, navigating more heightened and interesting conflicts, too. And wouldn’t you know, it centers on a family.

Origin stories

Netflix is the lovechild of Hollywood and Tech, and in a deeper way than the one you might be thinking. As the story goes, in 1997 Netflix co-founders Reed Hastings and Marc Randolph were brainstorming startup ideas while the $700M acquisition of Reed’s company, Pure Atria, was in the process of closing. Favoring Amazon’s eCommerce model for books, they sought to replicate it in another category.

“Wait a minute” I hear you thinking, “I thought Reed was inspired to start Netflix after getting hit with a $40 late fee for Apollo 13.” That’s just a story he tells to pitch the company. Want proof? Netflix used to charge late fees. As the site’s “About” section used to read in November 1999: “The best way to avoid due dates and late fees is to join the NetFlix Marquee Program. But for those occasions when you choose not to rent through Marquee, you'll be glad to know that every standard DVD rental from NetFlix.com is yours to watch for a full 7 days from the day you receive it. That means you can still save rental and shipping fees by ordering several at a time, while enjoying great entertainment at your leisure.” Still an effective, albeit apocryphal, origin story.

Reed and Marc considered VHS tapes for their hypothetical Amazon-like online store, but the category was rejected as the tapes were too expensive to acquire and too fragile to survive shipment. But a new technology had just come out, which as destiny would have it, would change everything: the Digital Versatile (or Video) Disc, aka DVD.

Like a great Hollywood story, the origins of the DVD involve two warring tribes, a cartel and a marriage. As discs were being developed for video storage, two rival manufacturing groups formed: Phillips & Sony versus Hitachi, JVC, Matsushita Electric, Mitsubishi Electric, Pioneer, Thomson, Time Warner & Toshiba. Eager to avoid another costly format war like the one between VHS and Betamax, a working group formed among the most important computer companies at the time: Apple, Compaq, Hewlett-Packard, IBM, & Microsoft. The group pledged only to work with a single, universally-adopted format, and so the Computer Company Cartel successfully pressured the rival factions to make peace and compromise: thus the DVD was born.

But while Tech gave birth to the DVD, its life was nurtured and sustained by Hollywood. Upon its release, Warner and to a lesser extent Sony were the only major studios to embrace the format - perhaps unsurprising given their parent companies’ roles in developing the technology. Universal tip-toed in, while Disney and Fox conspicuously remained out. At the time in 1997, many consumers viewed the DVD as similar to LaserDisc, the latter’s sales stabilizing when it was clear major studios were staying out of DVD. Part of the reason studios were wary to adopt DVD was because of piracy concerns, arguing that consumers owning DVDs meant essentially owning masters of their films. Without more robust copyright protections, they would stay out.

There was no guarantee Hollywood would play ball and embrace the format. Indeed, had they remained out, the DVD would instead have been known for personal data storage rather than media consumption. And maybe Reed and Marc would have settled on a different category to replicate Amazon’s eCommerce model. How does “NetSoap and Chill” sound? Perhaps we’d all be sitting here today lamenting the demise of Bed, Bath and Beyond instead of Blockbuster.

Alas, DVD’s fate was secured by none other than Hollywood incarnate: the Mouse. In September 1997, Disney, at the time the leading global home video seller, announced plans to release titles on DVD by Christmas. Many analysts considered Disney’s participation make-or-break for the format, with expectations for the technology immediately shooting up following the announcement. After Reed and Marc successfully tested delivering a DVD via mail, NetFlix, too, was born.

Talkin’ Bout A Revolution

NetFlix wasted no time dropping their pay-per-rental model for a subscription model by 2000. The company also raced to go public, filing their S-1 in April of the same year and IPO’ing in 2002. Even at the time, the company was thinking about a broadband-based future, and they weren’t the only ones. But DVD vs. Downloadable distribution was not the headline story. In fact, it wasn’t even necessarily the company’s focus.

The S-1, filed with the SEC in April 2000, begins its company description as follows:

“We have created an authoritative online source for movie recommendations and

selection based on personal preferences. We collect preference data from our

users through our Personal Movie Finder service to provide personalized movie

recommendations. Since February 2000, our Personal Movie Finder service has

collected over 8.9 million ratings from over 132,000 individual users. At our

Web site, www.netflix.com, users can rent DVDs through our Unlimited Rental

subscription service, purchase DVDs through our e-commerce referral program and

choose theater locations and showtimes. We operate one of the stickiest sites

on the Internet. According to Media Metrix, during February 2000 visitors to

our Web site spent an average of 40 minutes on our Web site and viewed an

average of 46 pages in a month.”

Reading the company’s description of itself in 2000, you would think NetFlix was primarily a movie recommendation engine, with an add-on DVD rental business meant just to keep people returning to the site. It’s an interesting, and perhaps even strange, way to describe a company whose revenue came exclusively through subscriptions for DVD rentals. This focus on data-driven recommendations over the logistics of distribution was no accident. 

Wired magazine wrote about the company in 2002 thusly: “But it's the recommendation engine that fascinates independent film producers and Hollywood studios… Given a large enough customer base, the Netflix model could even change the way Hollywood develops movies… Imagine studios, with a better sense of who likes what, embracing off-center movies — and concluding that big-budget films are just a big drag on the bottom line.” (Emphasis mine)

14 years later at the 2016 Consumer Electronics Show (CES), Chief Content Officer Ted Sarandos promoted the company’s Original Content strategy similarly, as reported by Deadline: “with the data to target shows and promotions to specific viewers ‘we can spend less on marketing’ and ‘score [not only] with home runs but also singles and doubles and triples’.” At Goldman Sachs’ Communacopia Conference nine months later, at-the-time CFO David Wells echoed this view: “We don't necessarily have to have home runs. We can also live with singles, doubles and triples especially commensurate with their cost.

Such was meant to be the Netflix Way: a Moneyball-styled, algorithmic approach to TV & movie development that would outcompete a reductive, archaically blunt studio system. The channel and format of delivery: on-demand streaming vs. downloadable vs. DVD, all-at-once vs. weekly, subscription vs. Pay-Per-Rental, these were details. Important and impactful, of course, but not positioned as necessarily core to the Netflix value prop. After all, Hollywood had evolved along these dimensions before. A la carte cable channels had proliferated years earlier, analog TV had been replaced by digital transmission, VHS had become DVD, Electronic Sell-Through (EST) had grown largely through Apple’s iTunes platform: Hollywood has been no stranger to evolving forms and formats of distribution and monetization over the years.

Indeed, Netflix promised a lot more than updated content distribution, which had more to do with cheap, accessible broadband than business prowess anyway. It was the data-driven approach to content development that represented true disruption, the innovation striking fear in the hearts of Hollywood creatures and institutions facing impending doom.

The “Hollywood” placed in the crosshairs here was the collection of studio execs, producers, agents and other power-players that drove the industry’s content creation engine. Not dissimilar to Washington, D.C.’s much-maligned “swamp” of the federal government, this group is also largely opaque to the public, heavily relationship-driven, and operating in accordance with a specific set of norms.

But Netflix was going to blow it up with its vaunted algorithm and data, its doubles and triples and apathy to hits: Silicon Valley analytical muscle bulldozing old school Hollywood dinosaurs.

If You Can’t Beat ‘Em, Be ‘Em

So what ultimately happened? When I joined Netflix’s Content Strategy team in 2017, the company pitched itself as being equal parts a tech company and a media company. All new employees would attend an orientation called New Employee College, held quarterly at the company’s Northern California campus in Los Gatos. For what it’s worth, the link to the company’s Investor Relations section on its website featured a picture of Chief Product Officer, and thus algorithm-overseer, Greg Peters. And interestingly, the company did not focus on marketing specific titles, instead focusing on marketing the overall service and believing the algorithm would more effectively market individual titles to the right audiences within the app.

These days, New Employee College is held in a sound stage at Sunset Bronson Studios, the studio complex adjoined to the company’s LA flagship office. Former CFO David Wells left the company when the CFO role was relocated to LA from Los Gatos, and Chief Content Officer Ted Sarandos was named co-CEO this past July. Nowadays, the link to the site’s Investor Relations section features a still from The Crown.

The author’s recollection of the previous Investor Relations image, featuring CPO Greg Peters

The current Investor Relations image

Out is the rhetoric about “doubles and triples”. In are rich overall deals to TV’s top creators like Ryan Murphy and Shonda Rhimes, for which successful Return on Investment would require at least some number of “home runs”. Netflix creative executives who were once DVD execs and inherited the creative role as the company evolved have largely been replaced by Hollywood lifers. For example, studio veteran Scott Stuber came aboard to revamp the company’s film team in a noisy hire in 2017. Since then, Netflix has gleefully abandoned the abstinence from “big-budget films dragging the bottom line” that Wired prophesied in 2002. Instead, we’ve seen tentpole titles with A-list talent and A-list budgets, including the $160M Scorcese epic The Irishman and $150M Ryan Reynolds, Michael Bay spectacle 6 Underground. And in a less noisy but perhaps far more telling sign of what the company has become, Sarandos’ long-time top lieutenant and head of Original Series, Cindy Holland, left the company this year. Her replacement is Bela Bajaria, another Hollywood lifer who joined Netflix in 2016 and grew efforts across a variety of content types, from co-productions to international series, before assuming the top TV role. Cindy had been Ted’s right-hand since 2002. She had been instrumental in the company’s entrée into Original Programming through its House of Cards acquisition, building out the Original Series slate, and signing many of the company’s buzziest overall deals. Netflix is famously no stranger to executive turnover, but this change nevertheless felt like the end of an era.

Netflix realized what Hollywood has long-known: this is a hit-driven business. And while certain business models can accommodate a more diverse mix of content, which I believe is a good thing, everyone is nevertheless in search of that next home run. While algorithms can help distinguish the doubles and triples from the singles or strike-outs, they can’t necessarily predict the home runs or grand slams. That process is much more qualitative, or dare I say, much more human: great artists telling great stories. And when the stars align, with the right team and the right material and the right marketing support and the right distribution strategy and the right cultural moment and the right amount of cosmic luck, you get a hit.

Netflix has long demonstrated an ability to evolve as the circumstances required: from pay-per-rentals to subscription, DVD’s to streaming, second-window content to first-run exclusives, licensed originals to owned productions, again and again. But over time, the most profound change has been in its overall ethos. Netflix is now a media incumbent, not old-school, but closer to a traditional studio than a Moneyball-black box. It’s no longer aspiring to reinvent the wheel, instead leveraging its scale to play the same game as its peers, but at the highest possible level globally. The center of power has shifted to Los Angeles, where its most important hires are ultra-talented content, marketing, business affairs, and production execs from the same Hollywood “swamp” as their counterparts at legacy studios.

Netflix didn’t disrupt Hollywood. Hollywood disrupted Netflix. It triumphed, taming yet another Silicon Valley invader that had promised to blow up its way of life. Instead, Hollywood forced Netflix to change, to adopt its set of norms. It not only faced down this unfamiliar threat, it subsumed it.

The King, who once nurtured his child’s life, later fended off an attempted patricide and re-asserted his rule, like a reverse Oedipus. 

Or, put another way, compelling characters with complex relationships navigated heightened conflicts that propelled them forward.

Now that’s good TV.

Nihaar Sinha is a screenwriter and Founder/CEO of Indo-SoCal lifestyle brand Maiya. From 2017 to 2019 he worked in the Content Strategy & Analysis group at Netflix. He lives in Los Angeles, CA.