Netflix - the end of the red envelope

A collection of climate stories mostly

Last Friday was the last day, when someone at Netflix will send out a red envelope with an enclosed DVD. The service has finally closed its doors after 25 years. Netflix still has roughly 1 million active customers who were given a parting gift on their very last order. They could keep the DVD.

When our children were growing up we lived in Wokingham. It’s where we started our own business, not a video rental one, I hasten to add.

One of the highlights of a typical week was Friday night. One reason was the Chinese takeaway, sometimes a pizza for a change; the other was the visit to Blockbuster video, conveniently located nearby.

It was extremely popular, especially at weekends. Parking was a nightmare. Cars often double parked as someone dashed into the store to return a DVD before they incurred late fees. Remember them?

David Cook is attributed with opening his first Blockbuster video store in 1985, in Dallas Texas. His original business was selling software services to the oil and gas industries throughout the lone star state, but it proved to be tough going. No one really wanted his database skills.

It was Sandy Cook, David’s wife, who perhaps a little frustrated, originally spotted the opportunity for a video rental business.

Their offer was significantly different to the other rental stores. They stocked over 8,000 VHS and 2,000 Betamax films, which compared favourably with their competition, who typically only stocked a few hundred.

The check-out process was also computerised, making it more accurate and faster. That paper based video record kept in the grubby, plastic tangerine-coloured box on the counter was no longer susceptible to being lost by the teenager working their Friday night shift. No offence teenagers.

Video rental took off for good reason. Unless you were prepared to buy your VHS or DVD films, the only way to watch anything after it had finished at the cinema, was to rent it.

As a result, David Cook was a lot more successful.

Two years after founding the business in 1987, three new investors took Blockbuster to a whole new level, which included moving the HQ to Florida and saying goodbye to Dave.

He sold his shares for $12 million. He has since admitted to doing that what if calculation, if he’d held on rather than sold. The estimated value of his shares at their peak would have been a dizzying $300 million. It’s a big if.

The new owners immediately went on an acquisition trail and by 1988, Blockbuster had become the biggest video chain in the US with 800 stores.

By 1992, the company was expanding outside of the US including the UK, where they bought the Ritz video chain, taking the growing number of shops to 2,800.

Viacom stepped in two years later and bought Blockbuster Video and its 6,000 stores for $8.4 billion. The company went public in the process.

There were already cracks appearing in their business model, which they failed to act upon at the time.

Everyone hated the late fees that Blockbuster charged after a returns deadline had passed. In 1997, they even admitted that $800 million or 16% of its revenue came from overdue videos.

It frustrated many of their customers including Netflix founder, Reed Hastings. He said he started Netflix in 1997, because of a big late fee on Apollo 13, owing his local Blockbuster store a $40 fine. He’d misplaced the VHS cassette.

Later that day, on his way to the gym, he made a very valuable connection. The gym had a far better business model. Pay a flat monthly fee and workout as much or little as you want.

He was proved right. Hastings and Marc Randolph, co-founded Netflix, offering flat rate monthly film rental-by-mail to customers in the US using two emerging technologies. The new DVD format was perfect for their red envelopes and only being able to order via a web site kept their costs down and meant their local HQ in Las Gatos, California, could reach anyone in the US.

In 2000, Blockbuster considered buying the popular Netflix service for $50 million, but decided against it.

23 years later, stuffing red envelopes with DVDs is apparently no longer the cash cow it once was. Who would have thought that Netflix would grow from a DVD rental business to a major influencer of the films which are now being commissioned in Hollywood.

Not only did they catch Blockbuster napping, but also the major media companies later, when they morphed their business into a video streaming service which launched in 2007. One of the reasons for stopping their red envelope service is to cut costs in an increasingly cut-throat streaming war.

The Tim Burton film, Beetlejuice, was the first DVD sent out by Netflix. About the same time back in Wokingham, aside from not being able to park easily, we also discovered that our local Blockbuster had already rented out all the copies of A Bug’s Life, and we had to settle for Antz.

In time, Netflix became the fifth largest customer of the US Postal Service, processing 1.2 million DVDs every week. It made $2.6 billion in profit between 2012-2019, which was invested in their thirsty video streaming business, giving them a significant head start over future rivals.

By the summer of 2023, Netflix reported that it had 238 million subscribers.