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. They get it through Roku's player, which was successfully launched in May 2008. (The Roku now also offers more than 45,000 movies and TV shows on demand through Amazon.com and, since August, live and archived Major League Baseball games.) They get it through their Xbox 360s—Microsoft added Netflix to its Xbox Live service last fall. They get it through LG and Samsung Blu-ray players. They get it through their TiVos and new flatscreen TVs. 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.
You'll never hear Hastings point that out, however. Unlike many in the tech world, he's a quiet disrupter, sabotaging business models silently and irretrievably. His first hit was to the DVD business. Netflix, which lets subscribers hold on to movies for as long as they like, was cheaper, easier, and more convenient for consumers than building film libraries; DVD sales have plummeted as Netflix has grown. And while his streaming service would seem to present a similar threat to cable companies, Hastings argues that their real challenge comes from the Internet in general, not just Netflix. "I mean, will people disconnect their cable over time?" He shrugs. "Potentially." Hastings may undersell the impact of his service, but some of his partners don't share his gift for diplomacy. "Our goal is to have everyone cancel their cable subscription," Roku's Wood says.
Whether Hastings cops to it or not, that day could be coming soon. That's why, for Hastings to fully accomplish his vision, he'll have to go up against some of the most powerful incumbents in media: the cable companies and content providers that have successfully stymied or co-opted all previous entrepreneurial efforts. So far, Hastings has avoided the wrath of the giants by building his Netflix service surreptitiously, slowly amassing his library of streaming content and giving viewers new ways to access it. And now, even if the cable and content companies do take him on, it may be too late. Hastings' Trojan horse—Netflix's software, embedded on myriad consumer devices—is already in place.
It is odd, in an era when the Internet seems able to worm its way into every part of life, that nearly all of us still watch television the old-fashioned way, piped over cable or beamed in by satellite and available only in bloated packages of channels programmed by network executives. Breaking out of this system requires more patience, money, and technical expertise than the average couch potato is willing or able to expend: Plunk an expensive streaming device or PC tower in the living room, wire up a connection to the TV, and install the Boxee app or program a BitTorrent RSS feed to get the content. Watching live shows in real time requires an even more elaborate work-around. Cable companies have made some feints toward giving subscribers more control over what they watch, but most of their efforts have been lackluster. Verizon's FiOS TV offers access to a few user-generated Web sites; Comcast and Time Warner Cable are rolling out services that let subscribers stream cable channels to their PCs.
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