For several months now, I’ve been complaining on Twitter and a bunch of other places that, for as ubiquitous as Netflix streaming has become—I think it’s one of the most important technology products of the last decade at least— there’s actually been comparatively little journalism or scholarship about how the product came about. That’s why I was delighted to get acquainted with Neil Hunt, who is the Chief Product Officer at Netflix. Since he’s been at Netflix since 1999, not only is he the perfect person to tell us how Netflix streaming came about (the technical hurdles, the strategic decisions, etc.) but he can also give us the whole history of Netflix, from basically the very beginning.
Brian: Neil Hunt, thanks for coming on the Internet History Podcast.
Neil: Brian, thanks for having me on your show.
Brian: I always like to begin with educational background in a really, really general way, but I see from your CV that you went ahead and got a full PhD in Computer Science. So I’m wondering, was your intention…earlier in your career, were you gonna be an academic or a researcher?
Neil: I sort of found myself attracted to that, yeah. Definitely, academia was a good way to go. Actually, I found myself pretty attracted to university life, in general. It was a good way to prolong that, but that’s not the way it played out.
Brian: So the first few jobs when you came out of university, were they generally in, like, research labs and things like that?
Neil: Yeah. I managed to overlap those in a fairly unusual way. I got my BSc at the University of Durham, and then I stayed on there to do a PhD. And once I finished the coursework, my professor ended up signing me to a summer internship at a lab in Palo Alto called Schlumberger Palo Alto Research. And it was very much doing work that was aligned with the computer vision and image processing research that I was doing at…well, had by then become the University of Aberdeen because my professor had moved. And so, I got to spend a summer, which turned into five years at Schlumberger, and I did eventually graduate. It took a little longer than it should’ve done, but I came out with my PhD eventually in, whenever that was, 1999. No, 1991, sorry.
Brian: Nineteen ninety one, but…
Neil: I came out eventually. Would’ve graduated in 1989 when Schlumberger dissolved their lab.
Brian: But when you were at Schlumberger, that’s generally in the what, the mid-’80s, early ’80s?
Neil: Yeah, 1984 for a bunch of years. That’s right, yeah.
Brian: Well, the reason that I ask that…
Neil: Schlumberger, of course, was an oil field services company, so then, in the ’80s, they were getting very deeply into computer and microelectronic stuff and so they bought a bunch of companies. And remember, they bought Fairchild. This was actually the Fairchild AI Lab, and, you know, it became a Schlumberger Palo Alto lab about the day before I joined, in fact.
Brian: And I bring that up because, is it correct that you met Reed Hastings at Schlumberger?
Neil: That’s correct, yeah. He was there in a different position, but we crossed paths from time to time. And that formed a connection that he would come to tap a little later on.
Brian: Right. So moving forward a bit in time, can you tell me about Pure Software, what it was, and how you got involved in what you did there?
Neil: Yeah. After the Schlumberger Lab had dissolved, people were spun out to all kinds of different companies, and I went to join [inaudible] Research Lab. And I was working on productizing some of my research, making a software tool, and Reed contacted me. He had built a prototype of a software checking and validation tool he thought might be useful. And he brought it over and I tried it out, and it was useful. It found a bunch of issues and challenges. And shortly afterwards, he invited me to join his new company and productize that offering. And then that was Pure Software and the tool was Purify, which was a C and C++ error checking tool.
Brian: So to be clear, Reed founded Pure and was the CEO?
Neil: Correct, that’s right.
Brian: So this is now into the early ’90s?
Neil: Yes, it’s 1991. And Pure Software quickly became profitable on that [inaudible] tool Purify, and then we added a variety of additional tools. The software tool space was going through a phase of consolidation at that point, and so there were a bunch of different mergers. Oh, by the way, we became Pure Atria Software, and then we became Rational Software and a big suite of software development tools off of Rational, of which Purify was one, and that was kind of the story there.
At that point, Reed moved on. I moved, temporarily, to Boston, which probably wasn’t my long-term future. And in that intervening year, Reed and a couple of other folk, Mark Randolph and a few folk, started putting Netflix together. And in 1998, he approached me about joining Netflix and moving the engineering effort there. And so we came and talked, and ended up…I joined Netflix in early 1999 when it was still a very nascent business and there were lots of things still to be figured out in the future.
Brian: To the best of your recollection, I know it’s a long time ago, but do you remember what you thought of the idea of Netflix when you first heard about it?
Neil: It clearly had some big ambitions, but at the time, the goal was to start building a business around shipping DVDs through the mail. And DVDs, you remember, were only just introduced, so there was a very small install base of DVD players in the country and the world. And shipping by email was an unusual proposition, to be sure, so it was quite a speculative venture.
Brian: So when you do sign on, what is your job description, or what do you work on first? What do you join the company to do?
Neil: My job description was VP of Internet Engineering. And the first mission, perhaps, was to solve the year 2000 problem, which was upon us at that time. And even though this was a brand new company, we were able to find a bunch of places where two digit year codes would’ve rolled over backwards and caused all kinds of trouble. In the end, 11 months later, we didn’t have a year 2000 problem, but it was certainly the very first thing dumped on my plate on day one.
Brian: So the website, when you got there, had already been launched live to the public?
Neil: Yes, it had. That’s right. At that point, it was a service offering transactions a la carte, rentals of DVDs for a period of a week or so. And we found it pretty difficult to get consumers to come back and have a second try. You know, shipping delay is a pretty serious impediment when you’re taking a day to four days to ship a disc each way. And so at that stage, the business was not tremendously successful.
Brian: Well, right. I think we need to underline that. Everyone thinks of Netflix as this subscription service, but it was an a la carte rental service at the beginning. Do you remember what the thinking was that evolved into the subscription plan that people would remember?
I’d like to lay just a little claim to credit for calling it the “Queue” which, of course, me as a Brit, that’s a very familiar word.
Neil: Well, even before I joined, we were discussing how we could turn this into a recurring revenue model, which is what subscription is, effectively. And it became quickly apparent that we needed to get to that really quickly. We were able to get customers to come try Netflix, but to get them to come back again was difficult. And so, the key pieces that we needed to build were a model where people pay for a month of service and then they get to use it a number of times during that month. And secondly, the Queue was a super important piece of the puzzle because if you got consumers to build a list of the titles they were interested in, then you could automatically ship the next one when they returned the first one. And that was the key to providing a continuity of service and a value that made people engage.
And so, I’d like to lay just a little claim to credit for calling it the “Queue” which, of course, me as a Brit, that’s a very familiar word. To people outside of Britain who are not computer scientists, queue is a pretty strange word, is it the Kway or the QU or what have you? Unfortunately, my technical terminology leaked through into the consumer space, which I’ve regretted for years and years, but it is kind of a humor [inaudible].
Brian: Yeah. I mean, so the queue is obviously this… moving to subscription allows you to do the Queue, it allows you to collect information what people want to watch next and what they’re interested in, but it also gives you the great tagline of “No late fees.”
Neil: That’s right, exactly, yes. I think I’ve got it the other way around. The Queue allowed us to go to subscription, not the other way around. Without a queue, we wouldn’t have had a subscription plan, but with a queue, we are able to eliminate late fees, to always have a DVD sitting on top of your TV ready to go, and you know, the rest was history at that point. The business began to grow and accumulate subscribers, and the revenue started [inaudible] looking great. We worked on the…I joined in ’99, we started work on subscription pretty quickly. And by the fall of ’99, we were out with the subscription plan.
Brian: And you also—correct me if I’m wrong—but you also started working really early on things like personalization and algorithms to help recommend movies and things like that, right?
Neil: That’s correct, yeah. You’ve gotta remember, again, that in 1999, the library of titles on DVD was measured in the dozens, not the thousands. But very quickly, it became apparent that giving people a tool to find the next interesting thing to watch was gonna be important for subscriber satisfaction, member satisfaction. But also, the habit was for people to come in and search for the newest release, and we would rush to the store and buy a whole lot of copies of the new release, whatever it was. “Das Boot” was one of them, was one of the first new releases after I joined, the…
Brian: Submarine movie, yeah.
Neil: The submarine movie, correct. That’s right.
Brian: The U-boat movie, yeah, yeah, yeah, yeah.
Neil: Yeah. Which was chiefly distinguished by the fact that they printed the Side 1/Side 2 on the wrong side of the disc, and it really wasn’t clear. So you put the thing in, and then the thing started right in the middle of a really intense [inaudible] charging scene with rivets popping off and explosions and…
Brian: Wait a minute, why do I have a memory of that? Like, did I actually watch that DVD? You literally just rang a bell in my head. I feel like that happened to me. Anyway, sorry, go ahead.
Neil: It probably did. And then about 10 minutes in, you realize, “No, this isn’t the start of the DVD.” And you pull it out, and then it’s, “Yeah, okay. Let’s flip it over [inaudible].” Oh, there was so much broken stuff in those days.
Brian: Well, okay…
Brian: Yeah, go on.
Neil: Yeah. So we needed to figure out a way that we weren’t shipping the newest copies of the newest titles to our members and then having them come back and sit on the shelf and nobody else ever wanted to watch them. And so, the idea of recommending stuff that they might not immediately have in mind but which they wanted to see, maybe all the titles, historic titles, was gonna be an important piece to making the business sustainable. If we could rent each title 10 or 20 times, it would become a sustainable business. If we were buying a title for $20 and renting it for part of a subscription, it was not gonna float for very long.
Brian: So let me just underline this again. So the Recommendation engine is obviously something to help users, you know, find movies they might wanna watch, but also on your side of it, it’s a solution to inventory issues and profitability issue?
Neil: That’s correct, yeah. We called it the “percent new problem,” that if 80% of what we shipped out of the door was a brand new disc, then it clearly was gonna be very expensive to run this business. And the recommendations was a way to solve that in a win-win way.
Brian: To nudge people into the long-tail.
Brian: So I’m gonna just throw this in here real quick. Just, you know, like we said, you join in ’99, it’s the height of the dot com bubble, 2000, the bubble bursts. I know you can only speak for yourself, but you’re only there for about a year, maybe a year and a half, when the bubble bursts. You can only speak for yourself, but were you ever concerned that, “Oh, maybe we’re one of these dot com companies that are gonna go under, we’re not gonna make it?”
Neil: Of course. You know, the world was pretty strange. A little anecdote that probably comes from a few months later, but that’s quite relevant…
Neil: I feel like Reed and the management of Netflix had always had in mind building a sustainable business from the beginning and so, you know, hence their focus on solving the new disc shipping problem, even though all of our peer companies, at the time, were raising piles of cheap money and using it to fund growth and gaining eyeballs and market share at almost any cost. And I remember a board meeting where the board members were puzzled as to why we weren’t spending money faster and growing faster, as opposed to trying to solve the problems of making the thing profitable. And within months, that kinda turned on it’s head, and the fact that we had gotten reasonably close to profitability meant that we were able to raise one more round and eke that out. It was touch and go, but we were able to get through to profitability and growth, in spite of the fact that the market for internet businesses at that point had slipped to extremely negative.
Brian: Well, and you were one of the first, or possibly the first internet company, to IPO after the bubble burst. So yeah, you managed to thread that needle.
Neil: Yeah. As with all of these things, there’s a good measure of luck that. Luck favors the prepared mind, the prepared business, and we were fortunate that we had approached it with kind of a sound business idea in mind.
Brian: Before we get to what we came here to talk about, the streaming stuff, I wondered if you wanted to say a little bit about the competition with Blockbuster. I mean, this is one of those classic, you know, “Harvard Business School Disruption from the Internet” sort of stories. Blockbuster ignored you guys for a while, enough time for you to get traction. But once Blockbuster came online—again, from your perspective, speaking for yourself—like, how worried were you about competition from them and competition from Walmart and people like that?
Neil: Blockbuster was really the third wave of competition. The first wave was Walmart, and the second wave was Amazon. So we kind of faced a showdown with the world’s biggest retailer, followed by the world’s biggest e-tailer, and then Blockbuster came in as the world’s biggest video renter. But by that time, we had learned, I think, the benefit and virtue of being extremely focused on our customers, on delivering value that they needed and required. And I think what we saw, with Walmart, was that they didn’t really have the same level of focus and attention. And while it spooked the public markets and the stock price was in the toilet for a while, the actual outcome really was never particularly in doubt. We were able to keep growing, and we were able to be successful competing against Walmart. And then Amazon, I think, a little more smartly, decided to compete outside the U.S. and they launched LoveFilm in the UK.
Brian: Right. They never actually launched in the U.S. a DVD rental service.
Neil: That’s correct.
Neil: And then Blockbuster finally woke up that this was a potential threat to their business, and they proceeded to copy our model pretty much exactly and launched that out at a slightly lower price, and we ended up competing on price for a bit. They goaded us into— “Goaded” is perhaps the wrong word, they stimulated us into thinking about tiers of service. So we would offer a 1-disc, a 2-disc, and a 3-disc plan at different price points so that we could have a low price point compete. And that was an important outcome.
But at the end of the day, it’s fascinating, we had lots of meetings where we debated all the ways we could respond to the Blockbuster threat. And we charted all kinds of new projects in the niche [inaudible] that we were gonna do. And in the end, it amounted to a great deal of running around and not much outcome. The thing that really mattered was sticking to the core and delivering a great service and a better performance than Blockbuster was able to do.
And so, I think the learning that we took away from that was it was more important to focus on our customers and being great at making a great business than worrying about what the competitors are up to. And, you know, eventually, as history shows, Blockbuster overextended themselves and went bankrupt. And you know, I think, in that case, it was responding a little too late and then not really being able to put enough effort and focus on it to catch up with the lead and the advantage that we had.
So it sounds like a bit of a David and a Goliath story, but in the end of the day, I think it’s probably not that uncommon for the incumbent to fail to notice the challenger until it’s too late to effectively respond. So this is the story that you see repeated from time to time.
Brian: Well, you know, it’s probably not that uncommon, but what I would say is uncommon is that…and this is gonna lead us into streaming… is that it’s around 2007 to 2009 that Blockbuster is really vanquished. And you guys have proven your model, and you’re on top. At that exact same moment is when you start to move into this new business model. So what I would say is rare is, you know, you would expect you guys would maybe rest on your laurels for a bit and say, “We won” and celebrate for a bit, but you’re immediately moving into this new business model.
Neil: Yes, that’s correct. The interesting challenge here, of course, is it’s a pretty different business that serves the needs of a somewhat different customer base that doesn’t necessarily overlap with the first one. And I think we had learned from the Blockbuster experience that focus on your customers, your growth customers, your new customers, is an important thing. And so I think we pivoted pretty hard to really fit the attention and focus on the streaming business. Yes, initially, it was pretty nascent. We had to piggy back it on top of our DVD rental subscription business because we were unable to put together a library of sufficiently compelling content to be a standalone business.
Brian: But you know what, you know what? Let’s…hold on. I apologize for cutting in here. Let’s get into streaming with two questions, first of all. When the company was conceived… You know, Reed has, several times, given this quote that he didn’t call the company DVD By Mail, he called it Netflix. Was the idea always, eventually, to do delivery of video over the internet?
Neil: Sure. And when you look back at broadband plans and pricing back in ’99, 2000, 2001, that seemed like a pretty out-there suggestion. Then as the years went by, it became more and more practical until, by 2007, it was quite feasible. That was about the time that YouTube started out too, doing streaming, consumer-generated, user-generated video…
Brian: Okay, okay. That was gonna be…
Neil: So we had that as a parallel.
Brian: I was gonna say, that was my second question. Was there some moment or catalyst, perhaps YouTube, that was the tipping point that caused you guys to say, “Okay, now is the moment to jump in and try to make streaming happen”?
Neil: Actually, I would say it was concurrent, but no, we had started working on internet delivery actually a couple of years before, three years I think, before YouTube came on the scene, and it was a bit stop and start. And at the time, internet speeds were far too low and video compression was far too poor for a real-time delivery. And so we were looking at something much closer to the DVD model of trickle it down overnight and then have it stored on a disc on a box.
So it became pretty clear that that was not gonna be a very interesting model. I’m not sure whether we were thinking about streaming before YouTube or YouTube helped us to think about that. It’s exactly the same time we gave up on the disc storage model and started to think about real-time delivery and streaming to customers as they were watching.
Brian: And so, you’re thinking of set top boxes? I know, obviously, Roku sort of incubated inside Netflix. Were those some of the early projects that you’re talking about?
Neil: No, it was long before Roku. It was in like, 2003, 2004, we started prototyping a box that… If you remember, TiVo was the hot thing about then, and that was a TV receiver with a disc drive. And we were working with some contract manufacturers who were building similar boxes, you know, with a video processor and a hard disc, and we were cobbling together some software to be able to work with a thing like that because that was clearly how we start in the wrong direction that doesn’t go anywhere. And then, in the height of competition with Blockbuster, we cancelled all of those projects in favor of just winning. And then when Blockbuster finally diminished as an existential threat, we were able to get back. And at that point, it was like, “Okay, well, we’ll skip those things, go straight to streaming.”
Brian: Okay, so this is around…in 2007, I know, is when the first, I think, streaming products come to market. So when do you think that you start working on it in earnest?
Neil: Oh, it was probably 2006, something like that, we kinda had a model and…
Brian: There were so many other streaming experiments around that time, like MovieBeam, Movielink, you know, Unbox or something, I can’t even…there was dozens of ’em. And iTunes Video Rental starts to come out around the same time. So what is it that makes you guys wanna go into this crowded field that, seemingly, no one had had success with before?
Neil: I don’t recall it being as crowded as you are painting now. It feels to me like a lot of those things were a bit later. There was the ill-fated Enron project to “stream across fiber networks that they would own and deploy”, which, in retrospect, seems awfully quaint. Of course, we all know what happened to Enron. But that was maybe the thing that I recall was being most present in our minds as we thought about streaming. Like, “What is this thing, and how can this possibly work? And the economics are just gonna be completely crazy.” Yeah, anyway. That was a novelty. As far as streaming was concerned, YouTube demonstrated the feasibility of the technology, and there wasn’t a lot that was… When iTunes came along, you’ll remember that it was a download model, it was not a streaming model.
Brian: Right. Oh, that’s true.
Neil: And for the first several years, you pressed a button and you waited several hours while the thing trickled down to your disc on your laptop or your device.
Brian: You know what, you’re right because I’m thinking…
Neil: That’s very far from streaming.
Brian: I’m thinking of the Apple TV model, not the original iTunes model. You’re right about that.
Neil: Yeah. Even the Apple TV model, when the Apple TV first came out, that was a… I think I’m right. It had a disc in it, you pressed a button and you waited and it might take 20 minutes to buffer enough to be able to start watching.
Brian: Okay, so that’s a perfect entree into, what are the issues that you guys are having to deal with, you know, ranging from things like bandwidth, the technical issues of like audiovisual quality and things like that? So, in around 2006, you said, 2007, you’ve decided that you wanna do a streaming product. What are the roadblocks and what are the problems that you guys have to solve?
Neil: Well, the good news is that there are a bunch of off-the-shelf pieces that we can assemble to make this feel more real. We were able to go to Windows Media Player, and that was a Windows app that played media from your machine. And we wrapped that in a…in a wrapper that basically managed the streaming, dynamically assembled a video file on your disc, and then Windows Media Player added to play the content. Windows Media Player also had Windows Media DRM that enabled us to satisfy studio requirements that this not be a vehicle for piracy, for a source of stolen copies, that we would protect the content that went out.
And so were able to piggy back on top of that, and then we were able to leverage ACMI[SP] as a CBM. I think the key insight that we’ve had was that we chose to use HTTP to deliver a file, rather than to use RTP or one of these other streaming protocols. And we stayed away from all of the stuff that was being developed at the time in terms of smart streaming protocol, smart streaming engines, where the server was an integral part of delivering the content and where user firewalls and user networks had to be properly configured to listen to a new protocol.
By sticking with HTTP, we were leveraging the basic capabilities that deliver a webpage in a way that would seamlessly work almost everywhere. So we put together those pieces, and I would say the technology that we built, there was a lot of tape and veiling wire and that was pretty tricky, but it was good enough to say, “This is an interesting possibility.”
The flip side of this is that the content team was trying to assemble a library of content to stream, and that was extremely difficult because of the way video licensing works. That essentially, we’re competing with terrestrial broadcasters to acquire the rights to a title, and that can be pretty expensive, especially for a small business with just a handful of customers. And so, it was very difficult to get compelling content, certainly nothing that was new or current, it was all extreme, long-tail, deep catalog stuff at the time.
And it was a good supplement to the DVD rental business. We would be able to provide people with something to watch if they happen to run out of DVDs at home, and they could at least click and watch. They could browse catalogs, pick something interesting, say, “That’s what I wanna see,” click the button, and have it start playing within a few seconds, and go through it. So it was a great technology demo with a great introduction to some of the challenges of building a content library, but it got us off the ground. And so that…
Brian: Right. So that first product is, you know, on your computer desktop. How soon into that do you start to go out to other platforms? I think it was LG, maybe I’m wrong about that, was maybe the first consumer electronics partnership, but then, you know, things like Xbox, PS3, things like that. So do you start working on that right away because you realize, you know, only so many people are gonna watch on their desktop?
Neil: The chronology here is that, almost as soon as we had launched we went into hardware, and we started to build the thing that became the Roku platform, the Roku box, way back in 2007, and put a lot of effort into that. Part-way through, I think, most of the way through that development effort, we also engaged with the Microsoft Xbox team, and we started working on an app for the Xbox 360. In the end, I think the… If I have it right, I think the Roku box was first out and it ended up being Roku, the standalone company, rather than the box from Netflix.
And the reason for that is that we realized that we were going to want to work with all of the CE manufacturers and other partners. The Xbox project had demonstrated the appeal. And so, we thought it would be a lot easier if we didn’t have our own competing hardware solution in-house. And so, by selling up Roku as a standalone entity and freeing him up to go through competing streaming opportunities, we paved the path for working with Xbox, working with Sony PlayStation, and as you say, working with LG and Samsung.
Brian: So that’s interesting. I just wanna underline that again. The reason you spin off Roku is because then you can be sort of a neutral partner to all of these other hardware manufacturers. “We’re not doing hardware in-house. We’re just giving you this platform, and you can put it on your hardware.” And so that’s why you divest of Roku?
Neil: That’s essentially right, yeah.
Brian: What’s the big break… Maybe that’s not what I wanna ask, but was Xbox and things like that, those were the first big breakthroughs, even before we get into the era of all these smart TVs that start coming out?
Neil: Oh, for sure. Smart TVs were still way down the road. So we did the Xbox thing. It was an interesting quirk that…there were a bunch of things about the Xbox deal that were a little difficult. One of them was an exclusivity piece. And so, we did start working with Sony for their PlayStation platform, but Microsoft had a year of complete exclusivity, and so we didn’t get Sony until a year later. And then, the next year, they had an exclusivity on a game console app, and so we actually…we built a BD-Java application on a Blu-ray disc. Your listeners may not remember them, but Blu-rays had just about replaced DVDs by kind of the late 2000s.
And the content protection scheme was based on actually having a full-out Java implementation that was able to execute Java code on the Blu-ray disc. And, in fact, it was that BD-Java that was the authoring environment for all of the menuing and setup and control for Blu-ray discs. And we actually, in an amazing effort, we were able to build a complete streaming player using the BD-Java and delivering it on a disc to Sony PlayStation. And so, for the second year, we actually had PlayStation streaming, but not from a [inaudible], but from a piece of code delivered on a plastic disc, which is an interesting irony.
Brian: I think I remember that too, actually. What was…?
Neil: Along the way, we took the software platform that we had developed before Roku was spun out, and we generalized that into an SEK[SP]. I should put an asterisk on that, that generalization took years and is still ongoing at some level. But we were able to take that and deliver it to LG and Samsung. But not for smart TVs, it was for Blu-ray players at the time. Smart TVs were still a couple of years in the future, and Blu-ray players had…a process of it was fast enough to do streaming. And so, it was a credible place to go build a streaming app, and that’s what we did.
Brian: Well, I mean…
Neil: Another thing you have to…
Brian: Go ahead, sorry.
Neil: Another thing you have to remember here is that the capabilities of the early Roku box and of the LG and Samsung players were somewhat limited. And so we didn’t actually build a…what I would call a “discovery and selection UI.” We leveraged the queue concept that all of our DVD members were familiar with, and we allowed you to build a list of the titles you might be interested in. And then the UI on the LG Blu-ray player or the Samsung Blu-ray player just basically showed one long list of titles, which were things that you had added to your streaming queue, streaming list. And so, it was a very, very simple-done user interface, but it was enough to get going and begin to make things happen. And it wasn’t until a couple of years later that we started to add a real choosing and selection…discovery and selection UI on top of that.
Brian: And then that’s probably when you were into the smart TV era and things like that?
There was a lot of skepticism at the time that the Wi-Fi would actually work for streaming, and it often didn’t.
Neil: That’s right. And, you know, I’ll just say, we grew beyond LG and Samsung and pretty most of manufacturers of Blu-ray disc players, and then… The disc player and the TV are actually not that different when you dig inside. It’s a pretty similar chip inside. And soon as TVs started to add networking in meaningful numbers..and we pushed hard to have them add Wi-Fi. There was a lot of skepticism at the time that the Wi-Fi would actually work for streaming, and it often didn’t. It’s hard to imagine today, where Wi-Fi is super robust and generally works pretty well. But early Blu-ray players and smart TVs typically had a wired connection and no Wi-Fi, and you had to run a wire out to your TV, which was an unusual thing, for sure. But yeah, we got past that and eventually got good Wi-Fi in these boxes and made it work well.
Brian: Well, I want to point out for the listeners an interesting parallel here, which I’m sure you’re aware of, but back in the DVD-by-mail days, Netflix grew by… As DVD is a technology that’s being adopted and people are buying DVD players for the first time, one strategy that Netflix used heavily was you get a new DVD player, inside the box comes these coupons to try out Netflix. So it’s almost serendipitous that, again, as this universe of devices starts to come out, as these smart TVs start to come out, you sort of pursue the same strategy of, “You’ve got this new $3,000 smart TV. What are you gonna do with it? Well, look, Netflix is there.”
Neil: That’s right. You’ve kinda rewound the clock by a bunch of years. In fact, it was an innovation from the very earliest attempts to market the DVD service in early 2000, 2001, that we came up with the idea of… I shouldn’t say we, I wasn’t anything to do with marketing at that point. This was Leslie Kilgore and her predecessor, and they came up with the idea of, red tickets in the box were good for three or five DVD rentals.
And then we had the painful problem, when we introduced streaming, of converting that into, you know, “It says three rentals. It actually means a month of free service”. And it was a little bit of hand waving for you to tell there’s a slight difference in the service we were trying to do, but it was obviously a better deal for consumers. And then, eventually, yes, that became end [SP] streaming, and the red ticket morphed into other things. And in many ways, we continue that same partner marketing plan of including some periods of free subscription in with the purchase of new devices, and that’s been a hugely effective vehicle.
Brian: You know what, it occurs to me we do need to back up for a second. When you first launched streaming, what is the uptake, like, that you noticed? Like, how quickly do you see existing Netflix users using streaming?
Neil: That’s a great question. I don’t have numbers at my fingertips, but it was pretty slow at first. This was a fringe activity that was relevant to eager consumers, early adopters, who had superior home networking and who had the technical savvy to be able to, you know, download our app or to go buy a Roku box or find a high-end DVD player which happened to have an app on it. And these are the things that took off slowly. And, you know, the content was not strong at first, it took a while to start building a strong content library.
Brian: So the content library needs to catch up, the actual installed base of devices that can do the streaming needs to catch up, so it’s not an overnight thing.
Neil: That’s right. And there was a lot of hard work that Reed and others went through in sort of selling the story on both sides. You know, to the hardware manufacturers, “This is gonna be huge, and you should work with us because it’s gonna be a really big piece.” And to the content owners that, “You should sell us content because we’re gonna be able to deliver it effectively.” And, you know, [inaudible] when we started, and so there was a lot of building the credibility on both sides of the business to make it go. But it happened, and the rest is history.
Brian: Let’s go back to, also, some of the technical details. You know, famously, you guys start using AWS very early on. Just some of the… Once it does start to take off…we’ll fast forward to that. So once it starts to become a thing that, you know, a certain percentage of users are using and then it’s so popular it takes over a certain percentage of all internet traffic… So just the scaleability issues, the bandwidth issues, any of those things that you wanna go into or stories you wanna tell about that.
Neil: Well, there was an interesting moment in the summer of, I think, 2008 when it was still primarily a DVD business, and the distinction in that is because, as a DVD business, the value delivered to consumers is through the DVDs they have at home. And if the website is not up, well, they can come back tomorrow and order a new disc for the next day, and it’s not an egregious failure. But at that point, streaming was beginning to become interesting, and we knew it was gonna be the future.
Amazon had just launched AWS at the time and so we concluded, after a lot of discussion, that if we’re gonna rebuild for redundancy and failover, we should do it in the newest architecture that’s available and not try to build on our legacy stuff.
At that point, we had a database hardware failure that corrupted the main database that we ran on, and it was an ugly mess. It took most of the day to get the consumer-facing website back live again, and it took several days to get our logistics system back up and going again. And I’d say a lot of people tore out a lot of hair and lost a lot of sleep during those three days. And it became very clear that, as a streaming business, that kind of downtime was not acceptable, that we needed to have a much higher availability, and that we were gonna need to re-architect our systems to have redundancy and failover and all of the things that are necessary for that kind of improved uptime.
And we could look at building a duplicate data center and putting the Oracle and Java stuff in it, that we had at that point, or we could look to something completely different. Amazon had just launched AWS at the time and so we concluded, after a lot of discussion, that if we’re gonna rebuild for redundancy and failover, we should do it in the newest architecture that’s available and not try to build on our legacy stuff. And so, we chose to start from scratch and move our systems over to AWS piece by piece starting in 2008. And that was an odyssey that ended taking us about eight years…four years for the majority of it and eight years to clean up the last pieces and unplug our data center.
And, yeah, lots of interesting stories along the way. The key one is that we recognized immediately that to do a fork of our legacy system into AWS was not gonna get us what we wanted, we needed to re-architect with the structure of AWS in mind. And we needed to switch to things like NoSQL databases, instead of trying to use bigger and bigger Oracle installations. And we needed to switch to a micro services architecture, instead of a sort of monolithic client server architecture attached to the Oracle database.
And, in order to do that, we wondered about, “Do we try to build a selection of the complete service top to bottom and then bring that off in AWS? We can parallel with the current stuff and then shift customers over, a few at a time? Or instead, do we try to take this feature by feature and implement portions of our system in AWS, while leaving portions left back in the legacy architecture?” And it was that latter approach that we chose and I think it was the right decision. I think it got us a lot more experience with how to work with AWS and how to use the services, while deferring, kind of finishing up everything in order to get anything going at all. And that was, I think, a really key decision.
One of the implications, though, is that we spent months building scaffolding that was to real-time replication of our Oracle database in our legacy data center to the databases to the databases we were trying to use inside AWS that would copy data backward and forward in various different ways. We called this phase the “Phase of Roman Rising.” Certainly, we had a lot of challenges and frustrations with keeping that scaffolding robust and stable. But in the end, it enabled us to move page by page and feature by feature from the legacy data center into AWS and gradually build and gain confidence with, “This is the right way to go” and then move faster and faster until it was all done.
So it’s a…a critical moment there right after…actually, it was right before the iPhone 3 launched. iPhone 3, you’ll recall, was the first iPhone that had third-party apps available. And Apple had instructed[SP] us to build a streaming app for the iPhone 3, and in true Apple form, they had only given us about a month’s notice of what they wanted us to do. And so, we rushed to build the iPhone app. The app was actually pretty easy, but what would it talk to? We needed to build capabilities to serve user interface and the streaming content to the iPhone. And we debated extensively for a couple of days, and then we decided that, really, the only way forward here was to build this in AWS. We didn’t have time to build a backup first in our old legacy data center, and so were faced with a big launch of the Apple WWDC, predicated on our new AWS architecture working well. And it was certainly a bit of a nail biting moment for us, but it was a success and it gave us great confidence that AWS was the right way forward. And from then on, everything new we built was AWS only.
Brian: That was actually gonna be one of my questions because here you guys are originally trying to build for set top devices, for TVs, and things like that. So did the whole mobile viewing and, you know, the app economy, did that all kind of take you by surprise a bit?
Neil: I think it was pretty clear that these are gonna be good devices, but certainly the idea that the iPhone was gonna have third-party apps on it was… well, [inaudible] wasn’t obvious until it was, you know, kind of made public.
Brian: Or was it…?
Neil: I’m trying to remember the timing here. There was a tablet, too, and I think maybe it was the tablet that was… You know, the first iPad was the first device that we got onto, and then the iPhone followed a few months later.
Brian: I mean, because…was it even obvious to you guys that people would want to stream over a tiny screen, the handheld screen?
Neil: It still might not be obvious! There’s some differences in behavior in how people use the small screen versus the big screen. And certainly…
Brian: What are those? What are those?
Neil: Oh, if you’re watching on a TV, you tend to ignore the phone. If you’re watching on the phone, the phone call comes in, you get interrupted, and so, you know, we end up with shorter viewing sessions. I think that somewhat influences the kind of content, just content that people watch on phones it’s content that’s easy to stop and start. And then, nowadays, of course, we’ve…you know, fast forward many years into the future, we’ve implemented downloading on phones. And so, you know, people are now taking it with them on planes and on trains and on long commutes and in parts of the world where there isn’t a, you know, stable home connection sometimes. So, you know, certainly, the world and the environment has changed a bunch and the phone is a nice complement to a smart TV, it’s a way to watch content.
Brian: One more technical question and then we’ll try to bring it into the present day a bit. You guys, I feel like, have always been like really at the forefront of pushing…so you got streaming to work in a big way. You were the first ones to really, you know, crack that nut, but you were always pushing like audiovisual standards as well, like, you know, pushing HD and then moving into 4K. And so, was that always a goal as well, where it’s not just enough to get people movies on demand, we have to get them movies that are as high-quality as they could get from any piece of content?
Neil: I would say it was, in many ways, a reaction to YouTube being seen as lower quality video.
Brian: Ah, differentiate, yeah.
Neil: I think that we… We worried about being tarred with the same brush that, you know, Netflix streaming is an inferior brush. So we wanted to get out in front and say, “No, we can deliver the best quality AV. We can beat DVDs. We can beat Blu-ray. We can be first to market with 4K. We can be a leader with high dynamic range.” The big advantage of delivering over the internet is that you don’t have to upgrade an entire infrastructure in order to be able to deliver a new format. And so, we’ve been able to be pushing the lead in a lot of these things. And it’s been kinda fun working with…now, of course, we’re into original content…so working with the big-name producers and directors to put this together in the highest-quality formats available. That’s pretty exciting.
Brian: Well, before we get to the original content era, I have to ask about Quickster. We don’t have to spend an hour on it or even two minutes, but just whatever you wanna say about the thinking going into that, but maybe more importantly, the lesson that you guys learned from that experience.
Neil: Yeah, that’s a great question. In the Blockbuster fight, we had learned the importance of focusing on new customers and the future. At at that point, we were a business that was delivering DVDs and streaming on the same subscription, and we were charging $8 for the DVDs and $10 for the combined plan. And we were spending probably comparable amounts of money licensing streaming content as we were buying DVDs. And so, clearly, an $8 plus $2 didn’t work, we needed to start to collect revenue for the streaming plan that was commensurate with the quality of the content that was available, but by this time was much much better. And so, we needed to separate it into two plans and let people choose either DVD or streaming or both and charge a real amount of money for the streaming.
We were so eager not to make the mistake that most businesses do of ignoring the new business in favor of the legacy business that we were a bit too bold and a bit too eager to make the switch over, and so we kind of spinned into it. And we certainly…at this point, [inaudible] bunch of customers with some heavy-handed pricing stuff where we could’ve done somewhat better, I think, by looking to the future customer and being a bit more generous with the pre-existing customer, the customer who got us where we were going. But in the end, I look at the Quickster episode, not as a disaster that we not only avoided, but as a critical business transition, a discontinuity that we needed to go through that was gonna be painful, no matter how we did it. We didn’t do it perfectly, but we survived and we did accomplish the mission of ending up with a team that was dedicated and focused on streaming and so was able to grow the streaming business.
And today, dvd.com is a separate division in a separate building. They’re focused on the DVD customers, doing very nicely, and the streaming business is focused on the streaming customers. And because they’re different and non-overlapping, minimally overlapping, I should say, we’re able to build the features and capabilities relevant for each side and it’s successful. I think, had we not gone through some of the pain of the Quickster period that we might not even be here today at all.
Brian: So maybe you, you know, modern business theory says you should disrupt yourself, but maybe you guys just did it a little too aggressively.
I think the piece that many people miss [about Qwikster] is that it was a transition that needed to happen.
Neil: Yeah, that’s a pretty fair assessment. We were certainly intent on disrupting ourselves, and we did it rather nicely. We could’ve been more sophisticated about it, but I think the piece that many people miss is that it was a transition that needed to happen. If we hadn’t have done it or if we’d been to timid about it, you know, we probably wouldn’t be where we are today.
Brian: So again, to bring us into the modern-day era, in the DVD rental era by mail, you buy the physical discs and you can rent them out time and again to people. But into the streaming era, it’s a completely different ballgame, you have to acquire the rights to stream content. And so early on, because everyone thinks that this is an experiment, maybe even you guys think it’s an experiment, it’s not super expensive to get these rights. But then, as the streaming takes off and, as we talked about with the Quickster, you’re seeing this is the business going forward, that becomes more expensive, and then that’s the reason why you realize you need to go into creating your own content right?
Neil: Yeah. I’m gonna have to put a big caveat on this, that my role as the technology guy, Chief Product Officer, by this point, the technology really had relatively little to do with the content.
Brian: Well, you know what?
Neil: Ted Sarandos is the architect of the content stuff, so he’s the guy who you should probably do a follow-up episode with and…at some point in the future.
Brian: Well, obviously, we’d love to, but you know what, let me tee it up, though. I actually was doing that to tee it up to a technical question, which is that, you know, we talked… Early on you were coming up with recommendations and things like that and you guys used personalization and data very early on to help the business. But from the technical standpoint, once you get into streaming, you have loads more data about what people are actually watching, about what they’re actually interested in. So maybe talk about that, about how once you’re you in the streaming era, like, what you can learn about user behavior potentially transforms what Netflix can do.
Neil: Yeah, that’s a great point. The recommendation stuff we started out with in 1999 and through the DVD era was…it was important, but it was kind of the sweetener on top of the system. We didn’t have great feedback as to what people had watched and enjoyed. We knew what we’d sent them, we had hard data on which discs we’d sent, but we didn’t know which discs they’d actually watched and which ones they’d enjoyed. And so, right from 1999, 2000, we built the star bar, the five-star thing that’s become such a popular internet meme, because we needed to collect data, “This is a terrible movie” “This is a wonderful movie” and “This is an okay movie” to be able to feed back. And we collected a lot of that. I think we probably collected 5 million ratings a day, but still relatively small, compared to the shipping volume. And if people didn’t give us ratings, then it was very hard to predict accurately for them.
But with streaming, you actually have much better data. You see which titles people really engage with and which ones they watched a few minutes of and then turned off again. And so, that quality enjoyment data is actually probably better than the star data. The star data tends to be viewed as, “Well, this is a high-quality movie, whether or not I enjoyed it,” you know. So maybe it rates production value and sort of perceived value of the story rather than enjoyment value…
Brian: Like, you might give, say, I don’t know, “King’s Speech” five stars because you know it won Best Picture, but maybe you didn’t really like it and maybe you didn’t even finish it. But now, with streaming, you can see, “Oh, they would tell us it’s five stars, but they stopped after 1:20.”
Neil: Exactly. And the two examples from the era that I like to use for that, you know, “Schindler’s List” and “Hotel Rwanda,” both really good movies, but not necessarily what you wanna watch tonight. You know, really dark, deep, provocative, thought-provoking things, but you know, “Tonight, I just want something that I can lean back to and enjoy.” And so yeah, the streaming feeling data sort of gives us that enjoyment factor, which is much more valuable, and it gives us complete coverage too. And so, we’re able to use that pretty effectively to drive suggestions and recommendations.
more than 80% of everything that people watch on Netflix is influenced, to some degree, by the personal information that we’ve brought to bear.
The search feature on our system drives a small amount of viewing, it’s in the teens percent, I think. And search itself has a little bit of recommendations and suggestions built in. It’s designed to [inaudible] you, if you’ve got a small number of titles presented, then we know, roughly, what you might be aiming for. But everything that’s not search has a strong component of personalization and predicted enjoyment built in. And so, it’s true to say that more than 80% of everything that people watch on Netflix is influenced, to some degree, by the personal information that we’ve brought to bear. And that delivers a lot of value for our members and a lot of value for us, in terms of making Netflix just the key place, the place that people come back to every night.
Brian: Well, and also helps you figure out, now that you are producing your own content, what would be the content to produce that your users would actually want to view.
Neil: Sure, but there’s an assumption there that I wanna challenge. We don’t write stories by data. Stories have to be organic and intact, and so we trust a producer or a team to craft an interesting story. But we are able to take the outlines, the pitch, the casting choices, the various decisions that go around that and plug that in to get an idea of who’s gonna be interested, which helps us to know if this is an economically feasible project. And so, using the data to make funding decisions is a different game than using the data to tune the story, which we don’t do.
Brian: One more question and then I’ll let you go. You’ve been so generous with your time. I saw you give a talk where you discussed how, not only are you…you know, everything’s in the cloud, you’re delivering content streaming. But as part of the production process, as you’re producing content, you’re also using some of this cloud technology and these cloud services to help streamline production as well?
Neil: Yeah. You know, there’s an aside that I have to make here [inaudible] an introduction. Everything’s in the cloud except our CDN. OpenConnect is another important piece of the story that we haven’t talked about at all.
Brian: And we should say, CDN is Content Delivery Network. Sorry, go ahead.
Neil: That’s correct. So to make streaming work effectively, you don’t want to be streaming… Particularly, we’re streaming to 192 and a half countries around the world, the half is Ukraine without Crimea. You gotta get the content close to the subscriber, you don’t want it [inaudible 01:05:35] on the fiber optic pipes under the ocean. You know, the kinds of volumes we do that doesn’t work. And so, we have content servers all over the world in thousands of locations, in many cases, actually installed into ISP’s infrastructure and they write it…they [inaudible] in their system so that there’s a minimum amount of “internet structural backbone” that’s the first [inaudible].
And we put a lot of effort into building very small, very power-efficient, exceedingly effective delivery devices that can stream, you know, most of 100 Gigabytes a second out of a relatively small footprint. And the stack of the listings installed in an IX or an ISP’s infrastructure is really key to delivery, and that’s been an important piece of building to the scale we’ve got today. So I certainly wanna mention the team that’s been working hard on that because that’s an important piece of the story. If you’ll remind me your real question, I think just close out on the right topic…
Brian: That I saw you mention that you’re using things like the cloud and things like that on the production side, so that it’s easier for your actual, you know, original productions to do things more efficiently.
Neil: Got it, right. So yes, we are producing this year 400 original titles for, I think, 1,000-plus hours of content, and that makes us one of the bigger production studios in the world. And, of course, there’s lots of opportunity for IT to support an operation like making a series or making a movie, all the way from the planning stages, where we’re receiving pitches and scripts and we’re soliciting opinions and getting feedback, and where we’re making decisions and working through legal contracts and planning and scheduling and booking casts and sets and renting equipment and delivering it to the locations. All of this stuff is an opportunity for IT to make it more efficient, more effective. And then, into the production phase, where we wanna be able to capture the daily shoots, bring them home so people maybe in another country be able to see the daily takes and see what’s going on, through to the editing. We subtitle in 20-something languages, 23 or 25, I think. We [inaudible 01:08:38] languages, and so the localization and the post-production work.
So all this process in an area where, rather than acquire or license the conventional tooling to do this stuff, it’s an area where we’ve chosen to invest in building cloud-based technology. And the vision that I’ve tried to bring to life here, and so still a few years from being anything like tangible yet, is that there’s kind of a dashboard of a production that a director or a producer can carry around on their mobile device. And they can see yesterday’s tapes and today’s scripts and the planning for tomorrow, and they can make sure that everything’s lined up, and they can look to see what did they do last year in the previous season and then what’s going on on this other side. And, you know, it’s the dashboard that brings the data from all the phases of the current production and all the acquired knowledge from all the other productions that we’ve done in a way that provides us with…that will provide us, when it’s fully realized, an amazing tool for efficient production of original content. And so, I think that’s a really exciting possibility that we’re investing in heavily at the moment.
Brian: Well, Neil, I believe you are leaving Netflix in July, is it?
Neil: That’s correct.
Brian: So my last question is really simple, and if it’s too personal, you can be vague. But what are your plans for life post-Netflix?
Neil: I’ve been continuously employed since I was 16 or 17 years old, and I’m gonna take a bunch of months, maybe a year or two, to just go through the things that appeal. Travel, I’m a big outdoors person, I love to bike and kayak and climb mountains. And I’m gonna be doing all of those things here in my home in California and around the world, and that’s gonna be fun. I’m expecting, though, that at some point, I’ll wanna get back into building something. And I find, at this point, there are sort of three areas that are particularly appealing to me, the area of precision medicine, so healthcare augmented by technology and big data and machine learning. The area of education, I think that learning is going through a big transformation, and we need to make it much more effective and affordable and available. And then alternative energy, I feel like the opportunity to apply technology to solving some of the climate crisis problems is a good one too. So those three areas are particularly appealing to me. I don’t know if I’ll find something that’s compelling and where I can make a difference, but that’s something I’d like to imagine is in my future.
Brian: Yeah, well, good luck if you do one or maybe all three of those things. But Neil Hunt, thank you so much for coming on the show, giving us just a wonderful background history of Netflix, of the streaming product. But also, thank you for sharing a really, really fascinating career.
Neil: Well, thank you for the opportunity. And I would be remiss if I didn’t note that there’s about 2,000 people here now at Netflix and [inaudible 00:12:33] who’ve worked with me and around me and on my team and on my care teams over the past 18 years that I’ve been at Netflix. And it’s been an extraordinary experience, and I really I’m very fortunate to have worked with so many smart and sharp people. And that’s been great, so I thank them all as well. You know who you all are, if you’re listening to this. You did it with me. Thank you.
[…] Netflix’s response to these problems was reflective of how the management was focused on building a sustainable business model, as opposed to growing up too fast. Instead of focusing on building a huge content library the company instead optimized their DVD-on-mail solution for their existing library. This business decision was what helped the company survive the crash that followed the dot com bubble. […]
[…] Fascinating InternetHistory podcast examining the history of Netflix provided by Chief Product Officer Neil Hunt who interestingly is stepping down in July after 18 years at the company during which he oversaw their move into SVOD powered by AWS: […]