How Netflix Works

When it comes to Netflix, the story of market competition has an interesting twist. In the beginning, the company's primary competition was Blockbuster. In the 1990s, Blockbuster was the largest name in home video rental service in the U.S., with thousands of stores nationwide. By 2004, though, the Netflix brand was gaining popularity as DVD renters developed a growing interest in its rent-by-mail service. That year, Blockbuster launched its own rent-by-mail service called Total Access to complement its in-store service and hold on to the customers that Netflix had appealed to [sources: History.com, SeekingAlpha].

In the first quarter of 2007, Netflix reported that Blockbuster's new program had caused its growth to slow. However, some analysts suggested that Blockbuster's focus on following Netflix's rent-by-mail model would be its undoing. Those predictions proved correct. By 2009, Blockbuster had closed about half of its stores nationwide, with hundreds more to follow. Then, in 2010, Blockbuster filed for Chapter 11 bankruptcy protection [sources: SeekingAlpha, AP, McCarty, Sandler, and Kary].

Around the same time, another video rental model presented competition to both Netflix and Blockbuster. Redbox is a video rental service operated by Coinstar, a company known for its coin-counting vending machines often found in grocery stores. Like Coinstar, the Redbox service is provided through an automatic vending machine. Redbox launched its services nationwide in 2002, and by late 2011 it had more than 27,800 kiosks in grocery stores, drug stores and other retail establishments across the U.S. [sources: AP, Redbox, Redbox].

So, what's the twist in Netflix competition? With the introduction of online streaming content, that competition shifted dramatically. No longer were Blockbuster and Redbox the only threats, especially since Netflix was well-established as the market leader in the disc rental market. Potential threats to their market share also came in the form of online streaming services like Hulu.

When Netflix launched unlimited streaming in 2008, Hulu had nearly a year of experience in that market. The two companies had notably different markets, though: At the time, Netflix focused on movies by subscription only, and Hulu focused on television with both free and subscription-only content. Gradually, their content selections have overlapped, with many TV shows on DVD available commercial-free through Netflix. Also, other streaming services from Amazon and Time Warner have kept Netflix on alert for possible threats in the future [sources: Netflix, Hulu, Carr].

Throughout this article, we've looked at how Netflix recommendations work and how you can enjoy Netflix both through the mail and online. We've also examined some of Netflix's competition and how that's changed over its first 14 years. For even more information about Netflix, flick over to the next page.

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