How Netflix’s DVD-rental business transformed the way people watched TV and movies from home

Since Netflix was founded 25 years ago, it’s been posting DVDs to its customers, but that’s about to change.

The billion-dollar company has said it will shut down its DVD rental business as it “continues to shrink” due to the popularity of online video streaming.

Netflix’s DVD rentals accounted for $126 million (£101 million) of its $31.6 billion (£25.4 billion) revenue last year – just 0.4 percent.

Netflix lets people rent DVDs through the DVD.com domain it owns, but this will be phased out and the last discs will ship in September, the company says.

Here, MailOnline looks at the origins of one of the most ingenious business models of all, when mail delivery of discs was a revolutionary concept.

Netflix was founded in August 1997 by Marc Randolph and Reed Hastings after being inspired by Amazon, which was growing in popularity at the time.

The duo had come up with the idea of ​​selling or renting items over the internet, which they could then post to customers’ homes.

Initially they had considered posting VHS tapes, but these were too bulky and thus too expensive to post to make a real profit.

Coincidentally, 1997 was the year DVDs were first introduced in the US, so they thought such a disc was small and light enough to fit in a standard envelope.

To try this out, Randolph bought a Patsy Cline greatest hits compilation CD—the same size as a DVD—and put it in a pink envelope as a greeting card.

“We put the CD in the envelope without the cover, addressed it to Reed, and mailed it,” Randolph later said.

It arrived undamaged the next day. It only cost 32 cents to send a DVD, and we could buy them for 20 dollars [£16] each – we knew we had a chance.’

The first DVD Netflix ever shipped was a copy of the movie “Beetlejuice” on March 10, 1998.

Netflix.com finally launched the following month as the first DVD rental and sales website with 925 titles available – almost all DVDs published at the time.

Originally, Netflix users would search the website for the DVD they wanted to rent, pay $4 plus shipping to have it delivered, watch it, and then return it in a stamped envelope within seven days.

While Netflix’s DVD envelopes are known for being red, the first envelopes were white and made of cardboard instead of paper.

For convenience-loving Americans, getting DVDs shipped home took far less effort than going to a rental store — like a cross between Blockbuster and Amazon.

Netflix also had a larger selection of movies than many rental stores because it bought them in bulk and stored them in warehouses ready to ship.

In September 1999, Netflix replaced the pay-per-rent model with a monthly subscription model, ushering in the era of unlimited movie viewing for a single fee as we know it today.

Under this model, members could rent as many DVDs as they wanted for $19.95 – much more than Netflix’s starting price of $6.99 today.

However, the number of DVDs members could own at one time was limited, which would prevent people from storing the company’s inventory.

Crucially, this monthly subscription model no longer had expiration dates and late fees, giving it a huge advantage over rival Blockbuster, which relied on late fees to boost its revenue.

Fortunately for Netflix, the company fully embraced DVDs at a time when the format was booming in popularity overall, aided by the release of the PlayStation 2 in 2000 – the first DVD-based video game console.

In 2001, 25 percent of American households owned a DVD player—a figure that rose to 80 percent six years later.

After the turn of the century, Netflix continued to grow at an impressive pace and hit a number of important milestones.

It became a publicly traded company in May 2002 and posted its first profit the following year, making $6.5 million on $272 million in sales.

In 2005, there were 35,000 different movies available to rent and Netflix shipped a million DVDs every day.

That same year, the Profiles feature was launched, allowing members to create different lists for different users, such as members of a household.

But perhaps the biggest and most important change in Netflix’s history was the introduction of streaming in early 2007.

In addition to the option to rent DVDs, Netflix users could now stream content on demand through the website for a few dollars extra.

Streaming proved such a hit that in 2011, Netflix said it would split DVD rentals and streaming into two different platforms.

It also acquired the DVD.com domain name as the home of its DVD rental service, which was renamed “DVD.com, A Netflix Company.”

Since 2010, Netflix’s streaming service has expanded to multiple countries, including the UK and Ireland in 2012 and Australia in 2015.

But why has Netflix persisted in DVD rentals for so long, years after DVDs were first described as a defunct format, is perhaps the biggest question.

In 2011, Netflix’s DVD rental business had 14 million subscribers, but this dropped to just two million in 2019 and 1.5 million last year.

The new decision didn’t go over well on social media, however, as many users called out the company for abandoning its roots.

‘Waste decision. I still get the DVDs. So much better than Netflix streaming selections. Keep up the superior service: @criterionchannl,” one person wrote.

Along with the DVD announcement, Netflix shared its earnings report and new subscriber numbers on Tuesday.

Netflix added 1.5 million new subscribers in the first quarter, bringing its base total to 232.5 million subscribers worldwide.

While high, the number was down significantly from the 7.7 million new subscribers in the fourth quarter. Q1 numbers also fell below Wall Street expectations.

Meanwhile, a password-sharing ban was initially slated for a global rollout by the end of March, but Netflix said it now expects to complete the transition in the US by the end of June, it has announced.