Presentation from the Foundation for Economic Education on history of how streaming TV happened and became so successful.
Transcript below for anyone who reads……
with high-speed Internet in the late 90s
and early 2000s we all ditch dial-up and
got t1 lines it wasn’t fast enough to
actually stream movies yet but we were
able to download movies this was a big
for the first time in history consumers
had home entertainment options that
weren’t 100% controlled by studios and
distribution companies and we weren’t
limited to the couple hundred titles
available at her local video store only
there was still a big problem long
before iTunes the alternative to going
to rent a movie was blatant copyright
violation and piracy by the time I was a
freshman in college my generation had a
choice to make leave campus drive to Blockbuster and
rent a couple movies to watch in the
dorms risking expensive fees we didn’t
make it back to the same location in 48
hours or we could just get on Kazaa and
download dozens of movies and TV shows
at once for free while we were attending
classes setting aside the legal and
moral ramifications of pirating movies
from a purely practical standpoint it
was instantly clear to almost everyone I
knew which option was better nearly
twenty years ago we could see the
writing on the wall streaming media was
the future if you want to watch it first
weekends maybe won’t be available first
weekend but then if you want to watch it
you know you’ll pay more and then as it
goes to another stage and its release
it’ll become less expensive but there’s
a lot more about adoption that has to
happen
technologically speaking right now
before people can watch movies at least
integrate in terms of the PC or web
connection you know the technology is
not quite there yet but it will be
within I would say five years
Aflac was exactly right only it wasn’t
the big studios that figured out how to
deliver movies and TV shows right into
people’s homes they dragged their feet
standing in the way of progress the same
way they did when the VHS format first
came out worried that streaming movies
was going to destroy their business
instead the astounding wealth of home
entertainment options we have today are
the result of entrepreneurial startups
working totally outside the existing
system and with that I bring you a brief
history of streaming entertainment the
year is 1997 IBM’s deep blue beats Gary
Kasparov at chess Hong Kong loses its
relative independence to China and movie
tickets cost about $5 blockbuster
dominates the rental video space
charging the dollar to per movie but
tacking on substantial fees for
returning movies rate as the story goes
40 dollars in late fees at Blockbuster
annoyed Reed Hastings enough to start a
new subscription based company built
around mail-order movie rentals with no
late fees call Netflix users went online
and selected a list of movies they
wanted to see and DVDs would get shipped
directly to their homes back then for
$20 a month Netflix subscribers could
borrow up to four movies at a time and
whenever they sent one back the next DVD
in their queue would show up in their
mailbox by 2000 Netflix was already
nipping at blockbusters heels but it
wasn’t without problems in those early
years their network of warehouses was
pretty limited so people didn’t always
get the next movie in their queue as
promised and sometimes there were long
delays especially for new releases it
was also an expensive business model and
Netflix struggled financially that same
year Reed Hastings approached
blockbuster CEO John ante OCO with an
offer to settle Netflix 450 million
dollars can’t Yoko turned him down
meanwhile blockbuster was busy charging
their customers over 800
in late fees but here’s the thing even
though those late fees may have kept
blockbuster profitable e early 2000s
they were also undermining the company’s
long term future at the same time
speaking as a customer it always felt
like blockbuster was salivating at the
chance to cash in even if I returned to
movie mere minutes past noon in the end
by giving customers like me an
unpleasant experience blockbuster was
really just creating more and more
opportunity for competition even before
digital technology made the in-person
rental business obsolete
but let’s flash forward to 2002
Netflix’s mail-order business is growing
and other entrepreneurs are starting to
take notice with the help of an
investment from McDonald’s Greg Kaplan
creates an automated kiosk business
branded as tick-tock easy shop selling a
variety of retail products groceries and
allowing people to rent DVDs for a
dollar a day the grocery side of the
business didn’t pan out but the red box
automated retail worked pretty well
incidentally both Blockbuster and
Netflix had the chance to buy red box
over the next several years competition
from Netflix and red box start to eat
away at blockbusters profits and by 2005
the company had lost 75% of its market
share it’s the beginning of the end
remember Ben Affleck’s five-year
prediction it’s just about to come true
but before I get to that I want to add a
little bit of economic context to the
whole situation the first person to
deeply explore the idea of
entrepreneurship was an early 20th
century Austrian economist named Joseph
Schumpeter along with some of his
contemporaries like Ludwig von Mises
Schumpeter studied law and political
economy under eugene von bomba ver at
the university of vienna he would go on
to become Austria’s finance minister
from 1919 to 1921 and later became a
professor at the University of Bonn in
Germany from 1925 to 1932 when Hitler
rose to power
Schumpeter emigrated to the United
States and
professor of economics at Harvard
University Schumpeter saw the role of
the entrepreneur in a market economy as
central to innovation in his 1942 book
capitalism socialism and democracy
he wrote the function of entrepreneurs
is to reform or revolutionize the
pattern of production by exploiting an
invention or more generally an untried
technological possibility for producing
a new commodity or producing an old one
in any way by opening up a new source of
supply of materials or a new outlet for
products by reorganizing an industry and
so on perhaps even more famously in that
same book Schumpeter also introduced the
term creative destruction as a defining
feature of free market economies we see
this in action with the story of
streaming media as new companies like
Netflix create superior methods of
bringing entertainment into people’s
homes older companies like blockbuster
have to become more innovative
themselves or be destroyed by their
competition this all can sound very
cutthroat but most of the time it
happens fairly organically it’s an
evolutionary process not an
executioner’s axe and more importantly
this process is how our standards of
living continually increase over time
but there’s another critical element to
understand here again in Schumpeter’s
words success in the market depends on
intuition on seeing what afterwards
proves true but cannot be established at
the moment the point is people like Reed
Hastings can’t know if their innovations
are actually going to pan out in advance
nobody does not every new idea is a good
one and even a lot of the ideas that
seem great aren’t good enough to justify
the cost plus just because you or I like
some product or service doesn’t mean
that everybody else does so we need some
effective way to tell which innovations
are really valuable and which ones
aren’t
that’s where markets and prices come we
only find out whether or not some
development is really good or bad once
it’s offered to consumers who are free
to choose what to buy or not the
entrepreneur is always going to think
their idea is great but as consumers
we’re the ones who get to decide which
businesses succeed and which fail this
is the biggest reason why trying to
centrally plan an economy just doesn’t
work
politicians and bureaucrats don’t know
what people are going to value and
they’ll never know so instead they pick
winners and losers based on what they
want or what they think is going to earn
them the most important allies the free
or a market the more goods and services
are an accurate reflection of what
people want and don’t want in society
the less free the more it’s a reflection
of what a small handful of people in
power want personally I consider the
fact that the internet and
internet-based businesses have remained
largely unregulated to be one of the
greatest strokes of luck in history and
that brings us back to Netflix by 2007
internet speeds and media encoding
technology caught up with Reed Hastings
Vision and Netflix became a fully
fledged streaming video service this was
right around the time I first signed up
for Netflix and back then they just
offered streaming as a bonus to their
mail order customers but it quickly
split off into its own business and
that’s the moment you see tons of other
companies trying to catch up around the
same time Jeff Bezos had just launched a
small movie streaming app called Amazon
unbox which later became Amazon video on
demand but which at that point was still
mostly an experiment a year later NBC
Universal decided to put its big library
of content into a new service called
Hulu but it didn’t have a great
interface and users still had to watch
ads like live TV meanwhile Netflix was
busy crushing everybody in the home
entertainment space as of 2010 Netflix
had what some of you might think of as a
natural monopoly based solely on what’s
called first mover advantage it figured
out the technology and user experience
before anyone else
so for
a hot second it had no true competitors
and became a multibillion-dollar giant
by the way that same year blockbuster
wants the indisputable king of home
video entertainment filed for bankruptcy
at this point I’m sure it sounds like
Netflix won the streaming wars but
remember what I said in my episode about
the boys the idea that free markets
inevitably lead to monopolies is a myth
without government suppressing
competition Netflix had no way to
maintain its temporary hold on the
streaming market other companies caught
up real fast
Hulu introduced Hulu Plus in 2010 with a
substantial lineup of network TV shows
and would go on to add other features
over the next several years like live TV
and bundled premium channels like HBO
and stars by 2011 Amazon rebranded its
video on-demand service to Amazon
Instant Video adding thousands of movies
to its library through a deal with epics
and making those available to anyone who
was already a prime subscriber a unique
aspect of Amazon service was that you
could not only watch movies and TV shows
as part of your subscription but
purchase the rights to include them in
your own streaming library a short while
later Netflix and Amazon both announced
that they’re going to get into the
business of producing original content
exclusive to their platforms meanwhile
competing services like Vudu that
allowed people to rent or buy movies and
stream them at home and had been around
for a while without much success we’re
just starting to gain traction again in
2010 Vudu got bought out by Walmart
which was already battling with Amazon
in the broader retail market but by 2014
had worked out deals with the digital
Locker systems ultraviolet and Disney
movies anywhere which meant that their
library of streaming content was not
only massive it was also possible to
pair digital downloads with the physical
DVDs and now blu-rays that were already
being sold in thousands of Walmart
stores around the world
a restructured Blockbuster also launched
a streaming service in 2011 but by that
point it was really just too late
consumers had spoken I have spoken
Blockbuster got acquired by DISH Network
but the world moved on by 2015 you have
stuff like shudder PlayStation View and
sling TV by 2017 we got YouTube TV and
file it by 2018 we started seeing more
more niche services like DC Universe CBS
all access and AMC watch now and now we
have Disney Plus none of this came about
by magic and it’s also not something
that could have happened anywhere under
any type of economic system it’s
something that could only happen in a
market economy I say this because I want
people to really grok how this works
with no central plan no political
decision-making and no legislative
controls on what people had to do with
their resources enterprising individuals
like Reed Hastings offered consumers a
service that they believed would be
valuable and those consumers like you
and me were and are free to choose
whether or not to use that service
nobody forced it on us we weren’t going
to be sent to jail we opted out or
refused to pay and as a result our
choices actually mean something
fortunately for Netflix we all respond
positively for an infinitesimal moment
in time they had what a lot of people
might have thought of as a monopoly over
streaming media but again without any
kind of top-down control antitrust
action or restrictive regulations that
monopoly disappeared almost as soon as
it formed that’s because in a free
society prices a reflection of consumers
genuine preferences and when they choose
to flock to one product or service and
make it profitable that signal ripples
through the economy when that happens
other entrepreneurs and existing
businesses see the demand and have an
incentive to innovate even more
offering their own competing goods and
services as long as they’re able to do
that without getting political approval
or navigating major restrictions this
kind of open competition is what drives
rapid innovation and development and
that’s how we end up with better living
standards year after year now we are
awash in streaming content and the flood
is unlikely to stop anytime soon and I
get it
some people think this is going to
create some kind of race to the bottom
where companies push the price down
create poorer quality programming and we
go back to a world where we’re all
paying hundreds of dollars for content
split across tons of different apps but
I don’t see it the Renaissance of
incredible shows and movies that we’ve
seen on cable and streaming services in
the last few years has permanently
altered audience expectations for
quality content and it’s a direct
consequence of having an open market for
entertainment if Netflix feels the
pressure to compete with Disney Plus by
creating poor quality original
programming they’re going to have a bad
time and they know it when people talk
about Netflix they talk about the shows
that move them you know and so that is
way disproportionate and positive impact
even for the subscriber growth that you
talked about is those couple big
memorable shows but what we want to do
is offer a variety you know you don’t
want to watch the same thing every night
as much as you like it you want to try
different things and what we haven’t
seen is there’s a race to the bottom of
your violent pornography kind of
examples instead we’ve seen you know
great viewing across a whole range black
mirror and with the distribution of
on-demand
you can make these much much bigger
shows mythology and catchy critical
phrases aside competitive markets almost
never actually produce a race to the
bottom in the products that they produce
in their cost to consumers or even in
terms of things like wages for employees
furthermore let’s try to keep all this
stuff in perspective when I was a kid a
basic cable package cost around $30 a
month that was when the average wage in
the US was about $8 now so back then one
month of spotty limited cable cost
almost four hours of labor for the
average person
much more if he wanted channels like HBO
or ESPN adjusting for inflation from
nineteen eighty five dollars to twenty
nineteen dollars basic cable used to
cost around seventy three dollars a
month cost of a basic cable package
without add-ons today the heck of a lot
lower than that but it’s still more than
Netflix or Disney Plus in fact if you
subscribe to every major streaming
service at the same time which I pretty
much do you’d still be paying way less
money for a vastly superior product and
more importantly the evolutionary
process that brought us these kinds of
improvements is still working just as
hard as ever
Disney Plus is amazing so it’s Netflix
and Hulu and Amazon Prime and they’re
all getting better and better but it’s
also far from the end of the road as
long as politicians don’t do something
stupid and make it impossible for
entrepreneurs to come up with new ways
of delivering incredible entertainment
to people’s homes the future looks
really good but right now I’ve got some
gargoyles to watch everybody thanks for
watching this episode of out of frame