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Netflix established in Scotts Valley California, in August of 1997. The company founders are Reed Hastings and Marc Randolph. Randolph had previously helped found a computer mail order company called Micro Warehouse and then served as vice-president of marketing for Borland International, while one-time math teacher Hastings had founded Pure Software, which he had recently sold for $700 million. Hastings, who supplied the firm’s startup cash of $2.5 million, had reportedly hit upon the idea for rental-by-mail when he was forced to pay $40 in fines after returning an overdue videotape of the film Apollo 13. The DVD format, which can store a high-quality copy of an entire feature film on a single five-inch disc, had been introduced in the spring of the year and less than a thousand titles were then available. Although the hardware needed to play DVDs was fairly expensive and owned by relatively few Americans, Hastings and Randolph thought the disc had the clear potential to replace bulkier, lower-resolution videotape as the consumer format of choice.
Key to the firm’s initial strategy was the fact that few video stores carried DVDs, making renting them in person a hit-or-miss affair. The company was also able to take advantage of the small size and light weight of the discs, which could be shipped to users very cheaply. The firm experimented with more than 200 mailing packages before finding one that could safely ship a disc (in a plain case without cover art and inserts) for the cost of a single first-class stamp. A stamped return mailer was also enclosed. NetFlix.com (with a capital “F,” as the name was originally rendered) promised to virtually guarantee titles would be in stock, with reasonably quick delivery offered through the U.S. Postal Service. The company pledged to buy more than 1,000 copies of new releases which could be reserved in advance for shipment on the day they were made available in stores.
The company opened for business on April 14, 1998, with 30 employees and 925 titles for rent, which comprised nearly the entire catalog of DVDs in print. The firm offered some “soft-core” Playboy titles but shied away from hardcore pornography to avoid the potential for legal problems in certain states. Netflix initially offered a seven-day DVD rental for $4, plus $2 shipping, with the cost going down when additional discs were rented. Discs could be kept longer for an additional fee. New DVDs were also offered for sale at a discount of up to 30 percent.
Consumers could decide to purchase a rented disc once they got it home by having the balance of the retail price charged to their credit card. The firm’s Web site offered some informational features including movie reviews, and once a customer had rented several titles, a profile would be generated that automatically suggested additional films of interest based on the characteristics of ones already chosen.
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