EXPLAINED | Reed Hastings steps down from Netflix: Inside story of the streaming giant's rise and struggle

Netflix co-founder Reed Hastings recently announced his decision to step down from the company as co-CEO. The decision preceded almost a whole year of bad financial reports. Now, Greg Peters, the former COO, will be the new co-CEO in his stead and run the company with Ted Sarandos. Over the last year, the streaming giant has faced financial woes one after another, though there have been reasons to celebrate as well. We do now know for sure whether Netflix's losses over the last year still played a part in Hastings' sudden decision. But it is likely that is the case.

Also Read:Netflix's most-watched movies and TV shows of 2022: 'The Gray Man' and 'Stranger Things 4' come out on top

Who is Reed Hastings?

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Hastings was born in Boston, Massachusetts, and grew up in the San Francisco Bay Area. He graduated from Bowdoin College in 1983 with a Bachelor of Arts degree in mathematics and computer science. After college, he joined the Peace Corps and served as a teacher in Swaziland, Africa.

After returning to the United States, Hastings worked as a software developer at Adaptive Technology and then as a senior software engineer at Pure Software. In 1991, he founded his first company, Pure Atria, which developed software tools for developers. The company was acquired by Rational Software Corporation in 1997 for $750 million.

After the acquisition, Hastings turned his attention to the entertainment industry and in 1997, he founded Netflix. Hastings has been recognised for his entrepreneurial success and has received several awards for his contributions to the technology and entertainment industries. He is also known for his philanthropy, particularly in the field of education.

Netflix, the house Reed Hastings (and Marc Randolph) built

Hastings has talked about an alleged incident several times that, if true, is quite interesting. As per Hastings, the idea for Netflix, which was initially a DVD rental service, came to him after he had to pay a large fee for returning a video cassette. In his words (spoken to the New York Times), "I had a big late fee for Apollo 13. It was six weeks late and I owed the video store $40. I had misplaced the cassette. It was all my fault. I didn't want to tell my wife about it. And I said to myself, ‘I'm going to compromise the integrity of my marriage over a late fee?’ Later, on my way to the gym, I realised they had a much better business model. You could pay $30 or $40 a month and work out as little or as much as you wanted." However, the story has been rejected by Marc Randolph, Netflix's co-founder. You may not have heard of Randolph as he quit the company in 2002. It is Hastings who is largely responsible for the leading streaming service the company became.

Also Read:Netflix co-founder Reed Hastings to resign as chief executive

Hastings and Randolph thought they would start a mail-based rental service for VHS tapes in 1997. But as some of you who are old enough would know, the said tapes were too delicate and were damaged in transit. They instead set their eyes on DVD, the latest and most advanced form of portable data storage then that was more durable. After beginning with a per-DVD rental service, Netflix became a monthly subscription service. As long as one had a Netflix subscription, they could hold on to their DVDs for as long as they liked.

In 2000, Hastings almost sold Netflix to the video-store giant (then) Blockbuster in 2000. Had the deal been made, Hastings would have certainly come to regret it until the end of his life. In any case, Blockbuster, which would go defunct less than a decade and a half later turned down the offer.

In 2007, Netflix transitioned to streaming, though the process was gradual. For a time the company ran a hybrid system (both DVDs and online streaming). It was not until 2013 that company began producing its own content and ushered in a new era of TV and film entertainment. 'Orange is the New Black' came that year, and so did 'House of Cards'. As it delved deep into the production of original content, Netflix expanded into other territories, eventually making shows and movies geared to audiences in other countries. Suddenly, Netflix was the favourite entertainment platform for millions around the world. This strategy of relying on original content allowed the company to differentiate itself from its competitors and build a loyal subscriber base. The onset of the COVID-19 pandemic and the subsequent lockdown only helped the company gain more subscribers as film theatres and other outdoor forms of entertainment were shut down for audiences around the world.

So why has Netflix been in trouble recently?

In April last year, the company reported that about 200,000 subscribers said goodbye to their subscriptions, which was the first time in more than a decade that the company lost users, instead of gaining them. The execs had actually expected to gain 2.5 million subscribers. Then between April and July last year, the service lost almost a million subscribers. But it had expected an even bigger drop. Its losses were somewhat curtailed by 'Stranger Things 4', which debuted in two volumes in 2022.

But still, the subscriber loss was the biggest in the company's history. The company does appear to have bounced back by the end of 2022, with 231 million subscribers (a gain of 7 million). But what caused those losses?

Netflix mainly relies on its original content to garner and retain its subscriber base. But there are high costs associated with producing originals and acquiring content from other studios. The company has also had a heavy investment in international markets in the last few years. Also, it has a subscription-based model, and it is dependent on constant subscriber growth to generate revenue. If the company's subscriber growth slows down or if it experiences a decline in subscriber retention, as it did, it severely impacts its financial performance.

Then there is the increased competition from other streaming services such as Disney+, Amazon Prime Video, and HBO Max. All of those are new players and are eating into Netflix's subscriber base. Also, Disney+ and HBO Max boast of a huge library of legacy titles going back a century thanks to their parent companies' long history (Disney and Warner Bros). And both have also spent heavily on the development of exclusive content. They are following Netflix's lead, certainly, but they are also troubling the market leader.

The streaming market is becoming more competitive and subscriber retention is becoming more challenging for Netflix. The company has to keep in mind the cost of producing and acquiring content, as well as the changing preferences of its subscriber base, in order to maintain its subscriber base.

What has Netflix been doing to recover from its losses? And did it work?

As said above, Netflix has gained 7 million subscribers to cap off the end off 2022 on a positive note. We do not know if a slew of measures launched by the company may have resulted in that manna from heaven. These measures include a ban on password-sharing (that is already in effect in several countries) and lower-priced and advertisement-supported plans. However, these strategies are not widely deployed yet and likely did not have a significant effect on subscribers. Rather, I suspect the jump had to do with newer original movies and shows on the platform like 'Wednesday' and 'Glass Onion' that made many shell out bucks for a subscription. Content, as always, remains the king.