The Idea for Netflix Came From $40 in Late Fees on an ‘Apollo 13’ Rental

Who doesn’t remember loving the local video store in their neighborhood? What seemed like endless aisles of VHS tapes for rent offered endless potential for a weekend slumber party or perhaps a “dinner and a movie on the couch” date night well before “Netflix and chill” was a thing. It was always fun trying to find something to rent, get home, rewind the VHS because the person before you was a jerk, and enjoy.

“Hastings was just trying to enjoy a Ron Howard/Tom Hanks classic space flick and next thing he knows he owes the video store $40 just because he got busy for a few days and forgot to return the movie on time.”

be kind rewind
Be kind, please rewind

But with all these positive memories of course it’s important to reminisce about the mad dash to make sure said movies were returned no later than 6PM. Otherwise the dreaded late fee would hit like a scarlet letter draped across your account for all employees of the video store to see. “I’m sorry sir, before you can rent ‘Never Been Kissed’ you must pay the charges assessed to your account for returning ‘Notting Hill’ two days late” they would say, with judgmental inspection of your rental history. How embarrassing.

Back in 1997 when Netflix was started, Reed Hastings, CEO of the company, knew this pain as well. In fact, it’s what inspired him to create the now-household name. Hastings was annoyed with a $40 late fee after he had rented ‘Apollo 13.’ A tweet from several years ago revealed that Hastings was just trying to enjoy a Ron Howard/Tom Hanks classic space flick and next thing he knows he owes the video store $40 just because he got busy for a few days and forgot to return the movie on time.

There is no better reason to start a business than trying to solve a problem or frustration in your own life, and Hastings did just that. He had just recently sold his first company for $750 million, so it wasn’t even about the money, but rather the inconvenience of having to deal with timing the returns of movies he was renting. What if he didn’t have time to watch it before it was due back? What if something came up and he just couldn’t get around to running the video back to the store? There had to be a better way.

Enter Netflix: A humble 1000 title online DVD rental library with free shipping, no due dates, and no late fees that quickly expanded during the dot com boom of the late 90s.

netflix original website
The original Netflix website

But after a few difficult early years (seriously look at their stock in the early 2000s), Netflix almost ended up selling itself to its largest competitor at the time, Blockbuster. Netflix was looking to partner with the rental store giant, offering to setup and run a DVD-by-mail service as an aside to physical retail locations. Fortunately for everyone, Netflix was laughed out of the Blockbuster offices, and 900x in value later, Netflix is thriving while Blockbuster is virtually no more.

One of the key factors of Netflix’s success has been their pivot from DVD rental delivery to digital streaming. Making the move was a major shift from fringe benefit for their subscriber base to the key functionality we’ve all gotten used to using. This move has of course paid major dividends but Netflix knows it can’t last forever. Netflix has once again begun to retool their business strategy, as third party content providers continue to get more and more stingy with streaming distribution, making it either massively more expensive or almost entirely inaccessible to stream titles that belong to other content owners. Thus, the service has decided to focus heavily on creating its own original content, an expensive but hopefully rewarding effort.

All this goes to show that the littlest inconveniences sometimes turn into massive multi-national billion dollar businesses.