The Red Envelope Was Already Losing

From Disc to Stream

Netflix launched its streaming service in January 2007, offering subscribers unlimited online viewing as a no-cost addition to existing DVD-by-mail plans. At the time, the disc business was the company's core product: customers selected titles from a queue, received physical discs by post, and returned them in the distinctive red prepaid envelopes. According to Netflix's SEC filings, the company reported approximately 6.3 million subscribers at the end of 2006, almost all of them DVD customers. Streaming, at launch, carried a library thin enough to make it an afterthought.

The January 2007 rollout coincided with a broader shift in household technology. Broadband penetration in the United States had passed 50 percent of adults by 2007, according to Pew Research Center survey data, and the flat-panel television was replacing the cathode-ray tube in living rooms that now sat closer to network routers. Netflix moved quickly to reach those screens directly, striking deals with hardware manufacturers to embed its player into Blu-ray players, game consoles and eventually the Roku box — a device developed inside Netflix before being spun off as a separate company in 2008. Each embedded device removed one more reason to wait for the postman.

Subscriber growth through the late 2000s was steep. Netflix's SEC filings show the company crossing 10 million subscribers in 2009 and reaching approximately 20 million subscribers by the end of 2010. By that point the streaming library had expanded substantially, boosted by licensing agreements with major studios and networks. DVD-by-mail remained profitable, but its trajectory was plainly downward: shipping costs were fixed, late fees had already been abolished in 2005, and the model depended on a postal infrastructure whose economics moved against the company every year.

The Qwikster Detour

The tension between two businesses with opposite futures produced one of the more closely watched corporate missteps of the early streaming era. In September 2011, Netflix's chief executive Reed Hastings announced that the DVD and streaming operations would be separated into two distinct services, each with its own subscription and billing. The DVD company would trade under the name Qwikster. The announcement followed a July 2011 price increase that unbundled the two services, raising combined costs for customers who wanted both by roughly 60 percent. Netflix lost approximately 800,000 subscribers in the third quarter of 2011, according to the company's own quarterly earnings filing — a figure that attracted significant press coverage and scrutiny from investors.

The Qwikster name lasted twenty-three days. On 10 October 2011, Hastings reversed course and announced that the DVD service would remain under the Netflix brand. The streaming and disc operations continued to share billing but diverge in investment and ambition. From that point the company's public communications focused almost entirely on streaming growth, international expansion, and the question of what Netflix would make rather than merely license.

House of Cards and the Original Bet

The answer arrived in February 2013 with the release of House of Cards, an adaptation of the British political drama produced by Media Rights Capital and distributed exclusively through Netflix. The company released all thirteen episodes of the first season simultaneously — a delivery model that had no broadcast precedent and that embedded the word "bingeing" permanently into conversations about television. House of Cards was not the first streaming-exclusive series (Hulu had produced original programming earlier), but it was the first to arrive with a production budget and cast — Kevin Spacey, Robin Wright, director David Fincher — that matched premium cable ambitions.

Netflix did not publish viewership data in standard industry terms, declining to share figures with Nielsen or the Audit Bureau of Circulations' broadcast-adjacent counterparts. What it disclosed in SEC filings was subscriber momentum: the company reported 27.1 million domestic streaming subscribers at the end of 2012, rising to 29.2 million by the end of the first quarter of 2013, the period covering the House of Cards debut.

The DVD operation continued under its own subscriber line in those same filings, shrinking each quarter with the reliability of a tide going out. The red envelope had built the company. The company had moved on.