True story behind Netflix's rise – and the downfall of Blockbuster

The Netflix co-founder Reed Hastings has fact checked the story about his overdue Blockbuster DVD rental. Photo / File

According to legend, the Netflix we know and love today was born after co-founder Reed Hastings racked up a $US40 ($A58) fine thanks to one overdue videotape.

The story goes that Mr Hastings had rented a copy of Apolo 13 – the 1995 hit starring Tom Hanks and Kevin Bacon – from his local Blockbuster store.

At the time, the video rental empire was king, with thousands of stores and employees across the globe.

But Mr Hastings lost the tape and was slapped with the late fee – an inconvenience so irritating he was supposedly inspired to create a new entertainment company that would do away with late fees forever and disrupt the entire movie and television business in the process.

But there's just one problem with that fascinating origin story – it didn't actually play out that way at all.

In his recently released book That Will Never Work, Netflix co-founder Marc Randolph debunked that infamous origin myth once and for all.

WHAT REALLY HAPPENED?

According to Mr Hastings, the truth is a lot more mundane than one eureka moment.

"The idea for Netflix didn't appear in a moment of divine inspiration," he writes in his book.

Instead, it was the result of necessity – and a process of elimination.

That's because at the time, Mr Hastings and Mr Randolph were co-workers at Silicon Valley software company Pure Atria, but it was about to merge with another company – a move that would make both men redundant.

They were looking for their next career move and decided they wanted to follow in Amazon's footsteps by creating an industry disrupter and becoming the next big thing.

The pair carpooled to work together, and during the drive they would throw around many different business ideas.

One of those happened to be renting videotapes via a website, but they realised mailing out heavy tapes would be too expensive.

But the arrival of DVD technology changed that, and the original Netflix prototype was born.

The 'embarrassing' late fee helped Reed think about the market for DVD mail rental, which would eventually become the streaming giant Netflix. Photo/ Netflix

NETFLIX MYTH

However, Mr Hastings has insisted the Apollo 13 late fee did, in fact, happen, so it's easy to see why the myth has persisted for so many years.

In an interview with Fortune magazine in 2009, for example, Mr Hastings confirmed the $40 fine did inspire him – it just wasn't the single catalyst behind Netflix.

"I remember the fee because I was embarrassed about it. That was back in the VHS days, and it got me thinking that there's a big market out there," he told the publication.

"So I started to investigate the idea of how to create a movie-rental business by mail. I didn't know about DVDs, and then a friend of mine told me they were coming.

"I ran out to Tower Records in Santa Cruz, California, and mailed CDs to myself, just a disc in an envelope. It was a long 24 hours until the mail arrived back at my house, and I ripped them open and they were all in great shape. That was the big excitement point."

The story has been perpetuated by Netflix itself in social media posts and has been in countless media reports about Netflix's meteoric rise.

But speaking with the Silicon Valley Business Journal in 2014, Mr Randolph dismissed it.

"These founding stories are just that – they're stories," he told the publication. "It's a good story, and Netflix is a story, so I'm OK with that."

DEATH OF BLOCKBUSTER

Despite the confusion over the idea behind Netflix, it ended up changing the entertainment industry forever.

But it didn't happen overnight – in 2000, Netflix was struggling and on the brink of collapse when Mr Hastings and Mr Randolph and chief financial officer Barry McCarthy organised a desperate last-ditch meeting with Blockbuster CEO John Antioco.

They hoped to sell Netflix to Blockbuster for $US50 million ($A72.6 million) – but when they made their pitch, they were just about laughed out of the room.

Two years later, Netflix went public with market capitalisation of $6.5 billion, and in 2007, it launched its movie streaming service that would make the company a household name.

And by 2010, Blockbuster had filed for bankruptcy protection due to rising debt and growing competition – from none other than Netflix itself, along with other video on-demand services.

Today, there's only one Blockbuster store left in the world in Oregon in the US, where it has become a tourist attraction as a quaint relic of the past.