The untold truth of Netflix

Netflix, or that thing statistically like 30 percent of the people reading this right now have open in another tab, is the world's most popular streaming service with some 70 million plus subscribers. For anyone who's ever been a little curious about the benevolent red logo on your Xbox, here are few little-known facts and debunked myths about the streaming service, or if you prefer, the untold truth of Netflix.

The real reason Blockbuster didn't buy Netflix

Spend enough time online and eventually you'll happen across a rather amusing tidbit about Netflix—that in 2000, the company offered Blockbuster the chance to acquire the then-fledgling business for $50 million and were turned down. Numerous sites report this as one of the biggest business blunders of all time. After all, today Netflix is worth ten times what Blockbuster was at its peak, and Blockbuster couldn't be less relevant if it sold pogs.

However, what few places fail to report is that in the year 2000, Netflix was hemorrhaging money and the valuation of $50 million was way more than the company was actually worth at the time. Another seldom mentioned fact is that Netflix didn't just offer to be acquired by Blockbuster. Instead, they proposed a partnership where they'd run Blockbuster's online storefront. Basically, Netflix swaggered into what was, at the time, one of the biggest companies on Earth and asked for $50 million and exclusive use of their extremely valuable brand in the burgeoning internet market. Blockbuster executives rightly told Netflix they weren't interested and then torpedoed their brand by making 30 completely unrelated but also completely terrible business decisions in a row.

Of course, since "Blockbuster executives make smart business decision based on information available to them" doesn't really get a whole lot of clicks, it's not really a big surprise that a lot of places fail to mention this fact.

The mythical Netflix origin story

Search around online about Netflix, and you'll probably find some website talking about how Netflix's founder, Reed Hastings, was inspired to start the business after being slapped with $40 in late fees by Blockbuster and deciding at that exact moment he'd do everything in his power to screw them over for it. Hastings has told the story dozens of times with varying levels of detail, but one fact that seems consistent is that he was apparently trying to return a DVD copy of Apollo 13. As great as the story is at putting a neat little bow on the founding of the company, it's completely made up. Like it's not even a little bit true, at all.

Hastings basically made the story up for after-dinner speeches and interviews because he didn't want to go into the long and convoluted story of how the company was actually founded. It also, rather conveniently, downplays the input of Netflix's co-founder, Marc Randolph, by making it sound like the company was all Hastings's idea. To quote Gina Keating, author of the book Netflixed which gives a comprehensive overview of how the company began and eventually came to dominate the online landscape:

It didn't really happen, but the founding story is long and complicated and is not a lightning strike. Initially the tale was sort of a marketing tool. It tells you everything about how Netflix works.But what would grate on the founding team is that Reed would go out and just tell that story all the time. It never happened and there is something very indicative about the fact that Hastings would continue to do that. We go back to the hubris of the whole thing. It's sort of, "This company is me; I thought it up," and maybe it just becomes true after a while.

The site has quite a few "micro-genres"

As you'd expect for a company with thousands of films in its archives, Netflix meticulously catalogs every film in its library. Unlike us peons, though, who are happy enough dividing films by their genre or how much nudity they contain, Netflix takes everything into account when it adds a new film or TV show to its library.

Netflix's proprietary algorithm sorts films based on everything from historical settings to whether or not it contains vampires, allowing them to cater to almost ludicrously specific tastes. As an example of how laser-like the focus of Netflix's genre algorithm is, for an April Fool's joke they once suggested users check out "Movies Featuring an Epic Nic Cage Meltdown." Which may as well have just been a list of every Nic Cage film, but you get the idea.

In 2014, a curious statistician worked through the code of Netflix and found the site has over 75,000 different "micro-genres" that it uses to categorize movies and shows (76,897 to be more precise). These genres are largely hidden from the user, and most people will barely see even a fraction of them while browsing, which is kind of the point. It's your Netflix account. So if you're not interested in period movies featuring sexy werewolves, it's not going to suggest them to you. But then, who's not interested in sexy werewolves?

Netflix tracks everything you do

What's the most important thing Netflix owns? Perhaps the licenses to the many movies it streams? Or maybe the rights to original programming and Kevin Spacey's face? Actually, it's the data produced by subscribers while watching.

Along with collecting basic data from subscribers (e.g., the shows they watch, at what time, and for how long), Netflix pinpoints when you pause, rewind, or stop watching something in an attempt to figure out why. This data on its own isn't all that useful, but when cross-referenced with basic geographical information and the same data produced by the other 70 million odd Netflix subscribers, it can be used to produce comprehensive charts detailing exactly what people watch. Netflix sadly keeps this data to itself so we'll never know just how many people stop watching Adam Sandler movies the second Kevin James turns up.

Along with helping Netflix decide what to purge from its library, the data is an invaluable tool for Netflix when it produces original content, allowing the service to confidently predict exactly how many people will watch a particular original program and set an appropriate budget. So remember, the next time you press pause, you're holding the fate of Francis Underwood in your hands.

Netflix has an unusual way of making TV shows

Because Netflix isn't beholden to advertisers and has a largely guaranteed revenue stream from subscribers, the company will often order two seasons of any show it produces rather than a pilot. Actors and writers have credited this with giving them a greater degree of flexibility when creating shows as they don't have to rely on gimmicks like cliffhangers to retain viewers. Instead, they can focus on simply creating good content. This is one of the reasons some episodes of original Netflix shows are different lengths. The writers aren't restricted to the usual time constraints of regular TV so they can make an episode as long or short as it needs to be.

Also, because of the vast wealth of statistics about viewing habits Netflix has at its fingertips, the company abstains from micromanaging shows because it knows they will succeed. The best example of this is probably House of Cards. Netflix had no qualms about giving director David Fincher approximately $4 million per episode because they had data showing that users loved the original British series. On top of that, the stats showed audiences were big fans of Fincher and Kevin Spacey and gave their respective films a whole lot of stars. As a result, Netflix pretty much knew the show would be a hit before it even aired because math said so.

They're pretty cool about overtime and expenses

Netflix is surprisingly hands-off when it comes to the management of its employees, which is pretty unusual for an omnipresent, monolithic media company worth billions of dollars. In fact, full-time workers in Netflix's main office are basically allowed to set their own hours, with company policy stating that an individual employee can take off as many days as they feel they need. The policy is so lax that if you want to take off more than 30 days in a row, all you need is the okay from a manager.

The reasoning behind this, from Netflix's point of view anyway, is that if you hire good employees and treat them like adults, they can be trusted to make good decisions. This ethos is best summed up by Netflix's official expense policy which goes, "Act in Netflix's best interests."

Employees can pretty much request expenses for anything they like, but they're asked to spend the money like it's their own. Despite seeming like such a system would be massively open to abuse ("Hello, 30 new laptops") it works and functions with little actual oversight, with executives noting that the only real people they have to keep an eye on are the IT guys because they always request fancy gadgets and toys for their office.

Netflix doesn't care if you share your account with other people

According to some studies, Netflix loses as much as half a billion dollars every single year simply as a result of customers sharing their accounts with friends and family members. Now another, less awesome company would probably look at a statistic like that and totally flip their lid, but Netflix not only knows that a huge percentage of their user base isn't paying for their service, they don't seem to really care.

While the company remained coy about directly addressing this practice of account sharing for many years, they did allude to it in interviews and press releases, explaining that Netflix policy says customers shouldn't share their password…but that there's nothing in their rules about an individual account holder sharing access to it.

More recently, the company has actively encouraged users to share access to an account by offering subscription packages that let multiple users watch at once on multiple devices. However, we think it's kind of awesome that Netflix basically wrote off hundreds of millions of dollars in potential revenue just to generate goodwill with customers.

Netflix's library is influenced by pirates

In addition to tracking what shows its customer watch and how often they pause to do a shot for Uncle Phil when watching The Fresh Prince of Bel-Air, Netflix also has analysts track what stingy people are torrenting on the web.

Like the data it collects from subscribers, piracy figures represent an invaluable insight into viewing habits that Netflix uses to adjust its own programming. After all, if people are willing to give their computer an STD to watch Game of Thrones or Arrow, it probably means someone is willing to pay a few dollars to watch a similar show from the comfort of their toilet.

Netflix has even been reported to use the geographical data of pirates to adjust its pricing, lowering the cost of their service in areas with high rates of piracy in an attempt to lure pirates over to the SS Netflix and Chill. It's a sentiment that kind of reminds of us this famous quote by Gabe Newell: "The best way to combat piracy is by offering consumers better service than they might get from the pirates."

Indeed, Gabe. Indeed.