In 1997, Reed Hastings Paid a Late Fee: And Built Netflix to Eliminate Them Forever

The year 1997 saw the creation of Netflix by Reed Hastings when the video rental market was largely dominated by physical stores, such as Blockbuster Video. While the practice was known, it was hardly convenient for people since it involved visiting stores, selecting available titles, and returning them within specific periods. Moreover, late fees were an integral part of the process, which is another aspect worth noting. According to the Journal of Retailing and Consumer Services, various pricing schemes affect the performance of consumers. Therefore, late fees in this situation led to a negative consumer experience.

Although the story behind the idea can be traced back to one person's experience, its broader relevance stems from recognizing a problem that exists at a certain level. In this situation, the issue was not unique; it resulted from the way the industry operated at the time. From this perspective, it is essential to remember that Netflix hwasborn from recognition of a specific problem rather than out-of-the-box thinking.

Removing Constraints Instead of Adding Features

Initially, Netflix provided an option for consumers to send DVDs through the mail without requiring a store visit. Thus, by adopting such a business model, the company eliminated several constraints simultaneously, including location constraints, inventory constraints, and return constraints. According to research published in Technological Forecasting and Social Change, disruptive innovations have a tendency to reduce complications of a particular process, as compared to enhancing them. In the case of Netflix, the number of steps that were needed to rent a film has been greatly reduced.


An equally important decision by Netflix concerned the elimination of late fees from its policy and the replacement of them with a subscription-based model. Users could keep DVDs for longer periods without having to pay any extra money. As reported in Marketing Science, the adoption of a subscription-based model can be a powerful factor behind customers' willingness to retain their membership in a service. Changes made by Netflix did not involve the use of technology; rather, they affected the entire process itself.

From Physical Distribution to Digital Platform

It is important to note that the progression of Netflix did not end with DVDs either. With the advancement in technology, the company started to offer streaming, which once again lowered the barriers. Research in Telecommunications Policy indicates that improvements in bandwidth and digital infrastructure have enabled more efficient distribution of media content.

The process of change shows how the concept of digital transformation works. Organizations that start with solving a certain type of issue can further grow by overcoming other barriers as well. In both cases, the basic principle was the same – to simplify access to content as much as possible. Thus, whether mailing DVDs or offering streaming, the main purpose was to minimize inconvenience for customers.