The inside story of how Netflix transitioned to digital video after seeing the power of YouTube

This is an excerpt from the book “Streampunks: YouTube and the Rebels Remaking Media” (HarperBusiness, 2017).

Around the time of YouTube’s founding in 2005, I was working at Netflix. Having worked my way up from a talent agency mailroom to jobs at Mutual Film Company and HBO, I joined Netflix convinced that the company would revolutionize home entertainment and upend rental chains such as Blockbuster. And in the early 2000s, that vision came to life. But once the company’s DVD mail-order business had really established itself, I began to get a little bored.

One day, my bosses, Ted Sarandos and Reed Hastings, asked for a volunteer to help lead a new side project: Instead of mailing out physical DVDs to customers, could we figure out a way for our customers to view films and TV shows digitally, over the Internet?

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Now, volunteering to lead a new initiative is a very stupid thing to do at Netflix. The company’s culture prides itself on relentless focus, dispassionately eliminating business initiatives that are not core to the overall strategy. You can work on something for years only to find that project mothballed during a quick meeting. But I was hungry for a challenge, so I offered to take on the new project. I was the only volunteer.

It wasn’t the first time that Netflix had evaluated an internet-only option, but only in the mid-2000s did data speeds and bandwidth costs finally reach the point where asking users to download an entire movie online no longer seemed like a crazy idea. The initial thinking was that we would create and supply customers with a “Netflix box” that they could use to download movies overnight to watch the next day. It was incredibly difficult to acquire the download rights to movies, just as it was difficult to create the new box and service, but by 2005, we were finally ready to launch.

Then I saw YouTube for the first time. More precisely, I saw grainy videos of snowboarding accidents and people lighting their kitchens on fire, and I saw that those videos were attracting massive viewership numbers, making YouTube one of the fastest-growing sites on the internet. We at Netflix — along with everyone else in the industry at the time — were focused on delivering movies to people in the highest quality available.

But YouTube clearly demonstrated that people were willing to trade fidelity for convenience and speed. Witnessing the popularity of YouTube was a revelation. And it caused us to stop our launch and pivot to a service that would allow consumers to stream movies remotely instead of downloading them. That pivot took two long years, during which we had to renegotiate all our rights and build an entirely new architecture to host and serve content. We had to transform our “Netflix box” from a hard drive that would download video to one that would stream it.* But finally, in 2007, we launched Netflix streaming because we saw the potential that YouTube presented.

Every month, YouTube seemed to be growing faster, launching in new markets, increasing its number of views and attracting more and more people to share videos. In 2011, when I left Netflix to join YouTube, around 40 hours of video were being uploaded every minute. In 2017, the number has grown over tenfold.

But as powerful as YouTube’s idea of free, global distribution of video was, I don’t think it alone was enough to lead to the streampunk era we live in now. I think there were three other developments that have been core to explaining the success of stars such as “Superwoman.”

The first has to do with a decision YouTube made very early in its history — to pay its creators.

Any new-media venture suffers from the same issue: How can it provide content that will attract viewers? That’s true whether you’re starting a blog, a magazine, a TV networ, or a video-streaming service. Your first instinct may be to pay someone noteworthy to create content for you, using an established brand to attract attention to yours.

When YouTube first started, its approach was no different. In addition to hosting all the videos that users uploaded, YouTube signed deals with NBC as well as smaller players such as CollegeHumor.com, giving them a share of advertising revenue in return for content they uploaded to the site.

But then YouTube made a novel decision: In 2007, it launched the Partner Program, extending the sharing of ad revenue to creators of all kinds, not just to established media companies. If you reached a certain number of views or subscribers, you could give YouTube the right to sell advertising against your videos and receive the majority of the money it earned from your channel’s traffic.

If you speak to people who were at YouTube in those early days, the creation of the Partner Program wasn’t primarily a business decision. Instead it was about fulfilling the egalitarian promise of anyone being able to create content.

George Strompolos, currently the CEO of the media company Fullscreen, helped create the Partner Program. He told me that the company “wanted to ensure that YouTube would be a home for new voices, not just to get seen but hopefully to generate some income and earn a full-time living.” It was one thing to give people an opportunity to connect with an audience; it was another to give them a paycheck.

There’s a lot of discussion today about the sharing economy and what companies such as Uber, Lyft and TaskRabbit owe to their employees. But long before there was a sharing economy, there was a social economy. That economy functions because users supply content (posts, tweets, pics, Snaps, Vines or videos), people tune in in massive numbers to see that content, and advertisers pay to run ads against that content to get their products in front of viewers. Without the voluntary contributions of billions of people, the social economy would collapse. But sadly, to date, YouTube is the only significant player in the social economy that pays all its creators a share of the advertising revenue their content generates.

In just over a decade, the scale of YouTube’s partner payments has become massive. Though some paychecks are smaller than others, to date we’ve paid out billions of dollars to content creators of all sizes. That money has helped anchor the growth of several new media properties, from Vice to BuzzFeed to George’s company, Fullscreen. It has helped bolster the bottom lines of traditional media companies and music labels (we’ve paid out $3 billion to the music industry alone). And it has created an entire business-to-business layer of service-oriented firms that provide the infrastructure for internet video to thrive, offering rights-management support, data analysis and specialized ad technology.

But the most significant consequence of YouTube’s revenue sharing has been the democratization of the job of internet content creator. Every month, we deposit money into the accounts of millions of creators around the world. That money is what helps a streampunk get his or her start. It’s what changes the act of making videos from a hobby to a trade. It’s what transforms a career in entertainment from an option available only to the well-connected or very lucky to a path that is open to almost anyone.

* Weeks before the launch of its streaming service, Netflix spun off the “box” into its own company, called Roku; again, a demonstration of the company’s strong desire to focus on its core competencies.

Robert Kyncl is the chief business officer at YouTube, where he oversees commercial, creative and content partnerships for the platform. Previously, he was vice president of content at Netflix, where he spearheaded the company’s content acquisition for streaming TV shows and movies over the internet. Kyncl has been listed in Variety’s Dealmakers Impact Report as one of its “disruptors,” Vanity Fair’s New Establishment List, Billboard’s Power 100 List and AdWeek’s 50 List of Vital Leaders in Tech, Media and Marketing. Reach him @rkyncl.