Netflix was born out of this grad-school math problem

And the rest is history.
And the rest is history.
Image: Reuters/Paul Hanna
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The idea for web-video giant Netflix, which today reaches nearly 100 million people around the world, can be traced back to a math problem co-founder Reed Hastings was instructed to solve back in graduate school.

While studying computer science at Stanford University in the 1980s, Hastings said there was an exercise by computer scientist Andrew Tanenbaum in which he had to work out the bandwidth of a station wagon carrying tapes across the US. ”It turns out that’s a very high-speed network,” Hastings said, speaking at a Mobile World Congress session in Barcelona. ”From that original exercise, it made me think we can build Netflix first on DVD and then eventually the internet would catch up with the postal system and pass it.”

The concept, of sending electronically information physically, is known as a sneakernet. This is how Tanenbaum and co-writer David Wetherall described the problem in their book Computer Networks (fifth edition, pdf):

One of the most common ways to transport data from one computer to another is to write them onto magnetic tape or removable media (e.g., recordable DVDs), physically transport the tape or disks to the destination machine, and read them back in again. Although this method is not as sophisticated as using a geosynchronous communication satellite, it is often more cost effective, especially for applications in which high bandwidth or cost per bit transported is the key factor.

A simple calculation will make this point clear. An industry-standard Ultrium tape can hold 800 gigabytes. A box 60 × 60 × 60 cm can hold about 1000 of these tapes, for a total capacity of 800 terabytes, or 6400 terabits (6.4 petabits). A box of tapes can be delivered anywhere in the United States in 24 hours by Federal Express and other companies. The effective bandwidth of this transmission is 6400 terabits/86,400 sec, or a bit over 70 Gbps. If the destination is only an hour away by road, the bandwidth is increased to over 1700 Gbps. No computer network can even approach this. Of course, networks are getting faster, but tape densities are increasing, too.

If we now look at cost, we get a similar picture. The cost of an Ultrium tape is around $40 when bought in bulk. A tape can be reused at least 10 times, so the tape cost is maybe $4000 per box per usage. Add to this another $1000 for shipping (probably much less), and we have a cost of roughly $5000 to ship 800 TB. This amounts to shipping a gigabyte for a little over half a cent. No network can beat that. The moral of the story is:

Never underestimate the bandwidth of a station wagon full of tapes hurtling down the highway.

Hastings had an embarrassingly large late fee in the mid-Nineties and became intrigued by the possibility of video rentals by mail, which would have been too costly with VHS tapes—but now the DVD had arrived and was starting to take off. Hastings thought about how his math problem could be applied to video-rental delivery.

“When a friend told me about DVDs and I realized, well that’s 5GB of data, and you know you can mail that very inexpensively, I realized that is a digital-distribution network,” Hastings said.

He and Netflix co-founder Marc Randolph reportedly went down to Logos, a record store in Santa Cruz, California, and bought a used CD to test it out. They picked up a blue greeting-card envelope from a gift shop on Pacific Avenue and went to the nearest post office, where they mailed the CD to Hastings’s house using a single first-class stamp, Randolph told Silicon Valley Business Journal. The next day, Hastings went to see Randolph with the CD in hand—unbroken.

“That was the moment where the two of us looked at each other and said, ‘This idea just might work,'” Randolph said.

Even in those early days, Hastings and Randolph were already thinking about how the internet could change video. But they knew the shift away from physical rentals wouldn’t happen overnight, and didn’t want to tie themselves to specific mode of a delivery.

“If we were to come out and say, ‘This is all about downloading or streaming,’ and we said that in 1997 and ’98, that would have been equally disastrous,” said Randolph. “We had to come up with a positioning which transcends the medium.” Thus, Netflix branded itself as a place to find movies, and now TV shows, you’ll love, while placing itself at the forefront of digital-video delivery.