According to the article, Blockbuster was initially skeptical about the online market. To compete with Netflix, it launched its Blockbuster Online service only in 2004, and the aggressive promotion facilitated the service’s growth. However, operating expenses and rejection of late fees resulted in substantial losses, and Blockbuster Online did not put Netflix at risk.

By the middle of the 2000s, the video-on-demand (VOD) model was gaining popularity among the market players, and Netflix’ CEO Reed Hastings was interested in it. Among other options, he preferred the model of renting feature-lengths movies.

Other market players, however, chose different ways of selling content online. In 2007, companies like Walt Disney or Blockbuster introduced their VOD services. Nevertheless, they struggled with content limitations and difficulties with connecting computers to televisions. Consumers who possessed large high-definition televisions did not want to watch the purchased video on the computer.

During this period, Hastings, who was always eager to implement VOD, was thinking of alternatives to avoid these limitations. For example, Netflix could license its famous user recommendation system and offer it to cable providers. It would allow avoiding technical limitations, but Hasting was not sure if the new technologies would not emerge soon after signing an agreement. Also, Netflix could add to its core business a free video streaming service. However, Hastings was not comfortable with offering it free of charge, because the company still had to buy content from studios and to pay the new employees.

Finally, he has chosen the third way. Hastings decided to create a separate business, offering chargeable online video content. It would not distract his core employees from their primary work, and a new team would entirely focus on its responsibilities. Moreover, charging customers for watching videos would ensure that the new company would not struggle with the lack of funding.