Illustration by Christoph Niemann

Adam Sandler, whatever his virtues, hardly seems like the kind of guy who might hold the fate of Hollywood in his hands. But when, recently, Netflix announced that it had signed a deal for Sandler to make four movies for its streaming service, and said that it would also be financing and streaming a sequel to “Crouching Tiger, Hidden Dragon,” journalists foretold an apocalypse for traditional moviegoing. The Sandler deal endangered “the underpinnings of the movie business.” It promised to “doom theaters” and “destroy the box office.” Who knew “You Don’t Mess with the Zohan” mattered so much?

Netflix has always provoked hyperbole, with boosters saying that it will change everything and skeptics prophesying its imminent downfall. It has gone from Wall Street darling to Wall Street disaster and back again. Twice, the stock price has fallen more than sixty per cent in a matter of months—in 2011 and 2012—but, since the start of 2013, it has risen more than three hundred per cent. At the moment, Netflix can do no wrong. Practically everything the company does is being treated as radical and, of course, “hugely disruptive.”

The hype is misleading. True, in its seventeen-year history Netflix has created two markets practically from scratch—online DVD rental, then video streaming. In the process, it has reinvented itself three times: it began as a traditional pay-per-rental company, turned itself into a subscription rental service, went into streaming, and then moved into original content. Yet, in the past couple of years, Netflix has actually become a rather familiar kind of business. Jeffrey Ulin, the former head of distribution at Lucasfilm and the author of “The Business of Media Distribution,” told me, “If you really look at Netflix, it’s a pay-TV company.” He went on, “People still think of Netflix as a video store, because that’s their history. But the way a pay-TV service works is that people subscribe and pay a monthly fee for a service that aggregates content and offers original content of its own. That’s exactly what Netflix does.”

Netflix obviously has a much bigger catalogue of licensed content, and less original content, than pay-TV services like HBO and Showtime do. But the differences are diminishing: streaming matters more to pay-TV networks now, while Netflix is adding more original shows and movies. Toss in Amazon’s streaming service—which has been licensing lots of TV shows and films and has also begun producing its own shows—and you’re looking at a crowded marketplace.

This is a fundamental shift from streaming’s early days. What set Netflix apart then was that it had far more—and far better—content than anyone else. It was able to build up a sizable catalogue of movies cheaply, because the streaming market was still small and Hollywood was happy to get the extra revenue. For instance, Netflix managed to license hundreds of movies from the Starz pay channel for a mere twenty-five million dollars a year.

So what changed? Netflix became a victim of its own success. Once content providers saw how popular streaming was becoming, they jacked up the price of their content. Netflix’s success also attracted new competitors to the market (like Amazon), and encouraged existing competitors (like HBO) to invest more in streaming. “The calculus here is simple,” Ulin told me. “There’s lots more competition for viewers. That means it’s harder to get content. And the content you do get costs more.” In the past few years, Netflix has lost thousands of movies as licensing deals expired, and this year it will pay at least three billion dollars for content (much of it on children’s programming and television shows). Though Netflix still streams plenty of great films, no one really thinks of it as a dream video store in the sky anymore. “Netflix used to really emphasize the breadth and depth of its catalogue,” Dan Rayburn, a principal analyst at Frost & Sullivan, told me. “Now it puts a lot more emphasis on its original content.”

As recently as 2011, Reed Hastings, Netflix’s C.E.O., told investors, “We’re better off letting other people take creative risks,” rather than investing in original shows and movies. But the rising cost of content and the added competition meant that this approach would no longer fly. Thus “House of Cards” and “Orange Is the New Black” and the Sandler deal. “The carrot for any pay-TV service is really original content,” Ulin said. That’s the one thing you can guarantee people won’t be able to find anywhere else. Of course, everyone is investing in original content, so Netflix just has to do what others are doing and hope that it can do it better.

Netflix has real advantages—the sophistication of its streaming technology, the trove of data it’s amassed on viewing habits—but competition will make it hard to boost profits. HBO is making noises about a stand-alone streaming service, and Amazon’s service comes free with Prime, so it’s unlikely that Netflix will risk raising prices anytime soon. Content costs, meanwhile, will keep going up. The situation is an unusually stark example of competitive capitalism in action: someone invents a new market and thrives, but the success shows competitors just how lucrative the market can be. This may be hard on companies, but it’s great for consumers, since they’re getting more new shows and movies without having to spend another dime. We can sit on our couches, while Netflix runs as fast as it can just to keep its place. ♦