Netflix was created in 1997 by Reed Hastings, who is still its current CEO, and Marc Randolph. In its early days, Netflix’s business model was based on DVD rentals, seeking to disrupt Blockbuster Video, which was the dominant actor in the United States. At the time, DVDs were only starting to make their appearance in the US market and offered a much better customer experience than videocassettes. Blockbuster Video was making a lot of money by renting them for a fee for a specific time. The fee would vary, depending on things like the s release date of a movie, late returns, etc. Hastings saw an opportunity to offer a flat monthly rate for all content and, he entered the market.
Netflix’s growth was quite substantial. From 300,000 users in 2000, the company grew double in 2002 and by 2005 it was counting 4.2 million users. In 2002, Netflix made its IPO debut in New York and, although the company had managed to outpace the business practices of Blockbuster, it was not until 2005 that it would adopt the feature that would place it as one of the primary contenders in the entertainment industry: streaming. By 2010, a user would be able to access Netflix via any portable or not device to consume content; the same year, Netflix expanded its operations to Canada. Over the next few years, Netflix would expand and, in 2016, it would end up rolling out its services globally (with the exception of China, N. Korea and Crimea). After adding original content in its services in 2012, Netflix has become a considerable contender in the entertainment industry having been nominated for 112 Emmy awards in 2018. It is currently counting more than 150 million subscribers internationally.
Netflix soon realized that it had to find a new angle if it were to survive. Blockbuster Videos were no longer a threat – they declared bankruptcy in 2013 – but a new competitor was emerging as Netflix was adopting a new business model. Although streaming appeared to be a niche market for the company, its dependency on licensing deals by the large Hollywood studios meant that Netflix would need to find a new way to become competitive. That happened with the adoption of a strategy on original content and the company’s conscious decision to invest billions of dollars in original programming, taking advantage of its global reach.
This bold move highlights the following disruptive strategy theories.
Netflix started as a low-end market disruptor. Taking advantage of some of the policies customers used to find annoying in Blockbuster (mainly the late return fees) Netflix did not seek to offer something better, but something that was performing “good enough”. Netflix also realized that all other DVD rentals were following the same business model as Blockbuster, which meant that consumers were overloaded with similar products and similar business patterns. To this end, it sought to utilize the idea that it could provide the same product but improved. The improvement was ordering DVDs from the comfort of your home by paying a flat fee. No extra charges would be incurred.
Netflix’s streaming, however, can also be seen as new-market disruption. What streaming did for Netflix is that it offered existing customers access to content cheaper –in the beginning, the service would offer lower performance for existing consumers (in those early days, Internet bandwidth would severely affect the streaming experience), but higher performance for non-consumers. As Netflix was rolling out its streaming service, Blockbuster considered that there was no incentive to go after the same service, effectively confirming the theory that a business cannot disrupt itself. To this end, Netflix created a whole new market that we only see now emerging and developing, with new entrants like HBO Max, Apple TV+ and Disney+ being amongst the competitors.
Almost every time, disruption is an opportunity before it becomes a threat. This opportunity can be seized once the company realizes what the “job to be done” is. In the case of Netflix, it was the case of understanding how to help customers consume content any time, at any device. Streaming filled that void by offering customers a catalogue of content that were able to absorb. In a similar vein, Netflix saw an opportunity to address a problem that was at the core of the way audiences used to consume content: removing advertisements in the middle of broadcasting and offering content all in one go.
As Netflix grew, the challenge was to ensure they remained faithful to their original business model and not try to emulate traditional broadcasting companies. Once they were dominant in the market, the temptation of adopting the traditional business model of offering content on a weekly basis was present, especially considering the costs associated with creating original content. Netflix, however, retained discipline and continued to integrate their organization to provide the consumption of content with an eye focused on the job to be done.
Netflix never stopped offering content from other studios. Since that content is subject to licensing deals, geolocation services would have to apply; what this meant was that, despite being a global service, Netflix could not offer the same content to all of its users around the world. Organizing for innovation, essentially defining how Netflix’s resources could work together to achieve its goals, became very crucial. Netflix had a big choice to make: either stick with the content from the Hollywood studios, a choice that would ensure the company always depended on them, or identify and prioritize the criteria that would allow it to differentiate itself. This was achieved by investing in original content, which Netflix was able to control fully and was able to distribute at the same time to all its customers around the word.
Netflix’s big challenge was how to create content that was easily consumable and was able to compete with traditional broadcasting incumbents, including ABC, HBO, Fox, Disney, etc. What is unique about the business model of Netflix is that it commoditized time – what a viewer was able to see on a Saturday at 9am was no different from what they were able to see on Tuesday at 10pm or Thursday at 3pm. Unlike traditional broadcasters, there is no ‘prime time’ on Netflix, and this allows Netflix the freedom to get rid of the advertising model, which has proven to limit the customer experience by breaking it in multiple segments.
By adopting this business model, Netflix was able to demonstrate that it had moved from its original core competence: it was no longer about providing DVDs to its customers, but rather about connecting content creators and content consumers in order to ensure a more efficient relationship in the way content would be conceived, created and, finally, absorbed. Up until Netflix emerged as a disruptor, content was consumed based on a variety of factors: users, advertisers, studios, broadcasters. In disruptive strategy language, these factors of creating and consuming content created a series of interdependencies that provided for an ecosystem that was inflexible and quite bureaucratic. A lot of shows would be created and, if they could not generate enough advertising revenue, they would be cancelled, often at the dissatisfaction and frustration of consumers. In essence, there were additional extenuating circumstances, beyond consumer demand, that were able to determine the future of a given production.
Netflix saw a great opportunity. Based on the data that it had generated from viewers’ habits, Netflix could integrate forward and offer personalized content to account for the interdependency. This is essentially what they did by partnering with various studios to produce original content. This collaboration included the interdependency of using Hollywood studios and content creators and the personalized information regarding customer content preferences, while letting go completely of advertisers. It is, however, logical to assume that over time this interface will become modular. At some point, Netflix needs to start looking for opportunities to have its own studios for the production of content.
Based on all this, there are a number of things we could extrapolate. Netflix can either be positioned as a low-end disruption or new market disruption. In either case, there is an asymmetric motivation being created because incumbents are motivated to move up a market. For traditional studios, this would mean focus on the content they have exclusive rights to. It also means that current incumbents, given their relationship with telecommunications providers, might start considering how best to offer their service as part of package deals with mobile phones. This is an advantage Netflix does not have.
According to the theory of disruption, Netflix will need to start moving up in the market offering more convenient and niche services in order to withstand the competition. You can easily imagine Netflix creating its own studios in order to cut the costs or start making more deals with actors and creators that tend to be popular with viewers, which it currently does. The same theory also suggests that incumbents, like HBO or Disney, will abandon low-end services and will start depending more on their niche products – HBO on shows like Friends and Disney on its massive catalogue of Marvell and Star Wars characters for instance – which can offer a higher margin to their businesses.
In order to achieve all this, strategy will be key. When it started, Netflix was operating under a deliberate strategy, a conscious and organized action aimed at disrupting the business model of Blockbuster Videos. Over time, Netflix moved into a more emergent strategy, one that saw some unplanned actions, i.e. the basis for original content, to emerge out of the initiatives of parts of the organization. Now, it appears to be the case that Netflix is operating under a more deliberate strategy again.
In order to survive what appears to be an increasing competitive market, Netflix will be required to again re-invent itself by moving into a more emergent strategy process.
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