The Netflix You Know Might Not Have Existed Today
How Netflix was Born:
Marc Randolph and Reed Hastings, co-founders of the world’s most popular streaming service “Netflix” changed the history of television, but it was just a fluke. Before Netflix or before the idea of online streaming existed, Blockbuster was the major player in home movie and video game rental services. They had their video-tape rental shops on almost every corner and were internationally expanding during the 1990s.
In 1997, on one fine night, a father and a Santacruz businessman, Marc Randolph was having trouble to put her daughter to sleep so he had to watch a used copy of Aladdin. So, an idea struck his mind “Why couldn’t the movie rentals be easier?”. He discussed it with his colleague Reed Hastings, who concurred, having recently paid a $40 fine for late return of a Blockbuster movie tape.
He saw an opportunity. Hence, Randolph launched Netflix as its co-founder and CEO in 1998 with about 800 titles. He started his DVD rental business (then a nascent technology) with 30 employees, in the times where people were only used to renting out Blockbuster’s VHS tapes. And the DVD players were a rarity as they were really heavy on the pocket. So, to overcome the static friction, Netflix partnered with the likes of Toshiba, Sony and HP and handed out free DVD rentals to the new DVD player buyers.
How Netflix almost failed:
The following year, they got a $30 million investment from a France-based company Groupe Arnault, which was a huge boost for them. With the help, they launched their ‘All-You-Can-Watch’ subscription-based ‘delivery-by-mail’ service with customers could rent out as many DVD’s as they want for $19.95 per month (given that they can only have 4 DVDs in possession at a time). Plus, there was no late return fine. Following that, it saw a sudden upsurge in its customer base but it was losing money, $58 million in the year 2000.
Hastings took over as Netflix’s CEO and proposed to John Antioco, then CEO of Blockbuster, to sell a 49% stake at Netflix for $50 million. In exchange, Netflix would handle Blockbuster’s brand online, which would complement their offline DVD rental business. Antioco laughed and rejected the offer, he didn’t see the potential of the new digital technology.
How Netflix overtook competition head-on:
So, Netflix started taking swipes at Blockbuster in the interviews. Since one of Blockbuster’s major revenue streams was charging a high late return fee from the offenders, it had to alter its business model to compete with the startup, which didn’t seem to be possible. This proved to be a very disruptive innovation and a great strategy. Hastings wanted Blockbuster to simply acknowledge Netflix as a potential threat as it would create brand awareness in the minds of consumers. But Netflix gained another benefit too.
It was the Framing Bias, Cognitive and Social psychologists have noted that if you frame a phenomenon to an individual or a group as a threat, it elicits a fear that would result in more intense and energetic response than if you frame the same phenomenon as an opportunity. If they encounter a threat, a response called ‘threat rigidity’ sets in and they cease being flexible and become focused on countering the threat in order to survive. Unfortunately, Blockbuster too fell into the trap, saw online DVD rental as a threat to its established, robust brick-and-mortar sales and tried to protect its customers. As Blockbuster considered it as a threat, the company did not see a necessity to invest in online DVD rental.
Since Netflix’s concept was still fairly a new idea and people were used to just pick up a movie tape on the way back to home, its ‘delivery-by-mail’ service was rather slow and cumbersome. But still, customers really loved the service and spread the word to their friends. Some were reluctant at first, they actually liked being able to browse movies at the store and pick one up at a moment’s notice, but others jumped right in. And as more of their friends raved about Netflix, the laggards tried it too, fell in love with it and convinced people they knew to give it a shot.
This is called the The Threshold Model of Collective Behavior, it is a statistical method to model the behavior of different groups in response to any new idea or innovation. These groups are classified on the basis of their varying levels of resistance to the new idea.
· The first group, called the “Innovators” (2.5%) are first ones to acknowledge the idea. They’re usually the ones that are mostly open to trying out new things or trends.
· The second group, called the “Early-adopters” (13.5%) are only slightly more resistant to join. But they soon hop on board too once the innovators have joined.
· The third group, called the “Early Majority” (34%) see this becoming the new trend and they come on board too.
· The fourth group, called the “Late Majority” (34%) become ready to join in because almost 50% of the total population has already joined. They do catch the trend, but when it’s late.
· The fifth and the last group, called the “Laggards” (16%) are the last one to adopt the idea, they do because everyone around them have adopted the idea. Generally, these are the ones that are “old school”.
How Netflix became an online streaming Monopoly:
Only in 2004, did Antioco realize what a huge mistake he had made, hence he convinced the board to take their service online which took an investment of $200 million and discontinued their late-fee policy which led to a further decline of $200 million. But Netflix was too far ahead in the online game. By 2005, Netflix already had 4.2 million subscribers and growing.
When these decisions were being made, Viacom owned 80% of Blockbuster who then sold its shares at Blockbuster thinking it would cannibalize its current strategy. The shares became publicly held, and Blockbuster was depressed by $400 million. Antioco lost the confidence of the board was fired from his position as the CEO. Blockbuster tried to compete but it had mere 20 million subscribers against Netflix’s 300 million. It couldn’t survive and went bankrupt by 2010.
In the meanwhile, Netflix had secured a huge chunk of the market share. The growth rate of Netflix was exponential, it didn’t solely focus on that however. Netflix always put its efforts on providing a premium experience to its subscribers. Growth increased as a by-product.
Netflix’s exponential growth rate:
What can we learn from this Netflix vs. Blockbuster saga?
1. Embrace Change
Where other companies saw barriers to entry, Netflix saw an opportunity. It leveraged upon the fact that people consumers value convenience more than any other thing. Netflix started a technological revolution — from starting a DVD-by-mail service, to streaming movies and TV shows online to creating their own content “Netflix Originals”. The company was in the right place at the right time (Internet boom). Blockbuster saw itself as the video rental king, with locations all over the world. They were more obsessed with their business model more than they ever were with satisfying customer needs. Their business model of charging their customers with late fees, their prime revenue source, was a major customer irritant. Netflix solved this problem.
2. Don’t be Afraid to Fail
Netflix has always been open to trying out new things. Many did work — such as their DVD subscription rental service, online streaming, and online streaming content creation. But some initiatives didn’t pan out as well, at least not initially. Netflix tried to enter the film-making business in the mid-2000s, long before it had a large enough audience to make this a profitable strategy. In 2011, Netflix received a lot of criticism for splitting up its DVD rental service and online streaming service. Hundreds of thousands of customers cancelled their subscriptions in the following months. Blockbuster, on the other hand, was unwilling to take risks. This became its Achilles’ heel. When Blockbuster did decide in 2004 to enter the online video rental business and eliminate late fees, it was too late. Netflix had a massive head-start in the online rental business.
3. Be Willing to Constantly Innovate
While Blockbuster clung to its business model of being a video rental company, Netflix constantly innovated itself to stay ahead in the game. Netflix went from being a DVD subscription rental service, to a streaming of movies and TV series model, to being a creator of content. It always focused on being technologically (and digitally) ahead in the game, even if it meant turning around its entire strategy multiple times.
4. Corporate Culture is the Key to Making Innovation
Great leaders make great businesses. One of the most important characteristics of being a great leader is to induce a great culture within the company, hiring smart people and delegating accordingly to get the best possible outcome out of teamwork. In 2009, Reed Hastings delivered a PowerPoint presentation internally within Netflix about the company’s culture and HR policies. This presentation has been downloaded more than 18 million times. Sheryl Sandberg, the COO of Facebook, says this document might be the most important one ever to come out of Silicon Valley (where Netflix’s headquarters is located). The title of Reed Hastings’ presentation was “Freedom and Responsibility.” In brief, it described that Netflix hires smart people, gives them full responsibility of their domains and pays them well. Hastings said, “Responsible people thrive on freedom and are worthy of freedom.” It is easy to say, who would want to be Blockbuster over Netflix? But the way Netflix entered the market when Blockbuster was practically a monopoly business, takes a great vision and courage. You should always know what broad category of business you are in (home entertainment, not brick and mortar video rental locations). Innovations happen inside and outside your niche as well, it always helps to take step back and reflect, look at the broader horizon of opportunities to find areas of innovation.