The Netflix Journey: A New Model

A new risk profile

In my last post, I wrote about a “new risk profile” and how companies need to incorporate experimentation and adaptiveness into their strategy. Let’s take a look at a company that has done this for the last two decades so that we can ask ourselves how can we accelerate our own efforts of digital transformation.

The Netflix journey… A New Model and Better Customer Experience

Netflix was founded in 1997 and appeared as an asymmetrical competitor to the video rental industry. They didn’t look like any other company in that space. Thousands of brick-and-mortar rental stores focused on incremental growth and maximizing profit in their existing business model. Blockbuster applied technology to optimize and scale their business and dominated for about a decade. They did this despite key Customer Experience (Cx) pains. There was limited in-store space to carry a broad selection of movies thereby only stocking the most popular titles (read more about the phenomena called “The Long Tail”). The pickup and return of one or two-day video rentals were inconvenient. It interrupted the everyday flow of life. It often resulted in late fees.

Netflix directly addressed these Cx pains. They addressed the inconvenience of in-store pick-up and drop-off by providing free shipping and return of DVDs. Customers were happy to subscribe to the service and avoid late fees. They overcame the limitations of in-store stock by building an effective supply chain. Thousands of titles were searchable, discoverable, and rentable via the website. The improved Cx is what drove early growth.

Longtail Chart

Cannibalizing the Business with Emerging Technology and better use of Data

Many emerging technologies were involved in taking Netflix to the next level. In 2007 Netflix began streaming content. Home internet and wifi speeds became dramatically faster. Wireless data plans were becoming more affordable. The most important screen was no longer the TV, desktop, or laptop. Tablets and smartphones were emerging as the most viewed screen with the most integrated content and capabilities. Cloud technology allowed Netflix to focus more on its business and less on managing technology.

Netflix used to gain customer insight from the “My Queue” feature and user ratings in order to help a user find or discover relevant content. The algorithms today are more focused on actual actions and behaviors over the user input. Co-founder Reed Hastings shared that users input was expressed an “aspirational” self when rating movies. What his team discovered was that actual choices and behaviors reveal preferences in a richer way. Netflix learned that a user may rate a movie like “Shindler’s List” very high, they will actually watch a movie like “The Do Over” (starring Adam Sandler) many more times than the highest rated movies. They also discovered the behavior of watching multiple movies in a row that has evolved into binge-watching of made for TV series like “Mad Men” and “House of Cards”.

A Bold New Direction

In their 20+ year history, Netflix has conducted multiple experiments that led to new features, greater Cx, and multiple iterations on their business model. Each iteration has been a conscious threat to their existing value proposition. They have accumulated a massive amount of data and analytics that help generate new ideas and make bold decisions. A recent significant example of this is in 2011 when they invested $110 million to enter into the content generation market with the series “House of Cards”, later released in 2013. It was a wildly successful new value proposition for Netflix and five years they have increased their investment from that $110 million to $8 billion dollars for content creation worldwide. If you listen to a recent Ted2018 interview with co-founder Reed Hastings, you will get a sense that all of this was a bit scary, they were never fully confident of each move, and they have a mindset and a culture predisposed to challenge the status quo.

Today…

Today Blockbuster is bankrupt and Netflix has over 40 million subscribers in over 50 countries. It streams a rich inventory of content in multiple languages with content relevant to a worldwide audience. It is at a content scale that is on par with Disney. Videos are received on many types of devices including smartphones, tablets, gaming consoles, and smart TVs.

How are they doing this? The Straight Dope

Pattern 1 – Leadership
In his TED interview, Reed Hasting shares that they were successful because there was “… a lot of paranoia of what’s coming next…” They knew that shipping DVDs was going to be a temporary business model. They saw that technology was changing the way customer behave and wanted to stay ahead of the changes. He stressed the need to empower employees and encourage critical thinking. Reed told the story of one of his early companies “… was very process obsessed …trying to dummy proof the system… eventually, only dummies wanted to work there”.

Pattern 2 & 3- Focus on the Customer Experience and Data
In the beginning, the focus was to solve the problems of the customer experience in the video rental business… late fees, the inconvenience of in-store pickup/drop off, and limited in-store selection. They cannibalized their DVD shipping business with streaming media as users were spending more time on their smart-phones. Today there is a growing number of smart-tv with the Netflix app.

They focused on data that revealed customer preferences rather than just relying upon what the users submitted as their preferences. They applied the data to algorithms that made it easy for the user to get to content that was a great match. When they aggregated the individual user preferences they began to learn the types of content/genres that resonated and had great insights when creating their own content.

Pattern 3 – Disintermediation
Netflix reduced the intermediaries in the movie entertainment business. They create content and deliver direct to the consumer. Great efficiencies were gained and the customer experience is better.

Pattern 4 – Value proposition constantly evolving
Initially, the value proposition was about a better experience in renting movies on DVD. They took advantage of new devices and technology and shifted to streaming. With access to rich data on customer behaviors, Netflix has shifted to delivering great content.

The next step for you?

You can find multiple digital transformation playbooks out there. Most of them make good sense at a generic level. All of them have some essence of the patterns above. Each industry and company have their nuances and one size does not fit all. To use a sporting analogy, it is good to have a playbook but you still call the plays based on what you are seeing on field.

Whether you are beginning your journey or have already started, there is an iterative cycle of:

Develop awareness
Experiment in-context
Integrate with strategy
Programmatic execution

Develop awareness
Each major technology wave (e.g. web, mobile, social, cloud) has fundamentally disrupt business and the way we live our lives. There are a set of emerging technologies waves that are happening in parallel. As these waves converge we will see disruption at a level never seen before. It is important that your technology leaders have some basic awareness of emerging technologies. It is more important that your business leaders are aware of how these emerging technologies are affected whole industries and the customer experience. Some ways to get this awareness include: conferences, meetups, podcasts, webinars and in-person learning workshops.

Experiment in-context
Once you have awareness of technical capabilities and business impact, seek a specific problem domain and run experiments. Run proof-of-concept projects. Many of these experiments will fail. Focus on learning and adapting with each project. Make sure to involve a growing set of diverse stakeholders. Organizational change is one of the biggest impediments to digital transformation. These experiments are about testing your organization as well as testing theories on product, services and business model.

Integrate with strategy
Traditional strategy exercises still apply. Your strategy process likely needs to adapt to include more nimble and experimental processes. Consider using a lightweight framework like Osterwald’s “Business Model Canvas”.

Programmatic execution
Finally, get to it. Build or adapt your product or service. Possibly, create a new business model. Depending upon your organization structure and capabilities, you may benefit from hiring individuals or contracting with other businesses that have leadership and technical experience that is not found inside your walls.

Want to hear more?

Rhommer will be speaking at the Building Tomorrow NEWaukee event on October 18th. For more information, click here.

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A new risk profile