Wednesday, November 27, 2013

How Netflix Achieves Tech Longevity

In the article, Lessons in Longevity, From IBM we learnt how IBM achieved “post-monopoly prosperity”. Let’s take a look at how Netflix, the company whose CEO is called “the Master of Adaptation” in a Forbes Article keeps reinventing itself. [1]

History:
Netflix was founded in the year 1997. Reed Hastings received a late fee of $40 for Apollo 13 and was convinced that the movie renting industry offered huge opportunities. [2] Netflix’s initial business model was renting DVD’s by mail. Like Blockbuster, it charged a predetermined renting fee per movie rented. Netflix couldn’t earn significant traction using this model and transitioned to a subscription model where users could pay a flat monthly fee and could rent as many movies as they wanted without incurring any late fees. Using this model, Netflix gained significant traction with the subscription-based model. [3]

Adapting to Video Streaming:
When the era of video streaming arrived, Netflix did a great job of transition to the video streaming model. Netflix launched video streaming in 2007. [4] In the period from 2007 to 2011, Netflix continued to see an increase in the revenue and the number of subscribers. As Netflix continued to gain popularity, the content owners demanded higher licensing fees.  
Netflix was struggling with customers who where transitioning from DVD-by-mail to online streaming. Consequently, in September 2011, Netflix planned split the movie renting and online streaming business. A new firm Qwikster would handle the DVD-by-mail service. [5] Initially customers paid $10 for the combined package. However, in order to stream videos and rent one DVD at a time, subscribers had to pay 60% higher fees. [6] This angered the customers and resulted in significant ill will for Netflix. Netflix lowered its prices again but the damage had been done and the Netflix stock hit its lowest point. [7]

In-House Production:
Netflix’s business model was very risky. It relies heavily on content providers and content owners raise their prices as Netflix builds a profit margin. Consequently, Netflix decided to start producing content in-house. Netflix aspires to be like HBO and have an exclusive library of its own shows. [8] Ted Sarandos, Netflix’s chief content owner said, “The goal is to become HBO faster than it can become us”. [6]
Netflix went on to produce shows such as House of Cards and The Ropes, which gained immense popularity. “Shows like House of Cards and Orange is the New Black earn heaps of praise from critics and inspire countless debates”. [9]


                                                  Netflix User Profiles  Source [10]

Customer Focus:
Netflix has developed algorithms that allow users to rate and movies and provide recommendations. These recommendations are partly based on user history and history of users with similar choices. Although this functionality is common today, Netflix was amongst the innovators of this functionality. Reed Hastings focuses on delighting the customer to gain customer loyalty. [3]
However, it is common for multiple viewers to use one account. This results in providing inaccurate recommendations to different users. In order to provide better suggestions to individual viewers, Netflix launched Netflix Profiles. It allows users to set up their profile and receive suitable suggestions. [10]

Conclusion:
Netflix not only uses its skills and technologies but also developed skills to pursue new opportunities. Netflix continuously reinvents and differentiates itself from the competition to succeed in the media streaming industry. Netflix earned $1.11 billion in the third quarter of 2013. Netflix has 40.29 million subscribers, out of which 38.01 million are paid subscribers. [11]

Netflix has just signed its biggest ever production deal with Marvel comics. How do you think this will turn out for Netflix in terms of adding subscribers?



References
[1] Cohan, Peter. "Netflix's Reed Hastings Is The Master Of Adaptation." Forbes. Forbes Magazine, 22 Oct. 2013. Web. 27 Nov. 2013. <http://www.forbes.com/sites/petercohan/2013/10/22/netflixs-reed-hastings-is-the-master-of-adaptation/>.
[2] "How Netflix Got Started." CNNMoney. Cable News Network, 28 Jan. 2009. Web. 25 Nov. 2013. <http://money.cnn.com/2009/01/27/news/newsmakers/hastings_netflix.fortune/>.
[3] Newman, Rick. "How Netflix (and Blockbuster) Killed Blockbuster." US News RSS. N.p., 23 Sept. 2010. Web. 27 Nov. 2013. <http://money.usnews.com/money/blogs/flowchart/2010/09/23/how-netflix-and-blockbuster-killed-blockbuster>.
[4] Anderson, Nate. "ArsTechnica." Ars Technica. N.p., 16 Jan. 2007. Web. 27 Nov. 2013. <http://arstechnica.com/uncategorized/2007/01/8627/>.
[5] INDIVIGLIO, DANIEL. "The Atlantic." The Atlantic. N.p., 11 Oct. 2011. Web. 27 Nov. 2013. <http://www.theatlantic.com/business/archive/2011/10/5-reasons-why-qwikster-is-now-deadster/246465/>.
[6] Cohan, Peter. "How Netflix Reinvented Itself." Forbes. Forbes Magazine, 23 Apr. 2013. Web. 26 Nov. 2013. <http://www.forbes.com/sites/petercohan/2013/04/23/how-netflix-reinvented-itself/>.
[7] "Netflix, Inc. History." History of Netflix, Inc. – FundingUniverse. N.p., n.d. Web. 27 Nov. 2013. <http://www.fundinguniverse.com/company-histories/netflix-inc-history/>.
[8] Salmon, Felix. "Felix Salmon." Felix Salmon RSS. N.p., 13 June 2013. Web. 27 Nov. 2013. <http://blogs.reuters.com/felix-salmon/2013/06/13/why-netflix-is-producing-original-content/>.
[9] Pomerantz, Dorothy. "How Much Longer Can Netflix Keep Ratings A Secret?" Forbes. Forbes Magazine, 18 Sept. 2013. Web. 26 Nov. 2013. <http://www.forbes.com/sites/dorothypomerantz/2013/09/18/how-much-longer-can-netflix-keep-ratings-a-secret/>.
[10] Sandoval, Greg. "Netflix Debuts Multiple User Profiles so Your Roommate Won't Screw up Your Recommendations." N.p., 1 Aug. 2013. Web. 27 Nov. 2013. <http://www.theverge.com/2013/8/1/4563718/netflix-multiple-user-profiles>.

[11] Ray, Tiernan. "Netflix Surges 10%: Q3 Revenue, EPS Beat, Adds 1.3M Domestic Streaming Subs." Tech Trader Daily RSS. N.p., 21 Oct. 2013. Web. 27 Nov. 2013. <http://blogs.barrons.com/techtraderdaily/2013/10/21/netflix-q3-revenue-eps-beat/>.

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