With humble beginnings as a DVD-rental-by-mail firm, Netflix has grown to be the behemoth that has disrupted the entertainment industry through leveraging digital transformation. Founded in 1997, Netflix\u2019s DVD rental service offered an innovative business model whereby the company only charged a flat, monthly fee for unlimited rentals with no due dates or late fees. While its pricing model offered significant value to its subscribers, Netflix also provided convenience through the digitization of movie selection. This process allowed customers to avoid the hassle of visiting traditional brick-and-mortar DVD rental stores while providing Netflix with valuable data that allowed for better demand forecasting (via the queue) as well as recommendation algorithms to drive usage which leads to better retention.<\/p>\n
We all know who won that battle (R.I.P. Blockbuster), but what is most exciting now is Netflix\u2019s more recent transition (2008) into online video streaming and the different set of opportunities\/challenges that come with this new digital transformation.<\/p>\n
Online Streaming<\/u><\/strong><\/p>\n Netflix\u2019s online video streaming service also has a flat monthly subscription fee for unlimited usage. The service\u2019s value propositions are:<\/p>\n With respect to digital transformation, the first four value propositions are most directly reliant on leveraging technology to differentiate against traditional competitors (linear TV and movie theaters).<\/p>\n Reliability<\/strong> \u2013 With over 86 million subscribers globally streaming more than 125 million hours per day, ensuring reliability is critical but can also be a challenge. [1] With this in mind, Netflix moved its entire database and streaming infrastructure to the cloud through Amazon Web Services. [2] The reliability and scalability of the cloud is critical as the business model relies on the decoupling of growth of content cost via licensing digitized content (vs. physical DVDs) with subscriber growth to drive margin growth.<\/p>\n Multiple <\/strong>Devices \u2013 <\/strong>Recognizing very early on the need to move beyond web browsers, Netflix began developing the Roku Player, a streaming set-top-box, with the intention of shifting viewing to larger screens. While the company ultimately decided to spin-off Roku and focus on its core competencies, the vision to be on multiple platforms remained. [3] Nowadays subscribers can access Netflix on almost all popular connected devices. [4] Without the development of the Internet of Things, it would be hard to imagine whether Netflix could have delivered on this value proposition and achieved the level of ubiquity it has now.<\/p>\n Catalog Optimization & Content Recommendation \u2013 <\/strong>With content distribution completely digitized, the potential for capturing large data sets to evaluate content strategy is tremendous. And that is exactly what Netflix is doing. To ensure the delivery of quality content at optimal cost, Netflix combs through millions of data points, identify viewing patterns, and extrapolate demand of or satisfaction with certain TV shows or broader genres. [5] These analyses, in turn, help structure licensing agreements for future content. In addition, like the DVD rental service, the data is also utilized to generate algorithms for personalized content recommendations. [6]<\/p>\n What\u2019s Next?<\/u><\/strong><\/p>\n Up until 2016, Netflix delivered on its customer promise to most of its target market because these markets were generally developed countries with established internet infrastructure. However, with the cost of content rising due to competition, Netflix needed to grow its subscriber base quickly to fully leverage its scale. As such, in January 2016, Netflix launched \u201cglobally\u201d (added 130 countries excluding China) which exposes them to developing countries with limited broadband penetration, a minimum requirement for streaming Netflix. [7] One potential solution is to offer offline viewing which the company appears to be exploring. [8] Another option, which I am not sure of its feasibility, is to find a way to reduce bandwidth required for streaming without significantly eroding the image quality.<\/p>\n Another headwind that Netflix will face is the scarcity of data as the company moves upstream in the content acquisition pipeline in their effort to shift towards more original programming (aka become a studio). In the past when licensing content from studios, the content has typically been on-air or in theaters or have even been available via Netflix DVD prior to the company having to decide on whether to acquire it. This meant there was some data to inform the decision around the value and potential of the content. With original content, the company can be presented with merely an idea or rough script of a show that have not yet been made. Hence, Netflix may lose its edge in leveraging big data to make bets on what would be the most expensive pieces of content to date. This is one challenge in which I unfortunately do not have a great solution to propose.<\/p>\n (789 Words)<\/p>\n <\/p>\n Sources:<\/strong><\/p>\n [1] Netflix Inc., \u201cCompany Profile,\u201d https:\/\/ir.netflix.com\/<\/a>, accessed November 2016.<\/p>\n [2] Yury Izrailevsky, Stevan Vlaovic, Ruslan Meshenberg, \u201cCompleting the Netflix Cloud Migration,\u201d Netflix Media Center, February 11, 2016, https:\/\/media.netflix.com\/en\/company-blog\/completing-the-netflix-cloud-migration<\/a>, accessed November 2016.<\/p>\n [3] Luke, \u201cA Short History of The Roku Player,\u201d Cord Cutters News, December 16, 2016, http:\/\/cordcuttersnews.com\/a-short-history-of-roku-set-top-boxes\/<\/a>, accessed November 2016.<\/p>\n [4] Netflix Inc, \u201cConnect to Netflix using your favorite devices,\u201d https:\/\/devices.netflix.com\/en\/<\/a>, accessed November 2016.<\/p>\n [5] Michelle Harnish, \u201cNetflix using data analytics to keep customers watching,\u201d Aviana Global, September 15, 2015, http:\/\/www.avianaglobal.com\/blog\/netflix-using-data-analytics-to-keep-customers-watching\/<\/a>, accessed November 2016.<\/p>\n [6] Lara O\u2019Reilly, \u201cNetflix lifted the lid on how the algorithm that recommends you titles to watch actually works,\u201d Business Insider, February 26, 2016, http:\/\/www.businessinsider.com\/how-the-netflix-recommendation-algorithm-works-2016-2<\/a>, accessed November 2016.<\/p>\n [7] Jon Russle, \u201cNetflix Launches In 130 New Countries, Including India But Not China,\u201d TechCrunch, January 6, 2016, \u00a0https:\/\/techcrunch.com\/2016\/01\/06\/netflix-finally-goes-global\/<\/a>, accessed November 2016.<\/p>\n\n
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