{"id":5219,"date":"2015-12-09T17:46:28","date_gmt":"2015-12-09T22:46:28","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/netflix-finding-the-next-hit-business-model\/"},"modified":"2015-12-09T17:46:28","modified_gmt":"2015-12-09T22:46:28","slug":"netflix-finding-the-next-hit-business-model","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/netflix-finding-the-next-hit-business-model\/","title":{"rendered":"Netflix: Finding the Next Hit Business Model"},"content":{"rendered":"

\"murray\"<\/a><\/p>\n

The story of Netflix’s founding sounds like an MBA student’s daydream. \u00a0Already independently wealthy after the sale of his first company, Reed Hastings claims to have conceived of Netflix after in response to a $40 late fee on a Blockbuster rental of “Apollo 13.” \u00a0He and co-founder Marc Randolph then tested the idea, buying a CD from a local music store and mailing it to Hastings’ nearby home, and the rest is history.\u00a0 If it were only so simple\u2026<\/p>\n

\u00a0<\/strong><\/p>\n

Like Blockbuster, but online<\/strong><\/p>\n

While Netflix originally\u00a0made money through one-off DVD purchases and rentals, its growth took off in 1999 after debuting its\u00a0subscription DVD rental offering<\/strong>. \u00a0Netflix’s subscription offering appealed to customers thanks to its\u00a0flexibility<\/strong>\u00a0(users could have up to 3 DVDs at one time, with no late fees),\u00a0reliability<\/strong>\u00a0(shipment error rate was said to be below 1%) and\u00a0depth of library<\/strong>\u00a0(I personally never couldn’t find what I wanted). \u00a0Netflix leveraged partnerships to stimulate demand and ensure supply.<\/p>\n

Netflix capitalized on\u00a0dissatisfaction and distrust of Blockbuster<\/strong>\u00a0and other rental chains — \u00a0selling\u00a0itself\u00a0to DVD player manufacturers and content creators as a\u00a0driver of DVD\u00a0adoption<\/strong>\u00a0(stores such as Blockbuster initially saw DVDs as a threat to their VHS-centric business). \u00a0These partners\u00a0packaged Netflix promotions with DVD players and sold physical discs to Netflix at attractive prices. \u00a0Logistically, Netflix leveraged the US Postal Service to physically deliver and pick up discs. \u00a0They also amassed troves of user data which in turn fed\u00a0predictive algorithms<\/strong>\u00a0that dictated how fulfillment centers would be stocked — ensuring that there would always be enough popular DVDs to satisfy\u00a0customer\u00a0demand.<\/p>\n

\u00a0<\/strong><\/p>\n

A steady stream<\/strong><\/p>\n

Netflix\u00a0began to offer streaming<\/strong>\u00a0in 2007. \u00a0Hastings claimed that a shift away from physical discs was always in the cards, famously stating: “That’s why we named the company Netflix and not DVDs by Mail.” \u00a0This shift required a\u00a0complete overhaul of supply<\/strong>\u00a0and, as a result,\u00a0cost structure<\/strong>. \u00a0Instead of relying on individual DVDs (variable costs), Netflix had to negotiate\u00a0fixed licensing deals<\/strong>\u00a0upfront with studios and other content providers. \u00a0Knowing that it would take time to build up a compelling streaming content portfolio, Netflix initially made streaming a free add-on to DVD subscriptions, getting consumers accustomed to the new business model.<\/p>\n

\"netflix<\/a><\/p>\n

Similar to the craftiness Netflix showed in capitalizing on market dynamics to improve operations, Netflix’s streaming operations leveraged two critical trends as well. \u00a0First, Netflix’s move into streaming followed and\u00a0increase in broadband and 3G penetration<\/strong>\u00a0— which in turn had prompted device manufacturers to improve\u00a0streaming capabilities<\/strong>\u00a0(e.g. XBOX360’s ability to stream to TV). \u00a0Second, Netflix noticed that cable\u00a0syndication deals had become less valuable<\/strong>\u00a0and less reliable streams of revenue for studios. \u00a0As such, licensing content to Netflix was a relatively painless way to for studios to\u00a0plug revenue gaps.<\/strong>\u00a0\u00a0These deals could then be optimized by Netflix thanks to the rich data sets that they had accumulated via their DVD business.<\/p>\n

\u00a0<\/strong><\/p>\n

Anything you can do…<\/strong><\/p>\n

Netflix\u2019s next shift in business model came in response to trends impacting content acquisition costs<\/strong>.\u00a0 Netflix was very much a victim of its own success in this scenario \u2013 as studios were pressured to raise licensing costs due to declines in linear TV ratings<\/strong> and the rise of \u2018cord cutting\u2019<\/strong> (both brought on in many ways by the popularity of Netflix).\u00a0 This pressure came from TV networks that were either corporate siblings of studios or their primary business partners.\u00a0 The price increases were further bid up<\/strong> by well-funded competitors such as Amazon Prime and Hulu (a joint venture of Disney, FOX and NBCU) while networks began to demand \u2018stacking,\u2019 full season windows for on-demand viewing (\u2018stacking\u2019 in turn reduces the value of Netflix\u2019s acquired content for subscribers).<\/p>\n

\"nflx\"<\/a><\/p>\n

Instead of paying more to studios for diminishing returns, Netflix instead moved to vertically integrate and produce content in-house<\/strong>.\u00a0 Once again armed with proprietary data<\/strong> \u2013 this time showing that subscribers \u2018binged\u2019<\/strong> on smart, serialized TV series such as \u2018Breaking Bad\u2019 and \u2018Parks and Recreation\u2019 \u2013 Netflix set out to make the types of content its users would love.\u00a0 Seeing a high likelihood of success, Netflix felt comfortable offering high levels of artistic control and full season orders to high-profile content creators.\u00a0 Thus far, Netflix\u2019s efforts in original content have been a smashing success, earning 79 Emmy nominations<\/strong> in three years.\u00a0 This move into originals will be even more pronounced in the future, with 16 shows, 10 films, 30 kids shows, 12 documentaries and 10 stand-up specials scheduled for 2016.<\/p>\n

 <\/p>\n

Sources:<\/p>\n

http:\/\/ir.netflix.com\/secfiling.cfm?filingID=1065280-15-6&CIK=1065280<\/p>\n

https:\/\/www.washingtonpost.com\/opinions\/five-myths-about-netflix\/2014\/02\/21\/787c7c8e-9a3f-11e3-b931-0204122c514b_story.html<\/p>\n

http:\/\/www.fundinguniverse.com\/company-histories\/netflix-inc-history\/<\/p>\n

http:\/\/mhlnews.com\/facilities-management\/all-queued-netflix<\/p>\n

http:\/\/faculty.tuck.dartmouth.edu\/images\/uploads\/faculty\/ron-adner\/11EIS_Main_Project_-_Netflix_Paper.pdf<\/p>\n

https:\/\/pr.netflix.com\/WebClient\/loginPageSalesNetWorksAction.do?contentGroupId=10477<\/p>\n

http:\/\/www.vulture.com\/2013\/10\/fx-turner-netflix-battle-for-tv-streaming-rights.html#<\/p>\n

http:\/\/www.vulture.com\/2015\/07\/netflix-original-programming-hbo-fx.html<\/a><\/p>\n

http:\/\/www.vanityfair.com\/hollywood\/2015\/12\/netflix-double-content-2016<\/p>\n","protected":false},"excerpt":{"rendered":"

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