{"id":5452,"date":"2015-12-09T18:51:15","date_gmt":"2015-12-09T23:51:15","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/netflix-winning-the-moment-of-truth\/"},"modified":"2015-12-09T18:51:15","modified_gmt":"2015-12-09T23:51:15","slug":"netflix-winning-the-moment-of-truth","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/netflix-winning-the-moment-of-truth\/","title":{"rendered":"Netflix \u2014 Winning the Moment of Truth"},"content":{"rendered":"

Netflix\u2019s market is full of well-funded competitors (Amazon Prime, Hulu, YouTube Red, HBOGO), yet they continue to win by aligning 1) a business model model that creates value via compelling, tailored content and 2) an operating model that invests in technology and maximizes human capital.<\/p>\n

Business Model:\u00a0 Winning the \u2018moment of truth\u2019<\/u><\/p>\n

Keeping and acquiring customers is a constant battle.\u00a0 Most subscribers use only one streaming service and switching costs are low [1].\u00a0 None of the services lock in customers for more than a month at a time and, unlike cable\/satellite, there are no additional hardware components.\u00a0 This all means that Netflix\u2019s business model cannot just stream content, it has to consistently win the \u2018moment of truth\u2019 (in Netflix parlance) against its competitors:\u00a0 when a user sits down to be entertained, what will they choose?\u00a0 What will be their go-to service [2]?<\/p>\n

Netflix has a short window to prove itself:\u00a0 the average Netflix user will spend 1-2 minutes browsing the app before either exiting or committing to watch [3].\u00a0 The business model is to make sure that, in just those 1-2 minutes, they serve up fresh licensed and original content. \u00a0Every time the user opens the app, they need to find value in something to watch in any given genre.\u00a0 Making sure that they have value-creating content available and easy to access retains the customer against competitors or convinces new customer to stay after the free trial period expires.<\/p>\n

Operating Model:\u00a0 Technology and people<\/u><\/p>\n

To match the ambition of its business model, Netflix has created an operating model that continually invests in its enablers:\u00a0 technology and people.\u00a0 Anyone with deep enough pockets can buy and develop content.\u00a0 Anyone with the know-how can host content. \u00a0Their combination of technology and people ensures that Netflix buys and develops the right content and then tailors the content library to an individual user\u2019s preferences.<\/p>\n

Technology<\/strong><\/p>\n

\"StreamingNetflix informs its\u00a0purchases and recommendations via its trove of data. \u00a0It\u2019s crowd-sourced:\u00a0 users contribute with their ratings knowing that it will get them more personalized results while inadvertently improving the system’s data points for other users.\u00a0 This crowd-sourcing happened on the engineering side as well:\u00a0 they offered a $1M prize in 2006 to come\u00a0up with a better recommendation algorithm [4].\u00a0 The engine supports their business model on the content acquisition side (creating and buying content) as well as retention (curating content to keep the content fresh and relevant every time a user logs in).\u00a0 This capability is so critical that Netflix spends $150M per year and has 300 full time employees working exclusively on the recommendations engine [3].\u00a0 If there\u2019s any doubt as to its efficacy in delivering value, just look to its yearly customer churn: at 9%, it\u2019s less than half of Amazon Prime and less than one-fifth of Hulu Plus [1].<\/p>\n

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

Silicon Valley\u2019s relentless focus on top-talent is well-known as are the strategies used to attract it \u2013 whimsical office spaces filled with bean bag chairs and ping pong tables, free food, and buses from the peninsula to the valley.\u00a0 Netflix\u2019s approach, however, leaves behind the Valley\u2019s twee trappings to focus on the real drivers of satisfaction and productivity.\u00a0 In its HR manifesto (Sheryl Sandberg believes it\u2019s \u2018one of the most important documents ever to come out of Silicon Valley\u2019), they outline a few core tenets:<\/p>\n

\"culture-20-638\"<\/a>
Slide from Netflix culture deck<\/figcaption><\/figure>\n