Author: Xiaotong Li
Introduction
Digital disruption has known as a revolutionary entrepreneurial technique ever since it emerged in the 20th Century (Vanini, 2017). The concept of penetrating an already flooded market with new ideas that attract a discontent portion of the clientele has been the basis from which many businesses have been founded. However, disruption is commonly confused for creativity. In fact, creatively designing a fuel-efficient engine may attract a new clientele however, minimal variation from the standard engines does not constitute disruption. Ideally, disruption presents itself with a focus on sectors neglected by established industry juggernauts or a completely different system of tackling a similar problem.
Netflix, a major player in the entertainment provision industry, began as a disruptive force that challenged the superiority of the more established Blockbuster Corporation. Its founder, Reed Hastings, irked by incurring, unsubstantiated late fees from Blockbuster Inc, decided to create his own company that would not only target the low budget market overlooked by more established firms but also revolutionize the concept of entertainment provision for years to come. This case study will focus on the disruptive tactics applied by Netflix to surpass Blockbuster Inc. Additionally, it will highlight examples of bad decisions Netflix CEO, Hastings made, as well as recommendations for Netflix to invest in innovative disruption to stay ahead of its key competitors.
Brief History of Netflix
It is important to learn about the history of Netflix in order to appreciate the impact that disruption and transformation have had on Netflix and how the company has leveraged certain strategies to rise above any of its rivals. Netflix is an American entertainment company that was founded in 1998 by Redd Hastings and Mark Rudolph in the Scott’s Valley of the state of California (McLoughin, 2018). It started from an initial investment of $2.5 million from Reed Hastings. The founders initially rejected VHS tapes because of their bulk and delicate nature that would have made their transportation problematic. They opted to ship DVDs, which were introduced to America on March 31, 1997 (Kamerer & Dunn, 2017). After successfully delivering their first DVD, the founders went on to challenge the sixteen-billion-dollar industry of home entertainment in the United States. The company started with 30 employees and 925 titles, which constituted most, if not all, the titles in the USA at the time (Kamerer & Dunn, 2017). To boost the business further, Netflix introduced a monthly subscription service in September 1999 and then fully dropped the single rental model in the early 2000 (McLoughin, 2018). Since then, the company built its reputation on a business model of flat-fee unlimited rentals with no time limits, late fees, shipping and handling fees, all of which have plagued consumers of the American entertainment industry under the monopoly of Blockbuster Inc.
Netflix faced financial challenges in 2000 and offered Blockbuster Inc. a deal to purchase their organization for $50 million, an offer that Blockbuster turned down (McLoughin, 2018). Tougher times were brewing when the dot-com bubble burst and the 9/11 attacks forced the company to lay off two thirds of its staff. However, the introduction of smaller, cost-friendly DVD players in mass also served to reinvigorate the plagued firm through increased monthly subscriptions. The company also floated and sold about 5.5 million shares of common stock in May 2002 and further sold eight hundred and twenty-five thousand more in June of the same year, all at US$ 15, and thus increased its capital base and consequently enjoyed the accrued benefits of their increased economies of scale (McLoughin, 2018). Mr. Randolph retired from Netflix in 2004. Netflix also mauled over the ides of offering movies online for some time, until the mid 2000s in which they introduced the ‘Netflix box', which could download moviesovernight for them to be watched in the next day. They were also encouraged by YouTube’s success to venture into the field of online streaming of data, a project that they completed in 2007. Netflix continued to bask in the glory of being one of the leading entertainment service providers in the United States and the world. They also introduced early Netflix content such as ‘Born into Brothels' and ‘Sherry baby’ by 2006, most of which did well in the market (Kamerer & Dunn, 2017). Netflix also opted to transform by rebranding itself. Part of this included a new logo and a change in the website’s UI.
Disruptive Strategies Applied by Netflix
In an attempt to develop a competitive advantage over Blockbuster Inc., Netflix had to employ elements of digital disruption. These elements would ensure progressive growth given that disruption, unlike transformation, is a process that operates gradually as opposed to instantly (Vanini, 2017). In line with the disruptive theory, Netflix attacked low end footholds which slowly gave them leverage to introduce new market ideas. Due to Blockbuster’s focus on its more profitable endeavors, Netflix was able to swoop in and adequately address minor issues, thereby attracting new clientele. For example, when Netflix launched, its initial DVD mailing service was not fascinating to most of Blockbuster’s clients, who borrowed videos on physical locations. The two companies supplied very different requirements for their clients. Netflix's early online interface was easy to use and supported by an extensive inventory of films, but delivery took several days to arrive. However, as Cloud technologies enabled Netflix to offer streaming service over the internet, Netflix ultimately became the first choice for Blockbuster’s customers, allowing a more comprehensive selection with unlimited access, on-demand playing, and monthly membership. If Netflix had started by targeting directly at Blockbuster's customer with the new release and store pickups, Blockbuster’s response would have been a successfulcounterattack. Netflix has quite considerably been increasing service speed and video request--- that’s what occurs when programmers reveal a more refined, less-expensive platform to public consumers. From streaming low-resolution videos to offering ultra-high definition movies; Netflix’s disruptive innovation on video streaming didn’t catch on with mainstream clients until quality reached to contemporary standards.
Low-End Footholds
Disruption, as tactically adapted by Netflix, may present itself by means of low end footholds. In these circ*mstances, the renowned organization puts too much focus on its most profitable endeavors while ignoring aspects of their business that are not as lucrative (Vanini, 2017). This may leave some clients disgruntled. In order to successfully execute disruption in this scenario, a new organization can make these neglected aspects its primary goals thereby enticing clients away from the established bigwigs in that particular sector (Gregory, 2015). This intervention will result in gradual growth that will eventually see the new organization at par with the heavyweight (Gregory, 2015). It is crucial for a business to remember the minor details that adhered it to its loyal clientele or else it opens itself up for possible disruption by any newcomers.
In the case of Blockbuster Inc., its initial priorities were centered around providing cost effective home entertainment to the film lovers. This strategy was successful, and the organization grew tremendously. However, with this growth came a monopoly that made them the premier home entertainment provision service in the country. Consequently, they built on their initial platform and developed a business model tailored to maximize incoming revenue. They abandoned their cost-effective roots and introduced penalties for delays with borrowed CDs and DVDs. Although this displeased many of their loyal clients, their monopoly meant therewas little anybody could do to deter this move. It is at this point that they exposed themselves to disruption from any newcomers. Netflix took advantage of this and introduced a system that lacked any delay penalties. Their business model, as is often the case during disruption, was different when compared with that of Blockbuster Inc. This was intended to lure aggrieved consumers away in a search for greener pastures. However, as was stated on the introduction, disruption is a process and it takes time before clients switch allegiances. This only happens once the newcomer, Netflix in this case study, raises their quality to a point where it rivals their opponent. Nevertheless, clientele aside, Netflix had efficiently disrupted the monopolized entertainment provision industry by catering for matters that Blockbuster had deemed trivial and abandoned.
New Market Footholds
In addition to simply delving into niches prominent organizations may have overlooked, disruption may occur by establishing new market footholds. This strategy involves introducing new, more efficient techniques to accomplish the same task thereby turning consumers towards your organization (Beaton, 2015). Commonly, doing so results in a complete shift within the entire industry in an attempt to stem the flow of customers leaving their corporation for better services (Beaton, 2015). However, with time, the disrupters, more often than not, end up with the bulk of the clientele with time.
Reverting back to the case study, Blockbuster widely used VHS tapes in the distribution of their films. These tapes were bulky and difficult to transport but due to minimal technological advancements at the time, they were the best in the market. However, Netflix’s inception coincided with the emergence of DVDs as a means to store movies. As they intended to mail outrented films, Netflix favored DVDs for their size and convenience. Although this was challenging at first because not many people owned DVD players, the gradual change occurred, and clients preferred the sleek disks as opposed to Blockbuster’s bulky tapes.
On top of that, Netflix developed a makeshift algorithm that enabled them to determine consumer preference. Blockbuster depended heavily on their expansive stock of movies that contained most, of not all, film titles at the time. Therefore, whenever a client requested for a movie, it would simply be retrieved from inventory and rented out. Recommendations were never a factor in film selection given that every client was expected to have a clear picture of what he/she wanted before commencing the renting process. However, Netflix considered the diverse range of ages and preferences among their clients and developed a system that would consider client characteristics and previous rentals so as to select movies he/she may enjoy. Netflix also adopted this system due to their initially limited collection of movies. They may not have had what clients wanted at the time but, with their algorithm, they could suggest viable alternatives. This new market development took time to catch on, as many people knew what they wanted and were adamant with their choices; however, over time, and with a few successful suggestions, gradual innovations slowly drew clients away from Blockbuster to Netflix.
Also, to stave off competition, Netflix aimed to produce their own original content. Whereas a standard home entertainment corporate would ideally stock up on all the latest films to rent them out to their clients, Netflix disrupted that system by renting out their own original content. Shows such as ‘Orange is the New Black’ have garnered worldwide acclaim thereby spreading Netflix’s reach beyond national borders. This disruption worked against Blockbuster Inc. when in addition to the original content, all the content they had could be rented on Netflix. This disruptive innovation has set the tone for modern fay streaming services such as YouTube to invest in content creators to expand their brand.
Failures addressed by Transformation
In order to sustain any business or maintain relevance in any industry, transformation is crucial. Stagnation breeds failure, as rivals and competitors will always be actively transforming their organizations aiming to topple the industry leaders. Although transformation may refer to managerial changes or procedural alterations, digital transformation entails the implementation of new systems to streamline business processes and optimize efficiency (Vanini, 2017). In whichever industry, be it medical, engineering or even entertainment, corporations must actively transform their organizations to counter the effects of any disruption or catch up to current trends. However beneficial transformation may be, it is often accompanied by challenges that may hinder its effectiveness. Organizations should find ways around this demerit so as to reap maximum benefits from any proposed transformation.
Blockbuster Inc., due to its unrivalled monopoly, stagnated in its routine and overlooked the potential benefits of transformation. On the other hand, Netflix was still trying to forge a name for itself in the industry and therefore it made constant transformations to catch up to, and possibly surpass Blockbuster. In conjunction with the disruptive innovations implemented by Netflix, transformation only strengthened their claim as a mainstay in the entertainment provision business. An example of how transformation can revolutionize a corporation is evident in the delivery systems employed by the two rivalling organizations. Blockbuster stuck to mailing VHS tapes to its clients because it was a system that had worked for them for a long time. They saw no need to alter it because it was working efficiently.
As stated earlier, most transformations emerge in the face of challenges. Before transforming itself into a digital streaming service to facilitate faster, more efficient movie deliveries to their clients, Netflix, was mailing DVDs to their clients. Under Hastings’ direction, when Hastings believed in the future of digital downloading than digital streaming, Netflix forced its millions of customers to create DVD accounts and adopt DVD-by-mail service, when their preferences were different from what Netflix believed. In addition, as the largest Internet service providers (ISPs) in the U.S invaded the market, Netflix viewers’ started to express frustrations with Netflix’s slow loading times for streaming video content. Indeed, to successfully stream a movie online, the bandwidth required is large; an asset that not many people had in 2008 when the service was unveiled. On top of that, streaming made it easier for online theft where the movies could be copied and resold with accrediting Netflix. These hindrances were overcome by progressive technological development and strong online security respectively. The result was a revolutionary film delivery service that made Blockbuster’s mailing seem archaic and resulted in a large number of new clients for Netflix.
Recommendations for Hastings and Netflix’s Path Forward
Although Netflix is currently one of the top entertainment provision organizations in the world, overshadowing their initial competitor Blockbuster Inc., they still need to continually grow to maintain their status. Disruption and transformation are processes that do not halt on their first success; instead they should be repeated, if possible, to ensure continued prominence in response to evolving customer needs. With the emergence of strong rivals such as Amazon Prime and Hulu, Netflix CEO, Reed Hastings, must adopt various strategies in order to maintain his organization’s relevance. These include, but are not limited to, adapting to in house challenges, monitoring and outmaneuvering the competition, continually creating innovativedigital content, embracing technological advancements, introducing convenient data savings plans, supplying location-specific content, infiltrating the Chinese market, minimizing financial commitments, and setting achievable targets for the future.
Overcoming In-House Challenges
All organizations have to deal with in-house squabbles and Netflix is no different. It is human nature for disagreements to develop among coworkers with different ideologies on how to move the organization forward. These challenges can be overcome by the recruitment of a strong, goal-oriented management team that will offer leadership and direction to the staff. Additionally, these managers will bridge the gap between the administration and the low-level employees thereby ensuring an amicable relationship.
Stakeholders are another challenge when it comes to the development of a corporation, given that all investors and owners may have different objectives for the organization. Whereas some stakeholders may be driven by monetary gain, others may feel inclined to provide quality entertainment to their subscribers no matter the cost. Such conflicts of interest may cause unrest within the organization and need to be handled prior to any proactive development. Such conflicts can be tackled by holding regular stakeholder meetings where Hastings and his fellow administrative personnel air out their targets and hold civilized debate until a compromise is reached. An example of such a compromise is the recent vote where stakeholders deliberated on whether or not to reinvest the firm’s profits in critical business improvements to streamline business operations. Doing so has resulted in the introduction of robots to handle the mail; indeed, the robots have stuffed approximately 3400 envelopes per hour resulting in faster operations, thereby cutting time losses and increasing profits.
Competition
Initially, Netflix had a simpler time obtaining subscribers when its only direct competitor was Blockbuster Inc. However, with time, numerous entrepreneurs have ventured into the entertainment provision industry with a bid to successfully disrupt and control the niche. Global technological advancements have also made it simpler to start up and increase the reach of entertainment services. Some competitors include Hulu, whose average approximately three hours of daily streaming per subscriber while Netflix only stands at 2.2 hours. Disney’s-ABC television group, Time Warner Inc., Amazon Prime Video and the web giants Google and YouTube Red are other trendsetters in the entertainment provision industry. YouTube’s subscribers constitute about 53% of the Wi-Fi enabled homes, a significant number for any streaming service. Facebook may also pose a challenge to Netflix after it announced an intention to join the film access service providers; its significant global reach will make it an unparalleled service if it succeeds in its endeavor.
However, Hasting’s expertise in disruption and transformation to suit whatever time period he finds himself will work in his advantage. Just as he trounced Blockbuster Inc. with innovative thinking and a drive to be the best, he must channel that ambition to find a way to defeat the competitors he faces now. In case he is open to it, coopetition, a mash up between competition and cooperation may work in his favor. Collaborating with a juggernaut such as Facebook, that has approximately three times as many subscribers as Netflix, could help generate awareness and increase their client base. With Netflix’s original content, they should consider offering a new dimension to Facebook as well attracting more users to sign up. Although this may mean splitting the profits, it is better than being gradually extinct as Netflix did to Blockbuster Inc.
Creation of Innovative Content
Netflix managed to disrupt the entertainment provision industry by introducing original content into their catalogues. Going the extra mile to provide subscribers with entertainment they cannot get from any other service set them apart from their rivals and gave them the competitive advantage. However, with the world accustomed to the now dated content, Hastings has to search for another angle so as to reel in a different set of clients. In 2017, Netflix invested in world renowned stand up comedians; a generational fad that attracted numerous clients to subscribe to the service (Kamerer & Dunn, 2017). These comedians would release special performances that were only watchable through the Netflix streaming service thereby forcing all their loyal fans to subscribe. It is ingenuity like this that will drive Netflix forward and always keep it one step ahead of its competitors.
Embracing Technological Advancements
As Netflix introduced its streaming service to replace mailed DVDs, they adapted to the technological developments in the world at the time. This move differentiated them from Blockbuster Inc. as the latter opted to maintain their mailing system and was therefore phased out by time. In a similar manner, Hastings must ensure Netflix stays abreast with all the trending technological developments to ensure they are not deemed archaic or cumbersome to use among their users. If an innovation is ever to surpass the internet, Netflix should find a way to smooth out their entertainment provision to remain at the pinnacle of the entertainment industry. Alternatively, they could always maintain their streaming service but endeavor to make constant updates and improvements to their digital system to hoodwink their clients that customer-centric progress is being made.
Introduction of Data Savings Plans
A current Netflix user who watches their content from a mobile device and uses data packages from local telecommunication companies may find Netflix services too expensive. Watching a movie on Netflix would require large amounts of data which many may not be able to afford. Inconsistent data packages which seem affordable may result in low resolution films whose quality may taint the credibility of the organization. Netflix can solve this challenge through the introduction of an alternative service that consumes less data yet allows clients to access their content. Although it may be challenging, Hastings and his team should work to ensure that these packages come with acceptable quality so as not to minimize the allure of Netflix. They can do this by mimicking other service providers such as Facebook that has a similar provision in the form of a Facebook Lite application for low data consumption. To make this move successful, it would be better to start with lower bitrate videos and then advance to higher bitrate videos.
Location-Specific Content
Currently, Netflix is attempting to expand its services to 200 countries by the end of 2018. This ambitious move may succeed but in order to build loyalty among their clientele, they should strive to introduce location-specific content on their platform. At the moment, most films and TV shows on Netflix are of American origin although they come with subtitles to cater for all subscribers. This may seem inclusive, but nothing will excite these foreign clients more than watching their nation’s greatest filmmakers on the Netflix platform. Location-specific content can be achieved by collaborations with local TV stations to not only understand what television programs are popular in the area but also develop a rapport with local entertainers that may come in handy later.
The Chinese Market
Netflix has targeted the Chinese market for many years due to its large viewership numbers and developed technological systems. This would vastly increase the organization’s subscriber count thereby raising their profits. However, China has a national policy that seeks to protect local businesses from unfair competition with foreign giants. The CEO of Netflix has been trying to get to the strong Chinese market from 2015 but has had his efforts hampered by the strict policies from Beijing. As a measure to appease the Chinese government at Beijing, the CEO should seek to partner with a Chinese citizen or firm so as to be able to access this giant market. Such a move would actually boost the lowering increment in the number of new Netflix subscriptions.
Minimizing Financial Commitments Netflix has heavily been borrowing in order to sustain its operations. Considering that its competitors such as Apple and Amazon Video Play have a large financial base and back up, Netflix must reassess its investment strategy to prevent sinking further in debt. Given that its current debt sums up to eighty percent of its assets, Netflix is standing on shaky ground. Should anything go wrong, the lenders to Netflix would bring a wave that may crush Netflix as the freezing of its assets would crash its operations. The CEO of Netflix should therefore try to minimize further borrowing and come up with strategies to pay off the debts that Netflix has accumulated over the years. Mindful investment in generating and producing original content as a strategy to grow its streaming subscriber base is critical.
Setting Achievable Targets
The move by Netflix to seek world domination is somehow excessively ambitious. For one, accessing two hundred nations is a move that is quite hectic and requires gradual implementation. The CEO of Netflix would find it easier if he were to implement the plan in a period longer than the two years that the company seeks to implement the same plan in. Rushing the plan may make it excessively expensive and quite impractical. It may also wear their staff out with stress and strain to be able to implement the same.
Conclusion
Developing an identity in a particular business niche is challenging. Although on paper it may seem viable, actually accomplishing it is an arduous task. Utilizing disruption and transformation in the face of poor decisions and consequences, Netflix has managed to outmaneuver Blockbuster Inc. and establish itself as the premier entertainment provision corporation. However, rival companies have employed similar techniques and have now caught up with, if not surpassed Netflix. It is therefore clear that disruption, however revolutionary, is a process whose continual success is not guaranteed. In order to stay ahead of competition and be a top choice in the minds of customers, regular ground-breaking ideas are a necessity because just as you take your place at the top of the mountain, what will stop your competitors from climbing up as well?
References
Beaton, G. (2015). Digital Disruption in Professional Services Delivery. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.2718631
Gregory, M. (2015). Telecommunications Disruption. Australian Journal Of Telecommunications And The Digital Economy, 3(2). http://dx.doi.org/10.18080/ajtde.v3n2.19
Kamerer, C., & Dunn, B. (2017). NETFLIX INC.: THE DISRUPTOR FACES DISRUPTION (1st ed., pp. 1-10). London: Ivey Publishers.
McLoughin, J. (2018). Netflix's history: From DVD rentals to streaming success. Bbc.co.uk. Retrieved 19 April 2018, from http://www.bbc.co.uk/newsbeat/article/42787047/netflixshistory-from-dvd-rentals-to-streaming-success
Vanini, P. (2017). Digital Disruption. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.2988962
