The Rise of Netflix
by: Mack Jackson Jr.
How did a small video rental company in the early ’90s compete with the giant video rental companies and the motion picture studios for your entertainment dollars? This article looks back at Netflix’s business models, strategies, leadership, competitors, and how Netflix has expanded into one of the leading entertainment corporations in the world.
In the ’90s, the video movie rental business was a growing industry in entertainment. Customers could rent movies on VHS cassettes or DVDs from video retailors that offered a wide selection of titles. Back in that time, I was a software developer for a national video rental franchise. The companies that I worked for did well during that time. However, they never predicted the new business strategy that was developing from a company called Netflix.
In 1997, a successful entrepreneur, Reed Hastings, founded Netflix to deliver DVD movie titles to consumers through the postal service (Netflix, 2011). Hastings saw an opportunity to capitalize on the change in movie rental markets from VHS to DVDs. This vision by Hastings was to start in a new creative business endeavor that changed the video entertainment industry.
Netflix Strategy Revisions
Netflix developed its strategic planning that included the following changes from 1994 to 2011 (Netflix, 2011).
1. In 2000, Netflix opened an IPO. Netflix’s mail-in-delivery service also provided a customer website subscription service. Hastings was moving forward with new strategies given the latest technologies, DVDs, and customer demands.
2. Netflix started selling video movie rentals for $4 with a $2 shipping fee. The popularity of DVDs attracted other major retailers to get into the market place on selling and renting DVDs (Netflix, 2011). However, customers were becoming dissatisfied with the Netflix subscription service. Netflix also was accumulating a high cost in its DVD inventory library for the subscribers.
3. In 2006, Netflix expanded its marketing efforts and shifted in strategy by acquiring independent films within the Red Envelope Entertainment (Netflix, 2011). This move provided Netflix with another market to deliver movies to consumers that were not from the major motion picture studios.
4. Customer retention was a critical issue for Netflix (NETFLIX, 2011). Netflix changes its cancellation subscription policy by making the process easier for customers to cancel. Hastings also revised their customer retention by creating a popular service called movie recommendations. This service allows a customer to leave a suggestion on movies that they have watched and made comments available to subscribers. This business model increased customer satisfaction with Netflix.
5. In 2011, as another shift in strategy revision, Hastings joined the Board of Directors for Facebook (Netflix CEO reed hastings joins facebook’s board of directors.2011). At the time, this move was unusual due to Hastings also was a member of Microsoft Corporation. Hastings was looking to integrate Netflix’s social service into other markets.
During the 1996 to 2011 period, Netflix had undergone issues surrounding management and leadership, which coping with complexity and changes (Kotter, 2013). These changes in customer retention, competition from major retailers, and a key focus on moving the company forward in innovation and technology.
In 2011, Hastings made another strategy revision to Netflix by splitting the DVD-by-mail business of Netflix into a new brand called Qwikster (NETFLIX, 2011) (Editorial: Reed hastings’ Netflix spinoff, 2011). At the time, analysts and consumers criticized Hastings for creating a company that no one wanted. However, this move was another vision of Hastings in preparing Netflix for a new technology market in delivering video movies to the public called streaming. It seems at the time that Hastings saw the expansion of the online internet service, and that DVD would go by way of VHS.
It appears that the decisions of Hastings during the period of Netflix evolution were top to bottom leadership. For example, when customers wanted to cancel their Netflix accounts, the company made it difficult for them to do so. However, after hearing customer complaints of dissatisfaction, Netflix created a faster way for the customer to cancel their account online from the website of Netflix. Also, customer feedback during that time stated dissatisfaction with the pricing structure and delivery time of movies. In my opinion and experience as a Netflix customer, the services at the time were not planned but reactionary. I could also see at the time that Netflix had a great competitor in the industry to challenge Netflix’s business strategy.
The Blockbuster Affect
In my experience as a software developer for video rental companies during the ’90s, the small video rental companies provided VHS and DVD rentals to customers at a daily rate between $3 to $5 per day. There were serval large video rental retailers supplying customers with the latest movie titles from Hollywood. However, one of the biggest that changed the game in video rentals was Blockbuster Video.
Blockbuster Business Model
· Focus on “Movie Night” for consumers making impulse purchases (NETFLIX, 2011).
· Blockbuster provided 5194 locations in the U.S. with 939 franchise operators
· Blockbuster provided large stores with at least ten employees part-time with one manager
· The brick and mortar stores carried over 2500 movie titles
· Maximizing revenue by the number of days a movie was out for rent
· Providing new releases days after the box office release
· Late returns provided 10% of business revenue
Netflix Business Model
· Began by targeting consumers who purchased DVD players (NETFLIX, 2011)
· Offered cross-promoting DVD rentals with DVD manufactures
· Provided a DVD by mail service to customers
· Provided a video recommendation system to everyone
· Provided a prepaid subscription service to customers
· Provided unlimited movie rentals
· Kept up with the technology by offering streaming video service
· Netflix is not a brick and mortar business model
Blockbuster competed with Netflix in the consumer video rental market for the best customer-centric business model. A customer-centric business model is when an organization connects and anticipates the customer’s needs by providing the best customer service possible (Turban et al., 2015). However, Blockbuster’s had a considerable overhead expense and did not see the new technology of online streaming service that Netflix used to its advantage in the market. Netflix had its issues also, but Hastings did not have megastores like Blockbuster. In my opinion, the closing of Blockbuster video stores was the overhead costs and the new technology that the company did not foresee.
Netflix was disruptive to the movie rental industry. The view of disruptive business practice is when an organization’s affective reactions to behavioral responses to business events due to unforeseen activities (Netz et al., 2019). In the case of Netflix, Hastings made several reactions that seem at the time haphazard rather than well-planned marketing. Netflix leads the way in entertainment content by providing an online streaming service that changed the way consumers watch movies. This technology has provided consumers with the ability to stream content over different devices like PCs, smartphones, tablets, and home entertainment systems.
Netflix is an emergent business model. In my opinion, the moves that Hastings has done over the years have been risky. Netflix has gone through customer dissatisfaction and recovered. Netflix started from the old technology of VHS to DVDs and now online streaming services and is still a relevant player in the entertainment industry.
Netflix has grown from a small DVD by mail company into a leading motion picture production studio. From the findings of this document, Reed Hastings had a vision and business strategy of providing video content to consumers using DVD technology and then expanding to streaming video. Netflix created several critical strategy revisions that helped the brand overcome pitfalls. The major competitors at the time could not compete against the fast technology market. Currently, Netflix is a major movie production studio that controls its streaming entertainment content.
Mack Jackson Jr
Editorial: Reed hastings’ Netflix spinoff isn’t about DVD success; it’s about hedging the stream. (2011).
Kotter, J. (2013). Change leadership HR.com, Inc.
Netflix. (2011). Shareowner, 24(2), 4. Retrieved from https://search.proquest.com/docview/846791629
Netflix CEO reed hastings joins facebook’s board of directors. (2011).
Netz, J., Svensson, M., Brundin, E., IHH, Center for Family Enterprise and Ownership (CeFEO), Högskolan i Jönköping, Tekniska Högskolan, . . . Internationella Handelshögskolan. (2019). Business disruptions and affective reactions: A strategy-as-practice perspective on fast strategic decision making. Long Range Planning, , 101910. doi:10.1016/j.lrp.2019.101910
Turban, Efraim, Pollard, Carol, Wood, & Gregory. (2015). Information technology for management (10th ed.) Wiley Etextbooks.