Netflix — how vision saved it

History

When we think of brick and mortar video rental, Blockbuster Video comes to mind. Founded in 1985, it was the place where families would go and rent movies to watch. At its peak Blockbuster had 9,000 stores and 60,000 employees. Present day it only has 50 stores. What led to this decrease? A misread on the future of its industry coupled with a monster competitor: Netflix.

In 1997, the DVD was introduced in the US. The same year, Netflix was launched. They would do exactly what Blockbuster did, but over mail. With the smaller size (compared to the VHS) of the video asset , the economies were there to launch the business.

Investments in the future

Netflix knew that they couldn’t and didn’t want to directly compete with Blockbuster. They decided to make investments in the next generation of video consumption, streaming. Through streaming, Netflix would bypass the mail delivery and have users watching videos in seconds, not days. In addition, they would pass off the cost burden of the project to the Internet Service Providers that were giving homes Internet. Now the ISPs were the new USPS.

Streaming was introduced in 2007. By 2007 over 60% of American homes had access to the internet, and of those homes over 80% had high speed broadband.

http://www.pewinternet.org/2012/04/13/digital-differences/

Data Analyzed

Since 1997, Netflix had information on the market demographics of its users. They knew what over 75 million subscribers liked to watch, who they were, and how sticky those shows were. The speed at which a household finishes a show would demonstrate their affinity for it.

Now with streaming, they could go so much further with their analysis. For instance, when a person watches a show, do they “binge” on a season or do they space it out and consume an episode a day or a week?

When they created their first original series, House of Cards, they knew it was going to be a success. As the New York Times reported,

It already knew that a healthy share had streamed the work of Mr. Fincher, the director of “The Social Network,” from beginning to end. And films featuring Mr. Spacey had always done well, as had the British version of “House of Cards.” With those three circles of interest, Netflix was able to find a Venn diagram intersection that suggested that buying the series would be a very good bet on original programming.

Platform Created

Present day, Netflix is the most streamed entity over the internet. In North America is hogs up over 1/3 of all Internet traffic during peak hours.

They have built out a platform where viewers can watch Netflix original movies and television as well as other media from other production studios. Netflix always wanted to carve out a “channel” for itself without having to deal with the cable companies — so that is where streaming came in. And to initially attract users, they had to offer other production studios’ content, even though it is a huge expense:

http://ir.netflix.com/secfiling.cfm?filingID=1065280-16-47&CIK=1065280

Future

In the future, Netflix will shift from non-original to original programming. Also, it will continue making investments in streaming and other mediums where its subscribers can consumer their media.


As we’ve seen, Netflix seemed like it was on the right side of history. This includes, making the investment in streaming to getting its original programming right. However, it was all for a reason. To create a cost effective channel to gather data on its users and to provide their subscribers with that they want to see. Netflix will continue to make up margin as it becomes vertically integrated: from creation of the content all the way through the subscriber consuming it.



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