Suggested For You: Collaborative Innovation

A few weeks ago, one of the last Blockbusters left in America (in Sodoltka, Alaska) shut its doors for good. It joined the ranks of thousands of video stores that have closed down in the last ten years. It’s hard to remember when we had a Blockbuster on every corner and in every mall — even though that was as recent as the mid 2000s.

At this point, it’s hard to imagine that we couldn’t have seen this coming — but how would we have? What’s the right way for an organization to respond when an emergent technology forces a groundswell shift in their industry? What did Blockbuster do (or not do), and how did its competitors rise and dominate? This isn’t really the story of Blockbuster; it’s the story of new opportunities created by different approaches to innovation.

Stop. Rewind.

Let’s go back to the early 2000s. The emergence of high-speed internet was an earthquake in the media industry, enabling quick and cheap streaming of high quality programming. This met a real consumer need — people’s desire to watch excellent content on demand wherever they were.

A new cluster of products materialized that promised to free consumers from the limitations of traditional cable providers. Some looked like you would expect — external startups, new entrants to the space who started at the low end and eventually captured the top of the market, like Netflix. Existing players often decided to build their own streaming services, like HBO. We also saw a more uncommon model emerge in Hulu. Hulu connected the resources and capabilities of two major players, NBC and Fox, and enabled them to collaborate to move quickly in the face of disruption.

At the CoLab, IDEO’s collaborative innovation platform, of course we’re interested in Hulu’s approach, the “partner” side of the build/partner/buy equation. But we see things to learn from all three of these innovation models. While Netflix, HBO, and Hulu have all built hugely valuable media services, their varying methods for getting there have had corresponding advantages and disadvantages.

(Aside: If you’re wondering who’ll win the streaming wars, well, the news is changing as we speak. Consolidation and collaboration are playing out across the media space — from the AT&T and Time Warner merger, to the recent bid from Comcast against Disney to buy FOX assets, including Hulu.) We may live in a golden age of television, but it’s certainly been a roller coaster to get here.

Netflix disrupts your living room.

In some ways, Netflix is the classic disruption story. Unencumbered by the complex operations of a large cable conglomerate, Netflix was able to work their way up from a simple, specific product (essentially digitizing access to DVD box sets) to creating content to rival major television networks (think Stranger Things). That’s not to say it was cheap or easy to get there — going from DVDs-by-mail, to streaming, to data analytics to identify and create the amazing original content we all know and love has been a multi-decade journey.

During an industry-wide shift to streaming content that Netflix exemplified, lots of incumbents adopted what we might call the onlooker model of innovation — watching the space emerge and the early entrants succeed or fail, weighing the opportunities and risks, and making a calculated decision to play or not to play via financial investment in external startups.

That had some downsides — Blockbuster reportedly passed on the opportunity to buy Netflix for $50 million, and have Netflix handle its online presence (whoops). Sometimes when you choose to participate only passively by evaluating ownership, it can mean you don’t directly confront real problems or opportunities in your core business that are ripe for disruption.

Still, the strategy of onlooker innovation isn’t necessarily a bad thing (especially if you’re Netflix in this scenario) but it can mean that spotting opportunity, reacting to market trends, and reaping the financial benefits of creating new categories ends up happening outside of organizational walls, ultimately leaving your core business vulnerable to disruption.

HBO rolls its own.

On the other hand, when some companies uncover an emerging opportunity, they may choose to devote time and resources to building it themselves. Let’s call this the DIY model. In seeing the huge rise in video streaming, HBO realized they could create a proprietary system that leveraged its existing competitive advantage, and benefit exclusively from the upside.

HBO’s excellent and well-known original programming gave them a strong leg up in the streaming wars. While they had a solid customer base, by investing in standalone streaming, they risked upsetting their cable cash cow. HBO focused on building out their streaming service incrementally, starting with HBO Go in 2010, a service limited to people who had purchased a cable television package. Passionate fans got to the point of launching a website (Take My Money HBO) to convince HBO they’d be willing to pay so long as they didn’t need to buy a cable package. The site received nearly 200,000 unique visitors in the 48 hours after its launch.

Even so, it took another three years — HBO Now went live in 2015, nearly a decade after Netflix first launched standalone streaming services. For HBO, finding the balance of benefiting from an incumbent advantage without being encumbered by the their existing business’ constraints was a process that led to long-term upside, but came with significant risks and costs in money and in time.

Hulu works together.

It’s not that easy to mitigate the risks of radical innovation in a moment of massive change. Blockbuster missed out on the Netflix opportunity, and HBO took nearly a decade to participate — so how could a big media player quickly participate in the streaming opportunity? This is just what Hulu did. We can call it the collaborator model.

Hulu began in 2007 as a collaborative joint venture between major entertainment studios (NBC and News Corp, which owns FOX) that attempted to build the best of both worlds. Rather than each network building their own platform, Hulu thought differently. Hulu imagined a streaming service with next-day content from a collaboration of major media players. Formed as a separate entity but integrated with its parent companies, Hulu believed that large organizations could come together to spot an opportunity and then act on that opportunity together.

It’s hard to imagine how difficult this must have been in 2007. Even now, organizations place huge hurdles on the path to collaboration — complex legal documents, meetings upon meetings to discuss the agenda for the next meeting, concerns about IP, metrics that are designed for the world of today and not the innovation of tomorrow, and lots of others. Big organizations aren’t well known for their ability to stay in front of trends or move fast and break things. TechCrunch’s expectations were so low that a reporter even nicknamed Hulu “Clown Co.” before it launched.

The way we see it, Hulu’s collaborative innovation had a few things that helped set it up to succeed where other collaborations haven’t:

#1: Executive buy-in is non negotiable. Most attempts at partnership between organizations fail when they hit internal barriers. Peter Chernin and Jeff Zucker, presidents of News Corp and NBC respectively, were instrumental in giving Hulu the space to grow its offering with both the benefits of original content from its parent companies and the nimble flexibility of a startup. In a 2012 Fast Company profile, Chernin recounts moments where News Corp pushed back against Hulu’s disruptive influence, and he found himself playing referee.

“… ultimately, I was in a position to make the final decision. I just said, ‘We’re doing it.’” When ad sales executives at Fox and NBC complained … Chernin and Zucker batted them down. Ditto when competing network executives moaned that Hulu was yet another drain on TV ratings.”

#2: Look beyond the walls when there’s an earthquake in your industry. Chernin and Zucker quickly identified the need for diverse perspectives and took an early equity investment from Providence Equity partners. That created a key element in Hulu’s success: the inclusion of non-industry insiders in the conversation, which led to hiring an outside, digital-native CEO. In a 2008 Wired article, Providence acknowledged that Hulu needed “somebody who was going to say, ‘This is not television on the Internet; this is the Internet.’” Jason Kilar, an ex-Amazoner responsible for building products like 1-Click, was offered the top job.

#3: Successful collaboration relies on being independent and integrated. It’s easy to imagine Hulu getting caught up in the red tape of ownership and fears of competition. Hulu’s status as a joint but external venture let it operate like a neutral party in the interactions between organizations. Hulu was its own platform, not “NBC’s platform that Fox and other networks are using” (or the reverse). In 2008, when Hulu officially launched, its catalog included over 300 shows and movies from multiple networks, including next-day availability of NBC and FOX shows. That gave it an upper hand in building its ad-based business. By maintaining its neutrality, Hulu was able to get the best of both worlds.

Spoiler alert! We don’t know who won.

Did it work? Well, Hulu still has a ways to go and the end of this story isn’t written yet. They seem to be on the right track — Hulu did over $1B in ad revenue last year, was majority acquired by Disney, and was the first streaming service to win an Emmy for an outstanding drama series. They’ve just passed the milestone of 20 million US subscribers, putting them squarely in between HBO Now’s 5 million and Netflix’s 55 million. Last year, they launched a bundled live TV package that now has about 800,000 subscribers. On the other hand, several senior executives recently left, the company is losing money (though its owners have pledged to invest another $1.5B), and it’s unclear who its owners will be in the near-term.

It remains to be seen who will win the streaming wars (or even if any single player will). Hulu was a strong bet by NBC and Newscorp, and an uncommon way to get to market quickly. Despite being a late entrant, the collaborative model let them build a business that grew quickly, responded to disruptive pressures, built new internal capabilities, and likely enabled more success than trying to build everything on their own. The streaming wars are an astounding case study in the many ways organizations have tried to respond to a consumer need that could be solved by an emergent technology and a new way of working.

Which one is the right approach?

We’re biased. Here at the CoLab, we’re trying to build opportunities for companies to work together in an ongoing collaboration, to build relationships, uncover opportunities, and act jointly, and share the risk in making them real. Rather than waiting for a lightning bolt confluence of circumstances, we’re asking ourselves: how might we design systems that remove barriers to collaboration, so that organizations can work together in the face of disruption?

We think that’s a pretty exciting problem to solve.

Just a note: I’ve never worked for or with any of these organizations although IDEO has done work with some of them. This article is based purely on publicly available information that I’ve linked to wherever I can.

Interested in learning more about the work we do in the CoLab? Find out more about our collaborative prototyping process or reach out to us here.

Visuals by the rad Zach Hobbs.