#37. The Streaming Wars
Part 4: Netflix vs Blockbuster
Announcement: Disney has overtaken Netflix with 221.1 million total worldwide streaming subscriptions, compared to Netflix’s 220.7 million. In response, Netflix is launching an Ad-supported subscription plan in partnership with Microsoft.
Dear Readers,
Welcome to the 4th article in The Streaming Wars series. You can catch up with past articles: Part 1, Part 2, Part 3.
This series is based on Netflix and its evolution from DVD mailing service to global streaming giant with over 212 million global subscribers, and the fierce competitions (with Blockbuster and other players) it had to overcome on the way to global success.
The goal of this series is to provide practical steps and lessons with which you too can apply and succeed.
Today, we would consider the 3 main lessons from the battle between Netflix and Blockbuster, and the Netflix algorithm advantage.
Table of Content
1. Netflix vs Blockbuster — 3 Takeaways.
2. The Netflix Algorithm Advantage
Netflix vs Blockbuster — 3 Takeaways
Lesson 1 — Change is Inevitable, So Adapt
Change is inevitable. Industries change, technologies change, and customer needs change, you must adapt.
Throughout this story it is evident that Blockbuster faced a headwind of changing factors but failed to change with it. Its model of providing movies to customers via its network of stores and charging customers late fees was outdated. Netflix on the other hand simplified the video rental process through its website, delivering movies to the customer’s home, and a subscription model with no late fees.
The culture was also changing. The internet was more ubiquitous, and more homes had broadband connections. Amazon had also made ecommerce mainstream. This changed consumer behaviour — they thought if I could order books online to my home, I should be able to also order movies.
To thrive and grow, embrace change. You need to stay ahead of the latest changes in your industry, the wider culture, and your customers’ needs and preferences.
Lesson 2 — The Customer-focused company wins
The most customer-focused companies actively anticipate and serves their customer’s needs, and are rewarded with their patronage, and loyalty.
As mentioned earlier, Blockbuster’s business model of penalizing its customers through late fees (though very profitable) was its ‘Achilles heel’. A model focused on maximizing revenue, unlike Netflix which focused on delighting customers.
By the time Blockbuster addressed this issue, the cost of dropping late fees amounted to a revenue loss of $200 million. While the cost of building its online platform cost another $200 million. This resulted in a net of $400 million, a sum that would be difficult to justify to their shareholders.
As a result, the CEO was ousted, and the new CEO brought back late fees.
Lesson 3 — Focus on your core value proposition and Excel
I wanted to name this lesson — Never forget what you are really selling, or the value you are really creating.
For years, Blockbuster’s success was their focus on one core value proposition: delivering entertainment to people’s home. They achieved this through ‘brick and mortar’ stores. A model that was successful, and so they got comfortable. But as technologies change, they failed to invest in innovation for new ways to deliver on their value proposition.
Netflix stuck to its value proposition — Getting people videos to watch. They achieved this by improving the video rental process, using algorithms to anticipate customer’s needs (more on this below) and transforming delivery from video rental to streaming. They focused on their core value proposition but evolved how they delivered on it.
Here is Netflix co-founder Marc Randolph on the business pivoting from a post DVD service to online streaming in his book, That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea:
“We’d finally figured out a way to make our original idea of DVDs by mail work, and here we were, looking ahead to a future without either DVDs or mail.”
Bonus Lesson — Carl Icahn (or Manage board relations)
The significant reason why Blockbuster failed is because of Carl Icahn and his active interference with Blockbuster’s management on the direction of the company. As a result, Blockbuster’s CEO John Antioco was fighting a battle on 2 fronts, one against Netflix, and another with his board. This should not be.
In an excellent reflection on Harvard Business Review by John Antioco (on his interactions with Carl Icahn and Blockbuster), he said:
“I probably should have met with Carl earlier, before the proxy fight, to lay out what we were doing and why. That might or might not have had an impact on his desire to hold on to the stock. And if I could turn back the clock, I might focus on the online business for a few more years and then drop late fees. Both were the right thing to do but doing them simultaneously increased costs and made a bitter pill for investors.”
This showed the importance of actively communicating with your board to get their buy-in, and the importance of timing.
Beyond these 4 key lessons another key factor in the success of Netflix is the competitive advantage derived from their algorithms.
The Netflix Algorithm Advantage
Blockbuster copied and tried to replicate Netflix’s website and distribution, but they could not copy the unseen aspects — the algorithm.
It showed how people searched for movies, how long they watched a particular scene, or skipped past one, which actors appeals to which viewers or group of viewers. This aided personalisation — each subscriber had a different homepage based on their preference.
Also, with this information Netflix developed a detailed behaviour profile for each subscriber. This would enable them to assemble different micro-audiences for different movies, which would be useful when Netflix starts producing original content.
The more you watched Netflix, the more it got better at figuring out what you want to watch and recommending the right shows.
Netflix had a similar strategy at their distribution centres. An algorithm that took in data from Netflix customers and produced maps every 6 months of where distribution centre should move to achieve overnight delivery. It calculated the demand for each DVD and found the cheapest delivery routes.
The algorithm gave Netflix an advantage in determining what customers wanted to watch, and how to fulfil that demand. As Netflix transitioned to streaming, this gave them more data to improve the accuracy of its prediction, without the need for physical movie distribution.
Conclusion
In this article we’ve seen how a combination of poor decisions, board interference, and technology contributed to the demise of Blockbuster, giving Netflix the runway it needed to take-off and fly.
In our next article, we would see what is next for Netflix as it takes on Hollywood.
If you think this is the end of the Streaming Wars, think again.
Bye for now.
Thanks for reading and see you next week.
You can catch up with past articles in this series: Part 1, Part 2, and Part 3. I previously did a strategic analysis on Netflix, you can also use this framework to analyse other companies.
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For any questions you can reach me at notesbynero@gmail.com or on LinkedIn, and Instagram.
Nero
Racing Towards Excellence.
