Before “Netflix and Chill”

 

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My presentation tomorrow I am analyzing why Netflix is dominating the online video streaming industry and its ability to continue its domination. However, the company existed before “Netflix and chill” and originally operated as a DVD-by-mail business. Netflix managed to fight off and then dominate in this space when two giants were going straight for Netflix’s throat. Once Blockbuster (a big threat at the time) and Walmart sniffed out that Netflix was on its way to becoming profitable, the companies rolled out DVD-by-mail subscription services of their own. However, the small company managed to win due to its key sources of competitive advantage: brand, scale, and data collection.920x920

Netflix developed its brand through superior customer experience. The combination of the firm being the first mover and its high degree of customer satisfaction translated into a strong consumer awareness of Netflix as the DVD-by-mail service. Even though Blockbuster and Walmart were very well known companies they could not duplicate the startup’s awareness as a DVD-by-mail service.

Netflix was also protected by its scale from distribution networks, product selection, customer base. Even though Netflix was a startup it still had firm size-based advantages in the DVD-by-mail business. The firm has 58 exceedingly automated nationwide distribution centers. From these distribution centers 97% of the US population could get overnight DVD deliveries which greatly increased customer satisfaction. Blockbuster and Walmart were not able to implement their existing scale in a way that was relevant to the industry they were trying to enter. These firms scale was nowhere near the size of Netflix’s therefore worsening their customer experience and negatively impacting their brand.

Another size-based advantaged the firm was protected by was its vast, seemingly infinite selection of video entertainment—this asset is referred to as a long tail. Being an online retail freed Netflix of the constraints of shelf space and geography. Netflix’s selection of over 125,000 unique DVDs, dwarfed the traditional video store’s stock of about 3,000 DVDs. With a Netflix subscription, users had the advantage of unsurmountable video entertainment options. An additional benefit of not be constrained to physical retail space is that Netflix was able to offer more than just the most popular movies or new releases. In fact, about 75% of Netflix’s DVD rentals were from back-catalog titles, while 70% of Blockbuster rentals were new releases. Hence, Netflix was able to offer less popular product—which were still relatively demanded—and make a profit off these DVDs.

Netflix’s most difficult to duplicate and most valuable size-based advantage was its vast customer base. The DVD by mail industry is an example of an industry that has high fixed cost with economies of scale, meaning that a firm can spread costs over increasing units of production. Therefore, in this industry entering the market earlier and building up a vast consumer based, will give a firm the better cost structure and superior potential profits, and thus should be able offer better pricing model for customers. In 2010, Netflix had 25 million subscribers and the cost of the revenues was $1.3 billion. Even though Walmart had the cash to compete, the firm recognize it would take a giant investment and multiple periods of loss to upset Netflix’s competitive advantage, therefore Walmart decided to back out of the DVD by mail delivery service.  On the other hand, Blockbuster attempted fight to Netflix but it never broken in to Netflix is scale advantages. The battle ended with Blockbuster suffering a loss of over $4 billion, hundreds of store foreclosures, and eventually filing for bankruptcy.

As if these factors weren’t enough, Netflix also benefited from superior data collection, which it leveraged in ways to improve the customer experience. Netflix had a collaborative filtering system, called Cinematch, that monitored customer trends data to in turn personalize each individual’s experience. The main improvement to customer’s experiences was the platform’s ability to make recommendations based on the movies customers rated. This system was very successful and over 60% of titles in user’s queues were from the recommendations. This data collection also created a switching cost and

netflixrec01_616-1.jpgreduced churn because if a user left Netflix they lost all the films and TV shows they had rated. The collaborative filtering system also cleverly paired recommendations to titles that were in stock in the distribution center closest user.  This enhanced the customer because it reduced customer frustration and also gave Netflix an operational advantage.

All in all, Netflix won in this space because the firm used technology in developing the key assets of scale, branding, and switching costs. This is just another example of how implementing technology and a focus on digital will help a firm dominate an industry. However, even the most digitally maturing firms can be shocked by changes in technology. This is exactly what happened to Netflix when it was clear the DVD business was dying because many media products for being shifted from physical containers to streaming bits. Netflix faced many challenges switching their business model to video streaming subscription model; but the firm’s commitment the digital and their focus on implementing sources competitive advantage is what led the firm to also succeed in the content streaming industry.

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https://scholar.flatworldknowledge.com/books/28393/fwk-38086-ch03_s02/read

 

5 comments

  1. mgiovanniello · ·

    I miss those red envelopes in the mail! I always thought the idea of one/two-day DVD delivery was fascinating, and at that point in time, Netflix didn’t build out its online streaming inventory enough for me to personally think it was worthwhile. The concept of collecting data in each of these consumer decisions is something other firms (like Blockbuster, as you mentioned) didn’t consider, and that’s partially what led to their demise. I’m glad that Netflix still offers this service, though spun out into a different website altogether. Side note: remember when Netflix first tried to do this with Quikster and lost 800,000 subscribers?! Here’s the link: https://www.theverge.com/2012/7/11/3153720/netflix-qwikster-dvd-spinoff-hastings. It’s amazing how consumer perceptions have changed since then!

  2. Great post, I started using Netflix when it went International in Mexico and we did not have DVDs sent to our homes. It started directly with streaming. Actually, curious and fun fact, a friend of mine started a business of delivering DVDs to your home before Netflix even existed. It will be interesting to know in the future what will happen to content and huge Media companies like Disney, who just announced 1 month ago, they were going direct to consumer with their own streaming service, powered by BAM Tech. They are also removing all content, not Marvel, from Netflix data base. Also, interesting to see what Amazon Video and Hulu will be doing in the near term to fight of Netflix.

  3. ojeagle121 · ·

    I didn’t know that Walmart tried to get in on the DVD delivery game. I also remember logging to their website and spending way too much time setting up my queue. I think that did have a large part in keeping subscribers … that and the rating system that you mentioned earlier.

  4. Awesome post! I remember when my family would get so excited receiving those red envelopes in the mail or going to Blockbuster when we were little and picking out movies on a Friday night. Now, I couldn’t imagine my life without having Netflix on demand. Even the fact that they were one of the first movers to produce such superb original content makes them a force to be reckoned with.

  5. I think its impressive to look at Blockbuster and Netflix at the same time on two extremely different trajectories. One was able to jump on the right trend and the other was not. I assume Blockbuster used their “gut instinct” when choosing to oppose the change in the business model.

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