Netflix 2.0 — Video Streaming

Since starting its video streaming services in 2007, Netflix has successfully grown its business. By the end of 2016, it had nearly 94 million members globally — expected to reach 100 million mark during the frst half of 2017. Netflix video streaming consumes 37% of downstream internet bandwidth during primetime hours in the USA — far ahead of YouTube, Amazon and Facebook.

Netflix has become the defacto primetime entertainment on the web. It can be streamed on computers, mobile phones, tablets, smart televisions and video game consoles.

Origins: DVD-by-Mail Business Model

The classic management textbook theories would have predicted that Netflix should have now failed. Indeed in January 2007, JP Morgan Scurities downgraded the Netflix stock citing high competition and most wondered how Netflix might create a ‘second act’ beyond DVD Distribution. After all, it started in 1997 as a mail-order DVD-by-Mail business with monthly subscription fees so that consumers could avoid late fees. During the first decade, it had built impressive logistics chain with over 50 regional warehouses to distribute the DVDs to its customers. By February 2007, it had distributed its billionth DVD. That success and that kind of growth should have trapped the company to define its business model with core competency in logistics and distribution.

But Netflix’s different in the sense that it had recognized the power of data and analytics. It had developed a superior recommendation engine, Cinematch to better predict the pattern of request of DVD titles by subscribers. It even organized open contest — Netflix Prize — to win $1 million prize to anyone who could improve on its algorithms. It was a data-driven company before data and analytics were in vogue.

By 2009, it had over 100,000 DVD titles and 10 million customers. It could have continued on its trajectory. But, it didn’t. Netflix innovation focused on two dimensions: logistics and analytics.

Blockbuster and other video rental physical stores didn’t recognize possible disruption from a mail-order subscription company like Netflix. Blockbuster even turned down an opportunity to acquire Netflix in 2000.

Netflix 1.0 was about disruption of physical stores.