Lessons from Netflix’s success

Lessons from Netflix’s success

How did Netflix go from a tiny, obscure DVD rental start-up in the late 1990s to the world’s biggest internet TV network? Management experts at the University of Auckland Business School have identified some of the secrets of its success, and predict its rise will continue, eventually erasing most of its smaller competitors in New Zealand and abroad.

Recent Business School graduate Paul Rataul had wanted to find a model for “disrupting” academic publishing, and turned to Netflix. “How did Netflix outmanoeuvre the titan that was Blockbuster Video? It was a real case of David versus Goliath.”

He teamed up with lecturer Dr Dan Tisch and senior lecturer Dr Peter Zámborský, both in the department of Management and International Business. They analysed company and media reports, applying insights developed by an influential New Zealand-born strategy theorist, David Teece, and have now published their conclusions in SAGE Business Cases.

Little bets
The key features of the business model that allowed Netflix to ride the technological wave of the early 2000s were:

• a trusting and experimental culture
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• capturing the value of other people’s creativity (movies and TV shows)
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• capturing the value of customer data (subscribers’ viewing habits), which helped generate not only personalised recommendations, but also hit Netflix Originals series and films.
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“What Netflix did was do little experiments, little bets, with certain demographics and once they saw what happens they’d scale it up,” says Mr Rataul, who now runs millennial career coaching firm, Millennial Mindset.

Dr Tisch: “There’s a theory that says companies gain a competitive edge through capabilities that produce value for customers, are rare or distinctive, difficult to copy and that are supported by the way the firm is organised. The quality and variety of Netflix’s library, and Netflix Originals tick all those boxes.”

It’s hard to over-estimate the significance of how Netflix has leveraged customer data, adds Dr Zámborský. “The world’s most valuable resource is no longer oil, it’s customer data.” He points to a Gallup finding that companies that leverage customer behaviour outperform peers by 85 percent in sales growth and 25 percent in gross margins.

Theorist David Teece has written extensively about why some firms are better at renewing their skills and developing new ones in a dynamic environment, like the one that Netflix exists in. These so-called ‘dynamic capabilities’ boil down to sensing and seizing opportunities, and reconfiguring capabilities.

Dr Zámborský: “That’s what Netflix has done as it reinvented itself again and again, from online DVD rental, to Internet TV service, to TV and film concept developer, producer and distributor in one.”

It was also a case of being in the right place at the right time, as video streaming speed and reliability increased and viewing devices became cheaper and ubiquitous.

Not all bets paid off. Netflix’s decision to rebrand its separate DVD delivery business as Qwikster in 2011, shifting its focus to streaming-only plans, met with a customer backlash.

Co-founder Reed Hastings responded with a frank admission of failure: “There is a difference between moving quickly – which Netflix has done very well for years – and moving too fast, which is what we did in this case.”

As the Auckland team write, Netflix “were not afraid to test out ‘risky’ or radical ideas because they believed that innovation involves failure”. They quote Hastings: “We’re in a creative-inventive market, not a safety-critical market like medicine or nuclear power. You may have heard preventing error is cheaper than fixing it – yes in manufacturing or medicine, but not so in creative environments.”

David becomes Goliath
But Netflix now faces serious competition from Amazon Prime, Hulu (now backed by Disney), HBO Now, and emerging players such as Malaysian firm iFlix.

Dr Zámborský: “Netflix now has more original content than HBO, the former content king, although I don’t think that will necessarily remain the capability that Netflix can always do better than anybody else.

“Could others emulate that unique package of customer data, the relationships Netflix has formed with movie studios and TV networks and the stars, and its creative, decentralised culture, which gives a lot of creative freedom to the actors and directors? In theory yes, but it’s not easy to change your culture and others will find it difficult to replicate it.”

Dr Tisch: “I predict the small players in New Zealand – Neon, Lightbox – are not going to make it. You need a Disney to take on Netflix. Competitive offerings like Sky TV and Lightbox will go slowly, milking existing rights as long as possible.”

How Netflix will fare in other markets is less clear. By January 2016, Netflix was in over 130 other countries, and it now has more customers outside the US than inside (60 million internationally, 55 million in the US).

Zámborský: “At the moment they’re capturing the richer, more westernised segments of the market in Asian countries, for example. Western shows are the drawcard for them. But if they want to access the wider middle and lower classes they’ll have to produce more local content.”

Tisch: “It can be done – Disney did it in Tokyo – Paris is controversial. It’s very hard for an American firm with a strong culture to come to grips with other cultures, and it’s much more complex and expensive than simply dubbing.”

Despite these challenges, the team pick that the industry will become an oligopoly that includes Netflix, as David truly becomes Goliath.

Associated article:
Sage Business Cases: Netflix: Dynamic Capabilities for Global Success

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