One day, Reed Hastings, an expert programmer, forgot to return a VHS movie he had rented and was made to pay a $ 40 fine for the delay. He was furious and outraged at the disproportionate fine. But that small and almost insignificant situation was the trigger for a great idea that would revolutionize the Market.
The idea was to create a movie rental company without any kind of physical store where orders would only be made online. The films would arrive at the clients’ houses by mail and also all the films would be on DVD, despite the fact that only 1% of the population had a player at that time. VHSs still predominated in those years. This is how Netflix was born and Hasting had a clear vision of how the market was going to evolve.
The first offer was to rent a movie for 7 days at a cost of $4 plus $2 for shipping. To solve the problem that everyone was ordering the same first-run movies at the same time, which meant that they had to have a large inventory of DVDs of each, they developed an algorithm that suggested to each customer which other movies they might like based on the previous preferences of the same. In this way, they managed to balance a little better the use of all the inventory they had and not just basically renting the first-run movies. This algorithm was a great element of disruption in that market.
But what really made the difference was when they went from a movie rental model to a subscription model. For $ 15 per month, you could see as many movies as you wanted with the only restriction that you couldn’t order more than 4 movies at a time. No fines of any kind for the delay. In this way, the rules of that industry were rewritten.
Far from settling for that, Hastings tried to ally itself with its biggest competitor, Blockbuster, which at the time had a market capitalization of $4.5 trillion (versus Netflix’s very modest $5 million), 60,000 employees, and more than 8,000 stores. Hastings was afraid that Blockbuster would adopt the same Netflix model and make it disappear. So he went to propose that Netflix be the digital arm of Blockbuster. The CEO of Blockbuster analyzed the proposal and found that the subscription model offering an unlimited number of movies and the elimination of late fees, which were a huge source of income for the company, was insane. They thus dismissed any type of association with Netflix. Blockbuster bet on sticking with the same business model that they thought would last forever. Big mistake !! Not innovating in line with the times is a safe passport to disappear from the map.
But Netflix didn’t have it easy either. Until 2001 the company kept losing money and things only started to get better when DVD players fell sharply in price and many people were able to get them. In 2003, Netflix made a profit for the first time, and only then did Blockbuster and others like WalMart begin to take Netflix seriously. Too late …
Faced with the threat, Netflix continued to innovate and in 2007 they again bet on disruption and focused on the online transmission of their content. For its part, Blockbuster in 2013, when it closed its last 300 stores, was only a memory for the most nostalgic. If they had understood the need to innovate and if they had taken Netflix’s offer seriously or copied it at the time, perhaps they would still exist.
Once again, Netflix was innovating strongly since the customer could watch the movie whenever they wanted without having to wait for the DVD to reach their mailbox at home. Even so, it was very difficult and expensive for him at that time to get the rights to the best films. However, with great effort they got the catalog of Disney and Sony, for which they paid 20 million dollars. Since the perfect is the enemy of the good, that was enough to validate the model and bring customers some very good films. Then over time would come deals with most of the rest of the big movie studios like Paramount, Lionsgate, and several others.
Was it time to loosen up and rest on the laurels of already having absolute market leadership? Not at all! In 2011 Netflix announced its first entirely original production. House of Cards was born in a context where it would not be shown in cinemas, on broadcast TV, or on cable TV. But back then Netflix also had a setback by implementing a service called Qwikster. They were actually dividing Netflix into two parts. Qwikster (name almost impossible to spell correctly) kept the DVD business that still survived and Netflix with online streaming. This caused great dissatisfaction from customers who still received the DVDs by mail and the company lost nearly 800,000 subscribers in one month, resulting in huge financial loss. Following the golden rule of good entrepreneurs that when you fail you have to do it fast, well and as cheaply as possible, Netflix quickly buried Qwikster and focused solely on the online streaming business. In a context where they had made a big mistake, it was also a smart move and again disruptive.
Netflix has continued to produce 100% original content and achieved great successes such as Stranger Things, Orange is the New Black, Narcos, La Casa de Papel and several others, achieving more and more customer loyalty, offering them exclusive and high-quality products. Netflix already has more than 100 million subscribers around the world. On the other hand, they set the bar so high that the entry of any competitor will be a very expensive bet for those who try.
In its history, Netflix went at least 3 times against the current. He first bet on DVD instead of VHS. Then he bet on the subscription model instead of the charging model for each individual movie. Finally he bet on streaming online instead of sending the movies by mail.
The merit of Hastings is that he knew how to see market trends, which Blockbuster with all its power and arrogance could not do. Trends change all the time and not surfing them is the beginning of the end. But it is not enough to identify trends if that is not accompanied by innovation in the goods or services we offer to satisfy our customers. Netflix did not stop doing it at any time. Finally creating strategies to make it difficult for competitors to enter is an act of survival. Netflix did not hesitate to do so as it began to bet more and more heavily on its own original productions and extend its online transmission to as many countries as possible in as many languages as possible.
How are you seeing all this in relation to your company? Do you have focus? Are you betting on innovation? How are you managing to stop your competitors? Are you evolving or are you seeing how a steamroller can run over you at any moment? There is not a single company in the world that does not have the risk of disappearing due to the evolution of new trends.
Those who dance are often considered crazy by those who cannot hear the music!