The classic management textbook theories would have predicted that Netflix should have now failed. Indeed in January 2007, JP Morgan Securities 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, Cine-match 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.
Earlier Netflix was about disruption of physical stores.
Since starting its video streaming services in 2007, Netflix as successfully grown its business
Digital business transformation of Netflix can be seen through two lenses: technology and data analytics
Through the technology lens, you see how Netflix worked with Amazon to develop a world-class back-end infrastructure.
Working with Amazon Web Services, Netflix could quickly deploy thousands of servers and terabytes of storage within short time. This video highlights their working relationship with Amazon.
Many companies might have shied away from depending so much on a competitor — Amazon has its own video-on-demand service. Netflix decided to bet on the cloud by working with a leading company, namely Amazon. By selecting the second-best to Amazon, Netflix would have simply compromised on its ability to deliver best quality service to its customers.
Netflix has been able to take its information advantage with big data and analytics one step further. Their bet on licensing House of Cards was not a blind bet but based on the analysis of their data. Kevin Spacey remarked, “Netflix was the only company that said, ‘We believe in you. We’ve run our data, and it tells us our audience would watch this series.” Other studios were handicapped because they did not have the required data and analytics capability. They continue to rely on outmoded models of pilot shows and sampling to decide the likelihood of success.
Netflix has further leveraged this information capability to produce its own hit shows such as Orange is the New Black and Marco Polo.
Thus, the Netflix story will be one of the most remarkable digital transformation stories of the century.