Netflix Digital Transformation

https://www.businessmodelsinc.
com/exponential-business-
model/netflix/#:~:text=It%20all%20began%20in%20April,people%20spend%20their%20free%20time.
Netflix: How a DVD rental company

changed the way we spend our free
time
When you think about searching online, you think Google. When you
think about colored sticky notes, you think Post-it. And when you think
about binge-watching series and movies you think of……right: Netflix.
Netflixing has become synonymous to binge-watching.
Netflix is an inspirational example of a company that successfully

shifted their business model multiple times and grew exponentially
because of that. They started with renting boxed products through a
mail service nationally (in the US) and shifted to delivering on-demand
entertainment catering to diverse needs globally. The ‘all you can eat
subscription’ that Netflix offers, lets you watch your favorite shows
anywhere and at any time you want.
It all began in April 1998, when Netflix started renting out DVD’s by mail.
Only a year later Netflix changed its pay-for-use model into a
subscription model. Nearly a decade later, Netflix changed their
proposition to a streaming service, which changed the way millions of
people spend their free time. There are new entrants in the market, such
as Amazon Prime, Hulu Plus and Facebook Watch, yet Netflix is by far the
leader, serving 125 million customers and generating 11.7 billion in
revenues in 2017.
What did their innovation journey towards this success look like and
what is driving the exponential growth? Let’s explore how Netflix shifted
their business model in order to grow exponentially.
The initial business model of Netflix
When software engineers Reed Hastings and Marc Rudolph founded

Netflix in 1997, video rental stores dominated the home entertainment
market. Hastings was frustrated that the market was not customer-
friendly, with charging the customers high fees for late returns as the
culprit. They saw an opportunity to do rentals differently and Netflix
began renting out DVD’s by mail in April 1998, which was a game
changer in the video-renting market and a huge gamble, there VHS
dominated the market and only 2% of the American households owned
a DVD player at that time. Reed and Rudolph knew if the market
reached 20% of households, they would have a viable business. They
had the foresight to take the leap and their vision was right: eventually
95% of all households had a DVD player!
From renting DVDs to a subscription model
The first business model was to let people rent videos by selecting it
online and having it delivered to their door. This service was
unparalleled at that time and a big shift in the industry. A year later,
Netflix introduced a subscription model, where customers could rent
DVD’s online for a fixed fee per month.
Initial competitor: Blockbuster
When Netflix launched, Blockbuster (a global chain of video stores

where customers could go and rent videos in store) was their biggest
competitor. It took Blockbuster years to start offering a similar service as
Netflix was already doing. By the time they finally shifted to a
subscription service, Netflix already had started the process of shifting
their customers to streaming subscribers and was quitting the DVD
rental business.
From the launch of their subscription model in 1999, Netflix gained

239.000 subscribers in its first year and went on to build a customer
base of 1 million subscribers by 2003. As of today, Netflix is by far the
number one online player of series and movies, with 11.7 billion revenues
in 2017 and 125 million customers who all pay a monthly fee.
Furthermore, Netflix’s business model has evolved into a service based,
nonlinear model. How did this happen and what is driving the
exponential growth?
Trends driving the exponential growth
The key trends that are driving the exponential growth and are
implemented in the current business model of Netflix are:
• Technology: available to watch content seamlessly on different

devices;
• Comfort: people don’t have time to go out and shop for movies,
people want comfort where content is presented to them
(personalized), people who are frequent renters and movie lovers,
and people who want to get the best value for money;
• On demand: being able to watch content anywhere and on any
time you want;
• Subscription addiction, low cost monthly fee and simple structure;
• Data driven: not only used for recommendation but also pro-
actively used to create content that fits personal preferences.
Building blocks for an exponential business model
There are nine building blocks to create exponential growth. You can
find more information about the nine building blocks here.
Netflix made use of all these buildings blocks to grow exponentially, but
there are two things particularly interesting to point out.
Cannibalize your own business model
One of the most important reasons that Netflix became an exponential

business model is that the founders had the ability to look as an
outsider at their business model. They were never happy with the way
the business model was at a given time but were always looking where
the market was headed in 5 to 10 years. They combined several building
blocks for exponential growth by always looking for new ways to solve
problems for many customers, to do this with digitalized services (an
info based offering) by using a lean approach.
For example, Netflix accepted already in 2007 that the DVD rental
business was not profitable enough anymore. They understood that
people not only want to rent videos but also want to pay for a large and
user-friendly offering, for the comfort of ordering a video from your
couch and for no hassle with returning videos. They foresaw the
change, used their IT-background to create fitting digital solutions and
rolled it out in a lean way.
Also, apart from being one of the pioneers of the industry with their
subscription model, the value proposition is yet another element which
helped this particular service to become as popular as it is today. In
fact, there are a total of four elements that are making all the
difference.
• Affordable price (every fourth household in the US has a Netflix

subscription, that’s why they can sell so cheap)
• Accessibility (on all devices, when and where you want)
• Original content (invest in own shows, based on the analysis of
their own customer data)
• Large amount of high quality content in many different genres
Netflix combined several building blocks to create an exponential
business model. They kept and keep changing the components that
needed to change in order to grow exponentially.
Using building block 7: Netflix’s algorithm
The seventh building block of creating an exponential

business, Algorithm to the core, is one that Netflix has played out
perfectly. Netflix started with a basic rating system, based on Big Data
and completely based on how good or bad a particular movie or show
had been rated. These ratings were based on number of views,
customer feedback, if videos were watched until the end and even IMDB
ratings.
When Netflix evolved their business model, an important part of this was
to gain more insight into their customers’ preferences and create a
community of fans with fitting content for everyone, at any time. They
evolved their algorithm to an open source initiative because they
understood that with more data and the technological knowledge of
more people, the Netflix experience would become much better.
Already in September 2009, a prize of $1M (called The Netflix Prize) was
awarded to team ‘BellKor’s Pragmatic Chaos’ for improving Netflix’s
recommendation model.
In 2013, Netflix started to develop their own production and shows,

based on the analysis of their own customers’ data. This way, Netflix
understood way better than their competitors what their customers
would like next and acted upon this. House of Cards was the first big
Netflix Original that was made this way. Where studios were only
wanting to make a pilot, Netflix already knew based on their data, that
this series would become a hit and immediately signed up for two
seasons!
They currently make use of and contribute to a large number of open
source technologies and even have their own Open Source Software
Center. In 2017, Netflix open sourced Vectorflow in 2017, which is a deep
learning library.
All these elements above were combined and led to the current
business model of Netflix.
What’s next
The Netflix model keeps evolving and changing the entertainment

industry. In December 2017, Netflix rolled out a new recommendation
algorithm that knows which image will make you click ‘play. It serves up
unique images to its 100million plus customers. For example, when you
have watched mostly romantic movies in the past, Netflix will show you
an image of the two lead actors kissing, while if you are more into
comedy, you’ll likely get a shot of a funny character in the movie.
This is only one of the things that are ahead of us. The paying for
services could further develop into paying for usage, as this is
something how the customer can get an even more personalized
offering. You could even get a construction where as a viewer you pay
in millicents per second. Blockchain technology will make it possible to
support such a structure with lower transaction costs.
Also, as Netflix gains more and more insight in how they can make use
of all their data, they will probably move even more from a platform to
a movie-studio business with data driven formats. Large players in
the media field become content sponsors. Even Barack Obama signed
a deal with Netflix last week. Traditional production companies are
already working together with Netflix to produce original content, using
traditional production methods but skip traditional broadcasting
methods and instead release directly to Netflix. TV-channels will likely
vanish and even Hollywood could in the future release full-length films
to Netflix directly, where Netflix subscribers can pay an ‘early bird’ fee to
watch the movie.
Netflix is very successful because they exactly know what customers

want, when they want it and on what device. Also, the company is bold
and courageous enough to keep changing their business model into
the most optimal future and not afraid to cannibalize their current
business model. We’re very curious what their next game changing
story will be!
Would you like to see more examples of exponential business models?
Download our deck Exponential Business Models.
This article is written by Marjolein Oomen

Netflix Digital Transformation

Uploaded by

Copyright:

Available Formats

Netflix Digital Transformation

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Netflix Digital Transformation

Uploaded by

Copyright:

Available Formats

https://www.businessmodelsinc.

Netflix: How a DVD rental company

Netflix is an inspirational example of a company that successfully

The initial business model of Netflix

When software engineers Reed Hastings and Marc Rudolph founded

From renting DVDs to a subscription model

Initial competitor: Blockbuster

When Netflix launched, Blockbuster (a global chain of video stores

From the launch of their subscription model in 1999, Netflix gained

Trends driving the exponential growth

• Technology: available to watch content seamlessly on different

Building blocks for an exponential business model

One of the most important reasons that Netflix became an exponential

• Affordable price (every fourth household in the US has a Netflix

Using building block 7: Netflix’s algorithm

The seventh building block of creating an exponential

In 2013, Netflix started to develop their own production and shows,

The Netflix model keeps evolving and changing the entertainment

Netflix is very successful because they exactly know what customers

This article is written by Marjolein Oomen

You might also like