The Netflix Success Story: Reaping Rewards from Disruptive Innovation

In the “The Producers”—the Broadway show that was created to fail then became a hit—the two partners, Boom and Bialystok, facing jail asked, “Where did we go right?” The usual question, of course, when something fails is “where did we go wrong.”

Netflix, a company founded in 1997 as a direct mail retailer of DVD movies, has made a series of brilliant business decisions that have elevated the company to an elite player in today’s home entertainment marketplace.

The streaming giant’s third quarter 2018 earnings statement was so bullish that its stock immediately rose 15 percent. The company produced quarterly revenues of $4 billion, and its per share earnings soared 31% over the comparable, prior year quarter.

The success of Netflix can be attributed to two key decisions—each of which totally changed the company’s business model.

The company’s initial model focused on DVDs delivered by mail. It started its business with a consumer-friendly format featuring no late fees and a huge selection. This quickly led to the destruction of the brick-and-mortar retail DVD market led by Blockbuster.

It had an unbeatable business with the ability to purchase huge quantities of DVDs very cheap, and a highly efficient delivery system.  But Netflix decided as much as this business model succeeded, it would not sustain the company’s future.

So Netflix made its mail delivery business model obsolete by embracing “streaming” technology. In a series of controversial moves, Netflix increased prices to its huge customer base to convert these customers to the more reasonably priced streaming. It was a difficult transition and the stock plunged. But Netflix persisted with the change in business model—and it worked.

By 2013/14, ever-increasing numbers of streaming customers both in the U.S. and abroad started producing excellent numbers.

Its initial streaming capabilities consisted of movies and purchased content. This gave rise to its second strategic initiative: movement into independent programming, otherwise known as Netflix originals. House of Cards was the first real success followed by other huge products such as Orange is the New Black and Stranger Things. Its business model made it possible to invest heavily in programming and convert that investment into profitability. Moreover, assets like House of Cards converted into other moneymaking ventures such as packaged DVDs sold at retail, plus other licensing opportunities.

Today Netflix has become the world’s leading Internet television network with over 83 million members including over 19 countries enjoying more than 125 million hours of TV shows and movies per day, according to Big Speak speaker’s bureau Website.

Netflix co-founder Marc Randolph said, in the Big Speak, “You have to disrupt yourself, before someone disrupts you.”  Harvard Business School’s Clayton Christensen adds that Netflix exuded a form of disruptive innovation by appealing to an audience and providing a service unmatched by its top competitors.

Christensen sees a disruptive company as one that “targets segments of the population that have been overlooked by competitors, delivering an inferior (but more tailored) alternative, often at a lower price.”

Christensen adds that this quick adaptation led Netflix to outperform major competitors and disrupt the entertainment industry for years to come.