HOW NETFLIX DISRUPTED THE VIDEO INDUSTRY Through Organizational Development (Research Paper)

Abstract

This paper is a research on how Netflix went through organizational development from a DVD post-to-mail rental business back in 1997 to an online video streaming platform, during a period when Blockbuster was the biggest DVD rental business and very little people in America had access to DVD players. The research also explores the role Netflix played in changing the entire video streaming industry. This study utilized various articles and opinion piece from select experts within the industry and video streaming users of various platforms other than Netflix.

Today, Netflix is a foremost Worldwide Online Streaming, Video and TV Production business.

According to Statista, video streaming online is one of the most widely used internet activities in the world. As at 2015, internet video viewers surpassed 200 million in the United States where most users viewed funny videos, movie trailers and music videos. And with the inclusion of mobile devices like smartphones and tablets, video streaming over the internet is set to consume about 1.46 million TB per month with mobile device users reaching 137 million in 2019, in the United States alone.

“More than a few video-on-demand companies have made their name in the area of paid streaming content, with Netflix being the most widely known example” having a 37 percent of peak period downstream traffic. Netflix made revenue of $5.5 billion, in 2014. (Statista, 2016)

Netflix Inc, is an entertainment company which was founded 1997 in California by Reed Hastings and Marc Randolph. It began by shipping DVD via US mail to customers who will watch it and mail the disc back. However, Netflix had two major challenges that it faced as a startup that would operate in an already established industry.

First, only 2% of the United States household had DVD players in their homes and secondly, there was Blockbuster, a provider of VHS home movie and video games that run video rental shops across the US, which was the “undeniable video rental leader, having over 2,800 stores in the US (Phillips, Ferdman 2013) and eventually 8,000 worldwide with about 60,000 employees”.

This research explores the external environmental pressure for change at Netflix which with a handful startup of 30 employees, was able to take on a big organization such as Blockbuster. It will also explain the following key organizational development process that made Netflix a success: The difference between Netflix organizational model and its other competitors – The organizational strategy used at Netflix for its development, how the use of technology revolution was responsible for Netflix success and how Netflix present structure with its disruptive innovation is sustaining change within the organization.

 

Netflix Organizational Structure and Strategy

October 19 1985, the founder of Blockbuster, David Cook opened the first store in Dallas, Texas. Cook had a creative background experience in the management of large databases, so after opening a few stores, he built a $6 million warehouse that could serve as a logistic center to many stores in one day. Then he came up with a strategy that allows him to customize each store according to the neighborhood in which the store is opened, stocking up the store with movies that fit the demographic profile of people who live in that neighborhood. Using this organizational model, at its prime in 2004, Blockbuster opened about 8,000 store nationwide. This business strategy included having customers to pay a large flat fee of about $65 to offer unlimited movie rentals for the lifetime of the membership. Blockbuster would charge customer, a first day rental of $2.99 for new released movies and $1.99 for older movies. A late fee charge of 99 cents per day for up to 10 days was also applied, capping fees at $10 (Laura 2010). “In 2000, Blockbuster had collected an approximately $800 million in late, representing 16% of its revenue”, AP published in 2010. Blockbuster business model and strategy was so successful that it started acquiring many other businesses to expand.

The most defining moment for Blockbuster was however when customer Reed Hasting was charged $40 on late fee for the return of a VHS movie, Apollo 13, in 1997 (Harress, 2013). Hasting, out of anger on the high cost of fee, started up Netflix. In view of the Blockbuster organizational model, Netflix understood it could not immediately match the capacity of Blockbuster multi stores structure, so it remodeled the Blockbuster’s organizational structure. The concept of Netflix started in the early days of DVD where only about 2% of the US households had DVD players. But Netflix saw that if the market grew to about 20% of the households, it will become a successful company.

The key to its strategy was that few movie stores had DVD for rent. So, Netflix leveraged on the light weight of the discs by shipping DVDs directly to people’s home at an affordable rate – VHS was heavy. People did not have to leave their homes to rent and watch videos. This also saved Netflix the huge capital cost of setting up video stores across the US. Netflix also offered DVD rental for $4, plus $2 shipping for a seven-day period and it did away with late fee policy. Multiple options were offered the customers. Disc could be kept longer for additional fee, new movies on DVD copies were sold at 30% discount and customers could decide to buy the copy, at a favorable cost, if they did not want to return the DVD copy. In addition to these, Netflix was one of the first few companies to rent DVD by mail.

 

Netflix Technology Innovation to sustain Development and Change

First, the pricing model. Hastings was a tech entrepreneur with a Masters in Computer Science from the Stanford University. Within two years after startup, Hastings leveraged on technology innovations at the time, the internet, to create a pricing model of – using the service for as long as you want, for a fixed monthly fee. Customers could now also browse a large collections of movie titles online and receive in their mailboxes. In addition, because of the low-cost production of the DVD and the compactness, Netflix could eventually do away with the late payment policy.

Netflix also tapped on another technology trend – streaming. Broadband internet and WiFi service was on the rise. Portable mobile devices were getting cheaper and widely in use. By 2007, Netflix launched a service to stream video contents directly to user’s portable devices and home TVs. Netflix bet heavily on the use of technology to drive its business that it kept on spending to entice customers to its website, on the assumption that it would become more profitable after the brand has established itself better. Netflix used technology to develop an extensive custom-made video-recommendation system based on customer’s reviews. This made it easier for customers to pick a very good movie without having to, first, view it. In 2003, Netflix crossed the 1 million subscriber mark, opening additional 5 shipping centers. By 2005, it was shipping 1 million DVDs by mail every day with over 35,000 titles to choose from its web services.

Sustaining Development through Vision and Internal Change Drivers

Netflix Vision and Mission statement states that “Our core strategy is to grow our streaming subscription business domestically and globally. We are continuously improving the customer experience, with a focus on expanding our content, enhancing our user interface and extending our streaming services to even more interconnected devices”. This was a clear vision statement from the CEO, Reed Hastings for the future of Netflix

Netflix continued to innovate and sustain its development. It started to develop its own content called Netflix Originals. These were contents that are distributed exclusively on their services. A success story of the use of technology to create content is “House of Cards”.

House of Cards is a show that was created from data-driven programming. Netflix with 27 million subscribers in the US and 33 million worldwide, collected data – like when you pause, rewind, fast forward, reviews, ratings; from its customers to create a bespoke show. With this strategy, Netflix was able to connect more with its customers and further increase customer’s satisfaction. Many industry experts believe Netflix has affected the way audience watch TV content. Neil Hunt, Netflix CPO, believes that Netflix strategy has created a model on how television will be viewed in 2025, that is, watching shows and TV content at their own pace. People will no longer be forced into a 30 or 60-minute slot once a week.

In conclusion, Netflix was able to remodel Blockbuster’s organizational structure by taking advantage of the many flaws from its big size and multi stores model, using disruptive technology innovations and continuous technology improvement to sustain its development and self-changing strategy by linking selection to objectives and measuring progress, as it grows. Blockbuster, on the other side, failed to adapt and change.

Finally, Netflix understood that making timely modifications in the light of experience will normally be more effective than attempting not to deviate from plan (Palmer, Dunford and Buchanan (2016). Netflix did a lot of fine-tuning as it expands its business, “building the plane as it flies”. By 2011, Netflix had become an American success story for an organization with well-paid, well-managed employees and happy customers. It had overtaken a big competitor using technology, or as Harvard Business Review called it “big bang disruption.” Netflix shares hit $299 a share in 2011 from a 2003 $22 per share, becoming the first platform one will think of, when it comes to Online Video Streaming.

 

Oyinloye Adebola

California Miramar University

 

 

References

Pouge, David. (January 25, 2007). “A Stream of Movies, Sort of Free”. The New York Times

Stellar, Brian. (October 21, 2013). “Netflix hits Milestone and Raises Its Sights”. The New York Times. http://www.nytimes.com/2013/10/22/business/media/netflix-hits-subscriber-milestone-as-shares-soar.html

BBC News. (December 2013). “Blockbuster to close more stores as 427 more jobs to go”. http://www.bbc.com/news/business-25232069

Wired. (May 2014). “What Television will look like in 2025, according to Netflix”. https://www.wired.com/2014/05/neil-hunt/ .

Staistics Portal. (January 2016). “Statistics and Facts about online video usage”. https://www.statista.com/topics/1137/online-video/

Laura Heller (Mar 3rd, 2010). “Late fees are back at Blockbuster; goodluck with that”. AOL Finance https://www.aol.com/article/2010/03/03/late-fees-are-back-at-blockbuster-good-luck-with-that/19380683/

Associated Press (September 2010). “Blockbuster tries to rewrite script in bankruptcy” http://www.cleveland.com/business/index.ssf/2010/09/blockbuster_tries_to_rewrite_s.html

Paul Holland (June 2015). “The netflix startup story”. Venture Beat. http://venturebeat.com/2015/06/26/the-netflix-startup-story-video/

Palmer, I., Dunford, R., Buchanan, D.A. (2016). “Managing Organizational Change”: A Multiple Perspectives Approach. New York NY. McGraw-Hill Education

David Carr (Feburary 2013). “Giving Viewers What They Want”. NY Times. http://www.nytimes.com/2013/02/25/business/media/for-house-of-cards-using-big-data-to-guarantee-its-popularity.html

 

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