Essay on Netflix: The Disruptive Innovator

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Essay on Netflix: The Disruptive Innovator

Introduction

Consumer demand evolves swiftly while interacting with innovation. For consumers who are conversant with wired and wireless network, their main consumer demand is speed. On the other hand, consumers who mostly utilize Internet on their computers seem to want Internet accessibility through their smartphones. While pursing innovation is a difficult, costly and time-consuming task, companies continuously undertake innovative projects while refraining from compromise when responding to the incessantly changing consumer demands. A significant form of innovation that only a few companies have attempted to pursue in the recent years is disruptive innovation. A disruptive innovation formulates a novel market and value network and eventually disrupts a prevailing market and value network while displacing established alliances and market leaders.

In the recent years, there have been discordant kinds of disruptive innovations that have altered the market, as well as, people’s lives and operations. A god example of a company that has employed disruptive innovation in its products, services and business model is Netflix. This paper is a case study of Netflix as a disruptive innovator. Since its launch in 1997, Netflix has been described as a classic disruptive model since initially, the services provided by Netflix did not appeal to Blockbuster’s mainstream consumers, but as the quality of the company improved, it eventually appealed to customers to extent of driving its competitor Blockbuster to bankruptcy.

Company Description-essay on Netflix: The Disruptive Innovator

Netflix was founded in 1997 with its main service being offering online DVD movie rentals. Contrary to the regular retail video outlets, Netflix provided an online store, as well as, a subscription-based membership. In 2002, Netflix grew to the point of undertaking an IPO and fifteen years later, the stock price of the company has increased by more than 450%. Currently, Netflix is the world’s leading Internet television network with more than fifty million members in more than one hand and ninety nations. These members enjoy more than two billion hours of movies and TV shows every month, including original series (Manning, 2012). Through their monthly subscription at a certain fee, Netflix members can watch as many movies and TV shows as they want, in any given physical location on any Internet-connected screen.

In terms of disruptive innovation, Netflix is a leading innovator and this is evident in a number of ways. For instance, Netflix dented DVD rental stores, but most majorly it disrupted Blockbuster LLC which was formerly referred to as Blockbuster DVD. While Blockbuster and other vendors would rent videotapes and later DVDs to homeowners who were required to return them in time or incur a late fee, Netflix introduced a business model whereby DVDs were mailed to subscribers and no late fees were charged for late returns. This meant that viewers no longer had to go to a store to get the disk. As a result of Netflix gaining market share rapidly and replacing Blockbuster in the industry, Blockbuster was driven to bankruptcy in 2010 leading to the company being delisted from the New York Stock Exchange. Later Netflix began digital delivery of video directly to the viewers and in the process it supplanted the video disc mailing system. The next step that Netflix took was to invest in the streaming of videos; a move that brought in four more subscribers for every additional dollar the company invested in streaming new content (Manning, 2012). In order to attract new members and maintain their existing subscribers, Netflix invested in continuous service improvements by refining the user experience, that is, minimizing buffering and loading times (Manning, 2012). Apart from expanding internationally; a move that has made Netflix the leading Internet television network in the world, the company has also formed partnerships with other companies so as to increase its members and web traffic directed to it.

Disruptive Innovations by Netflix-essay on Netflix: The Disruptive Innovator

At the time when Netflix was founded, Blockbuster was still the leader in the DVD rental market with their offline shops. Most of the profits of Blockbuster’s offline rental stores came from rental and late fees, with customers being charged extra depending on their rental period. Reed Hastings, Netflix founder found that the customers did not like these charges. More specifically, he discovered that the late charges could accumulate to the point whereby it was tantamount to buying a new video. The recurrent late fees charged by Blockbuster and other vendors discouraged customers from using their services and Netflix saw this as an opportunity to provide better services to these aggrieved consumers.

Netflix assumed a business model of fixed monthly payments and no late fees, enabling customers to return the borrowed or rented content at a time that was convenient to them. This innovative business model showed rapid growth since consumers were able to make reservations online and upon receiving the DVDs through post mail, they were able to return the DVDs to the company by sending them back from their nearest postbox (Choy and Park, 2016). This move was met by quick retaliation by Blockbuster who set to expand the content in their offline stores. However, this response was inconsequential and did not make Blockbuster recover the customer it had already lost. Netflix’s transformation did not stop there.

In 2007, Netflix began providing a VOD service based on streaming known as Watch Instantly for its subscribers (Choy and Park, 2016). The company had the vision that the DVD by mail service it was providing was soon to fade away and be replaced by video streaming; the next disruptive innovation in video rentals (Aksuyek, Hacklin and Sidhu, 2013). The VOD streaming service provided by Netflix was a novel and innovative business model that disrupted its previous target market, that is, the DVD rental market. The company undertook a smart step based on forecasted consumer demand changes as a result of expanded bandwidth and higher network transmission speed (Choy and Park, 2016). When Netflix introduced the video streaming option, it also included the same membership fee it charged for its DVD by mail service for its members. As such, consumers were able to rent movies or instantly watch them on their personal computers if the movie they desired was available to stream (Aksuyek, Hacklin and Sidhu, 2013). Netflix also made it possible for viewers to recommend movies available in the inventory based on the Netflix ratings. This provided Netflix with the control it sought to influence the demand for blockbuster movies while fostering customer value.Essay on Netflix: The Disruptive Innovator

In 2012, Netflix accounted for approximately thirty-three percent of North America’s Internet traffic and named the leading over-the-top (OTT) company in the region (Choy and Park, 2016). Having received such international recognition, Netflix sought to make it services more innovative by creating and producing its own content through the online platform. The product of this innovative process was the television show “House of Cards” (Choy and Park, 2016). This self-produced content was a drastic innovation that altered the system of the VOD streaming market whereby the content producers and distributors were previously distinguished or limited to Hollywood. Moreover, the move was risky since Netflix could have damaged its relationship with content producers. Notwithstanding, the outcome was successful so much so that after the release of “House of Cards,” three million new online users joined the platform which resulted in Netflix recording its highest sales of $3.75 billion (Choy and Park, 2016). Basically, on top of Netflix changing viewership of movies and TV shows from renting DVDs to streaming them online, the company also broke the existing norm whereby movies and TV shows were only produced and distributed by selected personnel and channels and made it possible for online networks to produce their own content. Nonetheless, why did Netflix take such a risk by making another radical and innovative transformation even though it was already at the top of the industry?

Netflix forecasted that consumer demand would continue to change. By introducing video streaming in 2007, Netflix instigated a service and phenomenon that would later change the preferences of customers towards content consumption. This is based on the fact that streaming changed the content consumption habits or demeanors of customers from merely watching TV in their homes to watching contents in different places, discordant times and on various devices such as PCs, smartphones and tablets. Consumer behavior or patterns also changed from content consumption that involves watching specific scenes or episodes of a television show to content consumption that entails watching an entire series all at once. Netflix was able to take this change in consumer demand into contemplation and decided that producing content that optimizes the streaming service was necessary (Choy and Park, 2016). As a result, Netflix invested more than $100 million in the production of “House of Cards” in its new innovative transformation in 2011. The outcome of this innovation was evident in the increase in the percentage of North American consumers watching movies and TV shows online to the point where it exceeded the percentage of customers renting movies by Blu-ray or DVD (Choy and Park, 2016). In this regard, Netflix was once again one step ahead in forecasting consumer demand change and facilitating radical innovation aimed at meeting these consumer demands. Currently, people can watch, pause and re-watch movies and complete seasons of TV shows on the Netflix online platform without commercials or interruptions. However, in order to keep this innovative transformation in operation for the long-run, Netflix had to employ an open innovation strategy.Essay on Netflix: The Disruptive Innovator

As Choy and Park (2016) state, in the process of altering its business structure to meet the consumer demand, Netflix filled the gaps and missing links in its new innovative transformation through open innovation. In comparison to Blockbuster, Netflix was a small-sized business enterprise venturing into the online rental business. This means that it was not considered to pose any significant threat to Blockbuster on its own. Netflix needed comprehensive and strategic partnerships and investment in order to become a disruptive innovator. Based on this understanding, Netflix established strategic alliances or partnerships with Toshiba in order to surmount its lacks of brand power and management resources. As such, customers who purchased a Toshiba DVD player were awarded a free voucher of Netflix (Choy and Park, 2016). The outcome of this promotion was the increased consumption of DVD contents, that is, movies and television shows and Netflix successfully securing a customer base.

Based on the success of Netflix’s partnership with Toshiba, it sought other strategic alliances with hardware manufacturers and film companies in order to enhance its customer base and transform the industry through its innovations. Some of the filming and manufacturing companies that partnered with Netflix include MGM and Paramount to produce streaming contents and LG Electronics and Samsung Electronics to produce HD televisions suitable for the consumption of online streaming contents by consumers. These types of televisions are often referred to as Smart TVs. It is through such open innovation that Netflix was able to procure the required resources and facilitate its disruptive and radical innovation.

Factors Driving Netflix’s Disruptive Innovation Essay on Netflix: The Disruptive Innovator

Consumer Behavior Observations and Big Data Analyses

Accurate identification and satisfaction of the prospective needs and wants of customers who double as innovation users are critical to sustaining success. It is not just enough to come up with innovative concepts. These concepts must satisfy consumer needs and wants. Nonetheless, in most situations the customers do not vividly recognize what they want, are reluctant to express their opinions or reply to questions regarding consumer preference from their memory which could be biased. Zaltman (2008) asserts that ninety-five percent of people occur in the subconscious mind and of these thoughts only five percent is conveyed through language. While consumer needs and wants are important, they are only a portion of process it takes to make consumers utilize a particular innovation. This is why a big company such as Netflix relies on big data analysis and extensive consumer behavior observation to identify and satisfy the hidden needs of customers.

Before Netflix embarked on its disruptive innovation in the form of self-produced content which was poised to not only change the industry but also determine the direction of the company in terms of meeting its consumers’ needs and wants, it employed data analysis. This occurred at the planning stage of the successful self-produced TV show “House of Cards” as Choy and Park (2016) report. The company invested immense effort towards identifying the watching patterns and preferred contents of their target market, that is, the VOD streaming users. The Big Data analysis revealed that there were three million daily search results, thirty million movies watched daily and four million user sentiments. With this information in mind, Netflix further evaluated the watching patterns of VOD streaming users by location and analyzed their content preferences and the devices they used to stream movies and TV shows through Netflix. Based on its big data analysis, Netflix found out various determinants of the prospective demand of VOD streaming users. For instance, the company found out that the users preferred intense and familiar stories. Moreover, at that time the VOD streaming users had immense interest in works directed by David Fincher and starring Kevin Spacey, as well as, preferred watching the entire TV show or series all at once (Choy and Park, 2016).

Based on these findings, Netflix decided to recruit the cast and the director preferred by users to produce “House of Cards.” The outcome of this disruptive innovation in online television streaming was a huge success with Netflix surpassing Time Warner in terms of members in 2014 (Choy and Park, 2016). In as much as this innovative transformation was successful and brought a whole new meaning to ‘binge watching,’ it depended on careful and extensive analysis of consumer needs, wants and preferences through big data. Netflix did not just assume that its innovation would be disruptive due to its already established brand name. It conducted a consumer demand and preference analysis that ensured that the innovation would be one that met consumer needs and wants. Notwithstanding, in as much as Netflix and other firms use big data analysis and consumer behavior observation to identify hidden consumer demands, without proper direction the data would be inconsequential.

Waste, Anxiety and Inconvenience-essay on Netflix: The Disruptive Innovator

When it comes to disruptive innovation, a company must vividly discern what it wants to detect or find through the analyses and observations so as to determine the implications for the innovation. Customers engage in content consumption for a particular reason and in this process, they face different difficulties. Slywotzky and Weber (2012) are of the opinion that a company sets its objectives according to the difficulties experienced by customers can formulate novel products or services. This is because it is all about finding a way of eliminating or decreasing the difficulties faced by consumers and making it easier for them to utilize certain products and services. Research evinces that in discordant areas of the Information Communication and Technology industry, for instance, mobile payment, customers normally expect and experience difficulties or obstacles such as anxiety, financial loss, wasting time, risk, violation of privacy and inconvenience while utilizing products. Solving these difficulties or obstacles usually requires the creation of new and innovative products that eliminates the difficulties previously experienced by consumers and the products easily usable. Among the many difficulties experienced by consumers on a daily basis, waste, anxiety and inconvenience are the most frequent in the Information Communication and Technology industry and are contemplated as critical to the sustainability of any innovation. It is such difficulties that Netflix eliminates through its disruptive innovations.

For instance, before Netflix was founded, Blockbuster offline stores and some vendors were the only avenues where people could rent movies. However, people soon became frustrated by the accumulation of late fees charged by the company when the customers returned the rented movies late. Moreover, people were not allowed to rent unlimited DVDs at a specified price. When Netflix came into the DVD renting market, it became the first company to permit unlimited DVD rental by customers for a flat rate. This innovative strategy by Netflix solved the difficulty or problem of waste of money that consumers experienced in many occasions for late charges on the rented DVDs. When it comes to inconvenience, consumers experience inconvenience when the procedure of purchasing or renting a product is complicated and there is immense difficulty and inefficiency in using the products. Instead of having to walk to a nearby Blockbuster store to rent a DVD, Netflix brought about delivery services for rented DVDs through mail. This meant that people no longer needed to visit Blockbuster stores to rent DVDs and instead got them at home. Currently, Netflix users can stream movies and TV shows in the comfort of their homes or at any location, at any time and on any various devices whose screens support the Internet. These attributes eliminate the convenience obstacle or difficulty. Moreover, these features prevent Netflix users from experiencing anxiety when using the company’s products and services since they do not have to worry about extra charges and can enjoy streaming movies and television shows in the comfort of their homes.

Netflix’s Business Model Essay on Netflix: The Disruptive Innovator

A business model can be referred to as concept that is utilized to describe discordant issues, for instance, in the 70s, business models were used to describe knowledge management and business processes unique to a certain company for the purpose of creating Information and Communication Technology systems to support and foster the company’s workflow. However, in recent times, with the evolution of the World Wide Web as a key aspect of information and communication technology, business model concept is normally utilized to describe market structure and how companies will put themselves and operate in different cultures.

In the case of Netflix, its business model can be defined as the architecture of its services, products and information flow which entail a description of the various innovative processes and individuals, as well as, their roles and prospective benefits for the company in terms of revenue and the industry in terms of determining and spearheading its innovation strategies. Pereira (2015) describes Netflix’s business model as the “long-tail” business model approach. This business model approach entails having a vast array of movies, television shows and other videos whereby the majority of these contents is slightly popular, but can still make a lot of money in terms of revenue by targeting a broad range of customers (Pereira, 2015).

Comparison with other companies

Few conventional media companies focused on developing video streaming in 2007 when Netflix commenced its experimentation with this technology. Albeit Netflix demonstrated its VOD streaming service in 2007, the company rolled out the service slowly over the years until 2011 when it made its core strategy to grow its streaming subscription business domestically and internationally. Since 2011, Netflix has continued to expand its streaming content, extend its streaming service to even more Internet-connected devices, improves its customer experience and enhance its user interface to become the leading Internet television streaming service in the world (Venkatraman, 2017).

Netflix also formed strategic partnerships or alliances with companies in order to make its innovations successful. For instance, Netflix chose to partner with Amazon to host its computing platform. This is based on the Netflix’s forecast of Amazon as a potential competitor and as such, chose to partner with it instead of becoming competitors in the future. Cloud computing is the future and given that Netflix’s cloud competencies are limited to experimentation and research and ready for full scale global deployment, its partnership with Amazon is critical to maintaining its market share in a platform that is poised to control future information and video storage and relay.

The main discordancy between conventional media company and Netflix is that the latter places data and algorithms at the center of its engine. This is evident in the company’s decision to go ahead with the self-production of “House of Cards.” While television networks traditionally order a television show based on whether they like the pilot, Netflix ordered two full seasons of the TV show “House of Cards” based on the company’s big data analyses and consumer behavior observations without even seeing a single scene (Venkatraman, 2017). The big data analyses and consumer behavior observations utterly convinced Netflix that the television show would be successful and as a result bid more than $100 million to secure the rights to the show and in the process outbidding AMC and HBO (Venkatraman, 2017). Big data analyses and consumer behavior observations are crucial to the success of Netflix’s disruptive innovations, but human resource is also core to the company’s operations.Essay on Netflix: The Disruptive Innovator

Given the limitations of algorithms, humans play prominent complimentary roles in the company. Some of the innovative initiatives undertaken by individuals working with powerful algorithms and detailed data include service enhancements, major strategic decisions, product development and betting on original television shows and movies. The innovative culture that Netflix has created has made it possible for the company to attract and retain the top tech talent that would otherwise be lured by other giant digital companies such as Apple, Google or Facebook or other start-up tech companies. Given that its consumers are already enjoying the company’s products and services, Netflix has also made it its initiative to create a culture and working environment that is conducive and suitable for fostering innovation.

The tremendous success of Netflix has not remained unseen or been shunned (Pereira, 2015). Most of the giant players in the entertainment industry such as BBC and HBO have begun following in the footsteps of Netflix by developing their own OTT networks for their own content distribution. However, even though more and more companies are switching from traditional viewership to online viewership by having their own OTT television services, Netflix is still in a good position to utilize its market maturity and foster its content development while its rivals are focused on refining their platforms and improving their market shares.

Future Innovative Trends Essay on Netflix: The Disruptive Innovator

Netflix has already proven to be a master at capitalizing on technology developments and leveraging its information driven advantage to refine its business model incessantly. Internet TV is slowly but surely supplanting linear television. This means that computer and mobile applications are replacing television channels and Netflix is a leading application on that front. In addition, television is no longer the only screen where people can access and watch movies and TV shows. With smart televisions on the rise and gadgets that can convert digital or analog TVs to smart TVs that can support the Internet, Netflix will be on every screen, as well as, optimized for any size (Venkatraman, 2017).

Consumers desire a change from the standard television guides to networks that have personalized recommendations. People do not just want to peruse through television channels looking for televisions shows or movies that they can watch. Instead, people need personalized recommendations of movies and television shows to watch that can save the time they would have spent going from one channel to another looking intriguing movies and TV shows. Netflix is poised to provide unique suggestions that present suggestions to the users based on ratings and the consumer behavior. These recommendations will emanate from the data that suggests or indicates that there is distinct viewing demeanor which is contingent on the day of the week, the device the customer is using, the location of the viewer and the time of the day (Venkatraman, 2017). In as much as contextual recommendations have not been implemented by the company, Netflix will implement in the future in a move to reinforce its disruptive innovations.

Conclusion-essay on Netflix: The Disruptive Innovator

The speed of innovation is at its fastest now. Giant companies that had large market shares a few years ago are struggling to sustain their success amid rapid advancement in technology and increased competition from innovative companies. Disruptive innovation is going to continue to take place in every industry. Thus, it is critical that companies such as Netflix evaluate emerging tactics that employ processes and attracts individuals and other companies that are open to change and are willing to challenge the status quo with the objective of producing and offering more innovative products and services. The precept of disruptive innovation has enabled Netflix to analyze current products and services, as well as, consumers over the years and taken advantage of opportunities whereby consumer needs can benefit from an innovative solution. By adopting this precept, Netflix has been able to become the world’s leading internet television network by implementing innovative strategies that have disrupted other companies and products. For instance, Netflix dented DVD rental stores and introduced video streaming for movies, television shows, as well as, other videos that have made it possible for consumers to access and watch numerous movies and complete seasons of television shows anywhere, any time and using various devices. These services and products have met consumer needs and wants and provided solutions to problems experienced by consumers, particularly in situations whereby they experienced difficulties and frustrations in the form of anxiety, inconvenience and waste.

 

 

 

 

Works Cited

Aksuyek, E., Hacklin, F., & Sidhu, I. (2013). Cost of sustaining a disruptive service: evidence from the Netflix’s business model innovation. Retrieved from https://ikhlaqsidhu.files.wordpress.com/2010/03/aksuyek-hacklin-sidhu-2013-egos.pdf

Choy, M., & Park, G. (2016). Sustaining Innovative Success: A Case Study on Consumer-Centric Innovation in the ICT Industry. Sustainability, 8(10), 986. http://dx.doi.org/10.3390/su8100986

Manning, R. (2012). Case Study: NetFlix. Retrieved from http://www.jackmwilson.net/Entrepreneurship/Cases/Case-NetFlix.pdf

Pereira, M. (2015). Netflix – the new face of the TV industry. http://dx.doi.org/10.13140/RG.2.1.3867.4081

Slywotzky, A., & Weber, K. (2012). Demand: Creating What People Love before They Know They Want It. New York: Business Plus.

Venkatraman, N. (2017). Netflix: A Case of Transformation for the Digital Future. Medium. Retrieved 12 April 2018, from https://medium.com/@nvenkatraman/netflix-a-case-of-transformation-for-the-digital-future-4ef612c8d8b

Zaltman, G. (2008). How customers think. Boston, Mass.: Harvard Business School Press.