With the right business model, a single-minded focus, and an understanding of customer needs, sometimes David can slay Goliath.
Like many dot.com businesses, Netflix saw inefficiencies in the brick & mortar approach of traditional business. Unlike many of their counterparts, Netflix focused its efforts on a specific, yet widespread area of customer dissatisfaction, late fees on video rentals. The team at Netflix saw that the traditional “Blockbuster” approach to video rental was not customer friendly. Driving to the local outlet only to find the video you wanted was out, plus paying large penalties if you didn’t return that video on time, led many customers to think of video rental as a necessary evil. These late fees were significant. Recent estimates for Blockbuster showed roughly $250M of their revenue coming from late fees.
Based upon this, Netflix saw an opportunity to provide a more convenient service, eliminating visits to the store as well as the concept of late fees.
Early on, Netflix focused its efforts on building the logistics infrastructure to scale its business. Its systems for managing, processing, delivering and receiving DVDs have driven costs down to where it’s nearly impossible for others to compete. After a few years of ostrich-based management, Blockbuster responded to the Netflix threat by launching their own subscription-based plans combined with grace periods to eliminate late fees. But, by waiting until 2005 to do so, they had given Netflix the opportunity to establish itself in the market with enthusiastic viral marketing.
Meanwhile, barely two years after WalMart entered the video rental market, in May, 2005, they and Netflix announced a partnership by which WalMart exited that market, making Netflix its exclusive partner. Through the partnership, Netflix agreed to direct customers seeking DVD purchases to WalMart.
In 2005, more than 6 million subscribers rented DVD’s over the Internet. According to market research firm Screen Digest, the online rental/post-office delivery model will grow to 25% of the US market and a third of the European market by 2009. There will continue to be new competitors – including on-demand cable and web-based video services. In anticipation of such, Netflix inked a deal with Tivo, to enable online ordering and Tivo-delivery of video on demand. While this partnership seems to have run into some roadblocks, as video on-demand becomes more significant, I expect Netflix to position itself to be a major player in that market as well. In the near-term, though, it seems that the movie studios will push DVD over video on-demand, as the margins are much more attractive.
The keys for Netflix have been its patented video rental system and its cost-saving infrastructure. But more than anything, their success is due to their complete focus on delivering a better video rental solution to their customers. And for that, Netflix is certainly one of the 50 content companies that matter.
