Question

What was Netflix's initial business model?

Did it work? How did it evolve?

Is this an example of emergent strategy?

Answer 1

The Netflix Initial Business 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.

Introducing a subscription fee to the video on demand service was certainly a risky move. Before Netflix, this practice was still unheard of. Today, inspired by the success of this company, many services are adopting this model. You can find everything from opera to BBC classic shows available online in exchange for a subscription fee. However, the VOD giant is still dominating the market, with more than 89% of total shows streamed online during the first quarter of 2013 coming from this service alone.

The DVD rental business is actually one of the least lucrative services which Netflix offers. Although DVD-mailing system was popular at first, with the development of modern technologies, and streaming services becoming more popular over the years, today this business segment of Netflix is actually in decline. On the other hand, the domestic streaming service and international streaming service are both rapidly growing.

How Netflix Initial Business model works

1. 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!

1. 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.

1. 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.

Example of emergent strategy

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.