Changing With the Market: Netflix

I read this headline from CBS (“Netflix Socks Subscribers With 59% Price Hike“) and I thought it was good inspiration to think about adopting to a changing market.

Netflix is a fascinating success story; a company that continues to defy the laws of business physics, or at least manages to bend them in their favor. Starting in 1998, Netflix built an online ordering platform and got so good at turning a disc around in the mail that it essentially wiped out Blockbuster; a very large and formidable competitor. Timing the company’s inception with flooring prices of DVD players, Netflix was able to flip the traditional rental model on its head by offering a no-late-fee, subscription-based service, growing to over 9 million subscribers between 1999 and 2008 and exploding to 23 million subscribers today.

But times change.

The DVD rental model was a transition business, and the DVD rental business is dying. Netflix’s long-term play has always been streaming content. It used its powerful customer base and its online DVD selection platform to draw users into their streaming service (a competitive advantage that was brilliantly leveraged). After years of this practice, the company has now effectively established a two-segment market: subscribers who order DVDs and subscribers who consume online content. It’s probably true that many of us get both services right now, but I think that this pricing segmentation will put most of us on one side or the other.

Aside from the fact that the economics of these two businesses (rentals by mail and online streaming) are different, the customers are now different. Netflix is formally recognizing this and is in the process of killing it’s legacy business and doubling-down on the future. Under the new system, most of the current DVD-only subscribers will move to the online service or go to Redbox. Either way, Netflix is building on the future and moving itself away from being a DVD company. There isn’t a sustainable future in renting DVDs.

I’m not entirely certain that this strategy will work for them in the long-term (sitting between the cable operators and the studios makes them a middle man), but I applaud the company’s willingness to commit to the change and adapt to the new marketplace. I discussed this in an earlier post about creative destruction, but I think it takes real leadership on the part of Reed Hastings for a company avoid killing the new business in an effort to save the legacy cash flow business.

Besides, if the whole segmenting thing doesn’t work out, they’ll still have tech writer, musician and Netflix aficionado Kyle Monson, who probably speaks for a lot of Netflix’s current customer base:

The ever-brilliant Kyle Monson
The ever-brilliant Kyle Monson on Twitter

That’s some serious brand loyalty.

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