Netflix: David Becomes Goliath

Netflix is considered a classic example of innovative strategic planning. From the outset, it was designed primarily as an internet-based company, unlike its principal rival, Blockbuster. The early history of Netflix is a study in looking forward to gaining and keeping a competitive advantage. Remember Porter's Competitive Forces Model as you read this chapter. The pressures of all five forces are present as Netflix tries successfully to enter and eventually command a competitive advantage in the rental film industry. As you read the case of Netflix, consider the following question: What are the long-term threats to Netflix? (Hint: Consider changes in technology and copyright/patent/media law). How would Netflix overcome or avoid those threats and continue to have a competitive advantage?


Learning Objectives

After studying this section you should be able to do the following:

  1. Understand the basics of the Netflix business model.
  2. Recognize the downside the firm may have experienced from an early IPO.
  3. Appreciate why other firms found Netflix's market attractive, and why many analysts incorrectly suspected Netflix was doomed.

Entrepreneurs are supposed to want to go public. When a firm sells stock for the first time, the company gains a ton of cash to fuel expansion and its founders get rich. Going public is the dream in the back of the mind of every tech entrepreneur. But in 2007, Netflix founder and CEO Reed Hastings told Fortune that if he could change one strategic decision, it would have been to delay the firm's initial public stock offering (IPO). The first time a firm sells stock to the public. "If we had stayed private for another two to four years, not as many people would have understood how big a business this could be". Once Netflix was a public company, financial disclosure rules forced the firm to reveal that it was on a money-minting growth tear. Once the secret was out, rivals showed up.

Hollywood's best couldn't have scripted a more menacing group of rivals for Hastings to face. First in line with its own DVD-by-mail offering was Blockbuster, a name synonymous with video rental. Some forty million U.S. families were already card-carrying Blockbuster customers, and the firm's efforts promised to link DVD-by-mail with the nation's largest network of video stores. Following close behind was Wal-Mart - not just a big Fortune 500 company but the largest firm in the United States ranked by sales. In Netflix, Hastings had built a great firm, but let's face it, his was a dot-com, an Internet pure play without a storefront and with an overall customer base that seemed microscopic compared to these behemoths.

Before all this, Netflix was feeling so confident that it had actually raised prices. Customers loved the service, the company was dominating its niche, and it seemed like the firm could take advantage of a modest price hike, pull in more revenue, and use this to improve and expand the business. But the firm was surprised by how quickly the newcomers mimicked Netflix with cheaper rival efforts. This new competition forced Netflix to cut prices even lower than where they had been before the price increase. To keep pace, Netflix also upped advertising at a time when online ad rates were increasing. Big competitors, a price war, spending on the rise - how could Netflix possibly withstand this onslaught? Some Wall Street analysts had even taken to referring to Netflix's survival prospects as "The Last Picture Show".

Fast forward a year later and Wal-Mart had cut and run, dumping their experiment in DVD-by-mail. Blockbuster had been mortally wounded, hemorrhaging billions of dollars in a string of quarterly losses. And Netflix? Not only had the firm held customers, it grew bigger, recording record profits. The dot-com did it. Hastings, a man who prior to Netflix had already built and sold one of the fifty largest public software firms in the United States, had clearly established himself as one of America's most capable and innovative technology leaders. In fact, at roughly the same time that Blockbuster CEO John Antioco resigned, Reed Hastings accepted an appointment to the Board of Directors of none other than the world's largest software firm, Microsoft. Like the final scene in so many movies where the hero's face is splashed across the news, Time named Hastings as one of the "100 most influential global citizens".

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