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Netflix's subversive innovation

Netflix: A Perfect Case of Subversive Innovation

In its short history of 20 years, Netflix has left many classic cases for the business community-founded in 1997:

For example, how did Netflix, a weak player in the early days, start its business, survive in the cracks, and defeat bestv, the industry overlord? Later, I encountered changes in the wind direction of the whole industry, how it subverted itself to complete the transformation, how the content industry it represented changed, and so on.

Let's take a look at Netflix, a company that was on the verge of bankruptcy and was worth $300 million when it went public. Now its market value has exceeded $66 billion.

We mentioned the book The Innovator's Dilemma several times before. This book is a classic business work by clayton christensen, a professor at Harvard Business School. One of the most important content is to explain such a question:

How does subversive innovation happen? How can innovative small enterprises beat big companies?

The occurrence of subversive innovation, the core of the three steps are:

First, use subversive new technologies;

Second, provide differentiated product experience;

Third, find your niche market and sell your products to them.

The origin of Netflix

Let's talk about Netflix's use of disruptive new technologies.

Netflix was founded by Wilmot Reed Hastings Jr. and Mark Randolph at 1997.

1997, two new technologies are about to change the world. One is the familiar Internet, and the other is that DVD has finally entered the civilian market.

In February of that year, several major film companies, including Columbi, MGM, Warner Bros. and Polaroid, announced their support for the DVD format standard. In March, DVD players began to be officially sold in the American market. Hastings and his team thought this should be an opportunity, so they set up a company to rent DVDs online, which is Netflix.

So, how can Netflix use these new technologies to provide differentiated product experiences?

At that time, the leading company that dominated the home entertainment market was bestv, and its model was home video rental.

As a user, you can drive to the bestv store next to your home at any time, choose your favorite movies and TV videos, and rent some CDs to go home.

How much has bestv achieved in this business? At that time, there were 50 million subscribers, and there were 8,000 physical stores at the peak. It has many innovations.

For example, in the pre-Internet era, it began to use data to analyze the demographic characteristics of the people living around it, and then decided the types of movies and TV dramas collected by nearby video stores according to the data for everyone to rent.

However, when subversive new technologies appeared, Netflix launched a "dimensionality reduction attack" on bestv, in the words popular in today's business circles.

Netflix has made three changes in the whole product process and user experience:

First, don't open a physical store, just do online business.

This saves the cost of store rent, service staff salary and so on. , greatly reducing the operating costs of Netflix. (Marginal cost is zero)

In addition, even if bestv's customer analysis is done well, it can't be as comprehensive and easy to use as the user data collected directly by Netflix online. Where the traffic goes, we go, which means there is a lot of data.

Second, mail D VD directly to customers. (logistics)

Because DVD is much smaller than video tape, it is very convenient to mail, and it is easy for customers to mail it back after watching it. This will not only save trouble, but also have more choices-after all, no matter how many videos there are in the store, it is impossible to have a comprehensive choice online.

The changes made by Hastings' team in the real user experience.

That is: Netflix has launched a "three noes" membership system with no expiration date, no late fees and no postage. (First-class rocket: free service-second-class rocket: membership system)

At that time, their practice was that anyone who paid $65,438+$09.95 per month could rent up to four discs at a time and watch them as long as they wanted. As long as you return it after watching it, Netflix will select four movies from the list of "movies you want to watch" collected in your online account and send them to your home. The whole process is very automatic and simple. (process recording system automation)

In contrast, if you are a user in bestv, you not only have to go to the store to select films in person, but also have a deadline to return them. Once you forget to return it, you have to pay a very expensive late fee. (User cost)

In addition, Netflix also has a killer service, which is overnight delivery. (Logistics-Faster Arrival)

Netflix finds that people are usually impatient. Once you can promise to place an order today and the rented DVD will arrive tomorrow, both the registration rate of new users and the repeat order rate of old users will be greatly improved. Therefore, Netflix also promoted overnight delivery service.

Difficulties-problems faced by the situation at that time.

However, if the analysis ends here, we will make the mistake of "simple attribution" and not look at business from a historical perspective.

Netflix did do a lot of right things, but these are more of our summaries afterwards.

At that time, it actually faced many specific difficulties, even on the verge of bankruptcy. Later, it came to this day with its own efforts and a lot of luck. So what happened then?

First of all, disruptive new technologies are certainly good. But the problem is also very simple. When DVD technology first came out, too few people used it. (niche market)-The market is not big enough.

Families who want to buy DVD players think there are too few DVDs to play, and big entertainment companies want to make DVD content, but they think there are too few users with players to do it.

Say a number and you will have an intuitive feeling: by the end of 1997, there were only 500 movies in DVD format on the market, and most of them were old movies. This is about one thousandth of what bestv can offer.

Therefore, Netflix has been waiting for the outbreak of DVD for a long time-of course, now we know that it has finally waited for this wave, but at that time, there were many new formats to provide movies and TV content, and no one knew whether the DVD format could break through. Wait a minute-step on the right point of the trend, or you will be dead before the trend really comes.

However, Netflix has also made some very clever marketing moves. For example, it teamed up with some DVD manufacturers to put free experience coupons for Netflix in the box of DVD players, so that everyone can experience DVD rental service for free after buying the player and going home, which greatly improved its promotion speed. (promoting hardware facilities)

Netflix's very good user experience also has very specific difficulties.

For example, Netflix has been studying for several months, just to design envelopes for mailing DVDs and to study how to package DVD discs so that the sorting machine in the post office system will not be damaged.

In addition, in order to ensure the timeliness of express delivery, how to choose the geographical location of your own inventory center and let the center best cover the surrounding users is also a great knowledge. Netflix spent unimaginable efforts on these problems and finally solved them better. (accumulation of specific problems)

Market acceptance of new technologies is always gradual.

It is very important to find your earliest loyal users. (Find the first sheep and treat it well, from 0 to 1)

In the early days, Netflix found that many of its users were Indian students and skilled immigrants, because it was difficult for them to find movies from their hometown in traditional video stores. However, Netflix included many ethnic minority and foreign movies, and even secretly said that there were many soft pornographic movies. (Meet the specific needs of market segments)

A large part of the reason is that these movies are not popular, so the cost of Netflix is very low. The unpopular content also brought the first batch of loyal customers, which should be another excellent case of turning disadvantages into advantages.

In the end, the superposition of all these factors made Netflix survive in the early days and really began to occupy a place in the market.

Just like the subversive innovation theory in The Innovator's Dilemma, small enterprises should:

1. Be good at using subversive new technologies.

2. Provide differentiated product experience

3. Find your own market segment.

Netflix | The fatal mistake of giant bestv

How can innovative small companies beat big companies?

Three links are very important: (1) using subversive new technologies; (2) Provide differentiated product experience; (3) Find your niche market and sell your products to them.

Of course, we also said that these principles are simple to sum up, but we will encounter many specific problems when we really do it.

Any small business can be said to be very dangerous at first.

In any such situation, whether in business, sports or war, the weak side has to do many things right and the other side has to make many mistakes. It's not how many things you do, but how many things you do right and how many mistakes you make less.

As the overlord of an industry, what mistakes did bestv make and what restrictions did he receive, so that he was defeated by a small company and eventually went bankrupt?

The internal cause of the giant's subversion-that is, its own mistakes-can be divided into two categories:

First, its own accumulated resources have become the limitation of its transformation; (Relocate and change the cooperative network of cost and benefit relationship at your own expense)

Second, it must have made an arrogant mistake.

Advantages are also disadvantages.

Let me talk about how bestv's own situation has limited its transformation.

Let's take a look at the scale comparison between the two companies to establish a more intuitive understanding: before and after the listing of Netflix in 2002, its users were about 700,000-800,000, while the active users in bestv were close to 20 million, with a total of 50 million users.

But bestv's huge size has also brought many restrictions to himself, three of which are very deadly:

1. For a long time, bestv has been proud of its thousands of offline stores.

According to media statistics at that time, 70% of Americans can find offline chain stores within 0/0 minutes' drive from bestv/Kloc. This is the ultimate in the United States, a country where many places are sparsely populated and rely heavily on driving.

But when Netflix, a light asset and online operation mode, appeared, it became a disadvantage for bestv.

Because if it once does similar services, offline franchisees will have great opinions, because users may not go to their stores.

Moreover, this may directly lead to the decline of bestv's profit and share price. As a large listed company, it is difficult to explain to shareholders. (Interest relationship and interest chain are damaged)

Second, Netflix's cancellation of late fees for renting houses has a great impact on bestv. (How the Internet Against Traditional Industries-Free Service)

When Netflix officially launched 1999 with zero late payment fee, that is, users can keep the movies they want indefinitely without worrying about when to return them, when did bestv follow up this very popular zero late payment fee service? In 2005. The slow response can be seen.

Why is this happening? If we look at bestv's financial report in that year, we can know that the late payment fee actually accounts for 10%- 15% of bestv's annual income, which is quite a small source of income.

Therefore, if the late payment fee is not cancelled, more customers in bestv will be lost to Netflix; ; Once cancelled, not only the company's profits will be affected, but its offline franchisees may also rebel.

Bestv's business model, that is, renting movies, TV series and games offline, has a very high fixed cost. The so-called fixed cost refers to the cost that needs to be paid regardless of the company's operating conditions, such as store rent, employee salaries, and the cost of purchasing content, that is, videos, DVDs, and game discs.

These are fixed costs and will not change much with the company's business. Therefore, in order to make a profit, their rental volume must go up, otherwise it is difficult to share these costs.

If we look at the financial statements of bestv in 2003, the revenue in that year was close to 6 billion US dollars, and the gross profit exceeded 50%, reaching 3.5 billion US dollars-but once all kinds of fixed expenses and financial expenses were deducted from the gross profit, the net profit of bestv in that year was actually negative 65.438 billion US dollars, and the loss was terrible.

On the other hand, Netflix can take advantage of its light assets to fight a very flexible battle.

In 2003, although their income was less than bestv's 1/20, they began to break even. Netflix has also done a lot of operational optimization. For example, Netflix engineers have made a recommendation system long ago, which can guide customers to avoid the hottest movies and rent old movies that they may like but are not so famous.

This improves the rental rate and turnover rate of DVD, and is also of great help to the retention of customers.

Netflix's research on user behavior began very early in its business, so this gene also made them the best company in the so-called entertainment industry to apply "big data" and made such a successful work as House of Cards.

The last bestv's self-restriction can also be seen from the above two points, and their decision-making is really too slow.

When they really started to pay attention to the DVD rental business in 2003, they were six years later than Netflix, which was founded in 1997. At this time, it is even harder to catch up.

The physical store in bestv seems to have a huge customer base of 20 million, but due to the outdated information management system and low efficiency, there is not much data mining and analysis on users' buying and renting habits. (Not enough new technology support)

The price of arrogance

A common mistake made by giant companies: arrogance. There are two small things about bestv's arrogance.

The first thing is that when Netflix went public, the media interviewed the CEO of bestv.

Therefore, he said, bestv does not consider Netflix a threat. Because first of all, they think that the new format of DVD may not have a great future, and video will dominate for a long time;

In addition, he also said: Most customers made the decision to rent movies half an hour before entering the store, so thousands of chain stores all over bestv will have irreplaceable value.

When the CEO of bestv put forward such a viewpoint, his starting point was definitely a reflection on the classic sentence "ass decides head".

It is precisely because bestv's main product is video tape and has its own chain stores that they are proud of, that they will regard themselves as the general trend and core competitiveness of the industry, instead of thinking about the real general trend of the industry and the changes in user behavior. (User's behavior will change)

At that time, Netflix seemed to have a very advanced business model, but the biggest problem they faced was the lack of funds.

Because whether it is the subsidy of early free coupons, the lack of customer base, or the bursting of the 2000-200 1 Internet bubble, Netflix's life is very sad, and the capital chain almost broke several times.

So in 2000, when Netflix lost $57.4 million, in order to survive, Hastings had no choice but to seek cooperation with bestv.

Hastings's idea is that Netflix can focus on old movies and niche movies, and then leave 80% of the new movie business to bestv and become a branch of bestv. Later, he suggested selling Netflix directly to bestv for $50 million. When the small company first started, it didn't expect to grow to what it is now.

As a result, the CEO of bestv directly rejected the proposal. At that time, they felt that Internet companies were not profitable and their business models were unclear, so they were not interested in Netflix.

Of course, as you know now, Netflix has become an industry giant with a market value of more than 60 billion dollars after nearly 20 years' efforts, and bestv also filed for bankruptcy protection on 20 10. This is probably the price of arrogance.

An extension of subversive innovation theory

Regarding the theory of "subversive innovation" mentioned in The Innovator's Dilemma, Professor Christensen summed up several factors that large companies usually fail:

1. Destructive technologies are often simpler and cheaper, but their profits are also lower. Therefore, for large enterprises, low-profit businesses are often not done.

A good big enterprise will "listen to the opinions of consumers" and optimize its business according to the feedback.

But this way of thinking can only bring about gradual change, but not subversive innovation. Because mainstream users often don't pay attention to immature new technologies or products. (Users often don't know what they want)

3, in order to create profits, maintain the stock price, and even for the promotion and development of internal employees, large enterprises should also maintain their own growth rate.

Therefore, they tend to focus on a large enough market to maintain their own growth. However, disruptive technologies often target very small markets at first. (Look for opportunities from market segments, because the consideration of giants is often big and comprehensive)

Netflix | Subversive self-subversion

Netflix subverted itself from 2007 to 20 12.

In other words, Netflix not only subverted bestv, the former overlord at the beginning of its business, but also resolutely subverted itself when the wind direction of the industry changed. This is the glory of Netflix today.

Industry background

During the period of 2006-2007, the biggest change in the American Internet community was that the broadband penetration rate of American households more than doubled compared with previous years. At that time, the number of American families with broadband exceeded 1 100 million, especially American middle-class families with higher broadband coverage.

Another thing, in 2005, Youtube was born. It was incorporated in February 2005 and was acquired by Google in June 2006 for1165 million USD. It can be said that the maturity of technology, coupled with the rapid and great success of Youtube, makes people realize that the era of watching video content on the Internet has really arrived. This is what we later called the "streaming media" era.

At this time, Netflix, the leading company in the DVD rental industry, certainly feels the general trend that the industry is about to change. Netflix, a former subversive, of course knows that it is better to do it myself than to let others change my life.

Three-step self-revolution

The first step is to launch a new service: members can watch movies, TV series, etc. directly online on their computers without ordering DVDs.

What they started online were old movies and old TV programs with relatively low copyright prices, which were directly provided to members for free. (Preliminary try-quick iteration-determine whether this is a trend)

Therefore, Netflix allows users to enjoy the "DVD rental+streaming media" service at the price of $65,438+00 per month without increasing too much cost.

This strategy is moderate and will not affect the growth of DVD rental business, but also attract some customers interested in online video. In fact, from 2008 to 20 1 1 year, Netflix's DVD rental business still increased by 30%, but the growth rate was not slow at all.

Every once in a while, entrepreneurs should abstract their own affairs and business to a higher level.

what the hell are you doing？

Which human's most basic needs have been met?

What other solutions can you find to meet this demand? (Do it again with new techniques and methods)

(looking for the constant in change)

Just like "staying in a hotel" is not an essential need, but "having a place to live outside" is.

So a large hotel group that can't think like this can't make a company like Airbnb.

Founder Hastings' thinking is very clear. He knows that Netflix is doing a business-video content on demand, whether watching videos, DVDs or online videos. (essence)

The user's demand is to see all kinds of good video content, regardless of the specific carrier of the content. Therefore, Netflix dares to start its own life.

20 1 1 year, moderate Netflix took a radical second step-splitting personal services.

In July of that year, Netflix split the original DVD+ streaming media packaging service of $65,438+00 into $8 per service. At that time, many people didn't understand why they did this and thought it was a disguised price increase of 60%.

In fact, from the perspective of the whole market at that time, the packaging service fee of Netflix 16 was still cheaper than other video content providers, such as HBO or ESPN.

Moreover, the price increase of six yuan is actually not much, so I can't buy two cups of Starbucks coffee. This unilateral price increase is too simple and rude, and there is no communication and discussion with users in advance. Therefore, as soon as the new price policy was announced, it set off a great wave of opposition. By the end of September, the company had lost 800,000 users-and Netflix's growth momentum was 654.38 million+00,000 per quarter.

So in the eyes of Wall Street, Netflix suddenly changed from a fast-growing star enterprise to a company with sudden stagnation and great uncertainty. Results From July, when 20 1 1 announced the price increase, to the end of that year, in less than half a year, Netflix's stock dropped from nearly $300 to about $70, a drop of nearly 80%. Very scary.

Except the stock price plummeted. Netflix faces another challenge.

Switching from DVD rental business to online streaming media business seems to be just a change in content storage media, but actually surfing the Internet has stirred up other people's cakes.

Because, in the past, major film and television companies and content producers. They have an upstream and downstream relationship with Netflix. Netflix can help them sell DVDs and bring more sales. Of course, film and television companies are very welcome.

Once Netflix starts playing its own content, the sales of DVD and other services of these large film and television companies will be affected.

As a result, these content providers began to raise prices one after another, and greatly increased the licensing fees for Netflix. (homemade content)

For example, in 2008, Netflix reached an agreement with a pay TV company named Starz: Netflix paid a copyright fee of 30 million US dollars every year so that its users could watch a large number of movies made by Sony and Disney on Starz.

As a result, when the 20 1 1 agreement expired, Starz directly increased the license fee to $300 million.

The net flies away from the third step of its self-subversion-persistence (patience, living in the future, delaying satisfaction)

Fortunately, Netflix, a reform warrior with a broken wrist, ushered in spring without waiting too long.

Although the company reached its lowest point on 20 1 1, its performance improved from the second half of 20 12. (the general trend is coming, and it is necessary to step on the spot accurately. )

By the fourth quarter of 20 12, the number of Netflix streaming media users increased by 2.05 million, while the number of users who canceled DVD rental business in a single quarter was 380,000. From 2007 to 20 12, the company's streaming media users finally reached 25 million, while DVD rental users were only about 8 million, which shows that the company's business transformation is successful.

At this time, Netflix's share price also began to take off. Because investors find that the biggest advantage of streaming media business is that the company doesn't need to give the content a physical carrier at all-in the previous DVD era, the cost of sending and manpower increased a lot with each additional customer;

But online video, watched by 6.5438 million people and 2 million people, has no obvious cost increase. Companies with marginal costs close to zero.

Summary points: