Perhaps this book will be the most read case study in business schools in the future. What is drawn here is the chronicle of Netflix, which is now in the corner of "FANG" along with Facebook, Amazon, and Google, from its founding in 1998 to 2011.
Formerly Netflix was a "postal DVD rental" startup that took orders online and mailed movie DVDs home, and had no remnants of today's content empire. Moreover, VHS tapes were still the mainstream for video rentals at that time, and the store-type rental giant "Blockbuster" had already reigned in the industry. Netflix was just a niche company, and as with startups, it was still in the red, but managed to "live" with investor money. However, despite various difficulties, Netflix continued to move forward slowly but steadily, and noticed that it was building a business model with extremely high barriers to entry.
Finance, Marketing, Logistics-This book describes every aspect of business strategy. How did the giant Blockbuster counter the "disruptive innovation" of Netflix with "ambidextrous management"? Despite the story of an era ago, a universal management drama that is not influenced by individual technology or media emerges. And finally, the reader is reminded that it is the person who says the thing.
The main points of this book
Netflix has constantly evolved its own algorithms to maximize long-term customer value in the video rental industry. At the same time as building a complex logistics system, we continued to search for ways to minimize costs, and built a business model with high barriers to entry.
Although blockbuster was split between store and online groups, it countered by spinning out the online group. He squeezed Netflix to the limit by competing in price and service, but lost momentum in the wake of the change of CEO.
Postal DVD rental
In April 1998, the Netflix website was launched. When you find a movie title on the site and place an order, a rental DVD will be sent to the user by mail. The price is the same as when renting at the store.
DVD recorders just appeared in March 1997, and video rental stores still had VHS specifications. There were about 500 DVD titles on the market at the time, and many were old movies. Warner was the only one who was working on making a new movie on DVD.
So the target was very limited. It's like having a DVD player and enjoying online shopping. Netflix has decided to reach out to influential influencers in the online community as a first step in marketing.
On the other hand, as marketing for the mass market, we also tried to partner with a DVD player maker. Specifically, I put a free coupon in the box of the DVD player. Consumers don't buy DVD players because they don't have the DVD movies to watch. Record stores don't put DVD movies because no one has a DVD player. Then, if you put a Netflix coupon in the box of the DVD player, the manufacturer should be able to appeal to consumers that "you can access the video library for free". But this free coupon is a double-edged sword, and Netflix will run into the red for a while.
No late fees
The early Netflix was characterized by the recommendation engine "Cinemacchi," which recommends movies to customers. The algorithm-powered AI (artificial intelligence) recommends movies to each customer. In addition, the interface of the website aimed at such an atmosphere that a clerk with a sense advises according to the taste of the movie of the customer.
Delivery was also gradually improved to a sophisticated one. For that reason, in areas where next-day delivery is possible, word of mouth called "Next-day delivery Netflix" has spread steadily. If it turns out that it will have a tremendous effect on acquiring new customers, it will focus on expanding the area for next-day delivery by establishing a distribution center that matches the delivery area of the post office.
In 2000, it introduced a "subscription plan" that allows you to rent up to four movies at a time for a fixed monthly fee, attracting many customers. Once returned, the next movie can be requested, but the customer can return it at any time. In other words, you don't have to pay late fees. "No late fees" was a major difference from store-based video rentals.[Must read point!] Battle with blockbuster
Netflix made an IPO (initial public offering) in 2002, and in March 2003, the number of subscribers exceeded 1 million. I got on the waves. The video rental industry giant "Blockbuster" was watching the situation with mixed feelings. Blockbuster's own consumer survey showed that interest in online DVD rentals remained low, and Wall Street's view was similar.
Initially, Blockbuster forgot to enter postal DVD rentals for fear of "cannibalization," which would erode the sales of physical stores. But that's not the only reason. In fact, Blockbuster jumped over the DVD and was looking beyond it. By building an optical fiber network, he was seriously considering the realization of video on demand (VOD), which distributes movies to ordinary American households.
However, due to unfortunate circumstances such as the energy giant "Enron", which had been affiliated with the construction of broadband, went bankrupt due to window dressing, the service could not be started. Therefore, I reluctantly disposed of the huge VHS inventory and proceeded to make it a DVD. This would incur significant costs.
In 2003, Blockbuster was divided into "stores" who said that strengthening the existing store network was the most important, and "online" who said that online services should be launched. Management eventually decided to spin out the online sect from headquarters.
And at the end of the year, site development began. However, it was separated from the actual store, and marketing that stands out from the store and appeals that mention customers' dissatisfaction with the store were also prohibited. And engineers quickly realized that Netflix was far ahead in terms of site sophistication and recommendation engine. We can resemble the surface, but we can't keep up with the time and budget we have.
Nevertheless, in August 2004, "Blockbuster Online" was launched. I arrived at a postal DVD rental that looked just like Netflix. The sale was a monthly fee that was $ 2 cheaper than Netflix.
Netflix was calm in response to these blockbuster movements. From our experience, we knew that building an entire system, including the backyard, would not be so easy.
From the table, Netflix is just a huge video rental store. This is because they only collect a fixed monthly fee from customers and rent out DVDs. However, when I look at the backyard, a completely different figure emerges.
We are constantly evolving our unique algorithms to maximize long-term customer value, building complex logistics systems, and at the same time continuing to explore ways to minimize costs. This hard-to-see part is the source of Netflix's competitiveness, which has created a high barrier to entry. One analyst described Netflix as "a think tank rather than a video rental store."
Another reason Netflix was calm was because he knew that Blockbuster was pretty vulnerable financially. I read that you can't keep spending money for a long time to maintain a cheap rental fee.
Subscription-based businesses are difficult to make a profit until their subscriber base is large enough to cover fixed costs. Generally, during the first nine months of a new contract, marketing to prevent churn will increase costs. On the other hand, if more than 9 months have passed, the cost increase will be stopped. Blockbuster wouldn't benefit from anything if it didn't put up with it for the first nine months and continue to invest-this was an internal Netflix analysis.
Besides, online services must be minimally marketed at all times. This is because a certain number of cancellations will always occur, and it will be necessary to make up for it with new contracts. This was also something I learned from experience.
In fact, in the summer of 2005, the growth of Blockbuster Online stopped due to the deterioration of the parent company's cash flow and the temporary suspension of marketing. The number of customers leveled off at 1 million. Netflix's prediction was right.
In November 2006, Blockbuster launched a new plan called "Total Access." This is a hybrid model that connects online and physical stores, and it was a service that could never be realized by Netflix, which does not have physical stores.
Actually, there was a concept of a hybrid model from the beginning, but it was difficult to take it due to consideration for the store. However, after trial and error, Blockbuster found a way to turn the network of more than 7,000 stores into a weapon of "Overthrow Netflix." Specifically, it provided online users with the advantage of being able to utilize blockbuster stores as well. Every time you go to the store to return it, you can rent a movie for free in the store with a bonus.
This response was great. In just two months, Blockbuster Online has gained nearly one million new subscribers and achieved its goal of two million members by the end of the year. A consumer survey also found that none of the benefits of being a Netflix member could match the hybrid service. In three months, 100% of new online rental subscribers would have flowed to Blockbuster Online. On the contrary, it was a momentum that could rob existing Netflix customers.
Store retrograde from online
After months without finding a countermeasure against blockbuster, investors began to move away from Netflix rapidly. If you continue the chicken race as it is, you will fall down together. The only way to prevent that is to buy and incorporate Blockbuster Online. But the proposal was rejected by Blockbuster. It's just a blockade in all directions.
However, the ending came without a hitch. Blockbuster's CEO has replaced him by pulling money online and increasing investment in physical stores. Blockbuster Online will have to raise prices and will stall by the end of 2007. Netflix has thus come back to life again.
In 2007, Netflix finally launched a streaming service for video distribution over the Internet. At first, the authority of the existing media such as cable TV and the industry such as movie production studios thought that these movements were only media for secondary use of their content and disregarded them. When Netflix actually delivered the old program, the viewers who saw it paid attention to the new program, and the audience rating also increased. That's why they generously provided content to Netflix. Netflix also said that it is just a complement to existing media and has a win-win relationship with existing media and industry.
However, if you buy content cheaply while the people around you are willing to accept it, you have built a content empire in just two years. Before I knew it, the number of subscribers had reached the level of the largest cable TV company. The existing media, which has been competing for customer viewing time, finally realizes that it has invited a "Trojan horse" called Netflix.
Recommendation of reading
This book also introduces the trends of Netflix since 2012 as a special contribution to the Japanese version. As you read on, you'll find that the company is a mass of "disruptive innovation" anyway. In addition, the detailed human depiction based on many years of coverage is also wonderful. Proper nouns in katakana will appear one after another, so it may be annoying at first, but I would like you to follow each character carefully. It should be fun to read like a series drama produced by Netflix.