The purpose of this course is to help individuals and organizations survive when confronted with disruptive technologies that threaten their current way of life. We will look at a general model of survival and use it to analyze companies and industries that have failed or are close to failing. Examples of companies that have not survived include Kodak, a firm over 100 years old, Blockbuster and Borders. It is likely that each of us has done business with all of these firms, and today Kodak and Blockbuster are in bankruptcy and Borders has been liquidated. Disruptions are impacting industries like education; Coursera and others offering these massive open online courses are a challenge for Universities. In addition to firms that have failed, we will look at some that have survived and are doing well. What are their strategies for survival? By highlighting the reasons for the decline of firms and industries, participants can begin to understand how to keep the same thing from happening to them. Through the study of successful organizations, we will try to tease out approaches to disruptions that actually work. Our ultimate objective is to develop a strategy for survival in a world confronting one disruptive technology after another.
3.2 Netflix
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From the course by University of Maryland, College Park
Surviving Disruptive Technologies (On Demand)
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From the lesson
2.1
A company that did not survive and its disruptor
Meet the Instructors
Hank C. LucasRobert H. Smith Professor of Information Systems
School of Business
In this video, we want to take a look at Netflix.
And remember, the Netflix motto is, Net flix.
It's not DVDs by mail. This is their headquarters, in
California, looking like it's right on the railroad tracks.
Short history, Reed Hastings is the man behind Netflix.
He started the company in 1997 with 3 friends, who were annoyed with the late
fees that they were charged for DVD rentals.
In 1998 they launched an online version of the video store.
Their first fee scheme was $4 a rental, $2 in postage and late fees.
Kind of ironic that they didn't like late fees very much that they included them in
their business model. As a result, they did not have a great
success. So, they chose a different model.
Being a little more flexible, and maybe some companies are, and they started a
flat rate subscription service. Unlimited rentals and no late fees and no
shipping charges. They actually worked with the post office
to develop the shipping envelope, to go through the postal machines, because they
depend on the post office to get the videos, the DVDs, to and from their
customers. They also made a deal, similar to what we
saw with Blockbuster, for studios for low upfront price, and then they give them a
part of the rental fee, so they can afford to have the copies in stock, the
DVDs in stock that people would want to rent.
By 2005 they were shipping a million DVDs a day.
By 2009, they had 100,000 DVD titles, 10 million subscribers.
2011, 23.6 million US subscribers, digital revenue of $1.5 billion.
So what's the technology behind all this? Well pretty elaborate automated
distribution centers. The DVD comes in and updates the database
and the system then indicates where it's to be mailed to the next viewer preparing
the envelope for it. And by 2007, an employee could process
over 1,000 DVDs an hour. You have to have fast turnaround for
movies for this model to work. we are subscribers to the DVD service,
and typically when we put a DVD in the mail, in the Washington DC area, it gets
to Netflix in a day, and the replacement comes back to us in another day.
You have to have fast turnaround for this to work.
There's also something called a recommender the, that they have labeled
the Cinematch algorithm, which has 315 million film ratings.
And what this system does is to take a look at the movies you've watched, and
then try to guess from that, movies that you would like.
So, similar to say, Amazon, which comes up and says, people who have bought this
book have also bought the following books, the Recommender engine will come
up and say, if you like this movie, here we'll pop up another six that are similar
to it that you might like. And we'll keep track of all of your movie
rentals and try to predict what you would like and, and show that to you, because
there are so many movies in our database. In 2007 they mailed their one billionth
DVD. They also began a video on demand via the
Internet, which is the direction which it would like to move.
Remember we said their motto is not DVDs by mail, it's Internet flicks, Internet
movies. Well they had a bit of a stumble.
In 2011 they decided to create a DVD rental subsidiary called Qwikster and to
separate DVDs and streaming with separate pres, subscription prices for each one.
Customers did not like this very much, and so Netflix canceled Qwikster.
So Qwikster had a very short lifespan. They lost 600,000 customers when they
made this split. So, with the payments separated so you
were paying separately for DVD and streaming, you had about a 60% increase
In your monthly cost. In the old model you paid a flat rate and
you had unlimited streaming and unlimited DVDs, one at a time.
Now you paid separately for each one. A number of us kept it because it wasn't
that large amount of money but you can see they lost subscribers.
people who were dissatisfied with this. We'll see how that changed in a little
bit. Well, there is competition.
Okay. Netflix is not alone, Amazon has its
Prime in which you pay a flat rate per year and you get two-day shipping on
everything. Okay, for free.
And in order to make Prime more attractive, Amazon keeps adding features
to it. So, Amazon Prime provides a number of
movies on demand for free that Amazon streams to you.
Now, a couple of interesting things about this, is what do you suppose the
technology is that Netflix uses? Netflix has to send movies to a large
number of set tops. There are different ways to do this.
There are Internet enabled TVs. We use something called a Roku box, which
sets on top of our TV set, and it has a wireless connection to our Internet line
coming in, our wireless internet line from Verizon.
Where does this movie actually come from? Well it actually streams from Amazon
Cloud services. So Amazon is competing with Netflix, and
is also providing the hardware and software infrastructure that allows
Netflix to distribute its movies. Why would Netflix do this as opposed to
building its own? Well think about it, Amazon has a huge
infrastructure, and that infrastructure can expand as Netflix needs it, and yet
Netflix only has to pay for the amount of the processing power that it is using at
any given time. So it's a great opportunity for Netflix
to work on its business model and to leave the intricacies of the technology
infrastructure to Amazon which has a great deal of experience in providing
those kinds of services. There are also many other video sites
like Hulu which is owned by the studios. There is Red Box which you may have seen
in the United States. It's a kind of vending machine that has a
couple of hundred movies. And they're located in shopping malls, in
grocery stores, drug stores. you can, reserve a, a movie at a
particular kiosk and go pick it up and then return it to that kiosk.
The studios are having a problem here. They don't want to lose control of their
revenue stream. And yet there are all of these
alternatives out there. And people who were trying to get their
rights to their products. And distribute them to other people.
The content providers are also raising their prices.
Netflix ended up dropping Starz, that's Starz, a content provider.
when they wanted a huge increase in the licensing fees for the content.
But Netflix keeps going. It's expanded its streaming
internationally, Canada, Latin America, the Caribbean, three languages, English,
Spanish, and Portuguese. It has a 2010 agreement, with Paramount
and Lions Gate, and others for back cataloged tv programs.
Netflix is, is changing its strategy, I think, to focus more on TV programs,
rather than just on movies. Because there are so many TV programs and
there are series which means that you'd only not only just see an hour's program
or 45 or 50 minute program, but there might be 20 or 30 or 100 of these
programs for a TV series that's run for several years.
It's worked out agreements with major and many studios, and it has, just for
example, an agreement with, with Disney. of, of the latest movies from Disney.
And starting in 2011, it's actually offering original programming.
So here is a content provider that is now going into the creation of content.
In the past it's been a pipe, a distribution system, but now it's
actually going to create original programming.
And in the fourth quarter of 2012, knock Netflix did really well.
It reported that it's DVD by mail service is shrinking.
So, I want to ask you, is that good or bad?
I believe that Netflix thinks that that is a good idea.
Think of how much expense that Netflix could save by not having those automated
distribution centers by not having a lot of employees.
That's a manpower intensive job. Streaming videos from a video server does
not take a lot of people, but handling DVD's, anytime you have a physical
process that you have to handle the logistics of that take some amount of
labor. Now, as of the 4th quarter of 2012,
Netflix reported 33 million streaming customers.
27 million of whom are in the U.S. That means it still has 6 million people
outside this country, which is really good.
they anticipate adding another 2 million. They're going to release additional TV
series called the House of Cards. Now here's an interesting side light that
some of the stock analysts are a little concerned about.
Netflix owes $5.2 billion in licensing fees over the next five years.
What does this mean? Well a huge expense for a content
provider is the content, and the way that Netflix pays for that is by licensing the
content, the video content that it distributes.
And right now it's running a $5.2 billion tab.
However, most people regarded all of this as very positive news, and the stock rose
such that there was a 42% increase in the market value of Netflix when it announced
these fourth quarter 2012 results. Here is what it looks like.
Do you remember when we looked at Blockbuster?
All of the indicators were going down. Block, Netflix is going up.
So why is Netflix a success? Well, big flat panel TVs help.
I'm not sure that the attraction of movies would have been so great if you
had to watch them on a little screen like this but people are buying huge home
theater, LCD and plasma TV's to watch movies on.
you've got to have entire bandwidths for video.
Video just takes a lot of processing power.
Music was easy because you could compress music, and if you compress music the
human ear isn't really good enough to pickup much of the compression.
So you can squeeze music files down and not have so much to, to distribute, so
much bandwidth required. Video, yes you can also compressed video,
but you can't do it to the extent that you can with music.
So you need high bandwidth Internet in order to really enjoy streaming video.
Okay? Their physical distribution, even though
they may not think it's the greatest thing in the world to have to maintain
it, the physical distribution of DVD's works well.
They can execute where Blockbuster could not.
Customer satisfaction, well aside from that little glitch when they tried to
split up, or they actually did split up the DVD business from the streaming
business, they have pretty happy customers.
The recommender system is attractive. I feel that it hasn't worked terrifically
well for me, but maybe we just have very eclectic taste between my wife and I, and
maybe we confuse it. the part that pops up when you choose a
particular movie. And then it gives you a window with maybe
four or five similar movies. That has been valuable, and I have used
that to pick out another movie having chosen one already.
The streaming is extremely convenient. I did not relish either stopping at
Blockbuster or making a trip to Blockbuster.
You could easily spend the amount of time you spent watching the movie Driving to a
Blockbuster, looking at all the movies, picking one out, and driving home again.
And then of course, you had to go back to Blockbuster and return the movie.
I think that a personal criticism of Netflix is it could use more movie
content, and more recent movie content, but I think they're going more in the
direction of TV series. Okay, certainly Netflix is aware of the
technology. In fact it's interesting Netflix actually
wondered why Block Buster wasn't doing more to compete with them.
And after awhile they just kind of dismissed Block Buster as a threat, maybe
because it had such a hard time executing and because its management always seemed
to be in a state of turmoil. And so, you could say that Netflix is a
firm that uses disruptive technology, and keeps track of this disruptive
technology, as it implements it itself.
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