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Article 4c =Netflix How a DVD rental company changed the way we spend our free time - by BMI
Module: Management and social media (IS3183)
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Netflix: How a DVD rental
company changed the way we
spend our free time
When you think about searching online, you think Google. When you think about colored sticky notes, you think Post-it. And when you
think about binge-watching series and movies you think of……right: Netflix. Netflixing has become synonymous to binge-watching.
Netflix is an inspirational example of a company that successfully shifted their business model multiple times and grew exponentially
because of that. They started with renting boxed products through a mail service nationally (in the US) and shifted to delivering on-
demand entertainment catering to diverse needs globally. The ‘all you can eat subscription’ that Netflix offers, lets you watch your
favorite shows anywhere and at any time you want.
It all began in April 1998, when Netflix started renting out DVD’s by mail. Only a year later Netflix changed its pay-for-use model into a
subscription model. Nearly a decade later, Netflix changed their proposition to a streaming service, which changed the way millions of
people spend their free time. There are new entrants in the market, such as Amazon Prime, Hulu Plus and Facebook Watch, yet Netflix is
by far the leader, serving 125 million customers and generating 11.7 billion in revenues in 2017.
What did their innovation journey towards this success look like and what is driving the exponential growth? Let’s explore how Netflix
shifted their business model in order to grow exponentially.
The initial business model of Netflix
When software engineers Reed Hastings and Marc Rudolph founded Netflix in 1997, video rental stores dominated the home
entertainment market. Hastings was frustrated that the market was not customer-friendly, with charging the customers high fees for
late returns as the culprit. They saw an opportunity to do rentals differently and Netflix began renting out DVD’s by mail in April 1998,
which was a game changer in the video-renting market and a huge gamble, there VHS dominated the market and only 2% of the
American households owned a DVD player at that time. Reed and Rudolph knew if the market reached 20% of households, they would
have a viable business. They had the foresight to take the leap and their vision was right: eventually 95% of all households had a DVD
player!
From renting DVDs to a subscription model
The first business model was to let people rent videos by selecting it online and having it delivered to their door. This service was
unparalleled at that time and a big shift in the industry. A year later, Netflix introduced a subscription model, where customers could
rent DVD’s online for a fixed fee per month.
Initial competitor: Blockbuster
When Netflix launched, Blockbuster (a global chain of video stores where customers could go and rent videos in store) was their biggest
competitor. It took Blockbuster years to start offering a similar service as Netflix was already doing. By the time they finally shifted to a
subscription service, Netflix already had started the process of shifting their customers to streaming subscribers and was quitting the
DVD rental business.
Exponential business models (https://www.businessmodelsinc.com/exponential-business-model/)
(https://www.businessmodelsinc.com)
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