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  • Patrick Giry-Deloison

DISRUPTION – TRANSFORMATION: the Netflix way


SO FAR AND YET SO CLOSE!

This seems hard to believe but just six years ago, everyone had a DVD player at home.

When one wanted to see a movie not showing either on television or in the cinemas, one rented a DVD. In cities, DVD rental shops were all over the place. Today, these same DVDs gather dust on the shelves or in cellars, when they have not been sold (given?) at a garage sale.

Now, to watch a movie we simply connect to a video streaming site (preferably legal) and instantly view it. And we do it on a TV, computer or tablet - anywhere.

End of story for DVD distributors? Not quite.

NETFLIX, A SUCCESSFUL DISRUPTION FROM THE EARLY DAYS

Reed Hastings is the cofounder with Marc Randolph of Netflix back in 1997. The idea was simple: rent single price movies and send them by mail. But strangely the name of his company did not fit entirely made this business model: Instead of Netflix, he logically should have been called Mailflix (Flix, as in "flicks" - a term that dates back to the silent movie era when images…flicked). Even then, Hastings knew he would have to distribute his content either by mail but by the Internet - although the slow rate of broadband, especially in the US, did absolutely not allow.

Rather than create a second business - for example, a start-up in an internal incubator - Netflix has shifted its investment and organization to pre-empt the streaming video market. And not without reason: Netflix had in 2011 a basis of 40 million subscribers - an "asset" of enormous value taking into account of the purchase price would have to pay a new entrant.

A CHAOTIC JOURNEY

The story of Netflix would not be as interesting if it was not also marked by strategic mistakes. In July 2011, it suddenly changed its pricing system by lowering the rental price of 20% while making consumers pay for video streaming if they wanted both services. Result: up to 60% price increase! In September 2011, it announced the split of the business, separating the DVD business under the Qwikster brand. On September 20 of that same year, facing the reactions of both consumers and the market, Netflix announced reconsidering its decision. Netflix is now worth nearly $ 38 billion with its 75 million subscribers.

THE PRO-ACTIVE DISRUPTON

Netflix has managed to reinvent itself while remaining true to its roots - providing viewers the film they want, when they want it and wherever they want - and despite the difficulties that nearly cost Reed Hastings his job at and the company its life.

Why? Because Hastings knew from the beginning to anticipate a change in technology that would revolutionize Netflix’ supply chain. He pro-actively engaged in transforming his business rather than postpone the deadline and risk ending up like Kodak or Polaroid. And also because the leader stayed on course despite the setbacks without deviating from his first vision.

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The proactive approach to disruption strengthens the immune defences of the company in response to the major changes that may affect it. It gives it the means to project the company into its chosen future.

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