NETFLIX CASE

"I got the idea for Netflix after they bought the company from me. I got a penalty for
delivering Apollo 13 late. I was delayed by six weeks and owed $40 to the video store. It
was my fault and I didn't want to say to my wife, and I asked myself 'do I want to put my
marriage at risk by a penalty?'" explained years ago the co-founder of the company,
Reed Hastings, in an article in the New York Times. "Later, I went to the gym and realized
that they had a much better business model, because paying $30 or $40 a month I could
go as much as I wanted," Hastings added in the same article.
Netflix is a success story, but as usual, marked by real ups and downs and business model
changes that have led the company from being a business focused on the United States
to being a multinational giant of the digital age. Netflix has been close to being
swallowed up by competitors or having to close on more than one occasion, but the
ability to readapt has been its great virtue. Today we live in a world where, to sum up a
quiet sunset, younger generations simply talk about "Netflix and blanket."
Let's set ourselves in Northern California in 1997. Two entrepreneurs, the
aforementioned Hastings and Marc Randolph, who had had a successful career in Silicon
Valley, the business epicenter of the technological world of the United States, try to
create a company that improves the service of video stores. We are still in the age of
VHS, and the DVD is just beginning to get its head out, at high prices. The consumption
of films is channeled through video stores, which both in the US and worldwide was a
market dominated by the Blockbuster chain.
Hastings and Randolph's new company, which they named Netflix ("Net" means clean
and "flick" is an informal way of saying movie), was to mail videotapes that customers
would rent through an online catalog. The main problem they initially encountered,
however, is that the VHS, still dominant, was too fragile and did not withstand a
shipment. This limited the company's options to DVDs, much stronger, smaller and
lighter and, therefore, cheaper to send in a simple envelope.

Netflix CURRENTLY
This was the company's business model at the time of its founding: sending DVD discs
to subscribers by mail, who were to return them. The main stumbling block, however,
was that in 1997 a DVD player was still a small luxury for most families, so the number
of potential customers was much lower than that of Blockbuster, which also offered VHS
rentals. Despite this, it was growing with a lot of effort and ups and downs, although at
no time did it have benefits.

Netflix's first innovation was to introduce a flat rate on DVD rentals, which it mailed.

The business had not just started despite offering a very attractive differentiating
element: the flat rate. Unlike video stores, where you pay per rented tape, since 1999
Netflix offered a subscription price with an unlimited number of movies.
In 2000, Netflix closed the year with a loss of 57 million dollars, but with 300,000
subscribers in the US. With this panorama, Hastings and Randolph requested a meeting
with John Antioco, CEO of Blockbuster, in which they offered to buy Netflix for 50 million
dollars. The operation was attractive: "Blockbuster would have controlled physical home

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entertainment" and, at the same time, the incipient online market, explains Elena Neira
author of Streaming wars, a book about new audiovisual platforms. The Blockbuster
executive, however, declined the offer. The two businessmen left the meeting with
emptypockets, but despite the problems they continued with the business.
The bet of the founders of Netflix paid off two years after the meeting with Antioco.
Specifically for Black Friday 2002, when the star product of that day of discounts in the
US was the DVD player. It was a matter of time before the devices, which initially
exceeded $ 700, fell in price, and that year they were close to $ 200, which represented
the end of VHS. All American households switched to DVD and Netflix expanded the field
to grow. That same year the company went public.
However, the digitization of the DVD meant that films could be saved on a computer as
files (just like music), which led to the birth of online piracy. First Napster, and then other
platforms, allowed you to share movies among thousands of people. The wave of
downloads, declared illegal by the pressure of the audiovisual industry on the
administrations, made Blockbuster and also Netflix begin to suffer bravely.
Blockbuster launched a legal download system, a program that allowed its customers to
download films to the computer at night. Netflix considered doing the same, but in 2005
canceled the project. After DVD and downloads, a revolutionary new technology, again,
the audiovisual market.

"We are here with the elephants and what is cool is that they have very, very long ...
proboscis." Jawed Karim, a 25-year-old computer scientist, videotaped himself making
this comment outside the San Diego Zoo's elephant cage in 2005. The recording was the
first video posted on the web that Karim had created with two co-workers: YouTube. In
2005 the platform was a small unimportant page, but it quickly showed that the future
of audiovisual was not DVD, but streaming. That is, to watch a movie you only needed
an internet connection, not download files. Netflix bet heavily on streaming and
combined it with sending DVDs. As the broadband reaching homes improved, the
streaming service gained weight, until it became hegemonic. Online viewing was the
future and Netflix controlled it unopposed. In 2011 it was the great dominator of the
sector in the United States.
The next step was a double leap: internationalization and content production, a step it
took in 2013. Until then, Netflix offered third-party content, but when expanding to
other countries it saw that negotiating broadcast licenses "territory by territory was
unsustainable", so it opted to produce its series and films.
The company was the pioneer in the world of content streaming , but now it is no longer
alone. Being the first to carry out this business both in the US and internationally gave it
the advantage of controlling the entry market, but at the same time it awakened some
of the competitors that, until then, had been suppliers. "When it climbed internationally
in 2013, there was no one else," Neira recalls.
Currently, Netflix is still "the most consolidated platform", but with the disadvantage
that "the rest of the competitors are dedicated to other things or to offer other content",
that is, they are more diversified. Amazon Video is part of an e-commerce giant, while
HBO is owned by Warner, an entertainment conglomerate that includes movie studios,
TV channels, amusement parks and publishers; something similar happens with Disney,
which has launched Disney+. AppleTV belongs to a manufacturer of mobile phones and
aplis.

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This Netflix specialization is based on two "super-value" pillars that have so far
cemented the company to world leadership. The first is that, being the first, it reached
a very high market share. The second is that "it's light years away" from the competition
in "customer retention," says Neira. "It has the highest audiences,"he emphasizes. These
factors have allowed the company to move forward despite having had net losses each
year until 2020. It was expected that, in 2021, the company will recordprofits for the
first time.

Traveling with Netflix is now possible

In fact, the two factors are related. "Since 2007, Netflix has been monitoring a
generation of customers," says one industry professional. That is, what makes Netflix's
business move is subscriber data: what user profile watches each content, when they
watch it and how (on TV, on mobile) and where (at home, on the subway). Data perfectly
profiled by age, gender, location and all possible variables. It knows what customers
want and is able to anticipate their preferences, which is why it has a lower casualty
ratio than any other platform. When it comes to creating a new series, the chances of
success with all these figures at hand are much higher and, since House of Cards, the
company's first own production, Netflix has put data at the center of production.

The company creates its own series and films based on the data it collects from subscribers.
In this sense, then, the company has more of a technological company than audiovisual.
Its origins in Silicon Valley explain why it opted for this way of doing business, a model
that traditional entertainment companies had not even intuited. And the rest of the
competitors have other priorities. Amazon Video, for example, boasts about 200 million
subscribers, but Neira considers it misleading, because the subscription includes
Amazon's free and fast shipping service. Streaming is "one more excuse" to attract more
customers to the main business, which is online commerce. Instead, "Netflix doesn't
have a plan B," he says.

With increasing competition, where will Netflix go, now? "The consolidation of
intellectual property is the seed to make the business broader," says Neira. That is,
merchandising and getting juice not only from movies, but from related products, is the
main bet of the management. Just as the entertainment giants have continued Netflix
creating their audiovisual platforms, Netflix must make the reverse journey and copy
with its series what Disney does with Mickey Mouse and Star Wars or Warner with Game
of Thrones and Harry Potter: make t-shirts, toys, video games and theme parks.
"Licensing was invented by Disney. If Netflix does well, it's a very interesting business,"
sayindustry experts.