Netflix: A Case Study in Operational Innovation

Netflix:

A Case Study in Operational Innovation

Justin Kinzer

Portland State University

Executive Summary

This paper explores the success of the streaming media company Netflix. It examines the company’s beginnings and adaptation to changing technology and consumer tastes. Netflix’s value proposition is identified. It then looks at the upcoming struggles the company faces as more competitors enter the expanding streaming market. Two operational solutions are proposed and defined, that address this problem. The solutions are broken down into respective cost/benefit analysis and finally a solution is recommended.

History of Netflix

Netflix was founded in 1997 by Reed Hastings and Marc Randolph. The company began as a DVD-by-mail rental service with a web based user interface. The company experimented with different rental plans before settling on a system that included unlimited rentals with no late fees (Netflix, Inc. History). By February 2003 the company reached one million subscribers. By 2005, Netflix was renting out over a million DVDs per day (Netflix, Inc. History).

In 2007 Netflix began a streaming service to complement their DVD business model. The company felt that streaming would become the preferred method upon which people would access media (Netflix, Inc. History). Between 2006 and 2015 Netflix saw massive growth in revenue. This chart from Statistia.com demonstrates just how quickly the company went from generating $1 billion in revenue in 2007 to nearly $7 billion in 2015.  [pic 1]

In 2011 Netflix CEO Hastings announced that the company would be splitting into two entities; one to handle the streaming business that would retain the original Netflix moniker; and another that would handle the DVD business, which would be named Qwikster (Netflix, Inc. History). This announcement was met with an extremely negative response by Netflix customers and a large amount of subscription cancellations, losing approximately 800,000 subscribers (Netflix, Inc. History). Netflix’s stock price also plummeted 30% (Wingfield & Stelter, 2011) and the company was forced to admit their mistake and to cancel their plan. This remains Netflix’s biggest setback and is even mentioned on the company’s investor page (Netflix's View: Internet TV, 2016; Beaublen, 2011).

In 2011 Netflix began to switch their focus from leasing content from studios to developing their own original content. This began with the David Fincher produced House of Cards, and has continued with more original content each year.

According to the IBIS industry report the internet publishing and broadcasting industry is expected to grow rapidly over the next five years, as advertisers continue to shift their resources away from traditional media (IBIS, 2015). This coupled with the fact that more and more consumers are switching from cable to internet TV, and spending more on subscription services, means that there is a huge potential for market growth. The companies who are able to produce the most original content each year will be the companies who will be the most successful.

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