Sunday, May 12, 2013

Netflix - How it has "Innovated" itself out of the hole that nearly became its grave!

Netflix is near to my heart. Perhaps I am a bit biased but not because I love their $8.99 a month unlimited streaming plan that allows me to watch movies and TV shows to my heart's content. It's actually because I started Chapter 1 of my book, Living in the Innovation Age, with an interesting anecdote about Netflix that illustrated just how critical constant and continuous innovation is for all companies. Things looked pretty bleak for Netflix back in late 2011. About 18 months ago, Netflix was spending much time trying to save face. Netflix had awkwardly unveiled plans to raise prices and separate into two companies - a DVD mailer called Qwikster and a streaming entity still under the Netflix name - and lost millions of customers in the process. Not surprisingly, the share price fell from $298 to $52.81. Things were so bad that in a Saturday Night Live skit, Jason Sudeikis played the role of Netflix's CEO Hastings apologizing to consumers while at the same time unveiling increasingly complex businesses, culminating with Nutqwakflikster - a nut, insurance, and movie seller, mocking their recent Qwikster debacle.

But as I said, that was back in 2011. As documented in a recent Businessweek article, Netflix has mounted one of the all-time great comebacks. First quarter results show that revenue rose 18 percent from the same period last year to $1.02 billion, while the company added 2 million subscribers in the U.S. alone, dispelling widespread fears that its growth had slowed. And shares of Netflix are back above $200 being hailed as one of the best-performing stocks of the year. The article goes into quite a bit of depth on what has been going on at Netflix over the past 18 months.

Here are three key takeaways that I believe have contributed to their awe inspiring success:

Cloud Computing - Netflix has bet its future on cloud computing and Amazon's cloud platform. At any moment, Netflix draws upon 10,000 to 20,000 servers running in Amazon data centers somewhere. Being an early pioneer, Netflix has been forced to build from scratch much of the software it needs to survive. Since it relies on Amazon for data centers, its 700 engineers focus on coming up with tools for, say, automating the ways in which thousands of cloud servers get started and configured.

Original Shows - The biggest bets Netflix is making now are on its original shows. The company won’t disclose how much it paid for two seasons of House of Cards, though the Hollywood blog says it was about $100 million. Other original content includes Hemlock Grove, Arrested Development, and Orange Is the New Black.

Creativity and Innovation - Netflix is best known for the 1 million bounty that it offered to the person or group that could improve its ratings-based algorithm the most. A prime example of an open innovation contest, the winning team, a collection of independent engineers from around the world, built Netflix a better prediction engine. Netflix is always testing things - better recommendations, using avatars for interaction, voice guidance, etc. This mindset is at the crux of Principles 2 (Innovation is a Journey, Not a Destination) and 3 (Innovation is "Where No Man Has Gone Before") that I discuss in my aforementioned book.

The Bottom Line
Netflix is an excellent example of a company that has come back into relevance after everyone had given up on it. It did so, not by trying to doing the same things over again or finding new ways of cutting costs. Rather it rethought its business model with new technology platforms, new content, and new ideas. In other words, Netflix innovated! 


  1. by the way, can we also expect for some virtual data room comparison or maybe comparison of different clouds? This must be very interesting!thanks in advance for your reply.

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