A couple of weeks ago at Mobile World Congress in Barcelona, I had the opportunity to listen to Reed Hastings, CEO and Co-founder of Netflix. Netflix started as a DVD rental company in 1997. It used to rent DVDs and send them by courier to subscribers in the US. In 2007, Netflix started its online streaming service, which began picking up from 2010 onwards.
Today Netflix has about 100 million customers around the world and fewer than 5 million DVD customers (mostly in the US). On financials it had a top line of about $9 billion in 2016, which grew about 30 percent year on year, and a gross profit margin of over 30 percent.
Netflix has done quite well to scale the business so far. There were many DVD companies in the old brick-and-mortar era, and many of them disappeared without a trace. “What did Netflix do differently?” has been a question on my mind.
Apart from the fact the company was ahead of the curve in the way it digitized its business from couriering DVD to digital distribution, it has done a few other things differently too. Netflix has a great business model, huge focus on content, unique digital culture and exceptional use of technology.
Simple, scalable business model
In simple terms Netflix’s model has a mass market approach, and is driven by simplicity. Netflix is available around the world (some exceptions as usual) and pricing is extremely simple. The customer experience is simple too. I was able to get going with Netflix in 2-3 minutes and a smart recommendation engine already started showing what I should watch (and it was relevant to my taste).
There are three plans on offer with a 20 percent difference in amount and add-ons available, as well as monthly subscriptions (all you can eat). You get a one-month free subscription to start with. Prices range from $8-12 per month, which is targeted for the mass market. In most countries you pay a similar amount (or even higher) for a monthly cable TV subscription. No hardware required, all streamed over net (now you can download also). This model allows Netflix to scale on one hand and keeps all costs arising out of complexity at bay. It is a good example of what exponential growth means.
With smartphones getting into almost every pocket, smart TV gaining popularity in homes and internet access becoming ubiquitous, there are limited roadblocks for customers who want to use Netflix.
Work culture at Netflix
There are very few companies where culture is as discretely captured, emphasized and practised as at Netflix. I was shocked when I read about its culture — “Hard Work – Not Relevant”:
“We don’t measure people by how many hours they work or how often they are in the office. Sustained B-level performance, despite A for effort, generates a generous severance package. With respect. Sustained A-level performance, despite minimal effort, is rewarded with more responsibility and great pay.”
There is a strong performance culture at Netflix and its value is based on how important it is for talent to work alongside other exceptional people. There is a 124-slide corporate HR constitution at Netflix which is available in the public domain — Netflix Culture: Freedom and Responsibility. It is a great insight into the company culture.
Content is king
Last Christmas, I was watching the Sherlock Holmes movie (starring Robert Downey Jr.) with my son. He liked the character quite a lot and for the next few weeks there were quite a few books about Sherlock Holmes on his desk.
A month ago he started insisting that he would like to watch the Sherlock Holmes episodes available on Netflix. That was the first time I got interested in Netflix. Since then I have been through many series and I must say the experience of binge viewing with great content is beyond what I get from my normal TV. I hear that Netflix is focusing heavily on creating original content with regional flavors. In addition, a great collection of movies and attractive plans has made many people stop watching pirated stuff and turn to Netflix.
Technology at Netflix
Netflix uses about 10 percent of its top line, which amounts to around $900 million in research and development. And this number has been growing year on year as the top line has grown. Netflix uses open source extensively and has built a community around its open source products. In fact, the architecture of Netflix has been replicated by many companies and is referred to by some as Netflix Architecture.
Netflix has worked quite a lot on its recommendation engine, making it better every day. There is also lot of work being done to improve the viewing quality, where the network capacity is constrained and data is expensive. Netflix has been able to use technology to deliver its business objectives effectively.
I don’t know how this will play out over the next few years but the way Netflix transformed itself from physical business to global digital content powerhouse has been impressive.
At the end of his session at MWC, when asked about his prediction for 2030, Reed said:
“It’s tough to think about entertainment…when I’m not sure if we’re going to be entertaining you or entertaining AIs.”