Strategy-What is it about Netflix?

This past summer, I was standing around at a stereotypical New York loft party, angling to attack the cheese tray, when this woman starts talking about Netflix. She wouldn’t let me get to the Brie until I promised her that I would sign up. When I tell her that I’m already a big fan, she gives me a look that says, "Don’t try to bullshit me, buster." She’s committed! Netflix customers don’t like the company. They love it.

by John Ellis
from FastCompany.com

But still, how does Netflix survive? If you look around the corner, you see Blockbuster waiting to squash it like a bug. Peer into the broadband future, and there’s video-on-demand coming to obliterate it. And always lurking is Amazon, the Wal-Mart of e-commerce. Each threat by itself is enough to make Netflix a short seller’s fantasy.

Yet Netflix isn’t surviving — it’s thriving. Revenue growth is up 98% since last year. In the past 18 months, its subscriber base has doubled. And with Merrill Lynch taking the lead, the company has raised a bundle of cash with a successful IPO, heading straight into the teeth of the ongoing market, ah, "correction." Netflix chairman and CEO Reed Hastings expects the company to be profitable by late next year — maybe sooner than that.

Netflix is a straightforward company. It rents DVDs via the Internet and sends them to you through the U.S. Postal Service. For a flat fee of $19.95 a month, you can build a list of movies at the Netflix.com Web site that you want sent to your home. The company sends you the first three along with prepaid return envelopes. When you’re ready to send them back, you put them in the return envelopes and drop them into any mailbox. The minute the return is processed, the next one, two, or three DVDs are on their way. Depending on where you live, the turnaround time is two to five days.

My average Blockbuster store carries roughly 1,500 movie titles. Netflix carries more than 12,000 titles. It has movies that you can’t find anywhere else. And Netflix uses collaborative filtering technology to send you emails that alert you to movies that you might otherwise never consider.

But back to the big question: Why has Netflix survived when so many other Internet startups have failed? Did the company’s management have some secret strategy? And at a time marked by so much bad business leadership and unmitigated corporate failure, what can the rest of us learn from this company’s unlikely success? Six tips point to the answers.

1. Understand the big picture. Netflix saw the video- and game-rental market moving to DVD and built its business around that trend. Netflix doesn’t rent videocassettes, only DVDs ( in part because they’re lighter and cheaper to mail ). DVD adoption in American households is rapidly growing: By the end of this year, 40% of all U.S. households will have DVD players. The PlayStation 2 and Xbox double as DVD players. And most computers now come with DVD players as standard equipment. DVD technology isn’t going to win. It has won — so Netflix wins with it.

2. Understand consumer megatrends. Back in the 1980s, J. Walter Thompson conducted a macrostudy of consumer trends. The two most important finds: No one has any time, and people will spend money on those things that make the environments they control — their homes, mostly — a better haven. Netflix saves time and improves the nest. Any company that does that will ride these trends to real customer loyalty.

3. Understand that little things matter. After Netflix raised all of that cash from its IPO, the company opened 10 more regional distribution centers. Its main distribution center is near San Francisco, so if you are a Netflix customer in that area, the turnaround is very fast — usually one or two days. Here in New York, the turnaround is about four or five days. In theory, the difference is no big deal. But it really matters. San Francisco is Netflix’s best market by far because of the speed of the service. Those 10 new regional distribution centers mean that 90% of all U.S. customers will enjoy that speed.

4. Understand your competition’s weakness and then exploit it. The thing that everyone hates about Blockbuster is the late-fee drill. Analysts estimate that 18% of Blockbuster’s $5 billion in revenue comes from late fees. With Netflix, there are no late fees, and you can keep a movie for as long as you like. Blockbuster’s addiction to late fees helps drive Netflix’s success.

5. Good partners matter. Countless dotcom companies took their Internet funny money and blew it all on TV campaigns and parties. Netflix put its money on partnerships with the movie industry, the consumer-electronics industry, and retailers. When you open up a new DVD player from Samsung, there’s a Netflix registration card waiting for you. Go to any number of movie Web sites, and there’s a Netflix-registration banner ad. What defines a brand? Partner marketing and good word of mouth.

6. Be lucky. A friend of mine at Morgan Stanley says that luck is 75% of business strategy. He may well be right. But as baseball’s Branch Rickey said, "Luck is the residue of design." Netflix’s design lets it be lucky.

John Ellis ( [email protected] ), a writer and consultant, works in media, politics, and technology. Read his weekday musings on the Web ( http://www.johnellis.blogspot.com ).

http://www.fastcompany.com/online/64/jellis.html