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It’s hard to understand how tech giant business models work. We give companies like Netflix simple stories like “subscription” and leave it at that. Netflix indeed is one of the simplest of the top 10 tech companies in terms of having an open and fairly transparent business model. But let’s take a deeper look.
Business model innovation can be understood as a factor of three physical forces: waves, flywheels, and business models themselves.
Netflix Flywheel 1
1998-2006
Flywheel 1
Rent some dvds by mail
Wave Rider 1
Ride the dvd adoption curve
Flywheel 1 Moves
Netflix is founded in 1997. Don’t trust the Reed Hastings story that he was upset by Apollo 13 late fees – that was just a clever story to quickly tell the complexity of the business model in easy-to-understand terms. They try sending VHS tapes by mail, but the test is a fail. Their DVD test worked a bit better, but they weren’t sure about DVD adoption – it was just starting out in 1998. So the quick story of Netflix is about bold moves, novel ideas, but really it’s a story of riding a well-timed wave. Look at DVD adoption in the upper graph – the green line. Quite an exponential curve, and a bit of courage and luck to ride that wave up the chart.
Famously the company offered itself up to Blockbuster for partnership and sale, and they were turned down in the year 2000.
Wave 1
DVD adoption
Flywheel 1
License DVD content catalog, acquire customers via online rental and mail order
Business Model 1
Rent DVDs by Mail, E-commerce
Netflix Flywheel 2
2006-2012
Flywheel 2
Subscribe to dvds, streaming anywhere
Wave Rider 2
Ride the broadband adoption curve
Flywheel 2 Moves
Netflix begins adding subscriptions in their second year, they launch their IPO in 2002, and all is good. Then founder Reed Hastings makes a major pivot. The DVD team is demoted off the management team to make room for the Streaming team – Hastings did not want all of the thinking about DVD logistics to distract from what the he perceived to be an existential threat: streaming upstarts, planning to ride the broadband adoption wave. Netflix’s famous culture deck arose at this time: creating a relentless performance and execution culture that lasts to this day.
The pricing for streaming was poorly executed and Netflix’s stock took a hit; with subscribers complaining about the hard pivot. Netflix’s days looked numbered.
Wave 2
Broadband Adoption
Flywheel 2
Stream content anywhere, acquire subscribers
Business Model 2
Subscribe
Netflix Flywheel 3
2012 - Present
Flywheel 3
Understand preferences, develop and acquire content and subscribers globally
Wave Rider 3
global mobile internet use, international expansion esp. europe and india
Flywheel 3 Moves
Netflix’s biggest move: to commission US-Norwegian show Lillehammer with Steve Van Zandt, a tiptoe into original content production, and soon followed up with US remake of the British House of Cards Series. Netflix launched the full season drop and introduced the world to the binge-watch. The company began radically increases investment in original content, which continues to this day – an investment in continuing to keep its massively growing customer base.
Netflix also begins aggressive international expansion and uses the deep knowledge of viewing habits to commission and license content on a regional basis, and then determine cultural viewing habits that span time zones, language, and stereotypical media viewing habits. The company successfully rides the expansion of smartphone and internet service connection as countries like India arrive online.
Wave 3
Global Smartphone Use
Flywheel 3
Acquire content, know users, expand internationally
Business Model 3
Acquire Content, Subscribe
Netflix and ESG
Of all of the tech giants, Netflix stands out for mostly avoiding scandals, or if they do receive complaints the tarnish doesn’t stick for very long.
Look under the hood, however, and Netflix’s efforts in environment, social, and governance lags behind its media peers and is trending downwards.
The company received poor performance for corporate governance for ignoring shareholder votes against various anti-takeover attempts, executive compensation packages, and requests to change the board.
Netflix’s business model story can be understood as a relentless and well-toned surfer riding three massive tech waves of growth, and novel combination of flywheels with the new digital subscription model, the old media content acquisition model, but all powered on a treasure trove of user viewing habits.
The company has only recently started to share viewing numbers, standing out from its traditional media competitors who must make decisions based on overall ratings and broad appeal. Netflix benefits from a deep knowledge of niche audiences and a market cap and that fuels both debt and equity funded investments in an ever-revolving investment in content.
Did we get it right?
This teardown is our best guess following Netflix as a public company and listening to stories from employees. Let us know if you agree, disagree, or want to tell us a story about Netflix’s amazing moves.
