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Disruptive innovations in the movie industry on the example of Netflix

Definition

Disruptive innovation is a process that drasticly alters a market in terms of products, business models, consumer behaviour or market share distribution or a mixture of all aspects. Many of the disruptive innovations mankind witnessed over the course of the past decade were due to new digital possibilities, especially for the consumer industries. It seems the thesis holds true that those companies which respond to an industry instead of focussing on the current or future needs of their clients are bound to fail. Therefore companies often used consumer data that allowed for such analysis. Further, companies are becoming more and more obligated to analyse consumer data if competitive advantages and market positions are to be conserved.

Potential advantages & disadvantages of disruptive innovations

Weather disruptive innovation can be seen as an advantage or a disadvantage depends on what role the respective party or market participant embodies. Consumers would generally benefit of a disruption as the ´offer´ provided to them (here: movie-streaming) adds to their level of welfare. On the other hand there is the risk of the new establishing market to become more monopolistic than the market before as the first-moving companies might build up entry-barriers to potential competitors. A monopolistic market usually benefits the consumer less.

On the other hand there are existing market leaders to be considered. To these market participants disruptive innovation poses the threat of loosing their previous (dominant) position and finally profitability. On the contrary, the innovating companies have the chance to quickly acquire market shares in dimensions that under more continuos circumstances would seem unlikely or impossible. Further, for them usually the possibility arises to build up entry barriers to later adopters, thus making the newly establishing market more monopolistic / oligopolistic.

Netflix

Beginning of Netflix

Netflix's beginning in the 1990s was the delivery of DVD by mail subscription service, which was introduced in the United States in 1999. This business plan was Netflix's core business and had eviscerated former market leader Blockbuster LLC (Blockbuster), forcing it to divest itself of thousands of video stores before eventually going bankrupt.

When technology was evolving and consumer choice changed, viewers switched from DVD rental to video content streaming. Therefore Netflix decided to invest more in video streaming. In 2007 Netflix launched its streaming services as a leader in the Internet distribution of TV shows and films. In 2007, Netflix launched its streaming services as the leading provider of TV shows and movies on the Internet. Since then, BMs have grown to license, source and produce streaming content. The company has developed an ecosystem that enables users to watch TV shows and movies directly on TVs, computers and mobile devices with Internet access and increasingly licensed amounts of content.

Netflix is one of the biggest providers of content in USA and, like others, has benefited from consumers who have progressively abandoned cable-TV subscriptions by streaming films and TV content directly to TVs and computers and mobile devices.

Background (Industry and Market Entry)

Before entering the market, Blockbuster was in charge:

One of the most important developments in home video entertainment was a 1984 Supreme Court decision that found that the "Betamax" video recorder developed by Sony in 1976 did not violate copyright laws. As a result, Congress adopted the doctrine of the copyright law "first sale", which allows the lending or resale of film video cassettes. Bypassing the legislation proposed by the Hollywood Studios, the recording of broadcasts and films on blank tapes and their rental or sale was encouraged.

Initially, the market was dominated by a large number of independent video stores, until 1985, when David Cook opened the first blockbuster store. Blockbuster revolutionized the industry with an aggressive strategy. Several stores were linked together with a central database. The data obtained enabled more accurate forecasting of the demand for videos, thus reducing costs compared to the competition. Until 1993 Blockbuster expanded strongly and had 3400 stores.

Netflix disruptive innovation

How Netfix replaced Blockbuster at the top:

The idea of Reed Hastings Jr (founder of Netflix) to create Netflix dates back to 1997 when he had to pay a 40 dollar blockbuster late fee. Another important point in driving the mail-order business was the development of DVDs in 1995, and the switch from bulky VHS tapes to slim, durable DVDs paved the way for the mail-order business. However, a major drawback at the beginning was the high price of DVD players and therefore found only limited acceptance in U.S. households. The DVD player market grew rapidly, however, and in 2003, ~80% of American households owned a DVD player. The rapid growth of the DVD launch in the U.S. helped both companies, as blockbusters also integrated DVDs into their inventory.

The business model

Initially, a traditional fee per rental was charged, analogous to a video library, which was later replaced by a monthly subscription model. The model was initially limited to a fixed number of DVDs and later expanded to unlimited rentals at a price of $20 per month. Unlike Blockbuster, Netflix had no late fees - customers could view their rentals at their convenience. Another benefit was the convenience of shopping by mail which saved customers the trip to the video store.

The initial problem was that Netflix could not offer customers a sufficient number of titles in high demand. This was solved by personalizing databases and past rental histories to suggest other titles that they might like. In addition, the relatively centralized inventory allowed for a greater variety of titles that Blockbuster could not easily support with its inventory scattered across thousands of retail locations. Despite good trading relationships with DVD suppliers and the U.S. Postal Service, Netflix was still not profitable in the year 2000 with 300,000 subscribers. However, this should change in the coming years as the company grew from 4.2 million subscribers in 2005 to 32 million in 2013. Blockbuster and other companies tried to copy the online service but failed, and Blockbuster announced its closure in 2013.

Before Netflix turned to streaming services, a dedicated device was developed for video delivery of downloaded data. This device, called the Roku Box, was developed because Netflix initially saw the future of digital video delivery in downloads. After the device was sold, the first dedicated streaming service, called "Watch Instantly", was developed in 2008. With the growing potential of streaming, Netflix wanted to share its business model in 2011. The traditional DVD business was to be renamed to "Qwikster" and was to be spun off. Since the streaming business was a separate company, it required new customer logins and accounts. With the two independent companies, existing subscribers (who wanted to use both services) had to create a new streaming account and pay twice. As a result of the announcement, Netflix lost 800,000 subscribers and suffered a dramatic drop in the share price. As a result, Netflix withdrew its decision after only one month and quickly recovered from the damage. The number of subscribers increased at an average annual growth rate of 32 per cent to over 93 million in 2017.

Netflix nowadays

Netflix is the world's first global Internet entertainment service, with 125 million subscribers from over 190 countries since its release in 1997 and a famous american video streaming brand. In discussing the "Netflix effect" on business, media analysts are generally speaking concerned with the platform's pioneering role in the streaming culture of discovery, instant distribution and personalized output.

With the simultaneous distribution philosophy, the subscription-based models of Netflix provide on-demand access, without any commercial interference, to all episodes of the newly released series. In addition to its engaging facilities such as auto play and guidance, the main attraction of the app is its ability to produce a friendly sense of choice and promptness.

The concern of the business is rooted in traditional serial user interaction trends for the concept of immersive, personalized use. In keeping with our previous choices, Netflix invites us to further contact, for example through personal profile like "Because you added something to your list" and "Because you saw something".

In addition to the use of Binge-watch as a resource to visualize engaged brand experience the enhancement of its suggestions program is another justification for Netflix to concentrate its subscribers' attention patterns. The app uses its algorithms to captivate the user for more than one season. Through collecting data from our viewing, reading, searching, and scrolling behavior, Netflix collects any type of interface communication, so that it can provide more information for its recommendation.

Netflix has influenced the traditional market of the television and entertainment industries, especially how we access their content. Netflix started as a small service for people to rent DVDs through the internet. It slowly evolved, taking a monthly subscription model and then forming a streaming service in 2007. The cable networks were baffled; Netflix was doing different things from what the cable networks usually did, but people liked it. Netflix gained 20 million subscribers on their streaming service in just three years. How did it happen?

1. It’s Cheaper, Portable and More Convenient

Netflix is significantly cheaper than the regular cable service. The average cable subscribers pay more than 60€ for their plan every month. A monthly subscription to Netflix is more affordable for most people, starting from the significantly lower price of 14.99€. This alone allows more people to have access to media content than ever before. Bonus: Netflix doesn’t show ads to their users either.

Most importantly, Netflix breaks away from the rigid form of traditional cable service, which requires people to stick with a viewing schedule to be able to watch the shows or movies that they want. Even if people used DVRs, they still needed to set up the recording time for the show. Netflix understands that adjusting your own schedule for TV programs is not possible for everyone, and in return offers their customers a streaming service with multiple viewing options and no set scheduling, to move beyond the constraints of traditional television viewing. Moreover, the option to access Netflix through various devices makes it more versatile than cable. The instant access that Netflix offers manages to win over users who seek convenience in their life. We might not think much about the lack of time and space constraints on accessing entertainment today, but just a few years ago this convenience was unheard of. Now cable services not only have on demand options for us to rent or buy movies and the ability for us to record the shows we want, but also new phone apps where we can stream our shows. While cable services have only started to adapt to Netflix through the implementation of cable streaming apps on multiple devices, Netflix has always considered ease of access for their customers to be a main part of their streaming service from its inception.

2. It Produces Original Content

Netflix doesn’t just provide us a different way to access content—it also creates new content. Starting with a show called Lilyhammer in 2012, Netflix continued to produce original programming with House of Cards, Hemlock Grove, and the fourth season of Arrested Development, before branching out to many others. The successes of some of these shows, such as the 12 Emmy nominations that the first season of Orange Is the New Black won, urge Netflix to continue developing original movies and series. Accordingly, Netflix announced last year that they would be spending up to $8 billion USD on their original content in 2018. Judging by how shows created by streaming services, such as the viral Stranger Things, have been popular among the public and welcomed by awards such as the Golden Globes and the Emmys, Netflix’s investment may have been a smart move.

3. Now

Netflix targets specific needs in their customers—convenience and the availability of choice. If Netflix's surging number of subscribers is any indication, people respond positively to Netflix's innovation. In addition to Netflix's influence on the entertainment industry, Netflix became a disruptive innovation that has normalized the ways we can access our entertainment.

In New York City we can also find The Paris cinema, taken over by Netflix. Until recently it was closed down after it ceased operations in August 2019, but Netflix is restoring the shine of the place with its premieres. Paris screenings include the film "Marriage Story" with Scarlett Johansson and Adam Driver. Netflix plans to use the cinema to organize premieres of its other original films, press screenings, as well as other industry events, including the return of films to the screens from the artists it cooperates with.

The Netflix Effect

To the broadcast industry, the Netflix effect is the Big Bang. There is nothing more disruptive. Video on demand is an old idea, but it’s always been hampered by bandwidth. For many people, this is no longer the case. I live in the UK's seventh-biggest city and I have 300 Mbit/s broadband. That's enough for several channels of 8K. Soon it will be 1Gbit/s.

Netflix (and Amazon, and Hulu etc) are changing the way people consume media. We no longer exist on a scheduling timeline that's been imposed on us. We can binge, fast and then binge again - or set our own pattern entirely. It's cheap, the quality (technical and content-wise) is as high as you can get. So much so that Netflix is now the prime arbiter of broadcast and film standards, arguably.