Westminster Business School Blog Inspiring digital business innovation: How Netflix has used technology to change the market

Inspiring digital business innovation: How Netflix has used technology to change the market

February 24, 2014
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Netflix is currently the world’s largest online television network, which in despite of only been running for 16 years, operates in 40 countries worldwide, and has over 40 million members (Netflix, n.d).

Netflix is an example of a company that has used growing digital economies to its advantage, as it has noticed how new technologies can improve the services that they offer. Using these new technologies, Netflix has found a new way to provide their service, which gives their customers more benefits.

Marc Randolph and Reed Hastings founded Netflix in California in 1997. The original idea for the website came from the owners having to pay late fees for the movies they had hired. They came up with the concept of having a DVD posted to the customer, and then when they have watched the film; they simply posted it back, avoiding the late fees, as there was no time limit. Year upon year, Netflix increased their members by over 60% and in 2005 they had over 4.2 million members (Netflix, n.d).

However, Netflix noticed the increased usage of online streaming, and how new technologies; such as a wider availability of the Internet had changed the way that people were watching movies. This led Netflix to change their business model, and they introduced a service that allowed consumers to stream a film over the Internet, and therefore watch the film on their laptop or computer immediately.

Disruptive Innovation

This is an example of disruptive innovation. Netflix provided new value to the film market when sales of DVDs were falling. This led to other companies such as Blockbuster (which stuck to the traditional ways of customers renting the physical DVD) unable to compete with the services that Netflix were offering. Streaming films online started off as a marginal business to become mainstream business, and it became no longer the norm to go and rent a movie from a shop. Blockbuster and other DVD rental shops were no longer convenient or the most popular way to watch a film, and consequently, the value of the online streaming market overtook the value of the market of renting a DVD from a shop.

Netflix has succeeded where many have failed, and have achieved success by not only being innovative in the way they provide their service, but also being innovative throughout the whole business. Film distributors have huge power over Netflix, and keeping a positive relationship with the supplier has become increasingly important as, since Netflix introduced the online steaming model, new competitors have arisen and have tried to undercut them by offering the same service for a lower price.

Netflix and higher prices

Netflix’s higher prices need to be justified by them having a wider range of the best films, so to keep their competitive advantage; they need to have a good relationship with distributors. Being an innovative company, Netflix has realised the huge power, that the film distributors have, and they have started to produce their own TV shows, for example, House of Cards. This will make them less reliant on film distributors and it also adds value to the business.

Netflix and HR Management

Netflix is also innovative with their HR management. Staff are encouraged to be creative. The company aims to attract innovative professionals and give them space for keeping their creativity, improving the changes of success for the company.

While the innovation of Netflix was hugely successful, for other companies it wasn’t so positive. The main business that suffered was Blockbuster. Blockbuster was the original provider in renting DVDs, but they failed to take advantage of the new technologies to make their business plan more modern and up to date, ultimately making them unable to compete with the service Netflix was providing. Only in 2004 Blockbuster entered the by-mail service in this market, but from that moment Netflix had around 3 million customers, which demonstrates how important it is to not just have an innovative product, but to be innovative throughout the whole business, and take advantage of new technologies before it is too late. In 2010, and again in October 2013, Blockbuster went bankrupt and into administration.

About the author

Laura Barber is a second year student from the UK studying International Business with Chinese. She plans to have a career in Digital Marketing.

Westminster Business School started in 2013 a new module, Business Innovation in Digital Economies (BBIM510, level 5). The module has been a success, and students have been very inspired to learn more on digital technologies which are used in business innovation processes. WBS wants our students to become better entrepreneurs who have more information and skills to succeed in business innovation, using digital technology for that.

In order to motivate students to get more involved, we invited them to write articles for the series Inspiring Digital Business Innovation, to be published in our WBS blog. In this series, students choose the company or innovation which has inspired them to better understand the possibilities of business innovation in the digital economy.

You can follow the series here in the blog. We hope you get inspired as well.