Lessons from Netflix's meteoric rise

7 April 2018

Netflix will continue to grow, erasing smaller competitors in New Zealand and abroad, predict Paul Rataul, Dan Tisch, and Peter Zámborský.

From modest beginnings in 1998 as a small DVD rental start-up, Netflix has grown rapidly to become the world's largest internet television network. New research aimed at discovering the secrets of its success suggest that smaller local rivals will struggle to survive in its shadow.

University of Auckland Business School graduate Paul Rataul teamed up with Department of Management and International Business researchers Dan Tisch and Peter Zámborský to discover how Netflix got the better of entrenched industry giant Blockbuster Video.

The researchers scoured company reports and media coverage, and applied insights developed by the influential New Zealand-born strategy theorist, David Teece, to better understand Netflix's business model.

They found three key features that enabled the company to ride the technology wave of the early 2000s:

  • Fostering a trusting, experimental culture
  • Capturing the value of other people's creativity (in the form of movies and TV shows)
  • Capturing the value of customer data (viewing habits), to help generate personalised recommendations and hit Netflix Originals series and films

"What Netflix did was do little experiments, little bets, with certain demographics, and once they saw what happens they would scale it up", says Rataul, who now runs millennial career coaching firm, Millennial Mindset.

"There is a theory that companies gain a competitive edge through capabilities that produce value for customers, are rare or distinctive and difficult to copy, and that are supported by the way the firm is organised," adds Tisch.

"The quality and variety of Netflix's library, and Netflix Originals, tick all those boxes."

Tisch says that other companies are likely to struggle to match Netflix's customer data and its relationships with studios, television networks, and star actors.

"I predict that small players in New Zealand – Neon, Lightbox – are not going to make it. You need a Disney to take on Netflix. Competitive offerings like Sky TV and Lightbox will go slowly, milking existing rights for as long as possible," he says.

Studying why certain companies succeeded in changing business environments such as the one Netflix operates in, Teece found that this often came down to sensing and seizing opportunities, and reconfiguring capabilities.

"That's what Netflix has done as it reinvented itself again and again, from online DVD rental to internet TV service, to TV and film concept developer, producer and distributor in one," says Zámborský.

Past success is no guarantee of future survival, however. As market leader, Netflix finds itself facing challenges from Amazon Prime, Hulu, HBO Now, and newcomers such as Malaysian company iFlix.

Netflix timeline

1998: Netflix born as an online DVD-by-mail business in the United States after co-founder Reed Hastings is forced to pay $40 in late fees for a DVD movie rented from Blockbuster Video. Later in the year, when Amazon enters the market, it switches from selling to renting out DVDs. Just 1% of the US population own DVD players.

1999: Netflix introduces monthly subscription with a flat fee for rentals and no return dates.

2003: As DVD ownership takes off, so does Netflix, expanding its library and reaching one million subscribers.

Mid-2000s: Blockbuster Video finally drops its late-fee policy and introduces online rentals, but it is too little too late.

2007: Netflix begins transition from renting out DVDs to streaming movies and TV shows as broadband speed increases. Guided by a trove of customer data it starts licensing new and exclusive shows and films from movie studios and TV networks. And it forms strategic partnerships with the electronics giants on whose devices subscribers watch the shows, driving customer acceptance of internet-delivered entertainment.

2010: The majority of Netflix subscribers now watch more movies and shows via online streaming than by DVD.

2011: Netflix rebrands its separate DVD delivery service Qwikster and focuses on streaming-only plans. One month later it retracts the rebranding after a customer backlash that costs it more than 800,000 subscribers.

2013: The first Netflix Originals series, House of Cards, debuts to critical and popular acclaim.

2016: Netflix now available in more than 130 countries.

Paul Rataul

Paul Rataul is the founder of career coaching firm Millennial Mindset, and is a University of Auckland Business School Alumnus.
Peter Zámborský

Dr Peter Zámborský is a Senior Lecturer in the University of Auckland Business School's Department of Management and International Business.
Dan Tisch

Dr Dan Tisch is a Lecturer in the University of Auckland Business School's Department of Management and International Business.



Want to attract fan-page followers? Here's how

To use social media effectively, companies must first understand what users do online, and how they feel about company content, advises Hamidreza Shahbaznezhad.



Why blockchain challenges conventional thinking about IP

There is a simple reason for blockchain’s spectacular rate of development, says Alex Sims. No patents.



Jamie Newth on social entrepreneurship

Jamie Newth, a Research Fellow in the Business School's Department of Management and International Business, explains why social entrepreneurs are uniquely suited to tackle 'wicked' social and environmental issues. He is the CEO of Soul Capital, an organisation that invests in New Zealand social enterprises.





Has your strategy playbook expired?

In a new book, Suvi Nenonen and Kaj Storbacka explain how firms can design new strategies for innovation, value creation, and growth.




Peter Zámborsky on how to thrive in uncertainty

Dr Peter Zámborsky, a Senior Lecturer in the Business School's Department of Management and International Business, outlines three core capabilities that organisations must build if they are to thrive amid uncertainty. They are discussed more fully in his 2018 eText Global Strategy: Thriving in a World of Uncertainty.




Suvi Nenonen on shaping the market

Associate Professor Suvi Nenonen, Director of the Business School's Graduate School of Management, urges New Zealand companies to tap the power of market-shaping. Her book Designing Markets: Are You Market Driven or Market Driving, co-authored with Professor Kaj Storbacka, was awarded the prize for best Finnish book in 2009-2010.




Why companies should shape, not predict, the market

Suvi Nenonen and Kaj Storbacka argue for a radical rethink by New Zealand companies about how markets work and, therefore, how best to grow business.