Tuesday, January 04, 2011

Netflix - Innovation and making it look easy

Netflix is one of the top stocks for 2010. However, I do remember being part of the service way back in 2001 or so. I traveled a lot for work at the time, and thought it would be nice to have movies waiting in the mail for me when I got back. On the plus side, the movies were not due back at any specific time.

Fast forward about 10 years, and look at the changes. There are very few brick and mortar rental places left, and Blockbuster went bankrupt. Recently we obtained a Boxee Box from D-Link and again, this could be another game changer as it almost seems that it could replace the cable box for us.

The founder of Netflix is an interesting guy, he spent time in the peace corps and as a programmer. The most interesting things I think he brings to the table are vision, and innovation. He really was ahead of his time, and I do not think he had this in mind when he founded Netflix. At the time, the value proposition was no late fees and a reasonable price to rent movies.

The only real problem that needs to be overcome now is that Netflix delivers its content over the internet, which is fine until you get about to the last 100 yards to the home. Now, the cable companies want a piece of the action, because Netflix is taking up bandwidth and of course revenue from movie rentals and people having less use for the set top boxes. It should be an interesting battle, hopefully the best technology and innovator wins.

Read though the article, it gives you some good insight into the leadership style and thinking of this key innovator.


CEO Reed Hastings Teams The Net And Flicks

Netflix CEO Reed Hastings always envisioned his company as a provider of streaming video over the Internet, despite its beginnings as strictly a DVD-by-mail service. That's why the firm was named Netflix (Net as in Internet, flix as in movies) and not DVDsByMail.com, Hastings says. He envisioned the delivery of movies over the Internet as the future for the company back when he started planning it in 1997.
Since then, Netflix has vanquished retail chains Blockbuster and Movie Gallery. Now it's a major force in the movie rental business, providing a convenient and cheap alternative to making round trips to the video store.
Netflix has 16.9 million subscribers who pay for its service of DVDs by mail and streaming video.
The story of Netflix in 2010 was about the company successfully making the transition from discs by mail to digital delivery of movies and TV shows.
"By every measure, we are now primarily a streaming company that also offers DVD by mail," Hastings said on Oct. 20 after reporting third-quarter financial results.
The company's growth "is clearly driven by the strength of our streaming offering," he said.

Hastings' Keys

  • Founded online movie subscription service Netflix after selling Pure Software, another company he started; successfully transitioned Netflix from primarily DVDs by mail to primarily streaming video.
  • "You have to have a never-give-up perspective. You have to be irrationally determined."
Netflix's success in streaming drove the company's stock to new heights, rising over 200% in 2010.
In the third quarter, 66% of Netflix subscribers watched more than 15 minutes of a TV episode or movie streamed online vs. 61% in the second quarter and 41% a year earlier.
In the fourth quarter, Netflix expected that its subscribers would watch more content streamed from Netflix than delivered on DVD. Netflix also forecast ending the year with 19 million to 19.7 million subscribers, up 58% from 2009.
Ready To Go
Hastings had a long-term plan for Netflix from the start, says Ted Sarandos, the company's chief content officer. Sarandos has worked for Netflix for nearly 11 years.
"At our very first meeting he talked about Netflix almost exactly as it exists today — this model of DVDs by mail and streaming," Sarandos said. "One of the big ah-has for him and the whole company was this push-play-and-watch behavior that was developing on YouTube."
Netflix pursued streaming while many in the industry focused on developing business models where customers would download videos to rent or own.
Hastings saw how people gravitated to the simplicity of YouTube's watch-instantly service, which debuted in February 2005. Hastings' decision to get away from video downloads, which consumers find complicated, and move to streaming was a "brilliant flash point for all of us," Sarandos said.
Hastings set a direction for the company in terms of the technology to develop and what video content rights to secure. The CEO knows history is full of companies made obsolete by new technologies. He points to America Online as a cautionary example of a company that failed to adjust its business to stay relevant. AOL stuck to its low-speed dial-up Internet roots when it should have been transitioning to high-speed broadband service.
Hastings is "very focused on not missing the transition to a new technology," said Anthony Wood, CEO of Roku, which makes a popular Netflix set-top box. "He created a culture where that was a big goal to make sure (the company switched to streaming video) even if it meant cannibalized their existing business."
Hastings said that he viewed video streaming as a certainty. "We knew that broadband would grow and eventually you'd be able to stream movies," he said. "It was just a matter of time."
Netflix added a streaming video option for personal computers in January 2007 and directly to TVs in May 2008, starting with a Roku box.
Hastings saw a shift where older customers would want DVDs and younger consumers would prefer streaming video, says Mark Greenberg, president of premium movie channel Epix, which signed a major content deal with Netflix in August.
"For Reed, it's being entrepreneurial and recognizing that he has two audiences," Greenberg said. Hastings sees "an opportunity of developing a younger audience for electronic transfer. He's been aggressive in going after that."
Hastings also figured out that it was best to get the Netflix service to as many consumer electronics devices as possible, rather than sell a dedicated set-top box. Today Netflix is available on a host of Internet-enabled devices, including TVs, Blu-ray Disc players, digital video recorders and video game consoles.
Early on, Netflix adopted a subscription business model, setting it apart from rivals. Instead of paying for each video watched, customers could buy an all-you-can-eat plan.
Now they can watch as many DVDs and streaming videos as they'd like for one monthly fee. Subscription plans start at $7.99 a month for streaming, $9.99 for streaming and one DVD out at once.
As its business shifts to streaming, the Los Gatos, Calif., company has been steadily signing deals with Hollywood studios and other video producers for content.
In 2010 alone, Netflix forged licensing deals with Warner Bros., NBC Universal, 20th Century Fox, Relativity Media, Epix, Nu Image/Millennium Films, FilmDistrict and Disney-ABC Television Group.
Emboldened by the success of its Netflix streaming business, the company began offering a streaming-only service in Canada in September and in the U.S. in November.
A native of Boston, Hastings, 50, earned a bachelor's degree in mathematics from Bowdoin College in Maine in 1983. After graduating, he joined the Peace Corps and taught math in Swaziland for two years.
Upon his return to the States, he earned a master's degree in computer science from Stanford University in 1988. After graduating, he took a job as a software engineer at high-speed networking company Adaptive in 1989.
In his spare time, Hastings developed a software product in 1990 called Purify, a debugging tool used to detect errors in programs. It would become the first product for his startup company Pure Software, founded in 1991.
Company Shift
Hastings built Pure into one of the world's 50 largest public software companies. Rational Software, now part of IBM, bought Pure in 1997. Hastings came up with the idea for Netflix in 1997 after he returned a videotape of "Apollo 13" to a store six weeks late and was hit with a $40 late fee. He figured there had to be a better way to rent movies.

Netflix launched in May 1998 soon after DVDs debuted. "I didn't set out to be an entrepreneur. I didn't get an MBA. I never thought that's what I'd be doing," Hastings said.
Netflix didn't become the success it is today without some missteps. But Hastings was persistent.
"You have to have a never-give-up perspective," Hastings said. "You have to be irrationally determined."

No comments: