Read a great article from Wired.com on Netflix’s success. In the face of so many mounting business pressures in the early 2000’s who could have anticipated that they would achieve this level of success.
 

My Prognostication Failed

Five years ago I had a friend who was sitting with Netflix stock which had increased in value by 500% when he came to me and asked for some advice: Should he sell? My response was yes based on the following criteria.

Strong Competition- Blockbuster had recently entered the fray; they had a strong competitive strength with their local stores and had plenty of money to target Netflix. I figured even if Netflix did win the costs associated with acquiring and retaining subscriptions in a competitive atmosphere would erode substantial earnings.

Digital Transition- At the time 5 years ago many were predicting a strong push to web based content delivery. It made a lot of sense and would have an impact on Netflix. Expectations were that strong players like Microsoft, Google, Sony, and Apple would crowd out Netflix.

Content Acquisition- With the digital transition I expected consumers to transition to watching web video. As such, companies interested in this market would need to negotiate new deals with the film companies. The Netflix model is somewhat disruptive and they lacked strong relationships with the film companies. This would require a hurdle that Netflix would have to overcome, which introduced substantial risk.

Increasing costs of doing business- Netflix’s primary model was based upon delivery by mail, the more customers used the service the more expensive it would become. Additionally the US Postal Service had shown an interest in continuing to increase the cost of shipping.

Business Transition- Netflix was looking to radically change their business model from mail delivery to digital delivery. It was unclear they had the Intellectual Property, or business assets to smoothly make this transition.

While these were all valid concerns at the time, Netflix has been validated. My friend sold Netflix around $10, and it’s now hovering near $45 (yes up another 500% from where he had it).

How’d They Do It?

Where did this run-away success come from? Here are some of the keys I’ve noticed:

Great Business Model- Netflix had a great business model, understood the finances of the subscription based service and capitalized off Blockbuster’s blunders. Eventually Blockbuster went bankrupt which just forced more subscriptions back to Netflix

Differentiated Service- They doubled down on their key piece of intellectual property the recommendation engine and movie queuing. When you’re providing a service, the worst case scenario is someone not utilizing it, growing disenchanted with it, and cancelling. The recommendation engine is the key to Netflix’s captive audience, and they’ve invested in it appropriately.

Innovative Content Deals- Netflix knew they were in trouble when it came to securing rights for streaming; the reason is that Film Studios typically get paid big bucks for “First Run” rights from HBO, ShowTime, and Starz. With a little ingenuity Netflix turned the source of their frustration into the enabler for their business by signing a deal with Starz that enabled them access to the content without having to negotiate directly with a film studio.

Netflix App. On multiple devices- By leveraging platforms such as the Xbox360, Media Center Extenders, and Set-Top-Boxes Netflix is one of the few digital content provider setup to push from the PC to the living-room

Conclusion

Netflix will face more challenges in the coming years but with the strength in leadership and ingenuity they’ve shown they are well positioned to tackle them.