From Rental to Streaming: How Netflix Changed the Speed of Business

Glenn Wintrich

Once a staple of cityscapes and suburban strip malls, no matter where you traveled across America you were as likely to see a Blockbuster outlet as a McDonald’s.But in September 2010, the country’s largest video rental chain filed for bankruptcy. The U.S. satellite TV company Dish bought the failed video rental chain in a bankruptcy auction in 2011, but by the end of 2013 Dish announced it was throwing in the towel and closing all remaining retail stores.

When Blockbuster originally filed for bankruptcy, the company cited mounting losses, $900 million in debt and growing competition. Of course, the “growing competition” was from Netflix and, to a lesser degree, Amazon.com, Apple’s iTunes and Redbox.

Rewind to better times

How did the once tiny startup Netflix topple the Goliath of the video rental industry? The sudden fall surprised many because Blockbuster wasn’t always behind the curve. In fact, the founders started the company by coupling business innovation with technology innovation. Unlike the typical independent video stores of the day — which were sometimes seedy and lacking a broad range of titles — the original chain concept was clean stores with a huge number of titles on hand. To keep track of up to 8,000 tapes in a single store, the company also deployed a computer system with a recent innovation — the barcode scanner. The state-of-the-art system not only helped with inventory control, but also pleased customers with speedier check out and return of VHS tapes. It also helped Blockbuster quickly and efficiently calculate late fees.

Those late fees, however, had one unintended consequence. One day in 1997, when a man named Reed Hastings returned a late copy of “Apollo 13” to his local Blockbuster, he was shocked when they charged him a $40 late fee. Unfortunately for Blockbuster management, Hastings was a high-tech entrepreneur with a master’s in computer science from Stanford University. On his way home that night, not wanting to tell his wife about the $40, he stopped at the gym and it occurred to him that the gym had a much better business model — use the service as much as you want for a fixed monthly fee.

Serial innovation: The ticket to success

Two years later, Hastings co-founded Netflix based on a monthly subscription model and enabled by two technology innovations of the time. First was the Internet: Netflix subscribers could browse a huge choice of titles online and receive their movie in the mailbox. Another new technology, the DVD, made the movies-by-mail system possible because of its compact size and low cost to produce. And the Netflix subscription model also did away with the much-hated late fees.

Had Netflix stopped innovating at that point, perhaps Blockbuster would still be in business today. But, Netflix recognized another technology trend — streaming video. With the proliferation of broadband and Wi-Fi, young people were living on their laptops and consuming huge amounts of video content. In 2007, Netflix launched a service to stream movies and television to users’ computers and TVs.

“The End,” or how to avoid it

Blockbuster failed to look around and adapt to change, while Netflix did, and the rest is business history. In the end, Netflix toppled a huge competitor using disruptive technological innovation, or what the Harvard Business Review (HBR) calls has called “big bang disruption.” According to HBR, “Big bang disruption differs in that the startup offers an innovation that’s not only cheaper, but better — higher quality, more convenient, or both — almost right off the bat.”

This is where IT can create value. Blockbuster’s management had failed to evolve, and Netflix stepped into the gaping window of opportunity. It was a technologist with an innovative business idea — let subscribers rent as many movies as they want with no late fees — who had the technology vision to enable it. Similarly, the technologists in IT have a responsibility to their C-suite partners to look around at trends and enable the business to create innovation — ahead of the competition. So whereas in the past IT was thought of as rigid, today it needs to be ahead of the curve, not just providing core services and reducing IT costs but contributing value to the business through innovation.

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