From mailed DVDs to online streaming, Netflix exemplifies industry changes of the last twenty years. Co-founder Mitch Lowe talked at this year’s ORIAs about how the company adapted to changing technology and customer demand.
With Netflix now a go-to online streaming service and content creator worth billions, it can be easy to forget that the business started out in mail-order DVD rental and only went global within the last ten years.
Netflix co-founder Mitch Lowe remembers, however. At the tenth annual Online Retailer conference, held in Sydney on 25-26 July, he spoke about Netflix’s early days and how the company adapted to changing technology.
“When we started, of course, we had no idea the impact we would have,” Lowe told the audience at his talk. “We thought, you know, maybe we can create a job for ourselves for the next few years. Bottom line, what we were trying to do is solve problems that we felt in our own personal life. And so many startups start out that way.”
What was the problem that Lowe and his co-founders, Marc Randolph and Reed Hastings, were trying to solve?
“Late fees,” said Lowe. “It’s just amazing that a whole industry was built on fining you for bringing in something late when you’re actually trying to have fun and watch a great movie. The other thing we hated, the video stores had a very limited selection, mostly due to the space and customer base.”
Lowe admires the culture that Netflix is part of, one where successful startups are “founded on just a simple idea …. That’s the amazing part of today, where you don’t need huge infrastructure, you don’t need lots of people. You can essentially found an entire business with a simple idea that’s solving a problem.”
The company went through various hurdles before it became successful: “Believe me, if you think Netflix was like a perfect ride to the top, it had many, many bumps and challenges like this. But it was fun; it was fun trying to re-create that experience that you have at retail.”
That sense of fun helped Netflix to remain innovative and adaptable at a time when technology was reshaping the industry beyond recognition. “I know that we all know that things are changing at an even more rapid clip than they did in those days,” said Lowe, “but it was a completely different world.”
Listening to customer feedback identified problems with the initial setup and led the company in unexpected directions. A throwaway comment, overheard during a focus group in the company’s mail-order days, made the Netflix team realise a fundamental flaw they needed to fix: speed of delivery. Customers would order a DVD and then, by the time it arrived, be in the mood for something else. Relying on postal times meant that Netflix couldn’t expand past a local customer base.
“We didn’t immediately figure out how to solve that speed of delivery,” admits Lowe. After all, streaming and downloading hadn’t even been invented yet. “We thought, hmm, maybe there are some other clever ways we can get movies to people faster.” They trialed different approaches, including the “logistical nightmare” of installing DVD kiosks around the US, but “we just knew eventually that the technology would catch up”.
And it did, with streaming becoming possible in 2008, ten years after Netflix was founded. This did not immediately solve the company’s problems – in fact, people were initially nervous about streaming. Netflix overcame this by helping customers transition into the new technology, starting out with a deal where users could subscribe free to streaming if they paid for DVDs by mail.
Netflix still turns a sizeable profit with mail-order DVD rental in the US, but internationally it has become better known for its online services.
“You have to have the culture in the company to know what to do with what you learn,” said Lowe. “And we had that. But understanding the customer and how they use [the technology] makes a huge difference, and you have to pay for it. Even today, no one who works for Netflix gets the service for free. And it’s all because you need to experience it, just like a customer.”
Lowe’s final tip was that “you can’t be afraid to make a decision that may seem risky”. He pointed out that, in a culture overrun by startups and rapid change, allowing a business to stagnate is riskier than revamping it. Fear of change – of undermining one’s own services by moving onto new turf – has destroyed many a profitable company.
“I mean, look at what Blockbuster did,” said Lowe, who has reason to critique the video rental company’s shortsightedness. “They kept putting off and putting off on making a decision. Today I am sure you could come up with ten to twenty different companies, you know … they sat around and waited for a start-up to take over their business. And that is because the executives sat around and thought, ‘Boy we gotta protect our current business, we can’t cannibalise it.’”
Yet “cannibalising” itself is exactly what Netflix did, and the success of that risk shows in today’s multibillion-dollar company. “One of the most amazing things Netflix did” when it was already doing well in 2008, said Lowe, was to launch “a streaming service that cannibalised its complete business. How many companies do that? Launch a service or product that totally takes their existing, very profitable, growing successful business away? And that’s what you have to do to succeed today in this changing world.”