Netflix

"In all, Columbus did about fifty acquisitions between 2005 and 2015. That period also saw Columbus lay thousands of kilometres of cable throughout the Caribbean, including between Jamaica and the Dominican Republic, from Colombia to Ecuador, and across Panama, Costa Rica, Guatemala, and El Salvador. “We were an attacker for ten years. We basically built a network like stink and competed like stink as best we could,” Paddick recalled. “Our job was to build the best network in the region and make sure whatever came next worked best on our network. And that’s what we did. And what ended up happening was not only did the next killer apps like Netflix work best on our network, but all the other carriers in the region put down their pens and their capital budgets [for] building networks that were similar to ours and said, ‘We’ll use your network [to carry our traffic].’ That was a real game changer.”"

"Based on information released by the US stock market authorities, here are some of the startups in which Bernard Arnault has invested through his Dutch companies: 1800 Flowers (online flower-gift retailer); Ashford (cultural products e-commerce site); Boo (clothing e-commerce site); Boxman (online record store); Cryo Networks; Datek Online (online broker); e-Bay (online auctions); e-loan (real estate loans); epo.com (financial site); Firstmark (wireless local loop), in which Groupe Arnault invested $ 120 million; Furniture (office furniture e-commerce site); FusionOne (wireless technology); LeisurePlanet (tourism); Mercata (group buying); Mortgage (loans and credits); MotherNature (health and beauty); Pilinvest; MP3. com (online music); MyFamily.com (community site); Netflix (DVD rental); Oxygen Media (women's internet and TV), in which Groupe Arnault invested $ 122 million; Petopia (pet-related site); PlanetRX (health); VideoNet (interactive internet); Webvan (online grocery)."

"When some idea is shaking you so hard, you’re willing to go into poverty to make it a reality, that’s when you become an entrepreneur. Reed Hastings, founder of Netflix"

"In the Netflix example we see a feature of Scale Economies that recurs in many technology firms: a single fixed cost which declines per unit as it is prorated over higher and higher volumes. Beyond fixed costs, Scale Economies emerge from other sources as well. To name a few: Volume/area relationships. These occur when production costs are closely tied to area, while their utility is tied to volume, resulting in lower per-volume costs with increasing scale. Bulk milk tanks and warehouses would serve as examples. Distribution network density. As the density of a distribution network increases to accommodate more customers per area, delivery costs decline as more economical route structures can be accommodated. A new entrant competitor to UPS would face this difficulty. Learning economies. If learning leads to a benefit (reduced cost or improved deliverables) and is positively correlated with production levels, then a scale advantage accrues to the leader. Purchasing economies. A larger scale buyer can often elicit better pricing for inputs. For example, this has helped Wal-Mart."

"The Netflix response to these predicaments? They tested the waters, investing 1–2% of revenue on streaming79—not a bet-the-company amount, sure, but hardly trivial."

"Scale Economies: Summing Up Netflix’s streaming business is the driver of its remarkable rise to its double-digit billion market capitalization. Getting there has required the relentless pursuit of excellence in every corner of the company. Such dedication and focus is essential for creating value, but it is not sufficient. In addition, Netflix’s success could only emerge once they had crafted a route to continuing Power in significant markets—in other words, a strategy. The cornerstone of this strategy was moving to exclusives and originals which enabled them to wield their scale as a source of profound leverage. Such Scale Economies fully satisfy our definition of Power: the Benefit…"

"the value potential was opaque to the investment community, not because investors were thoughtless or ill-informed, but because the “route to Power” was not just unknown, but unknowable—even to Netflix management."

"The investment hypothesis was grounded in this dilemma: Blockbuster would drag their feet facing up to the painful existential imperatives that confronted them and Netflix would continue to cannibalize their customers.14 This hypothesis was borne out by Blockbuster’s subsequent behavior and their eventual demise."

"For Netflix, an advancing technology frontier opened up the potential for streaming: Moore’s Law in semiconductors, plus similar exponential advances in optical communications and storage. The embodiments of these trends were high-speed Internet connections, acceptably costed digital storage and a broad dispersion of devices with adequate performance (displays, storage, graphics processing and connectivity). If Netflix had bet the company on streaming any earlier, they would have been dead in the water—external conditions were not yet ripe."

"Customers responded positively, encouraging Netflix to fuel the fire. The company negotiated in turn with each hardware vendor to achieve device ubiquity; they upped their commitment on content, eventually reaching deals with CBS, Disney, Starz and MTV in 2008–2009, and they constantly refined the backend technology needed to make streaming a seamless customer experience."

"Out of the Frying Pan… When I became an investor in Netflix in 2003, my investment hypothesis had two legs: Netflix’s DVD-rental business had Power: Counter-Positioning to the brick-and-mortar incumbent, Blockbuster; Process Power, as well as modest spatial distribution Scale Economies relative to other DVD-by-mail wannabes. This Power was not properly recognized by the investment community."

"Power. The final step was the thrust into exclusives and originals. By bringing to rein the cost of content, Netflix forged powerful Scale Economies and hence Power."

"In our discussion of Power, I have been careful to characterize it as creating a potential for value, but this potential can only be realized when coupled with operational excellence. Netflix’s plummet in 2011 was the result of operational errors.19 Though the period proved painful, their strategy still remained valid, and their Power intact, so these missteps were not fatal."

"Power Progression. At Netflix, we aggressively prioritize our attention in order to focus on what is essential to accomplish now."

"if you want to develop Power, your first step is invention: breakthrough products, engaging brands, innovative business models. The first step, yes, but it can’t be the last step. Had Netflix invented the streaming product without introducing originals, they would have been left with an easily imitated commodity business. There would have been no Power and little value in the business."

"Flux in external conditions creates new threats and opportunities. In the case of Netflix, it was both: the eventual decline of their DVD-by-mail business was the threat, and streaming the opportunity."

"But rewind to my 2009 problem. The question facing me was this: How could we energetically pursue thoughtful strategizing at Netflix? Fortunately, by this time, we had expended a great deal of effort honing our unique culture—and that provided the key. We could face up to our challenging strategic climate by tapping into the very values we had worked so hard to embed in the company. Our first public “culture deck,” released in August of 2009, identified nine highly valued behaviors. The first was “Judgment.” As we elaborated: You make wise decisions … despite ambiguity You identify root causes and get beyond treating symptoms You think strategically and can articulate what you are and are not trying to do You smartly separate what must be done well now and what can be improved later"

"This parsing of Power intensity into the separate strata of industry economics and competitive position is critical for a practitioner as it applies to most types of Power. In any assessment of Power, both need to be understood independently, and both are fair game for strategy initiatives.21 Here, with their streaming business, Netflix launched a two-pronged assault. Their thrust into exclusives and originals changed the economic structure of the industry, while their early-in and thoughtful rollout gave them a scale advantage. If Netflix had accepted the existing industry economic structure as an unalterable given, then…"

"Invention. For Netflix, the inventions were their new product directions: streaming and originals and all the associated complements."

"Most of my time and that of everyone else at Netflix must be spent achieving superb execution. Fail at this, and you will surely stumble."

"For Scale Economies, the Benefit is straightforward: lowered costs. In the case of Netflix, their lead in subscribers translated directly in lower content costs…"

"In the spring of 2003 I took a leap by investing in a small early-stage company based in Los Gatos, California. Today you may recognize the name: Netflix. Most of my investments have been in large caps, but I made this bet on Netflix due to their impressive mail-order DVD-rental business which was successfully disintermediating Blockbuster’s brick-and-mortar business model. Blockbuster faced the unpleasant choice of losing market share or eliminating late fees, which accounted for about half of their income."

"Netflix understood this but remained undaunted. First of all, they realized they had no choice but to embrace streaming; as astute strategists, they knew that if they didn’t obsolete themselves, someone else would do it to them. And they were tactically smart. Given the uncertainty inherent in this emerging field, they took their time, demurring on high-testosterone bet-the-company antics. Instead, they modestly eased into streaming in 2007, hoping to test the waters and gain the needed experience. They accompanied this with much painstaking legwork, partnering with a dizzying array of electronic hardware streaming platform makers."

"This situation creates a very difficult position for Netflix’s smaller-scale streaming competitors. If they offer the same deliverable as Netflix, similar amounts of content for the same price, their P&L will suffer. If they try to remediate this by offering less content or raising prices, customers will abandon their service and…"

"Exclusive rights and originals made content, a major component of Netflix’s cost structure, a fixed-cost item. Any potential streamer would now have to ante up the same number of dollars, regardless of how many subscribers they had. If, say, Netflix paid $100M for House of Cards and their streaming business had 30M customers, then the cost per customer was three dollars and change. In this scenario, a competitor with only one million subscribers would have to ante up $100 per subscriber. This was a radical change in industry economics, and it put to rest the specter of a value-destroying commodity rat race."

"We derive the SLM for Netflix-like fixed cost Scale Economies…"

"Netflix adaptively found its way to streaming ascendancy via successive thoughtful experimentation, demonstrating once again that action is the first principle of strategy, just as it is in business. This is about as far removed from the orderly analytics of strategic planning as you can imagine."

"Competitive Position: an attractive new service. Netflix’s pioneering rollout excited customers, and their influx propelled Netflix to an early relative scale advantage that the company has never relinquished."

"It wasn’t a fine-tuning of their DVD-by-mail business which increased Netflix’s market cap by a factor of 100; it was streaming, with…"

"For Netflix, their original DVD-by-mail business endowed them with numerous resources relevant to streaming, including such directly transferable skills as their recommendation engine, their UI, their customer data and their relationships with content owners. Equally important was the platform of their existing business, which allowed them to easily offer streaming as a complement to DVD-by-mail, rather than a standalone service. This was far more important than you might think, as it silenced potential complaints about the initial small streaming catalogue that could have driven fatally negative word-of-mouth. Conversely, though…"

"To my chagrin, I was unable to convince Netflix founder Reed Hastings to merge his then-upstart company into DirecTV when I was chairman. Waiting for dinner to be served at a party hosted by Herb Allen at his annual Sun Valley retreat in 2011, Reed explained to me that he was betting the entire company on a rapid switch to distributing movies over the internet. I could see that he was close to cracking the code on streaming content ahead of cable TV, satellite companies—everyone. He passed. Sometimes it’s hard to catch lightning in a bottle."