In 2015, Netflix set a record with 6.78 billion USD in revenue. While popular shows like Daredevil and deals with famous actors like Adam Sandler helped grow its 40 million customer base, this video-on-demand service didn’t just appear overnight. Netflix went through many different stages and changed a lot from its original concept, which started nearly 20 years ago, to become a leader in the Video on Demand market.
American philanthropist and entrepreneur,Wilmot Reed Hastings, CEO of Netflix and a member of the Facebook board of directors, got the idea to start a VOD service back in 1997. The idea actually came to him after he was inclined to pay a late fee for a tape that he forgot to return to the Blockbuster video store. Ironically, Hastings offered Blockbuster a partnership in 2000, making it clear that he is about to make a serious move on this market. Blockbuster turned down his offer, and, as a sole competitor, they got annihilated by Netflix by the end of 2005.
Since 2013, Netflix has even been producing its own shows. Today, this company is an undisputed kingpin of the VOD industry that is changing the television as we know it, and one of the leading companies when it comes to forward thinking. Recently, Netflix presented a unique model of paternity/maternity leave that even applies for their hourly workers, and its owner, Reed Hastings, is investing heavily in the reform of the Californian educational system.
But how is this machine actually running? Not the app, but the actual business model. What makes it so unique and how could a VOD service get as big as Netflix has today? Let’s break down this model into crucial elements.
The Netflix Business Model
Introducing a subscription fee to the video on demand service was certainly a risky move. Before Netflix, this practice was still unheard of. Today, inspired by the success of this company, many services are adopting this model. You can find everything from opera to BBC classic shows available online in exchange for a subscription fee. However, the VOD giant is still dominating the market, with more than 89% of total shows streamed online during the first quarter of 2013 coming from this service alone.
The DVD rental business is actually one of the least lucrative services which Netflix offers. Although DVD-mailing system was popular at first, with the development of modern technologies, and streaming services becoming more popular over the years, today this business segment of Netflix is actually in decline. On the other hand, the domestic streaming service and international streaming service are both rapidly growing.
Image Source: revenuesandprofits.com
Apart from being one of the pioneers of the industry with their subscription model, the value proposition is yet another element which helped this particular service to become as popular as it is today. In fact, there are a total of three elements that are making all the difference.
- Affordable price
- Accessibility
- Original content
While Netflix offers more than 20.000 episodes of various shows for an extremely affordable price, it also delivers its content via multiple and various devices. There isn’t a service on the market which covers more electronic devices than this one. The rating algorithm is certainly a feature which adds on the value, but the cherry on top is definitely the original content which Netflix produces. In fact, the Fuller House show managed to get a total of 21 million of viewers in less than a month.
However, being the first VOD service of this sort, Netflix had the unique opportunity to offer this model to many studios and broadcasting networks. When faced with the possibility of selling their content through this ingenious model, very few companies made the same mistake which Blockbuster did, and almost none of them turned down Hasting’s offer. So before the actual production of the original content, Netflix served as a side-channel for distribution to many other companies, paying for licenses and exclusive deals in order to attract the crowd.
After this initial period, this company made another breakthrough with an ingenious idea. In 2013, the good people of Netflix started developing their own production and shows, based on the analysis of their own customers’ data. So as the people came to watch their favorite shows, the company monitored rankings, popularity, and interest of their customers and invested in original content production. A marvelous and yet unseen concept which proved to be extremely lucrative. This truly changed the world of VOD for good.
In conclusion, you definitely have to be the first that will answer a demand as big as this one is if you want to build a VOD service this big. Or any other service for that matter. Having that edge over the competition, or not having any actual competition at all, is definitely a compulsory factor. However, employing big data analysis in the production of original content is certainly a step forward in this industry that will redefine it for good.