This article is part of our Business Strategies series, an insight and analysis into the makeup and model of some of the world's most successful startups.
A streaming content service provider and, increasingly, production company, Netflix is responsible for massive shifts in consumer viewing patterns and has almost single-handedly changed the way we experience media forever.
From a simple DVD sales and rental platform to a global streaming behemoth, we're taking a closer look at Netflix's business strategy – and what you as a business owner can learn from it.
Netflix's corporate strategy can be summarised in its mission and vision statements:
We promise our customers stellar service, our suppliers a valuable partner, our investors the prospects of sustained profitable growth, and our employees the allure of huge impact.
Becoming the best global entertainment distribution service.
- Founded: August 1997
- Founders: Reed Hastings and Marc Randolph
- Headquarters: Los Gatos, California, USA
- Current CEO: Reed Hastings
- Global Employees: 7,100 (2018)
- Type: Public (floated May 2002)
- Initial Funding: $2.5m self-funding
- Key Products / Services: Content streaming, content distribution and content production
bennymarty - stock.adobe.com
Given its current status as an established unicorn, the origins of Netflix now seem somewhat quaint. Frustrated by Blockbuster's $40 late fee (when returning a VHS copy of Apollo 13, no less), current CEO and company co-founder Reed Hastings resolved to overhaul the then-established order of video rental.
The result was a subscription-based business model, with the unique selling point being the abolishment of due dates and late fees, as well as providing users with unlimited access to the company's content library.
However, while this strategy received modest success and proved scalable, it wasn't until dramatic shifts in technology – namely internet download speeds – that Netflix was truly able to come into its own.
Realising the potential of the digital revolution, Hastings ripped up the business plan and incorporated a new focus for the company - video streaming - and, despite initial apprehension from investors, the rental model was phased out across 2010 and 2011.
Still a subscription-based service today, customers can access an entire library of TV shows and movies in one easily-accessible place - and from a multitude of devices, too, including smart TVs, mobile phones, laptops, tablets and media sticks.
However, it's not just about recycling existing content; in 2013, Netflix aired House of Cards, a critically-acclaimed political drama starring A-list actors such as Kevin Spacey. This was the first taste of Netflix's original content, now branded as Netflix Originals; similar productions, such as Orange Is the New Black, Stranger Things and 13 Reasons Why have followed suit to great success.
Investment in original content 2014-2018 ($bn)
The company is also increasingly expanding into high-budget feature-length productions, including Martin Scorsese's The Irishman, a $160m production that was initially dropped by Paramount Pictures. This is a particularly intriguing area for Netflix, as in many cases, the cost of a cinema ticket now exceeds the company's monthly subscription cost. This, in turn, raises the genuine possibility that moving forward, Netflix could even begin to disrupt the entire motion picture industry.
The company also invests in curating the best foreign-language shows from around the world and, in some cases, even re-editing them to align more closely with the Netflix format; Spanish heist thriller La Casa de Papel is a hugely successful example of this. It also seeks to continue popular programmes that were discontinued or cancelled by other distributors, such as Black Mirror, Arrested Development and Trailer Park Boys, while a children's only library of content has also met with a positive reaction.
Crucially, the company offers a no strings attached, one-month free trial, too, which enables potential customers to access all of the available content. According to a study by wealth management firm Merriman Capital, the conversion rate of these free trials is a staggering 93%, which is well above the average conversion rate of 65% for other streaming services.
While it is, of course, not the only enterprise to offer such content, Netflix, through a combination of smart marketing, aggressive expansion and an ability to create culturally significant content, has established itself as the undoubted market leader.
Sample % of US viewing habits in 2018
While, in itself, Netflix's content library offers worth to customers, its true value - as touched upon - lies in the exclusivity of its most popular content. Take The Haunting of Hill House, for example, a Netflix-produced miniseries that aired on the platform in 2018.
Positively received by critics and audiences alike, the show attracted tremendous hype across social media platforms, almost creating a zeitgeist of its own - particularly with younger viewers. To be a part of this cultural phenomenon, however, viewers had to purchase a subscription - or at least sign up to the free trial. The Haunting of Hill House wasn't a one-off, either, with the likes of Making a Murderer, Abducted in Plain Sight and Bird Box having a similar effect, and establishing Netflix as merely the platform on which to access the product.
That's not to undersell the platform, though; convenience is another key aspect of Netflix's value. With an easy-to-navigate user interface and a host of handy features (such as the ability to skip the opening credits of a show, or watch trailers and deleted scenes), the company understands the viewing habits of its users. It also follows consumer trends in general; content suggestions are heavily personalised, for example, while the ability to view content offline allows users to watch during commutes, plane journeys, or indeed anywhere that its users wish.
In terms of its customers, Netflix's most important partner is perhaps Amazon, whose AWS cloud servers provide crucial support and hosting for all the company's digital needs. If its servers are down, then its customers cannot access their content, so this relationship must be robust.
Netflix also works with numerous global telecommunications providers; in the US, for example, it interacts with the likes of Verizon, AT&T and Comcast at exchange points to ensure that users receive a smooth service.
Of course, it also works heavily with content providers and production companies, too. Given the location-based nature of what it can and can't show, the company must build relationships with a whole host of television networks and distribution studios all over the world, especially given the frequently revolving content that it features from month to month.
Officially established in 1998, Netflix has remained under the control (or co-control) of Hastings since its inception, with the company continually growing year-on-year. As with many Silicon Valley-founded enterprises, his leadership style is heavily non-traditional.
CEO: Reed Hastings (1999-present)
Credited with a transformational-bordering-on-laissez-faire leadership style, Hastings isn't interested in telling his employees what to do; instead, he trusts in the company's hiring process, adhering to the Steve Jobs mantra of letting hires "tell us what to do".
This is illustrated by his decision in 2013 to greenlight House of Cards, a process which reportedly took just 30 minutes. According to Hastings, the choice was an easy one, as the groundwork done by Netflix's employees was so comprehensive.
CCO: Ted Sarandos (2000-present)
With an annual content budget of $6bn, Ted Sarandos is responsible for greenlighting Netflix's original programming; under his watch, the company's shows have received over 120 Emmy nominations.
Perhaps more significantly, though, Sarandos has implemented a unique approach to content production. Utilising a combination of personal judgement and data-driven algorithms for greenlighting decisions, he has described traditional TV network models as outdated. For instance, Sarandos does not order pilot episodes for potential productions; he also prefers to give shows a chance to develop a fan base over multiple seasons, rather than to cancel underperforming shows straight away.
As the company has evolved, so too has Netflix's brand strategy. Certain aspects of this are more visible - such as the numerous company logo changes - while others are more subtle.
Thanks to the company's in-depth analysis procedures, Netflix is able to reach its global target audience while still maintaining regional markets. When looking at the years 1999 to 2017, for instance, Netflix jumped from 110,000 subscribers in the US alone to 104 million, more than half of whom were located outside the United States. This increase in global interest is reflective of the company's inclusive business model, which takes into consideration international interest in their services; given that the company's brand value more than doubled in 2018 to around $21.2bn, it's a strategy that is certainly working.
Number of paid Netflix subscribers 2012-2018
Crucially, Netflix also understands the demographics of its core target market, as evidenced by the humourous and light-hearted nature of its social media marketing strategy.
Various big-name content streaming services have attempted to dominate the market in recent years: Hulu, Amazon Prime, and Apple TV are serious competitors, while Google, Disney and TimeWarner are all getting in on the act. Netflix has continued to maintain market leadership, though, in spite of massive investment and diversification in Amazon Prime in particular.
Although Netflix (at the time of writing) leads the way in terms of subscribers, revenue and investment in content, this diversification has the most potential to create problems for Netflix. Amazon Prime, for instance, has recently acquired live broadcasting rights for the English Premier League, which will likely lead to a significant spike in subscriptions and a potential knock-on effect. In terms of content, it is also attempting to go head-to-head with Netflix; for example, its upcoming Lord of the Rings series will be the most expensive ever made, with a staggering budget of $1bn.
Comparison of paid subscribers in 2018
It remains to be seen how this will affect Netflix's market dominance over the next five years, but for now, its tried and tested strategy of producing high-quality, exclusive content seems to be serving it well.
Under a CEO that requires self-motivated and innovative employees, Netflix boasts a highly unique company culture. The company's careers page is proof of this, emphasising the focus on transparency, accountability and independent decision-making, while it even routinely encourages employees to interview with competitors to attain a greater understanding of their market rate.
The company has also attracted criticism for its culture, however, particularly its own stark admission that it "keep(s) only our highly effective people". Some former employees have spoken out about this high-pressure, performance-driven environment, although it should be noted that Netflix themselves admit that this lack of stability is only motivational for a select few. Either way, the company's growth and success to this point suggest that such a brutal culture is working, while Bretton Putter makes a good point in Forbes: the entire point of having a company culture is that it's not meant to be for everybody.
As with all successful startups, Netflix's ability to scale is as a result of its leadership identifying external opportunity – in this case, the potential of video streaming. The company's corporate strategy has evolved massively over the past two decades and is seemingly poised to change again over the next one, but its commitment to producing quality content will always ensure that it has a paying audience at the heart of what it does.
- Offer something exclusive — What separates Netflix from competing providers is not its existing library, but the unique content it has invested in and created exclusively for their platform. Always ensure that you offer your customers something that they can't get elsewhere.
- Reach a global market — Creating an international service adaptable to any regional market has been crucial to Netflix's growth. When devising your initial business plan, always consider how your business model might scale.
- Move with the times — Netflix began as a regional mail-order DVD rental service in 1997, but with the swift shift and expansion of the internet, they adapted and altered their services drastically. Always look to identify where potential opportunities could work to your benefit.
- Company culture should reflect the CEO — Different companies extol different virtues, but they should always reflect the company's goal. Only recruit people that share the same values and motivations as you, and your culture will evolve naturally.
What other lessons can we take from Netflix's business strategy? Let us know your thoughts in the comments below.