Netflix found new and interesting ways to solve a critical problem: people watching video content at their convenience, often in the comfort of their own homes, and eventually on the go.
Before Netflix, watching movies was either a matter of going to a theater, watching on TV and being interrupted by commercials, or visiting a local video rental store: which included late fees and a lack of inventory.
First in the form of all-you-could-rent DVDs in the mail, then with one of the world’s first streaming platforms, Netflix did this in the best way anyone had seen, which allowed it to become the first choice for watching content.
Netflix solved a recurring problem of wanting to watch videos in a certain way. Not a soul watches one video and calls it quits. We watch content on an ongoing basis, making Netflix’s problem a repeating one. Solving a repeating problem is common in many of the world’s best products.
One of the founders of Netflix, Reed Hastings, was inspired to start Netflix after facing a large late fee after renting Apollo 13 from Blockbuster. Surprised by the cost of fees and annoyed by the inconvenience, he wanted to create a solution.
Late fees suck. Hastings experienced this first hand and they’re an artifact of the past thanks to Netflix. Rewinding to the past, if you forgot to return your video on time, or something came up, you’d get slapped with an extra fee on top of what you paid to rent. If you rented a VHS and didn’t rewind it, you’d get charged again. They solved this with a “return when you want” policy. It blew people’s minds. It was a better solution than the return timer that started after renting something from a store.
Inventory was a problem in the days of brick-and-mortar rentals. Netflix centralized its inventory in large stockpiles, and they were able to more effectively distribute goods without the constraint of scattered, decentralized buildings. Netflix created their product by combining several existing solutions, in a modularized fashion.
One module they would use, which was relatively new at the time, was the DVD. The DVD was an existing solution. It predictably encoded and transported video content in a more compact way than VHS. The picture quality of a DVD was better than cassette tapes as well. The founders of Netflix believed that the compact nature of DVDs could make it possible to ship more economically than its bulky older brother. The DVD would be the primary delivery mechanism for the requested media.
Netflix then combined their offering with another module, a website, to allow users to control which movies they received, and how many. The concept was new and old. Old in that an all-you-could-eat buffet was common enough. And new in that this could be applied to entertainment. By bundling a DVD delivery service with a website, Netflix offered a product that solved a common problem: sitting down with friends or loved ones on a cozy evening to see a new movie you were excited to watch. The website served as a be-anywhere kiosk where you could select the movies you wanted (and pay).
This pay-in-advance, get-what-you-want service also solved the latent want in customer’s minds: they didn’t want to leave their home to get or watch their favorite movie, they wanted to order and consume it from the comfort of their couch. They didn’t want to be interrupted by commercials. And they wanted to know their selection without traveling.
The importance of the product’s grasp on the problem—that moving, abstract amoeba—can’t be overstated. Netflix understood that people want to have fun. On the edges, maybe they want to learn something through an educational set of documentaries. They understood that late fees weren’t ideal, commercials were annoying, and inventory was important. People wanted certain media and they didn’t need to go to a store to find it. Netflix understood this problem deeply. Something we see in successful products is they often choose problems so large and unmoving, the problem doesn’t need to change as time goes on.
The combination of a website and all-you-could-watch DVDs arriving in the mail made Netflix a best-in-class solution. Near perfect. One group of customers wanted a larger selection, and didn’t want to drive to a brick-and-mortar location to roll the dice. Some wanted a movie waiting for them on a Friday night. Others lived in a rural area and didn’t have access to, or the effort required to drive hours to the closest Blockbuster. In 1998, a mail-order DVD service turned out to be the best possible solution by combining many modules together.
The best products, the most dominant athletes, and the most compelling art are significant in their cultural moment of time. Michael Jordan, da Vinci, Pele. While their body of work is impressive, the new crop takes over, and someone is next to carry the torch. Products often suffer the same consequence, though usually being a nostalgic memory of the past at best. But great products adapt. And successful products are never satisfied with their solution. If something in the world changes, making it easier, cheaper, or more likely to solve the ultimate problem, the product will change along with it. They’ll experiment with a new type of product that solves the same problem in a more perfect way.
While near-perfect at the time, Netflix had challenges. Centralized inventory was helpful, but it was still difficult to keep the new releases on hand for everyone in an economic way. For the consumer, returning the DVD wasn’t particularly fun. You’d have to keep track of your disc and your packaging, remember to watch it, and mail it back eventually.
Throughout the 2000s, internet bandwidth was growing, and Netflix started experimenting with a streaming service. In 2007, Netflix introduced “Watch Now”, allowing subscribers to watch a selection of TV shows and movies on their computers. Initially, this was added to the DVD rental service.
They started with about a thousand titles. Significantly less than every title in existence, and still less than their DVD lineup available for rental. Smooth like a marathoner they added title after title, building one of the largest libraries in the world. An added benefit of streaming meant that adding one title could serve everyone. No need to shard a limited inventory to first-come subscribers.
Netflix adding more titles made it more likely to become first in mind. When people thought “I want a movie” they started using Netflix more and more over competitors. It was the easiest and most likely place to find it. As your favorite moves, TV shows, and documentaries are added, more often the answer can be “you can find it on Netflix”. After several unsuccessful attempts to find a new release at Blockbuster, if your first try at Netflix was a success, you’d be more likely to start with Netflix next time. At some point, the scale tips, and person by person, the product at least meets—if not exceeds—your expectation to solve the problem. Word of mouth kicks in, and seemingly overnight, the product becomes a 100-ton freight train, laborious to stop.
During the transition of DVDs to streaming, Netflix was a temporary savior for the entertainment industry. The purchase of physical media was slowing, and entertainment executives were able to sell rights to Netflix to scale consumption. Of course, Netflix knew that people didn’t want DVDs, they wanted the video. This goes back to their deep understanding of the problem.
But innovation wasn’t free. Initially streaming meant trading off high-definition quality with a lower-quality standard that would allow streaming without pause. They were happy to trade off growing subscribers with quality—riding the internet wave—and believed that this solution was better than others at the time. It was the best. People got what they never had before: watching as much content as they desired anywhere they had an internet connection. Eventually, as available internet bandwidth hockey-sticked, Netflix would ditch its three DVD shipments. In 2012, Netflix’s annual revenue was $3.5 billion, and they had over 25 million subscribers.
Then Netflix found a new roadblock: success. In this past entertainment era, producers were happy to get more distribution for their content, making a buck along the way after suffering from DVD sales. But Netflix knew this well of content wasn’t infinite, and they’d eventually face direct competition. Sooner they’d face rising prices for content, which could prevent them from offering the service economically. In 2013 and still hungry, Netflix entered content production with its first original series “House of Cards”.
This was an experiment. One that worked. Creating original content did a few things: it differentiated Netflix as an entertainment provider and reduced its dependency on external content. In our framework, this also got Netflix closer to a perfect, best in class solution. If there was a highly-rated series you wanted to watch, and Netflix was the only place to watch it, it was the only destination for watching, and therefore first in mind. After introducing custom content, in 2014 Netflix had increased their annual revenue to $5.4 billion, and nearly 48 million subscribers.
Netflix didn’t invent subscriptions, DVDs, video streaming, or in-house content. They used modules—proven solutions to distinct problems—and bundled them smartly into a package, to give people what they wanted: their problem solved. This made them the best possible solution, and first in mind when it came to watching video content at home. Today, Netflix boasts a revenue in the $30 billion range and hundreds of millions of worldwide subscribers.