Most businesses find themselves precariously balanced between reacting and planning.
It’s a battle almost always won by the need to tend to the impact of decisions we made yesterday, the consequences of which we couldn’t or didn’t see at the time.
This creates a defensive, reductive view of a company and its possibilities, and usually results in neither the business nor its people fulfilling their potential.
Regular readers here will know that I am an impassioned practitioner of the power of envisioning the future we aspire to create - for ourselves and our business - and then designing and building a model capable of fulfilling that vision.
At the Wired/MDC conference on Tuesday, I listened to the founder of Netflix - Reed Hastings - describe the quite remarkable story of how he and his partners built their company.
Netflix started its subscriber-based movie and TV show rental business twelve years ago. Today, it has 23.6 million subscribers, and has just passed Comcast Cable in audience size.
Quite something for a business whose original business model was mail-order DVD rentals.
Except that its original model was not mail-order DVD rentals.
Its original model was the one it is living today: real-time streaming of movies and TV shows over the internet.
A model which follows a strategy borne of a simple realization. That the Purpose of a movie rental company is to offer its customers the widest choice of rentable movies whenever they want to watch them. Or as Reed Hastings wrote in 2005, "We rent movies. But the real service we provide customers is convenience."
Back in 1999, when Netflix signed its first subscriber, anyone on the web looking for content was going to AOL.com and listening to their modem sync up to the AOL servers at 56K. If you were lucky, you got mail. And if you waited long enough, a picture or two. You would have waited a long time for a movie. For some movies, you’d still be waiting.
In 1999, the best way to rent movies was to go to Blockbuster. And from Blockbuster’s perspective, they were fulfilling the movie renters' need. Some people got their first choice movie. The stores were pretty close to most people's homes. And as long as you got the movie back within a couple of days, the prices were competitive.
Except, if you looked closely, they were doing it on their terms. Not on their customers. And whenever you build a business based on what works for you, you leave a gap for someone else to build a business that works for the customer.
Enter Netflix.
“They built the railway line over the Alps before there was an engine capable of making the journey.”
One of the rock-like foundations on which the Technology Age has been built is Moore’s Law, which states that computer processing power will double every 24 months. Its accuracy has allowed for technological R&D to produce rapidly iterative design and capability.
Were all of life based on such certainty, our time here would be both richer and poorer. But when it comes to building a scalable business, speed of success is dramatically encouraged by predictability of resources.
Reed Hastings and his partners pulled out a spreadsheet and applied Moore’s Law to bandwidth expansion. Were the same growth-rate to hold true for both, when, they asked, would Netflix be able to satisfy the purest definition of its Purpose, and deliver streaming movies in real-time over the internet?
The answer, their spreadsheet projected, was 2008.
From that day, and every day for the next nine years, they worked to build a business capable of delivering the widest selection of movies as fast as possible to their customers based on current technology. It was a business whose end they had already designed.
The business was home delivery of DVDs, and they used it to create four long-term assets:
- A brand synonymous with being the best way to bring movies into our living rooms
- A reputation for a broad, deep and growing catalog
- A loyal and growing subscriber base
- A reputation for customer service
Everything else about Netflix 1999-2008, they planned to throw away.
As it turned out, the spreadsheet was right. And so was the strategy.
In the meantime, Blockbuster - which already possessed all four of the foundations Netflix aspired to create - continued to look backwards.
Driven by its historic success, and an operational model based on number and location of storefronts, Blockbuster convinced itself its approach was right. And if its approach was right, the answer to falling revenues must be to address the fundamentals.
Extended rental periods; reduced late fees; earlier new releases; increased inventory. All of which added cost, cut into margins and did little to arrest declining interest. Fundamentals in terms of Blockbuster’s business. But increasingly meaningless to its customers.
Because in the pursuit of its long term strategy, Netflix had discovered that choice and convenience were more important to most renters than immediacy. And so, knowing they didn't yet have the means to satisfy the entire Purpose, they built a model that in the short-run would satisfy two thirds of it. And they started mailing out DVDs to its customers. No more disappointment at the store. No more store in fact. Just ease and choice.
And, even better, Netflix knew this was just a stepping stone. They knew that the third leg of the strategy was just a matter of time. Their spreadsheet said so. They just had to wait for the technology to catch up.
When, in 2008, it did, Netflix satisfied their ten year old strategy to stream movies straight into the home. It took a couple of hours to download a movie, and the quality was only alright. But, innovation is about improvement, not perfection.
The results are astounding. Today, Netflix is valued at $12.5 billion and has recently committed $100 million to produce its own programming for the first time.
Blockbuster was sold a month ago for $400 million. $87 million of which was debt. From a high of 4,000 stores, its new owners are hopeful they will be able to keep 400 open.
This week, Comcast announced a new residential internet service that will allow its subscribers to download an HD movie in 3 minutes.
For Blockbuster, it probably means nothing.
For those waiting for new releases to be instantaneously available in 3D, it’s progress.
For Netflix, it’s just one more step on a journey that began when Reed Hastings pulled out his spreadsheet and designed the future of his company.
For the rest of us, it's perhaps a good reminder to make sure we're clear about what business we're building.
