Netflix has announced it is going to release its first official movie in 2015. This is a nice example of what together with Chris Zott we define as business model innovation – introducing a new business model in its industry. Netflix was started by Reed Hastings originally innovating the business model in the movie rental industry, dislodging Blockbuster as the reference for home video rental by organizing a new way to distribute the same product, movie rental, through sending DVDs by mail to customers instead of making customers go to a video rental shop.
Netflix thus replaced the established brick-and-mortar movie distribution system based on rental shops as practiced by such companies as Blockbuster, developing instead an online catalog and instituting a partnership with the U.S. Postal Service to ship movies with a pre-paid return envelope directly to user homes after burning DVDs just-in-time as the customers passed their movie orders through the Internet. By offering unlimited rentals for a low-priced monthly subscription and enhancing user experience with a highly sophisticated recommendation system based on member ratings, Netflix quickly gained a competitive advantage in the movie distribution industry despite being a latecomer. Customers flocked to this new company that offered a much more convenient experience of ordering movies online as compared to the trouble of having to physically go to the competitors’ rental shops and paying late fees each time they forgot to return a movie on time.
Netflix innovated again, moving its business model into streaming services, and today it is in a way not surprising to read about Netflix’s efforts to also control the content provided to its customers. One has to keep in mind though that Netflix is rather an exception than a rule, as from research on established firms we know that it is actually very difficult for incumbents to change and adapt their business models, when inertia is generally the rule and organizational routines determine the future. Many companies, such as Kodak, illustrate this. Business model innovation is not a panacea though, as it has to be designed very carefully due to several constraints, faced by both new, but also established firms trying to innovate. Netflix has managed this feat successfully several times now, and can probably offer several lessons to careful observers.