Netflix and the secret to disruption

I remember first reading about business disruption in Clayton Christensen’s book The Innovator’s Dilemma.

He argues that companies like Uber may have caused seismic shifts in their industries by digitalizing existing industries, but they did not disrupt the industries. True disruptors come up with a totally new business idea and a completely new market, turning non-customers into customers. If you ask any pro today what true disruption looks like, they will say “Netflix.”

So, I was thrilled to get some time with Marc Randolph, co-founder of Netflix, at our recent digital event conXion. Here are the highlights:

Q. Marc, what is the Netflix story and what is disruption?

A. It is exciting to look back at the story. We did not quite envision the effect we would have on the way people watch – or the way people make – TV and movies. But, after hundreds of twists and turns, dead ends and near-death experiences it sure worked didn’t it?

Q. I know that technology will change nothing if you don’t have a culture to support it. This makes creating a disruptive culture a mandate for companies. So, what does such a culture look like?

A. When you are doing something brand new; when you are a small scrappy start-up trying to take on a huge competitor, especially by doing something different, the future is opaque. You do not know what is going to work. You must be responsive, take risks. Perfection is the enemy of speed and innovation. It’s not that you reward failure, but your culture has to support everyone in trying things.

At the beginning, it is fairly easy. You have hundreds of things to do with 10 people to do them. So, you have people who are responsible, and can do it without supervision. You can say “meet you there in three weeks” and they get there. They might be bloodied, but they figured things out and they made it. With innovative companies, you continue to do this with hundreds or thousands or even tens of thousands of people. That is the secret sauce for Netflix.

Q. When I think of Netflix, I think streaming innovation. At Software AG, we’ve started to stream innovation to our customers via a subscription model. What advice would you give to companies wanting to make the shift to subscription?

A. On day one for Netflix, it was DVD rental by mail – a la carte with due dates and late fees. It took us 1.5 years of struggling and failure before we stumbled on subscription. It is a very, very different thing. It shifts the company from focusing on the sale to focusing on the retention; you live and die by satisfying your customers EVERY single day.

With Netflix, that means a fanatical focus on great content. It is not the marketing or the back catalogue that count, it is giving the customers great content every day. That means constant innovation, asking yourself: “How do I do this better?”

Q. In 2000 you had a huge challenge: You built a company that worked for DVDs with an eye to but staying relevant for when the world transitioned to streaming. How did you bridge the gap to tomorrow?

A. When we started, everyone told me it would never work, that we would never beat Blockbuster; we were tiny – they were a $6bn, 9,000-store company. How could we possibly compete?

The other thing they said was: “It’s just a matter of time before this DVD thing is streaming.” They were right, but wrong about the timing. We had to maintain a DVD business that we knew would inevitably change to streaming. It was the smartest decision we ever made, building a company that was meaningful then while building equity for the future.

We decided that delivery was agnostic, what was important was connecting customers with great stories. DVDs? Sure. Over the airwaves/Internet? Sure. With algorithms to help predict taste and with original content we built the equity.

When world was ready to stream, we were ready. We already had relationships with tens of millions of subscribers, and they were not disrupted. They thought of us as a content company. And we will still be relevant when people can beam content telepathically into your tooth fillings.

Q. Disrupt yourself, before someone disrupts you, that’s both advice and your mantra. But it’s easy to say and difficult to do. How do you constantly disrupt yourself – being sure you don’t get comfortable or miss the next wave?

A. It is down to one word: Courage. You must have courage to do what’s right for the customer – even though you know it will have a profound impact on your current business, distributors, employees, supply chains. Your customers don’t care if you are getting an earful from your biggest distributor. They don’t care that your senior sales leader quits.

It’s often not that you lack resources or talent. It can be because you are locked into quarterly earnings, or afraid, unable or unwilling to change. But you will be left behind. And then it is too late.

And that is the lesson; if you are not willing to disrupt yourself, you are leaving yourself wide open for someone else who will do it for you.

 See the three-minute extract from the video by clicking below.