NETFLIX: HOW WATCHING MOVIES CHANGED FOREVER

Jess & George

Why is Netflix Breakthrough? - Outline

• Extreme customization for each user account

• Constant communication of that customization to the users

• Able to rapidly innovate new ideas into working products

• Completely and irreversibly changed the video renting industry for the better

• Dominates the entire online content market when using consumption of bandwidth as a metric

• Despite constant apocalyptic rumors for the last decade Netflix has continued to succeed and typically overpowers its competitors eventually

Cinematch – What is it? • Currently 23 million subscribers in 47 countries generate 4 million ratings

per day• The Cinematch algorithm has been adapted in such a way that 75% of all

movies and TV shows viewed on Netflix are chosen due to some sort of recommendation

• Cinematch communicates personalization through several different focuses…

• Diversity– Cinematch is designed to provide recommendations that fit both the possible

different moods of an individual or possibility of many family members using one Netflix account

Cinematch – What is it?• Awareness

– Netflix reminds you that their product is being customized for you to promote trust in their product and to get customers more involved in helping the rating system work

– The extremely specific genre’s and placement of your user name in in the Top10 category are part of the awareness strategy

• Explanation– There are constant reminder’s that the recommendations are based on your taste preferences and

previously viewed and rated movies and not the interests of Netflix further increasing your trust in the product

Cinematch – What is it?• Similarities

– “Similarities” is used very broadly in that it can be between movies or between members and can be from ratings, whether or not the video was viewed to completion, sequences of different videos viewed, etc.

– Similarities between friends are used in other countries by connecting through Facebook, but the Video Privacy Protection Act prevents the same feature from existing in the USA

• The resulting output to the customer mostly comes in the form of customized rows that show either your Top10, Customized Genres, or Similar Titles

• Each title in each row is also displayed according to how Cinematch thinks you would rate that title based on your ratings and your taste preferences

Cinematch – Creating Customer Satisfaction

• At the end of 2010 (before the Netflix blunder in separating their products and increasing prices) customers were surveyed to determine what websites pleased their customers the most and Netflix and Amazon tied for first with a score of 86% satisfaction (Source: ForeSee)

• Netflix is not afraid of failure, despite the constant apocalyptic rumors, and perceives their failures as a sign that they are constantly trying to innovate to improve the Netflix experience

• The Netflix mantra on failure is basically that if you’re going to fail, fail cheaply, and know when you’ve failed and when you’ve gotten it right

• Netflix’s Product Development Cycle– Hypothesis: “Algorithm/feature/design X will increase member engagement

with our service, and ultimately increase member retention”– Design a test: This might mean building a full scale product or just building a

prototype to test for positive or negative response– Test it: Prototypes and products are tested on actual members and compared to

a control group

Cinematch – Creating Customer Satisfaction• Features of the Netflix Product Testing

– The main metrics used are customer engagement and retention, but Netflix claims to use “zillions” of other metrics

– Products can be tested with hundreds of thousands of test subjects and can be tested in two test cells or twenty test cells with different variations of the product

– At any given time Netflix is testing about a dozen different products on it’s customers without them knowing

– Both failures and successes improve Netflix’s product intuition and increase their chances of hitting it out of the park with the next hypothesis

– They eliminate the tyranny of “or” choices by ensuring that they can test many different approaches to a problem

• Does the customer-centric development process and customer-zation employed by Netflix make it breakthrough?

Cinematch – The Netflix Prize• In October 2006 Netflix offered a $1 million prize for anyone who could improve

Cinematch’s movie matching abilities by 10%• Final products were reduced to their most valuable components, adapted to provide real-

time analysis, and optimized to handle Netflix’s billions of ratings as opposed to the 100 million used in the competition

• From the final winner only 2 or the 107 algorithms used in BellKor’s program were added to Cinematch and because during the competition Netflix launched streaming service they switched to using many different types of data as opposed to just ratings

• Was the money and tens of thousands of man hours really worth it for this innovation?

End of The Netflix Prize – A Loss of a Brilliant Innovation Strategy

• The Brokeback Mountain Factor– The development model of outsourcing to free lance developers or inspiring

teams of developers to form and compete with each other was a brilliant strategy to keep Netflix at the fore-front of development

– It had to be shutdown because it was quickly discovered that you could correlate the “anonymous” ratings data to other available data

– Using the date a rating was made and the movie rating data could be compared to public ratings on IMDb during the same time and the identity of the users could be discovered along with fairly accurate assumptions about their sexual orientation and political views

– The law suites the followed and increased interest from the FTC have prevented Netflix from ever running another program like this

• The change in data being collected– After the launch of the Netflix streaming service in 2006 the data collection

included more than just ratings – Even if the Netflix Prize program would have continued it would have needed to

be completely revamped to include all of the additional data available from streaming

Cinematch says Jess should watch…

Netflix by Mail – Eliminating Managed Dissatisfaction

• What was the POG for Netflix’s mail service?– Video stores cannot stock large quantities of new releases because demand is so fleeting

that it is not cost effective– Video stores accept that a certain amount of dissatisfaction must exist when customers

cannot rent the movies they desire – Video stores have to impose late fees that seem outrageously high to ensure that their

videos are returned in order to maintain their ability to predict whether or not they will be able to rent a given movie to a customer that desires it

• How has Netflix eliminated the need to manage dissatisfaction?– The video queue

• Eliminates customers realization that they aren’t getting the movie they wanted when there aren’t any available copies in inventory

• Allows customers to store movies they want to see rather then deciding every time they enter a store

Netflix by Mail – Eliminating Managed Dissatisfaction

• How has Netflix eliminated the need to manage dissatisfaction?– The change in Blockbuster film preferences

• In video stores 80% of the movies rented come from 200 “blockbuster” titles at any given time

• Due to the Netflix Cinematch system this preferences for blockbusters was changed so that 80% of all movies came from 2000 titles

• With less demand for extremely popular films Netflix could carry less copies of new releases and still provide a much higher number of people with their first choice of movie

– The subscription service• Completely eliminated late fees and thus eliminated another reason

customers could be dissatisfied• Eliminates the guilt felt by customers who are late returning movies

Netflix Streaming (2006)

SET Factors

Product Opportunity GapSo we’ve made it easier to get DVDs without leaving your home… now it’s

time we let you get movies without needing a DVD…

Technology:Expansion of

Bandwidth that would allow for quality

image streaming with minimal (or no)

buffering

Social and Economic:

Advent of the “staycation”

The Importance of Bandwidthto Netflix’s success

Technology:Expansion of Bandwidth that would allow for quality image

streaming with minimal (or no) buffering

“We took our spreadsheets and we figured we’d get 14 megabits/sec to the home by 2012, which turns out is about what we will get… If you drag it out to 2021, we will all have a gigabit to the

home.” -R Hastings, CEO

Netflix Streaming: Features

Crushing managed dissatisfaction one stream at a time…

•Unlimited Streaming of both movies and TV shows for a monthly subscription fee (can select a plan with just streaming or can combine with DVD-by-mail)

•Cinematch uses the survey as well as your previously viewed material to help you find more TV shows or movies for you to stream

•New contract will allow users to stream DreamWorks films (2013); continuously trying to expand streaming content

•Exclusive Streaming Content• Lillyhammer• House of Cards (2012)• New episodes of Arrested

Development (2013) “Binge Watching”

Netflix Streaming – Creating Unlimited Availability

• One of the major focuses of Netflix is to make their service available across as many platforms as possible and to limit their development cost in the process

• In 2008 Netflix made their application programming interface (API) available to the public allowing device makers to program their own Netflix apps

• Netflix claims there service is available on over 700 devices today

Brand Management and the Envelope

• The Netflix brand is mostly centered around trust• The red envelope has changed the emotions associated with video

renting from guilt and disappointment to excitement and anticipation making a walk to your mailbox seem like Christmas morning

Let’s Play a Game…Amazon Prime•Yearly Subscription•Available on fewer devices•Late in the game; trying to play “catch-up”•2000 titles

Xfinity Streaming•Must have Xfinity and already be paying for their cable service•Limited archive, often has the “current” shows but not “last season” shows

Cable “On Demand”•Menu can be difficult to navigate•Limited archive•Most movies are pay-per-view; free movies are limited to TV movies; can get movies with HBO/Cinemax/Starz, but these are premium channels for most cable plans•Talk of Netflix partnering with cable companies•Commercials; fast forward may be locked

Network Apps•Only TV shows•Each network has their own app•Limited archive•Commercials

Walmart Streaming (“Vudu”)•Purchased, not created•Pay-per-view; limited selection of free videos•Rumors of Walmart breaking into this business were around in 2001; Vudu purchase in 2011 (10 year gap)

Blockbuster Streaming•Blockbuster “Freedom Pass” tried to compete with Netflix subscription, but barely made a dent in Netflix’s success•Talks of Blockbuster streaming service has been around for a while and it has only recently gotten off the ground

Qwikster: Sign of Demise or a Small Blemish?• Lost 800,000 subscribers in the third

quarter• Regained 600,000 subscribers by Dec 31st

2011 (2/3 of those lost)• Currently trading $101.15; dropped to

around $64 through December 2011 but then has been going up since then and consistently between $100-$120Too much too soon?

• Weaning customers in: isn’t that incremental innovation?

• Was the Qwikster brand too undeveloped for marketing?

Was it really as stupid as people say it was?• Now that we’ve been studying Netflix’s

business, we can appreciate that these are different companies; perhaps the true issue was communication with the subscribers

Phasing out DVDs• People are speculating that

this was partly to phase out the DVD service; was this the right action for the desired results?

The Qwikster Failure

• Why should a separation of the mail and streaming businesses work?– The business strategy for each services is becoming increasingly different because the

competitors for each product are totally different– The costs associated with each product are not the same so the prices must be different– The streaming business is expected to completely take-over the mail service eventually – The information collected by Cinematch for the two services is almost completely

different