Context
Netflix launched its DVD-by-mail rental website in April 1998, and in 1999 it moved to a subscription without late fees. In 2000 the company offered itself to Blockbuster for $50 million, and Blockbuster declined. By the mid-2000s rental by mail had become a profitable business.
Symptom
DVD rental kept growing, but internet speeds and the spread of devices made delivering films over the network a matter of a few years. The profitable model could become obsolete before it stopped making money.
Cause
The economics of rental by mail rested on physical logistics: warehouses, envelopes, postage. These advantages were worth nothing in digital delivery, where the rules were set by content licenses and technology.
The fork
Protect the profitable model while it is growing, or invest in the next one at the risk of weakening current income.
Decision
In January 2007 Netflix launched online viewing as an addition to the DVD subscription. For several years the company ran both models in parallel and gradually moved its investment into streaming.
Execution
The transition was not smooth. In 2011 the company changed its prices and announced that DVD rental would be split into a separate service, Qwikster. Customers saw this as a change for the worse, and the company lost hundreds of thousands of subscribers. A month later Qwikster was dropped. In 2013 the first original series, House of Cards, was released, and in 2016 the service became available in 130 new countries.
Outcome
Streaming became Netflix's core business, and DVD rental by mail kept running until September 2023. For more than fifteen years the company ran two models at once.
What it means for you
A transformation starts while the old model still pays for the transition. Mistakes are inevitable, as Qwikster showed, but they cost less than being late.
- Which part of your model still makes money but is no longer growing?
- Where is technology changing the rules in your industry?
- What are you postponing because the current model still works?
We would start by splitting revenue into the growing part and the aging part, and calculating how many years the aging part can fund the transition.
Key dates
| Year | Event |
|---|---|
| 1998, April | DVD-by-mail rental website launches |
| 1999 | Move to a subscription |
| 2000 | Offer to sell the company to Blockbuster for $50 million; Blockbuster declines |
| 2007, January | Online viewing launches |
| 2011 | Price change and the Qwikster episode |
| 2013, February | House of Cards, the first original series |
| 2016, January | Launch in 130 new countries |
| 2023, September | DVD rental closes |
