1

NETFLIX FOUNDER REED HASTINGS IS SHOCKED

AT THE $40 FEE HE INCURRED FOR THE LATE RE-
TURN OF "APOLLO 13."
SO, IN 1997, HE STARTED AN INTERNET-BASED DVD RENTAL SERVICE THAT
OFFERED DIRECT-TO-HOME DELIVERY WITH NO LATE FEES.
A MERE DECADE AND 25 MILLION SUBSCRIBERS LATER, NETFLIX HAS TAKEN ON ESTABLISHED VIDEO RENTAL COMPANIES SUCH AS BLOCK-
BUSTER, HOLLYWOOD VIDEO AND WALMART AND EMERGED AS THE INDUSTRY LEADER IN INNOVATION AND CUSTOMER SERVICE.
IMD32246
Professor Stefan Michel prepared this case as
a basis for class discussion rather than to illustrate either
effective or ineffective handling of a business situation.
Copyright 2011 by IMD, Lausanne, Switzerland.
Not to be used or reproduced without permission.
Illustration by Sarah von Blumenthal
IN THE INTERNET
AGE, THERE HAS
TO BE A BETTER
WAY TO RENT
VIDEOS FOR HOME
VIEWING.
ecch the case for learning
Distributed by ecch, UK and USA North America Rest of the world
www.ecch.com t +1 781 239 5884 t +44 (0)1234 750903
All rights reserved e ecchusa@ecch.com e ecch@ecch.com
U
s
a
g
e

p
e
r
m
i
t
t
e
d

o
n
l
y

w
i
t
h
i
n

t
h
e
s
e

p
a
r
a
m
e
t
e
r
s

o
t
h
e
r
w
i
s
e

c
o
n
t
a
c
t

i
n
f
o
@
t
h
e
c
a
s
e
c
e
n
t
r
e
.
o
r
g
T
a
u
g
h
t

b
y

V
i
l
l
e

O
j
a
n
e
n
,

f
r
o
m

1
6
-
J
a
n
-
2
0
1
4

t
o

2
5
-
A
p
r
-
2
0
1
4
.


O
r
d
e
r

r
e
f

F
2
2
1
0
5
3
.
P
u
r
c
h
a
s
e
d

f
o
r

u
s
e

o
n

t
h
e

S
e
r
v
i
c
e

i
n
n
o
v
a
t
i
o
n

a
n
d

m
a
n
a
g
e
m
e
n
t
,

a
t

L
a
p
p
e
e
n
r
a
n
t
a

U
n
i
v
e
r
s
i
t
y

o
f

T
e
c
h
n
o
l
o
g
y
.
E
d
u
c
a
t
i
o
n
a
l

m
a
t
e
r
i
a
l

s
u
p
p
l
i
e
d

b
y

T
h
e

C
a
s
e

C
e
n
t
r
e
C
o
p
y
r
i
g
h
t

e
n
c
o
d
e
d

A
7
6
H
M
-
J
U
J
9
K
-
P
J
M
N
9

O
r
d
e
r

r
e
f
e
r
e
n
c
e

F
2
2
1
0
5
3
2
HASTINGS WATCHED AS MOVIEGOERS DESERTED PUBLIC CINEMAS FOR THE COMFORT OFFERED BY HOME THEATER SYSTEMS, AND HE
OBSERVED THESE CONSUMERS EMBRACE THE FEATURES, CAPACITY, AND HIGH-QUALITY FORMAT OF THE DVD.
LATER....
HASTINGS REALIZED THAT THE INTERNET COULD ALLOW THESE SAME CONVENIENCE SEEKERS 24-HOUR BROWSING AND ACCESS TO A
SELECTION OF MORE THAN 60 000 MOVIE TITLES IN A SINGLE DIGITAL CATALOG.

SHOULD WE REGISTER AT
NETFLIX HOME SERVICE?
HOW MUCH DOES
ONE RENTAL COST?
YOU DONT PAY FOR ONE MOVIE, YOU PAY
A FIXED FEE PER MONTH. AND YOU NEVER
PAY LATE FEES!
U
s
a
g
e

p
e
r
m
i
t
t
e
d

o
n
l
y

w
i
t
h
i
n

t
h
e
s
e

p
a
r
a
m
e
t
e
r
s

o
t
h
e
r
w
i
s
e

c
o
n
t
a
c
t

i
n
f
o
@
t
h
e
c
a
s
e
c
e
n
t
r
e
.
o
r
g
T
a
u
g
h
t

b
y

V
i
l
l
e

O
j
a
n
e
n
,

f
r
o
m

1
6
-
J
a
n
-
2
0
1
4

t
o

2
5
-
A
p
r
-
2
0
1
4
.


O
r
d
e
r

r
e
f

F
2
2
1
0
5
3
.
P
u
r
c
h
a
s
e
d

f
o
r

u
s
e

o
n

t
h
e

S
e
r
v
i
c
e

i
n
n
o
v
a
t
i
o
n

a
n
d

m
a
n
a
g
e
m
e
n
t
,

a
t

L
a
p
p
e
e
n
r
a
n
t
a

U
n
i
v
e
r
s
i
t
y

o
f

T
e
c
h
n
o
l
o
g
y
.
E
d
u
c
a
t
i
o
n
a
l

m
a
t
e
r
i
a
l

s
u
p
p
l
i
e
d

b
y

T
h
e

C
a
s
e

C
e
n
t
r
e
C
o
p
y
r
i
g
h
t

e
n
c
o
d
e
d

A
7
6
H
M
-
J
U
J
9
K
-
P
J
M
N
9

O
r
d
e
r

r
e
f
e
r
e
n
c
e

F
2
2
1
0
5
3
SUGGESTIONS (2193)
LIKE WATER FOR CHOCOLATE
BECAUSE YOU ENJOYED:
- IL POSTINO
- AMELIE
- CINEMA PARADISO
3
THE MOST POPULAR PLAN COSTS $16.99 PER MONTH, WHICH
ALLOWS A SUBSCRIBER TO BORROW UP TO THREE DVDS AT A
TIME WITH UNLIMITED EXCHANGES. THE SUBSCRIBER BUILDS A
QUEUE OF FAVOURITE MOVIES AND NETFLIX MAILS OUT THE THREE
TITLES AT THE TOP OF THE LIST, ALONG WITH STAMPED, RETURN-
ADDRESSED ENVELOPES.
WITH 34 STRATEGICALLY PLACED DISTRIBUTION CENTRES, NET-
FLIX CAN DELIVER 92% OF ITS MOVIES WITHIN ONE DAY OF BEING
ORDERED. THIS OUTSTANDING DELIVERY SERVICE IS JUST THE TIP
OF THE ICEBERG.
AFTER VIEWING THE DVDS, THE CUSTOMER SIMPLY MAILS THEM BACK TO NETFLIX IN THE SUPPLIED ENVELOPES. ONCE THE TITLES ARE
SCANNED IN AT THE DISTRIBUTION WAREHOUSE, NETFLIX SENDS THE NEXT SELECTIONS IN THE QUEUE.
NETFLIXS CINEMATCH SOFTWARE RECOMMENDS
MOVIES BASED ON OVER HALF A BILLION CUSTOMER-
SUPPLIED RATINGS, AND OVER ONE MILLION
RATINGS ARE ADDED DAILY.
IN 2009, NETFLIX OFFERED $1 MILLION TO ANYONE
WHO COULD SIGNIFICANTLY IMPROVE ITS RECOMMEN-
DATION ALGORITHM. IN A WORLDWIDE PUBLIC COM-
PETITION, A TEAM CALLED "BELLKORS PRAGMATIC"
SUBMITTED A CODE THAT ENHANCED THE FORECAST-
ING PRECISION BY ANOTHER 10%.
ANOTHER COMMUNITY FEATURE
IS CALLED "FRIENDS". IT ENABLES
USERS TO SHARE TITLES, RATINGS,
AND PREFERENCES OF RECENTLY
VIEWED MOVIES WITH THEIR NET-
WORK.
BUT WHAT IF I RENT
30 MOVIES IN A MONTH?
STILL $17
PER MONTH.
BUT YOU CAN
NEVER HAVE
MORE THAN
THREE MO VIES
AT A TIME.
U
s
a
g
e

p
e
r
m
i
t
t
e
d

o
n
l
y

w
i
t
h
i
n

t
h
e
s
e

p
a
r
a
m
e
t
e
r
s

o
t
h
e
r
w
i
s
e

c
o
n
t
a
c
t

i
n
f
o
@
t
h
e
c
a
s
e
c
e
n
t
r
e
.
o
r
g
T
a
u
g
h
t

b
y

V
i
l
l
e

O
j
a
n
e
n
,

f
r
o
m

1
6
-
J
a
n
-
2
0
1
4

t
o

2
5
-
A
p
r
-
2
0
1
4
.


O
r
d
e
r

r
e
f

F
2
2
1
0
5
3
.
P
u
r
c
h
a
s
e
d

f
o
r

u
s
e

o
n

t
h
e

S
e
r
v
i
c
e

i
n
n
o
v
a
t
i
o
n

a
n
d

m
a
n
a
g
e
m
e
n
t
,

a
t

L
a
p
p
e
e
n
r
a
n
t
a

U
n
i
v
e
r
s
i
t
y

o
f

T
e
c
h
n
o
l
o
g
y
.
E
d
u
c
a
t
i
o
n
a
l

m
a
t
e
r
i
a
l

s
u
p
p
l
i
e
d

b
y

T
h
e

C
a
s
e

C
e
n
t
r
e
C
o
p
y
r
i
g
h
t

e
n
c
o
d
e
d

A
7
6
H
M
-
J
U
J
9
K
-
P
J
M
N
9

O
r
d
e
r

r
e
f
e
r
e
n
c
e

F
2
2
1
0
5
3
A
P
O
L
LO
13
2
0
0
2
2
0
1
1
0
%
10
0
%
X
% D
O
W
J
O
N
E
S
(+
2
2
.5
%
)
B
L
O
C
K
B
U
S
T
E
R
(-6
2
%
)
N
E
T
F
L
IX
(+
3
0
5
2
%
)
4
THE BIGGEST CHANGE IN THE BUSINESS MODEL,
HOWEVER, IS THE ABILITY TO "WATCH INSTANTLY".
SUBSCRIBERS CAN DOWNLOAD AND WATCH MOVIES
AT NEAR DVD QUALITY. INDUSTRY EXPERTS ESTIMATE
THAT IT COSTS NETFLIX 79 CENTS TO SHIP A DVD, BUT
ONLY 5 CENTS TO DELIVER A MOVIE VIA BROADBAND.
IN A RECENT DEVELOPMENT, NETFLIX
ALSO OFFERS AN APP FOR IPHONE AND
IPAD, SO THAT SUBSCRIBERS CAN SELECT,
STREAM AND WATCH MOVIES ON THESE
MOBILE DEVICES FOR $7.99 A MONTH.
WITH THE SAME SUBSCRIPTION, CUSTOM-
ERS CAN ALSO STREAM MOVIES TO THEIR
WII, XBOX 360, AND SONY PS3 CONSOLE,
WHICH ALL CONNECT TO AN HD TV.
WITH "WATCH INSTANTLY" AND THE IPAD
OR IPHONE APPLICATION, NETFLIX SEEMS
TO HAVE SUCCESSFULLY MOVED FROM
RENTING PHYSICAL DVDS TO STREAMING
MO VIES, AND IS COMPETING HEAD-TO-HEAD
WITH APPLE TV.
INVESTORS ARE ALSO VERY PLEASED WITH THE DEVELOPMENT OF THE SHARE PRICE.
A
P
O
L
L
O
1
3
SO, WHAT DO YOU WANT
TO WATCH NOW?
HARRY POTTER!
I AM SO GLAD WE DONT HAVE
TO DRIVE TO BLOCKBUSTER
OR WAIT FOR THE DVD TO
ARRIVE
THE END
U
s
a
g
e

p
e
r
m
i
t
t
e
d

o
n
l
y

w
i
t
h
i
n

t
h
e
s
e

p
a
r
a
m
e
t
e
r
s

o
t
h
e
r
w
i
s
e

c
o
n
t
a
c
t

i
n
f
o
@
t
h
e
c
a
s
e
c
e
n
t
r
e
.
o
r
g
T
a
u
g
h
t

b
y

V
i
l
l
e

O
j
a
n
e
n
,

f
r
o
m

1
6
-
J
a
n
-
2
0
1
4

t
o

2
5
-
A
p
r
-
2
0
1
4
.


O
r
d
e
r

r
e
f

F
2
2
1
0
5
3
.
P
u
r
c
h
a
s
e
d

f
o
r

u
s
e

o
n

t
h
e

S
e
r
v
i
c
e

i
n
n
o
v
a
t
i
o
n

a
n
d

m
a
n
a
g
e
m
e
n
t
,

a
t

L
a
p
p
e
e
n
r
a
n
t
a

U
n
i
v
e
r
s
i
t
y

o
f

T
e
c
h
n
o
l
o
g
y
.
E
d
u
c
a
t
i
o
n
a
l

m
a
t
e
r
i
a
l

s
u
p
p
l
i
e
d

b
y

T
h
e

C
a
s
e

C
e
n
t
r
e
C
o
p
y
r
i
g
h
t

e
n
c
o
d
e
d

A
7
6
H
M
-
J
U
J
9
K
-
P
J
M
N
9

O
r
d
e
r

r
e
f
e
r
e
n
c
e

F
2
2
1
0
5
3