Building a Streaming Empire: How Netflix Leveraged Resources and Capabilities for Competitive Advantage
A case study analysis exploring data, technology, and strategic shifts in the video-on-demand market.
Netflix has been one of the most successful technology-based firms in the 21st century. By leveraging tangible resources and path-dependent capabilities, Netflix has created enduring sources of competitive advantage. To gain better positioning in the market, it has also made major strategic changes in choosing what should and shouldn’t be in its organizational boundaries. With aggressive competition in the technology-driven video subscription business, Netflix’s path can be used to learn valuable lessons on corporate strategy.
The Netflix case study shows us that competitive advantage can be created via an organization's resources and capabilities. Very early on, Netflix started collecting data on user preferences towards their movies and TV shows. Because of the wide variety of available content, according to Harvard Business School, Netflix cultivated “a growing base of empowered subscribers who were happy to share their opinions and recommendations with others”. This allowed Netflix to create a recommendation algorithm, the “Holy Grail”, that was a leader in the video-on-demand space. With this tangible resource of historical data acquired over time, their recommendation service will only get better for existing users and new ones alike.
Another example of Netflix creating sustained competitive advantage is through its path-dependent capabilities. According to the CEO of Netflix, the company's name was meant to emphasize the internet as a way of delivering content. This meant the firm was digitally native and started developing its technological competency early. From leveraging “cloud services (mainly Amazon Web Services)” to getting “customized servers and components”, Netflix walked the treacherous path to successfully deliver their content. Although many players have entered the video-on-demand space, Netflix still reigns supreme, in part, due to the path-dependent competency of technological know-how that Netflix has developed since its foundation. With this, Netflix will be able to iterate on its existing product and innovate more efficiently than its competitors.
No one gets everything right the first time. Naturally, Netflix has made major strategic changes to respond to the ever-changing market. Since Netflix had a strong technological competency, they spent a lot of time developing their hardware to display their video content. But in 2007, the organization “pulled the plug on the project and spun off the company to Roku, Inc.” Although it would have been beneficial to have vertical integration, it increased the risk of conflict with other businesses that Netflix wanted to create and sustain partnerships such as other studios.
The most notable strategic play that Netflix made was to begin investment into their content, Netflix Originals. “The threat of bidding wars over shows that were available for license as well as the threat of the competitive pullback of title hastened the move”. After the market saw how profitable the streaming business was, it was inevitable that more businesses would join and take steps to get their slice of the pie. By creating Netflix Originals and creating their library of content, they would diminish the strength of their suppliers who would soon increase the prices for licensing rights or even remove them from the market totally to start their streaming services.
Once the video-on-demand market saw how desirable it was to have exclusive content, the risk of increased costs to produce it skyrocketed. Another strategic move that Netflix made was to start offering long-term exclusive contracts for talent in the industry. According to the case study, “Netflix locked-in Ryan Murphy (creator of Glee, among other shows) to an exclusive five-year, $300-million contract”. By taking actions like this, the organization was able to have predictable and stable costs for the short and mid-term.
In many of Netflix’s strategic changes, there are lessons on organizational boundaries that can be gleaned. To start, hierarchical governance, or bringing a new capability within your domain, may be required to ward off opportunism. As mentioned earlier on, Netflix anticipated competitive pullbacks from its competition. The reason their competitors were even able to pull back or potentially raise their prices was that Netflix made major transaction-specific investments into the technology and infrastructure to display video content. If they no longer have access to licensed content from established studios at affordable rates, Netflix’s business model would be heavily damaged. On the flipside, the studios would be fine since they got the lion's share of their revenue from box office, merchandising, and other means. Netflix’s use of hierarchical governance to develop their originals helped them avoid opportunism by other players.
Another lesson that can be taken from Netflix’s struggle to redefine its organizations boundaries was through their use of intermediate governance. Although the other studios were competition, the executives at Netflix realized that they still needed them. These studios had tangible resources that Netflix could not just duplicate. Legacy shows like The Office and Friends “accounted for the majority of viewership minutes among Netflix subscribers”. By maintaining good relations with the owners of these coveted resources by making moves like spinning off Roku into a separate business, Netflix was able to partner and license some of these legacy shows. Although the owners of these legacy shows would eventually create their services, the years that the shows were on Netflix were ostensibly a reason for the massive subscriber gains Netflix when the shows were available on the platform.
Netflix, one of the most famous companies to survive the dot com bubble, has sustained a competitive advantage through the use of its data and technological competency. In addition, they’ve made strategic changes to adapt to the ever-changing market like leaving hardware production, creating original content, and negotiating long-term contracts. We can learn several lessons on strategy and organizational boundaries.
Sources
Kelley, M., & Swann, C. (2020, November 2). Netflix: Will content be enough?. HBR Store. https://store.hbr.org/product/netflix-will-content-be-enough/W20875?srsltid=AfmBOoqfA-aXtad-Czp1gaD02lcP7s-ClFXmj1ETb1j0U80WTAJgbXVm
