Leadership Letter 3

Leadership Letter 3                    Disrupters – The Netflix Story

“Those who disrupt their industries change consumer behaviour, alter economics, and transform lives.”                                                                                        Heather Simmons

According to The Economist, the idea of disruptive innovation is the most influential business idea of the 21st century. So, what is a disrupter? To be a disrupter is to create a product, service, or way of doing things which displaces the existing market leaders and eventually replaces them at the helm of the sector. Disruptors are generally entrepreneurs, outsiders, and idealists rather than industry insiders or market specialists. Disruptors are often linked to the fast-moving technology industry but can be found in almost any area of business.

The Netflix versus Blockbuster Video saga is the ultimate example of technology disrupting a marketplace. When Netflix launched in 1997, Blockbuster was the undisputed champion of the video rental industry. Between 1985 and 1992, the brick-and-mortar rental chain grew from its first location (in Dallas, Texas) to more than 2,800 locations around the world. Two years later, Viacom paid $8.4 billion to acquire Blockbuster.

By the time Netflix showed up on the scene they realized that it would be easier to fight alongside Blockbuster than against them. In 2000 Netflix co-founder and CEO Reed Hastings approached Blockbuster’s then CEO, John Antioco, with a merger proposal: Hastings wanted $50 million for Netflix. And as part of the deal, the Netflix team would run Blockbuster’s online brand. Of course, that deal never materialized.

Flash forward to 2010, and Blockbuster was filing for bankruptcy, having incurred more than $1 billion in losses on the year. Their valuation at the time? $24 million. For comparison, today, Netflix is valued at around R125 billion — a massive increase from their valuation back in 2000.

So, as business leaders, what can we learn from this? For years, Blockbuster dominated the video rental space. But at some point, they lost sight of what business they were really in. Instead of focusing on delivering incredible and affordable entertainment to their customers, Blockbuster put more stock in the model they were comfortable using.

Secondly, be willing to adapt. As Forbes Magazine reported, “The irony is that Blockbuster failed because its leadership had built a well-oiled operational machine. It was a very tight network that could execute with extreme efficiency, but poorly suited to let in new information.” Technologies improve. Industries change. In order to grow, you need to keep a pulse on the ever-evolving needs and preferences of your customers so you can make changes to your model accordingly.

Thirdly, the customer must feel valued. Blockbuster’s model had a weakness that wasn’t clear at the time.  It earned an enormous amount of money ($200 million p.a.) by charging its customers late fees.  The ugly truth was that the company’s profits were highly dependent on penalizing its patrons. Once John Antioco became convinced that Netflix was a threat, he used his authority as CEO to discontinue the late fees that annoyed customers and invested heavily into a digital platform to ensure the brand’s future. When Antioco was fired by the board, Jim Keyes was named CEO and immediately reversed Antioco’s changes in order to increase profitability.  Blockbuster went bankrupt five years later.

Today, there are only two Blockbuster locations left — down from 9,000 when they were in their prime. Meanwhile, the once fledgling video rental start-up Netflix now boasts 167 million paying members.

So, the next time you think to yourself, “The way we do things now will never change,” remember the Netflix vs. Blockbuster saga and how an entire industry can become upended in just a few years. Key question: Are you a disruptor in your industry? If not, who is? How do you prevent your company from being the next Blockbuster Video? What would enable you to be the next Netflix?

Please feel free to share your insights with us about other disruptive stories. If you would want a consultation with us to explore how to lead in these turbulent times, please email me at antony@zifundise.com

Best wishes


   * Antony Jennings is Managing Partner of Zifundise Training and Consulting, a people development company based in Port Elizabeth, South Africa.

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