Blockbaster

KEL473

RUSSELL WALKER AND MARK JEFFERY

Netflix Leading with Data:
The Emergence of Data-Driven Video
Reed Hastings, founder and CEO of Netflix, Inc., sat at his desk reviewing the journey
Netflix had taken from a small startup to a company that revolutionized the way consumers
viewed movies and humbled entrenched players in the video rental industry. Since its founding
during theheight of the dot-com boom in the late 1990s, Netflix and its innovative Web-based,
home-delivered video rental business model had all but supplanted traditional bricks-and-mortar
chains such as Blockbuster and Hollywood Video by the late 2000s. A comparison of the stock
prices of Netflix and Blockbuster as of mid-2009 confirmed this—Netflix was trading at nearly
$39, compared with Blockbuster’sprice of less than $1.
Hastings, although proud of his company’s accomplishments, could not rest on his laurels.
Firms such as Amazon, Apple, and Hulu were beginning to allow consumers to stream movies
and television shows directly to their computers or home entertainment devices such as the Apple
TV, threatening Netflix’s business. Hastings had just met with Netflix’s director of marketing tobrainstorm about how Netflix should respond to these threats. They agreed that digital
distribution of movies was becoming increasingly important, yet they knew moving Netflix
toward video on demand would require significant investments in research and development and
operations, in addition to a fundamental restructuring of the organization. Hastings wondered how
best to meet these challengeswhile maintaining Netflix’s profitable core business.

The Video Rental Industry
The video rental industry in the United States had its beginning in the 1970s. The basis for
this new industry was the development of VCR technology. Studios initially resisted the industry,
fearing loss of control over the distribution network (at that time limited to movie theaters). In
addition, they did notbelieve consumers would be willing to rent videos. By the 1990s, however,
the studios’ acceptance of home rental videos was total, as they saw an opportunity to increase
revenues from movies that had performed poorly in theaters. Several independent studios that had
difficulty promoting their films in theaters became particular supporters of the video rental
business.
By 2000, DVD technologywas allowing studios to enhance the product delivered by adding
extra scenes, extended versions, and commentary tracks, thus increasing profitability. By 2010,
Blu-ray technology, which enabled the viewing of high-definition video, was challenging DVDs

©2010 by the Kellogg School of Management, Northwestern University. This case was prepared by Linus So ’10, Sripad Sriram ’10,
Jon Nathanson’10, Joao Ferreira ’10, and Julia Feldmeier ’09 under the supervision of Professors Russell Walker and Mark Jeffery.
Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data,
or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-5457685 (or617-783-7600 outside the United States or Canada) or e-mail custserv@hbsp.harvard.edu. No part of this publication may be
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NETFLIX LEADING WITH DATA

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as theindustry standard for movie rentals, although low penetration of Blu-ray set-top boxes
limited growth and helped maintain the DVD’s position.
At the same time, other channels for distributing movies were also gaining supporters. Digital
distribution of movies (via Internet streaming) was gaining market share, beginning with younger,
more tech-savvy customers. In the medium term, this form of...