Daniel Lubetzky

by Adeena Schlussel on behalf of Daniel Lubetzky

This New York Times article features Netflix as a prime example of companies that are staying ahead of the curve by focusing on efficiency and disruptive technology, in this case, enabling consumers to access movies from their homes instead of from a store.  What is most interesting about Netflix is that its creation was potentially self destructive- watching movies on the internet is even faster than having to wait for them to arrive via snail mail- but the company averted a crisis by adapting to the demands of the times.

August 7, 2010

Always Pushing Beyond the Envelope

By DAMON DARLIN

DO you still visit video stores? I stopped going six or seven years ago, after becoming obsessed with Netflix. In one year alone, I managed to watch 185 movies — DVDs, actually, which arrived in the mail.

This method was cheaper, simpler and more convenient than walking to the local Blockbuster store. And, yes, better. I got a broader choice of movies, which I selected on a Web site, and paid much less for them. That I had to wait two days for a DVD hardly seemed an annoyance.

For Blockbuster, the advent of DVDs in the mail was a disruptive technology. The chain relied initially on bulky videotapes and late fees to generate a fat revenue stream, and its scale was huge; smaller, independent stores gradually left the market. Netflix opened a new battlefront, mailing thin DVDs and letting customers keep a disc as long as they wanted.

Blockbuster saw the change coming. It even took action, setting up its own mail service. But seeds of destruction had been sown, and Blockbuster is now financially troubled. Netflix, meanwhile, is already embracing technology shifts that will make those red envelopes a quaint memory.

Creative destruction has such a cataclysmic sound. But the term, coined by the Austrian economist Joseph Schumpeter to show how capitalism destroys companies as more innovative ones succeed, describes a process that is more like a slow-motion train wreck.

Consider silver halide photographic film, a technology cited in “The Innovator’s Dilemma,” Clayton M. Christensen’s 1997 book about established companies’ struggle with disruptive technologies. Kodak saw digital photography coming. It even invented some of the earliest such technology, in 1975.

Kodak just misjudged how fast consumers would give up on film and start snapping up digital cameras. And it misjudged its ability to outrun both trends.

“It’s kind of alarming,” said Henry C. Lucas Jr., a professor of decision, operations and information technologies at the Robert H. Smith School of Business at theUniversity of Maryland. “It’s not like they had to turn around overnight.”

Even when Kodak wanted to change, it couldn’t, said Mr. Lucas, who has studied the company. “It was so large and had been so successful for so long that it was difficult to bring in people with a digital background.”

Kodak has had to take draconian steps to survive. It closed labs and factories and laid off 60 percent of its staff of 60,000.

Established companies’ historical inability to change is what makes Netflix’s maneuvers so fascinating. It foresaw its possible demise at the moment of its own creation.

The company was formed in 1997 with the idea of sending movie DVDs, then a new technology, through the mail. But Reed Hastings, the founder and chief executive, and early employees, recognized that delivery of movies over the Internet would replace the mail carrier soon. They named the company Netflix, not Mailflix or DVDs by Mail.

“DVDs by Mail would have been an easier concept to understand in 1999,” said Steve Swasey, the company’s chief spokesman.

It has been sad watching video stores close, especially small ones staffed by well-informed people who know and love old movies. Consumers benefited from that knowledge. But the tragedy of shuttered stores also implies something wonderful. Consumers also benefit when technologies usher in more choices and cheaper service.

It is happening again, this time to Netflix. It was only last year, more than a decade after its founding, that streaming movies started to take off. But it was Netflix pushing people to do it, even though it meant that the company might rent fewer discs by mail.

Since January 2007, it had been offering a small selection of movies for streaming from the Netflix.com site to a customer’s personal computer. Then it began streaming to TV-connected devices so that the movies could be displayed on a larger screen, the way customers have always watched movies at home.

If you have a Nintendo Wii, Microsoft Xbox 360 or Sony PlayStation 3 game machine, a new Blu-ray disc player, an Internet television from LG, Sony or Vizio, the Roku digital video player, TiVo digital video recorder or Apple’s iPad, you can stream movies. The list continues to grow, to beyond 100 devices. If there is an electronic device in the living room, Netflix wants to send a movie through it.

Netflix, meanwhile, keeps cutting deals with movie studios to get more films and television shows online. Now a movie aficionado paying $8.99 a month, for example, gets one DVD in the mail at a time — but can also watch movies online to his heart’s content. At one movie a day, the cost of the habit drops to less than 30 cents a film. Mail-only subscriptions are still available.

THERE is no way that a store with racks of movies can sell its wares for as little. Blockbuster’s same-store sales have declined steadily, even when including sales from its mail service and kiosks. It is closing hundreds of stores. Delisted from the New York Stock Exchange in July, the company’s stock is trading for around 17 cents on the pink sheets, down from $30 in May 2002, which is about when Netflix stock began publicly trading at $7.53.

Netflix now trades at around $118. But while Netflix’s DVD rentals are declining about 25 percent, year over year, according to analysts at Barclays Capital, there is little consternation among Wall Street analysts. The company is gaining subscribers at the rate of 50 percent a year, and some 60 percent of its customers are streaming movies, up from 37 percent just a year ago. It does, however, face competition from Amazon.com and Wal-Mart, and analysts expect Apple to enter the movie streaming business.

Netflix says the mail train is likely to keep chugging for an additional 20 years. But it has managed to do what few companies have done by leaping to faster transportation. Harrowing, yes. But consumers should enjoy the ride.