Cannibalising a $1.5 billion business model, near bankruptcy during the dotcom bust, and giving away its primary product for free: Netflix co-founding executive Mitch Lowe has opened up on how this start-up grew to become a $150 billion behemoth.
Most Australians have heard of Netflix, the online film and TV streaming service that went on to make award-winning series including political drama House of Cards and the dramatised version of Queen Elizabeth II’s reign The Crown – reportedly the most expensive TV series ever made.
Yet what is much less well known is the backstory to this US-based tech giant.
Fronting the Online Retailer Conference in Sydney this week, co-founding executive Mitch Lowe revealed that, just like any business, Netflix has had its share of bumps in the road along the way.
Humble beginnings and a near-death experience
He noted that Netflix was originally founded as a digital marketplace for video content – something akin to how Amazon began as online book retailer.
However, things almost came to an abrupt halt during the 2000 dotcom bust, with the business rapidly running out of money.
In a bid to shore up its finances, a plan was hatched to sell a 50 per cent stake in the business to the then market leader, video rental retailer Blockbuster Video.
Yet Blockbuster executives failed to see the upside, with Mr Lowe noting that they “smirked” at the idea and subsequently claimed that “if your business model is so easy, we’ll just do it ourselves”.
Netflix managed to muddle through and survive against the odds.
Since then, the tables have clearly turned. While Blockbuster has been forced to close unprofitable stores and play catch-up in the on-demand delivery of video content, Netflix has soared to become a multibillion-dollar company.
Such a reversal of fortunes makes it abundantly clear which business came off best from this decision.
The mother of all gambles
By the late 2000s, Mr Lowe said that Netflix had built up a sustainable business model delivering in the US by distributing physical copies of movies and TV shows from its multiple warehouses.
But it was not content to rest on its laurels. Seeing an end in sight to the popularity of movies on physical discs, just as the digitisation of music was taking off, Netflix instead delved into the world of video streaming.
It was a gigantic risk for the tech firm.
As Mr Lowe noted, in 2008 when Netflix was deriving around $1.5 billion in revenue, it launched a new service that “completely cannibalised” its business model and its established revenue stream.
Shockingly, though, he said that the subscription model was initially free to users, because “we didn’t think consumers would value it”.
Today, Mr Lowe said the company has in excess of 125 million users worldwide, with users consuming 100 million hours of video every day.
Why did they do it?
Without the benefit of hindsight, many people would claim the Netflix team were foolish to take such a risk that threatened the very existence of their business.
For Mr Lowe, however, giving in to the fear of making a wrong decision is itself a massive risk. The team had identified a need to adapt to technology and diversify their offering, and decided to pursue this evolution rather than let another firm come in and seize the opportunity before them.
To achieve this, he said Netflix had combined the right team, culture, structure and growth objectives that enabled it to look at a bigger picture for the future, rather than focus on maintaining the status quo of the here and now.
“Create an environment of self-awareness,” he said.
“But once you’ve created that, get out of the way.”
Implying that too many business leaders actually strangle innovation in their attempts to push for it, he said that employees need to be given the freedom and trust to use their skills to push boundaries and build new ventures for the business.
Mr Lowe said that if you need lots of team meetings, your team doesn’t know what they’re doing. But if they are skilled and capable and knowledgeable, “why do they need to sit around and talk about it [instead of getting on and doing it]”?
Advice to others in business
Now embarking on a new endeavour to drive a resurgence in cinema attendance – again, a seeming cannibalisation of Netflix’s business model – Mr Lowe said the best piece of advice he could impart was short and sweet: “Keep it simple”.
“The more things you advertise and promote, the fewer customers you get,” he said.
Complexity is a sales killer, so endeavour to keep things simple and easy to use, and the sales will take care of themselves.
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.