DISRUPTIVE INNOVATION: NETFLIX 1

Disruptive Innovation

Clayton Christensen claimed disruptive innovation to be the one that creates a new market by
bringing unique and distinct value proposition. It is said to be cheaper, convenient,
accessible, and simple. The adopters of innovation are divided into five different categories
which are Innovators, Early adopters, Early majority, Late majority, and Laggards. The new
disruptive innovation is adopted as the Shark Fin of Adoption by the industry. The internet
and social media have allowed consumers of new technologies to be informed about the
innovations, which make it easier to decide and adopt. Hence the adoption of disruptive
innovation happens in groups of trial users, and finally, everyone follows.

Fig 1.0 Shark Fin Adoption of disruptive innovations

Adoption of disruptive innovation is done based on characteristics such as:

 Lower price,
 More convenient product,
 Easily accessible, and
 Easy to use
Meeting the above-mentioned characteristics of the technologies allows the Industries and
various organizations to adopt the innovations[ CITATION App19 \l 1033 ].

Cloud Computing
Cloud computing, in simplified terms is data centers available to users around the world over
the internet. It is the on-demand availability of computer system resources, especially data
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storage, also called cloud storage and computing power, without direct active management
with the users.

Cloud computing adds capacity and capabilities without investing in new infrastructure,
training the employees, or licensing new software. It provides any subscription-based or pay-
per-use service over the internet that extend existing IT's capabilities [ CITATION Oll20 \l 1033 ].
The five essential characteristics of cloud computing are:
 It is service-based
 It is massively scalable and elastic
 It is shareable
 Billing is based on consumption
 Services are delivered over the internet.
The three deployment models of cloud computing are[ CITATION Ven17 \l 1033 ]:
 Infrastructure as a Service (IaaS): The IaaS refers to the building blocks of computing
that can be rented like physical or virtual servers, storage, and networking.
 Platform as a Service (Paas): The PaaS refers to the software and tools required by the
developers to build applications like middleware, database management, operating
systems, and other development tools.
 Software as a Service (SaaS): These refer to the service for a day-to-day basis.
Customer relationship management (CRM) applications and enterprise resource
management (ERM) applications are some of the examples of SaaS.

Fig 2.0 Models of Cloud Infrastructure

The Service models of Cloud Computing are:

 Private cloud
 Community cloud
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 Public cloud
 Hybrid cloud

Few of the cloud services providing companies are:

 Microsoft Azzure,
 SAP,
 Amazon Web Services (AWS),
 Salesforce,
 Oracle, etc.

Business Model of Netflix 1.0

Netflix started its business in the April of 1998 by renting out DVDs by mail. However after
a decade later it changed its business proposition into a streaming service which is currently
the most preferred mode of entertainment throughout the world [ CITATION Ven17 \l 1033 ].
The founders of Netflix, Reed, and Marc in 1997 found the video rental store to be dominated
by the home entertainment market, which was not customer friendly; hence they started
renting DVDs out by mail. This was a game-changer for them, which allowed them to reach
20 percent of the households in America, thereby, making their business viable [ CITATION
Ven17 \l 1033 ].

Fig 3.0 Netflix 1.0 The process of disruption of physical stores.

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The initial business model of Netflix was to let the people rent videos by selecting online and
having it delivered to their door. This was a significant shift in the industry. Along with this,
Netflix also introduced the subscription model where customers could rent DVDs online for a
fixed fee per month. The biggest competitor at that time, Blockbuster, faced a more
significant setback with Netflix's newer business model. This was the instance of Netflix 1.0's
disruption of physical stores. Fig 3.0 shows the process of disruption, which affected the
market leader Blockbuster as it failed to keep up with the newer business model of
Netflix[ CITATION Oll20 \l 1033 ].

The trend that drove Netflix's exponential growth are[ CITATION App19 \l 1033 ]:
 Technology: available to watch content seamlessly on different devices;
 Comfort: people do not have time to go out and shop for movies, people want comfort
where content is presented to them (personalized);
 On-demand: being able to watch content anywhere and on any time;
 Subscription addiction, low-cost monthly fee, and simple structure;
 Data-driven: not only used for the recommendation but also pro-actively used to
create content that fits personal preferences.

The business model of Netflix 2.0

Netflix's founders always aimed their vision for the next 5 to 10 years. In 2007 they analyzed
that the DVD rental business was not profitable, so they used their IT-background to create
fitting digital solutions and rolled it out in a lean way. The following figure Fig 4.0 shows
how Netflix evolved by incorporating new technologies and transformed its DVD rental
business to video streaming services[ CITATION Oll20 \l 1033 ].

Fig 4.0 Netflix 2.0 The process of disruption of the DVD rental business.
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Netflix made use of nine building blocks to create exponential growth listed in Fig 5.0. It
started with a rating system based on Big Data, which stated the type of movie or show –
good or bad. These ratings were based on the number of views, customer feedback if videos
were watched until the end, and even IMDB ratings. This data helped them to understand
their customer's preferences and provide content fitting for everyone at any time [ CITATION
Oll20 \l 1033 ].

Fig 5.0 Business model of Netflix 2.0.

The market need for choosing Cloud Computing by Netflix

When Netflix's founder realized the DVD rental business is not profitable enough, then they
started planning on ways to use their IT background and provide a digital solutions. Due to
the boom in the internet accessibility and availability of broadband and 2G, 3G services,
Netflix felt that contents are readily available online to be downloaded illegally, which
dropped their subscribers to the DVD rental program by a considerable percent. Therefore to
mitigate their losses in subscribers, they built a digital platform to put up with all the different
sorts of television programs and movies according to their user's preference [ CITATION
Ven17 \l 1033 ].
Features that Netflix targeted to provide its customers were:
 Affordable price – Cheaper rates
 Accessibility – Can be used in any mobile phones or Laptop or TV
 Original content – New and original stories and videos to grab customer's interest
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 High-quality content in many different genres-

Catering to the needs of the customers and analyzing the circumstances helped Netflix to
continue leading the market.

Implementing Technology

The digital business transformation of Netflix is seen through two lenses:

(1) Cloud Services from Amazon Web Services: Netflix worked with Amazon to develop a
world-class back-end infrastructure. Working with Amazon Web Services, Netflix deployed
thousands of servers and terabytes of storage within a short time[ CITATION Eun17 \l 1033 ].
(2) Data & Analytics. : Analytics is an important tool for Netflix to stay robust and relevant
to its customers and in the market. Netflix provides recommendations to each of its
customers. The core DNA of Netflix is Personalization — which builds on its data-rich
recommendation engine[ CITATION Oll20 \l 1033 ]. The most liked TV shows, documentaries,
movies based on different genres are portrayed on this personalization. This is entirely based
on the preference of the customer and the region where it belongs. Analytics has made this
possible at a larger scale and higher speed. Netflix has been using analytics in the most
efficient way possible using big data and analytics. Before licensing any shows, they run the
data and analyze whether the audience would watch the series. This way, they mitigate
risks[ CITATION Eun17 \l 1033 ].

Netflix based its business model based on nine building blocks. They are [ CITATION Oll20 \l
1033 ]:
 Solve problems for many (customer segment)
 Info based Offering (value propositions)
 Community of Fans (customer relationships)
 Digital Channels (Channels)
 Lean way of working (Key activities)
 Ultra scalable processes (Key activities)
 Algorithm to the core (Key resources)
 Self-managed Teams (Key resources)
 Partners for leverage (Key partners)
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Apart from all the nine building blocks that Netflix used to build their Online Video
Streaming platform, the two significant changes that were of utmost necessity for the
development of their new system was by:
1. Cannibalizing the older structure: It is said bigger organizations fail to stay the leaders in
the market for a longer period because they do not see the opportunities below their horizon
hence fail to destructively work on the older system to build a newer one. The main reason
for Netflix's success is altering its old business model and developing a new one to cater to
the needs of their customer by providing digitalized services using a lean-approach [ CITATION
Oll20 \l 1033 ].

2. Using algorithm to its core. : The algorithm falls under the fundamentals of Netflix's entire
structure. The taste and preference of the customers based on their geographic locations,
culture, and language are all identified and analyzed using analytics that runs on an
algorithm[ CITATION Sun20 \l 1033 ]. It generally develops a map of user ratings and
carries titles preferred by people with most common tastes. This is called collaborative
filtering. Netflix currently uses a large no. of open source technologies and have open-source
software center. In 2017, it also opened-sourced a deep learning library called Vectorflow.
The implementation of these technologies has helped to gain Netflix what it is
today[ CITATION Oll20 \l 1033 ].

The Implementation process

The AWS used by Netflix are:

Service Type Name of Amazon Web Services

Hosting EC2

Storage S3

Content Delivery Network Cloudfront

Database (for Data Analytics) Relational Database Service (RDS),

DynamoDB

Events driven programming Lambda

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Netflix implemented the systems in the following ways:

 It embraced Streaming as Experimentation at the Edge in 2007.  Netflix began

experimenting with this technology when very few companies thought of it. The core
strategy was to grow the streaming subscription business domestically and globally by
improving the customer experience, enhancing user interface, and extending the
streaming service to even more Internet-connected devices[ CITATION Ven17 \l 1033 ].
 It co-created with Amazon Web Services. Amazon shared four reasons for choosing
Amazon Cloud as Netflix's computing platform: 1. The need to re-architect, which
involves questioning everything. 2. Focus on data center infrastructure by Amazon
only allows Netflix engineers to focus on building and improving business 3. Netflix
technology costs will always be more than it would be with Amazon and 4.Cloud
competencies of Netflix was limited to research and experimentation and not full-
scale global deployment[ CITATION Ven17 \l 1033 ].
 It established the system based on machines rather than humans. The main difference
between Netflix and traditional media companies is that Netflix puts algorithms and
data at the core of its engine[ CITATION Ven17 \l 1033 ].
 Netflix uses AWS Lambda to Build Rule-Based, Self-Managing Infrastructure to
Increase Efficiency. The company has implemented AWS Lambda to build rule-
based, self-managing infrastructure, and replace inefficient processes to reduce the
rate of errors and save valuable time[ CITATION Ven17 \l 1033 ]
 Netflix realizes Multi-Region Resiliency Using Amazon Route 53 - Netflix's
infrastructure, built on AWS, makes it possible to be extremely resilient, even when
the company is running services in many AWS Regions simultaneously [ CITATION
Ven17 \l 1033 ].

Implications for managers

The implementation of cloud services and data analysis caused the structure of the
organization to change drastically. A significant change from DVD rental services to online
streaming service created a massive change in the type of talents and workforce required by
Netflix. The transformation saw Netflix lay off many employees. Netflix mainly has IT
DISRUPTIVE INNOVATION: NETFLIX 9

officials, Software Engineers, CIO, Analysts, Data Scientists, and Departmental Managers,
Rand E staff, Content Head and many others.

The main traits of Netflix's corporate culture after 2007 are:

1. Independent decision-making (Autonomy)
2. Open, broad, and deliberate information sharing (Communication)
3. Extraordinary candidness (Attitude)
4. Focus on high effectiveness (Productivity and Effectiveness)
5. Rule avoidance (Rules and Organizational Rigidity)

Issues in Cloud Computing and ways to mitigate them

The major issues in Cloud Computing are:

1. Privacy:
The host company can access the data. The service provider can access the data present
on the cloud at any point in time. Accidental or deliberate actions of tampering the data
are easily possible[ CITATION AMa19 \l 1033 ].
2. Compliance:
Many regulations in places related to data and hosting are present. To comply with
regulations (Federal Information Security Management Act, Health Insurance
Portability and Accountability Act, etc.), user needs to adopt expensive
measures[ CITATION AMa19 \l 1033 ].
3. Security:
Cloud-based services involve third-party for storage and security, which is really a
considerable threat[ CITATION AMa19 \l 1033 ].
4. Sustainability:
It refers to the minimization of the effect of cloud computing on the environment. To
reduce carbon footprints, many countries like Sweden, Finland is allowing Data centers
to be set up due to their sustainable infrastructure[ CITATION AMa19 \l 1033 ].
5. Abuse:
The hosting companies and the servers need to make sure that proper measures are
taken to address these issues[ CITATION AMa19 \l 1033 ].
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Due to the extreme success globally Netflix is also extremely prone to cyber threats and a
bigger target for hackers. So it has decided to develop its own security products. The
company has released open-source products.
Netflix has a team of 80 security employees which provide security products include
software that analyze and respond threats and products that manage access to data and
systems. The company has also developed encryption to protect data for developers who
work with Netflix’s site and apps. The company has built security products to bolster its use
of the public cloud. One of those efforts is Security Monkey, which permits Netflix to record
changes to an account[ CITATION Ksh13 \l 1033 ].

Conclusion
According to Clayton Christensen, to incorporate innovations and new technologies and be
disruptive right questions need to be asked and answered[ CITATION Amy14 \l 1033 ]. These
questions are based on :
 Desirability : It asks questions like will the solution fill a need, will it affect people’s
lives, etc
 Feasibility: It asks question related to how long can the implementation process go ,
will the organization make it actually happen and etc
 Viability: It asks questions like ROI, honouring client’s budget and etc.
Figure 6.0 shows how decisions should be taken based on the factors of desirability, viability
and feasibility for disruptive innovation[ CITATION Amy14 \l 1033 ].

Fig 6.0 Factors of decision making

Cloud computing is the future of all the innovations in the future. Netflix an organization
running for the past two decade has toppled over all the market leaders of its time and stands
DISRUPTIVE INNOVATION: NETFLIX 11

as the global giant in the Entertainment Industry. This has been only possible due to its
adoption and enactment of innovative ideas whenever required. In Netflix 1.0 and Netflix 2.0
it was observed that the decision taken to start the DVD rental services and then transforming
into online streaming services was meticulously handled based on the equal attention to all
the factors of disruptive decision making. Netflix is the market leader and has around 190
million subscriber worldwide. Disruptive innovation is therefore the best way to sustain for a
longer period of time in the market. The important factor is degeneration and restarting from
the smaller scale by big conglomerates to adopt new technologies which becomes a
challenging factor.
References

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M, O. (2020). BMI. Retrieved August 28, 2020, from Netflix: How a DVD rental company changed the
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Mahali, A. (2019). Issues in Cloud Computing. Retrieved August 23, 2020, from GeekforGeeks:
https://www.geeksforgeeks.org/issues-in-cloud-computing/

N, K. (2013). Privacy and security issues in cloud computing: The role. Telecommunications policy,
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Park, E. A. (2017). Why Networks cant beat Netflix? Digital Policy Regulation and Governance, 21-39.

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Tzu, S. (n.d.). Case Study: How Netflix uses Cloud for Innovation, Agility and Scalability. Retrieved
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how-netflix-uses-cloud-for-innovation-agility-and-scalability/

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Retrieved August 26, 2020, from Medium.com:
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https://medium.com/@nvenkatraman/netflix-a-case-of-transformation-for-the-digital-
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