Lessons from Netflix's Success

What is it about?

This article deconstructs the guiding principles (core objectives) that resulted in Netflix being the only streaming company to be profitable in 2024. Basically, the way they have succeeded is by developing/acquiring content with very little capital outlay and monetizing these beyond what anyone imagined was possible. The core objectives (or strategic KPI ) that have driven Netflix’s success are: 1. maximize library utilization (subscribers must like the content) and 2. minimize the cost of content acquisition. This is not something any of the other streaming services have come anywhere near copying. These objectives allowed Netflix to keep subscription costs low and subscribers engaged. There are several key capabilities that Netflix developed over the last 25 years that have enabled it to deliver the above. The article demonstrates how the choice of target market has played a big role at every stage. However, the most important capability was developing personalization algorithms to create a curated experience by predicting what a user might enjoy next. Personalization keeps viewers engaged and promotes exploration. If the exploration quickly leads to relevant and captivating content, it not only reduces decision fatigue but fosters loyalty. The genius of the strategy is that personalization not only leads to customer value but also leads to reduction in content acquisition costs. How? This predictive ability has allowed Netflix to be very astute in sourcing content that not only appealed to its target market, but the value of these contents was often not appreciated by the seller. Netflix has continued this ‘arbitrage’ throughout its history exemplified by the success of “Squid Games” recently. This strategy is not unique to Netflix but is rare, and most businesses can benefit by trying to adopt these principles in their own setting.

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Photo by Venti Views on Unsplash

Photo by Venti Views on Unsplash

Why is it important?

This article gives academics a normative process by which businesses can develop the inimitable resources discussed in the Resource Based Theory of the firm. The hypothesis that can be empirically tested is that resources acquired by the most innovative firms, such as Netflix, are acquired in 'inefficient factor markets' and then exploited in customer markets that other competitors do not consider. We want to emphasize the importance of starting with a profit logic before deciding on any concrete investments. There are several thought leaders that are coalescing around this sequence such as OKR, Play to Win and our favorite article Why Popular Strategies Always Fade. The main problem is that most of the popular frameworks used in management practice starts with action orientation or what to do. My philosophy is you must start with the profit logic or ‘what to win’ and then decide on ‘what to do.’ This is emphasized by a quotation in this article by the CFO of Netflix when asked about why Netflix did not distribute sports content: “we are not anti-sports but we are pro profit”.