Netflix’s Pivot:

By Shlomo Maital  

     A post by Lee Nallalingham, a change management expert, tells tersely the story of how Netflix transformed itself and its culture and business model several times, in what entrepreneurs call a “pivot” (change in direction).  We can learn a lot from it. As the Beegee’s song goes: 1-2-3-4- Stayin’ Alive! Stayin’ Alive. Startups’ existence often depends on a successful pivot — or more than one.

     In 1997, Reed Hastings and Marc Randolph founded a DVD rental-by-mail service – Netflix sent DVD’s by mail, people played them to watch movies on their DVD players, and then returned them by mail in convenient mailers.  Good idea.  Netflix went public in 2002.  But not long after, DVD rentals began to decline. Netflix needed a new business model.  [Blockbuster, a similar DVD rental business, went bankrupt in 2010; it failed to pivot].

      In 2007 Netflix introduced its streaming service, allowing subscribers to watch TV shows and movies online.  At first, selection was limited and you could only stream to computers. Netflix quickly expanded its offerings.   This was key Pivot #1.

       It was obvious to Netflix that the real value created by streaming was not the infrastructure that enabled the streaming – but the content that was streamed.  This was obvious – but the question was,  can a streaming infrastructure provider reinvent itself, its culture, business model, skills – to create winning content?  Netflix felt it could.  Here comes Pivot #2.

       In 2011 Netflix launched its own content.  Starting with House of Cards, which was a big hit.    In 2011 Netflix stock had a market value of $24 billion.  Netflix continued to create hit shows, like The Crown and Orange is the New Black.  It was helped by clever algorithms that tracked what people liked, asked them what they liked – and both offered offerings built on this and guided its new content creation according to its viewers.

      Netflix also formed partnerships with established networks and studios, to bring popular content to Netflix subscribers. 

      And, in a partial Pivot #2.5,  Netflix expanded worldwide, making its service available in 190 countries (out of some 225 in the world). 

          Notably, AI uses artificial intelligence in its content creation, to analyze data and create content it knows will be popular.  And it was among the first to move its entire infrastructure to the cloud, enabling it to scale up fast, and efficiently.

           Netflix stock today is worth $711 billion —  almost 30 times its pre-pivot #2 market value.  

           It is straightforward to write about these pivots.  But managing them took skill, leadership, intelligence and business insight.  Without them, Netflix would likely have gone the way of Blockbuster – straight into bankruptcy. 

  • Change Management. From DVD Rentals to Original Content: The Story of Netflix’s Transformation. May 5, 2023. Author: Lee Nallalingham