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#018: Netflix – known for one thing; twice.

Transcript

David Young:

Welcome to The Empire Builders podcast, teaching business owners the not-so secret techniques that took famous businesses from mom-and-pop to major brands. Stephen Semple is a marketing consultant, story collector and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode a word from our sponsor, which is, well it’s us, but we’re highlighting ads we’ve written and produced for our clients. So, here’s one of those.

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David Young:

Stephen, when you told me you wanted to talk about Netflix, my first thought was are we talking about the original Netflix or the Netflix of today or are we talking about the evolution because there’s a lot to talk about with Netflix.

Stephen Semple:

And we’re actually talking about all three, because we’ve got to go back to the beginnings, because the beginnings is where the stories are about how they became this successful thing that they are. So, we’re definitely going back to the beginning. We also do need to touch a little bit on the evolution because they went through an evolution I think a lot of people have forgotten about. Because it’s easy to forget that this company was founded on August 29th, 1997 and it was founded by Mark Randolph and Reed Hastings. So, this is long before or streaming. Heck, this is back when the DVD was launched, was created, because here’s what ended up happening. So, Hastings had sold a software company. He had built a successful software company and he sold the software company and he decided he had two and a half million dollars that he was willing to invest in a startup.

Stephen Semple:

So, Mark and Reed had been creating all these ideas when they were working somewhere else and they were creating all these ideas, what should we start? And they had actually developed the idea of Netflix back when there was, remember the big VCR tapes coming back in those days? And what they realized is they couldn’t make the business model work with a VCR tape, because what their business model was, they were going to sell and rent through mail and they just could not make the VCR so, they shelve the idea. And then one day they’re driving into work and they hear an advertisement for a DVD. They go that’s it, this will freaking work. They literally stopped the car and they tried to find a DVD to buy. They couldn’t find one to buy. This is how new it was they could not and they’re in freaking Silicon Valley and they couldn’t find a DVD to buy.

Stephen Semple:

So, they bought a CD because they were like well, this is close, put a stamp on it, mailed it. Because they wanted to see whether it would work and low and behold the next day a DVD shows up in the mail and they go, let’s start this company and that was August 1997. And they started with 30 employees and 925 DVD titles. And here’s the funny thing is, 925 DVD titles was the entire DVD library. The entire DVD library was 925 titles. That’s where they started and by April 2021, 25 years later, they have 208 million subscribers, they’re doing $25 billion a year in revenue and have got 12,000 employees. Huge success and in fact, in the decade of 2010, they were the best performing stock on the market. The stock had a 3693% return.

David Young:

And other than still being in the entertainment distribution business it’s not even the same company that was in 1997.

Stephen Semple:

No, not at all.

David Young:

They used to send a physical thing and now it’s all streaming and online and who doesn’t have it?

Stephen Semple:

They came up with this idea long before the internet was a big thing and before streaming and all of that. The interesting thing is, they were constantly being told, this idea will never work when they took it to investors, constantly. So much so, that Mark Randolph, one of the founders wrote a book called, “That Will Never Work” and has a blog called, “That Will Never Work” because he had heard so much that will never work and one of the reasons why they heard that will never work was they said, but streaming is coming and one of the things that he talks about is the industry way over anticipated how quickly streaming would come. Because he’d sit there and say to them dudes, most people still have dial up. And you’re not doing streaming on dial up. Most people in 1997, their access was dial up.

David Young:

So, people in big corporations in Silicon Valley just assumed that that their version of the internet was the same that everybody else had?

Stephen Semple:

Correct. So, one of the big dial up that they heard was this will never work because streaming is coming and they’re like streaming is not coming for a long time. And it turned out streaming was not coming for a long time. And they basically built this business in recognition that streaming one day would come and they would be part of that. So, they launched their business back again in August 1997 and there was a good news, bad news story with the launch. The good news is, they did a $100,000 in revenue in the first month, that’s pretty good for a launch, that’s really good. The bad news is, 98% of the revenue was the selling of DVDs. So, they started off by selling and renting DVDs and what they realized when they did that was, as they did their analysis, they realized it was too confusing to the consumer to do both.

Stephen Semple:

You can’t both be known for both selling and renting of DVDs, you can’t both.

David Young:

The most of their income that in that first phase came from selling.

Stephen Semple:

Correct and doing both was confusing to the consumer, hard on inventory and the shopping cart was a mess. And looking down the road, it was easy for them to see that Amazon was selling books at the time. So, remember Amazon at that time just sold books, all it sold, but it was no secret that movies and music was next for selling. Soon, Walmart, K-mart, remember Kmart, Kmart was big in those days, Walmart, Kmart, everyone would be selling DVDs. It was not hard to see that that’s where it was going. And so they were like, holy crap, that’s not the business we want to be known for. But 98% of our sale, our revenue is there. They had to do a hard pivot.

Stephen Semple:

They shut down the selling of DVDs and focused completely on rental.

David Young:

That’d be a hard thing to do.

Stephen Semple:

That would be a really freaking hard thing to do. And on top of that, what it now means is who’s your competitor? Blockbuster. We forget how big Blockbuster is. At that time, Blockbuster had 9,000 locations, 9,000 locations in revenue of $6 billion. Nowhere in America was less than a five minute drive from a Blockbuster. They were everywhere, everywhere, everywhere, everywhere. And their proposed model, the Netflix proposed model is you’ll get a movie in one to four days, but a Blockbuster’s five minutes away. But they decide to take Blockbuster on because Blockbuster had a weakness they could exploit. And there’s going to be a little bit more on that later in terms of Blockbusters, Achilles heel. And they actually tested a bunch of different models and it took them about a year and a half to find the program that would work.

Stephen Semple:

And they launched the subscription model in September of 1999. That’s the model that they decided to work. And one more note about being known for one thing, offering subscription and single rental, they found confusing. So they launched subscriptions in September of 1999 and what they realized a year later in 2000, they had to drop the rental model and just focus on subscription. So once again, be known for one thing, one thing, and you would think, well no, I should be able to sell and rent DVDs. That’s simple, right? Nope. I should be able to do rental and subscription, right? Nope. One thing, subscription.

David Young:

Well, you confuse your employees, you confuse the consumer. Like, did I rent this one or buy this one? I don’t remem- I don’t know.

Stephen Semple:

Right. But how many times do we have companies go? Well, I want to add this.

Stephen Semple:

I want to add this. I’m a heating company, I want to apply. We hear it all the time, people extending the brand. No, what Netflix figured out is simplify it. Be known for one thing and one thing only. Okay. But back to Blockbuster’s Achilles heel, because this is the reason why they became successful. ‘Cause remember they slaughtered blockbuster, slaughtered them. You know, the irony is in 2000, Netflix was struggling a little bit and they had a meeting with Blockbuster and Blockbuster could have bought them for 50 million dollars and chose not to.

David Young:

There’s there’s a great documentary called, “The Last Blockbuster.” Ironically, you can see it on Netflix now. It’s really good. It’s a really good documentary.

Stephen Semple:

There’s a fun payback. Right? So the key was again, Blockbuster’s Achilles Heel. And here’s what it was, no late fees, no due dates. And you would think that Blockbuster would’ve been able to crush that. We’ll just do the same thing, no late fees, no due dates. But, the problem is Blockbuster’s business model was reliant on due dates and late fees. They even had a name for it and it was called managed dissatisfaction. Think about it. Managed dissatisfaction was the name for late fees. So, their business model was based on it. So what Netflix knew is they’re not going to give this, they’re unlikely to give this up. And what Netflix knew is customers hated it.

Stephen Semple:

Blockbuster also had another challenge when it came to consumer satisfaction and that was on new releases. So new release would come out, we would drive to the blockbuster and there was never enough new releases. It was impossible. Because their business model was on re-renting the same thing, not renting at once. So they would get a limited number of new releases. And then Dave, I don’t know whether you remember this, I remember it, you go and none of the new releases are available and you spent 15-20 minutes wandering around the Blockbuster, hoping to find something else to watch. Cause you know, I’m here now I might as well get something. Well when your customers I’m here now I might as well get something and you’re doing managed dissatisfaction. You’re not giving a great consumer experience.

David Young:

And you make them ripe for a better experience. Right? It’s like you’ve set the stage for somebody to come along and solve that dissatisfaction and take them over as a customer.

Stephen Semple:

But what blockbuster believed, and what everybody believed, because again, that will never work, was why would I wait one to four days for the movie when I could drive down to the Blockbuster. I was driving down to the Blockbuster and not be unhappy with the experience. And then I would be late returning the damn thing and I’d be hit with another fee. Or you know what, I’ll wait the four days and you know what, if I don’t want to watch it this weekend, I can watch it next weekend. Because it’s a subscription model.

David Young:

I don’t return it until I’ve watched it.

Stephen Semple:

Bingo.

David Young:

I can remember the other frustrating thing is you would wander around the Blockbuster or the video store and you get a bunch of movies and they’re due back. And if you, if something comes up and you didn’t have a chance to watch them they got to go back anyway. Right. And the Netflix model, you had the little envelope, it’s like, oh we haven’t watched that yet. Well, okay, hang on to it. The worst situation is, we can’t order another one until we send that back.

Stephen Semple:

Right. So there’s a couple of really interesting lessons here that Netflix can teach us. And I think there’s three lessons and the first is-

David Young:

Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this.

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David Young:

Let’s pick up our story where we left off and trust me, you haven’t missed a thing.

Stephen Semple:

So, there’s a couple of really interesting lessons here that Netflix can teach us. And I think there’s three lessons. And the first is, when you see something that your industry is doing. Now, I know normally we say don’t look at your industry, here’s the exception. When you see something your industry is doing that customers don’t like, there’s a business opportunity there. All you have to do is eliminate that thing and you’ll find customers.

David Young:

Yep.

Stephen Semple:

And so the question you want to ask yourself is, because Netflix, their answer would be, well, we can’t eliminate our business model is based upon it. The question you want to ask yourself is how can I eliminate that problem? Because if there’s a problem and consumers don’t like it and you can eliminate it, that, there is a business opportunity. That is the one time you want to look at an industry and look, finding those complaints is easy today. Go through Google use and find where all the crap that people are complaining about, eliminate it, business opportunity.

David Young:

Perfect suggestion.

Stephen Semple:

So Netflix were the first to eliminate the whole idea of late fees. And by the time Blockbuster came around to eliminating, it was all over for them. It was a last ditch effort to save the business.

David Young:

It just felt desperate.

Stephen Semple:

And Netflix also eliminated the need to go to the store. But I’m not going to say that that was a consumer opportunity because at the time people didn’t realize that that was a benefit. That was discovered later. So look at your own industry and your own business and listen to the customers. Listen to what they’re complaining about and eliminate those things.

David Young:

Yep.

Stephen Semple:

So look at your industry, but then also look at your own customers. Figure it out because Netflix on the confusion side, they got that from listening to their own customers.

Stephen Semple:

They’re listening to their own customers and seeing people are finding this confusing. People are finding this shopping cart a little bit clunky. So what we’re going to do is we’re going to simplify things. We’re going to just focus on one, that came from listening to their customers. Late fees was listening to the customers of the industry, simplifying was listening to their own customers. And not fighting their customers on it. Going, okay great, we’ll make this simpler. Even when that went, I’m going to step away from where most of my revenue.

Stephen Semple:

Now here’s the big one, because those two are kind of table stakes. Those are kind of marketing 1-0-1, less is more.

David Young:

Less is more.

Stephen Semple:

Less is more. Be known for one thing. When you try to be known for a whole pile of things, it doesn’t work as well. Great example of this is, we did a podcast where there was an interview with Rick Showers, one of our clients, and he sells used RVs. So he brings in used RVs and he sells used RVs. And the temptation when you’re both a buyer and a seller is to run ads saying we buy and we sell. Real estate agent, I buy real estate, I sell real estate. Really? All of our ads, we only ever talk about one. And what we talk about is, we have buyers for RVs. So guess what people know?

David Young:

You can sell my RV.

Stephen Semple:

You can sell my RV. Is we have buyers for RVs. Pick one thing, get known for that message. The more things you try to get known for, it’s confusing for the consumer. And think about this renting Netflix had success when they stopped both renting and selling DVDs. You would think that would be easy to do those two things. They said, nope, they’re just going to rent. And then they did it a second time when they went, you know what, we’ve got this subscription model and this one time rental fee. That’s too confusing. We are just going to do the subscription model. That’s it. One thing. And they constantly heard that will never work to the point where, wrote a book “That Will Never Work.” We’ve got a podcast, “That Will Never Work.” That’s how often they were hearing that line.

David Young:

Really cool lesson. I think we could revisit Netflix and talk about some of the things they’ve done in depth other times, but I think that those are great lessons, Stephen.

Stephen Semple:

So look at your industry, look for the complaints, listen to your customers, make it easier and get known and famous for one thing.

David Young:

Thanks for listening to the podcast. Please share us. Subscribe on your favorite podcast app and leave us a big fat, juicy five-star rating and review at Apple Podcast. And if you’d like to schedule your own 90 minute Empire Building session, you can do at empirebuildingprogram.com.

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