Wednesday, February 11, 2009

Frontiers of innovation - Netflix demolishes own business model

We've been Netflix customers for several years, and generally like the service. But we're like a lot of their busy customers. We don't turn DVDs over fast enough and end up having months go by with the same two movies sitting on the television.

But last week we bought the Roku box and now use it to view Netflix movies streaming over the web on our flat-screen TV. It's cool, easy, the quality is good and it's a great antidote for our laziness with the movies. Plus, you don't have to wait for the DVD to arrive in the post.

It's not perfect--there aren't enough titles yet. But it's a product that will only get better and more useful. And put Netflix in place as a contender to lead the integration of TV and the internet.

[Aside: I drove through Cerritos, California, today. In 1987 GTE, my former employer, trialed interactive television in Cerritos. Needless to say, they were too early--bandwidth issues, lack of content, and, frankly, the lack of a powerful vision of sharing and openness a la Tim Berners-Lee, doomed the project.]

What's so impressive to me about this is that Netflix is investing in technology and partnerships expressly designed to make their old business model obsolete. When I think about how much they have spent, in dollars and time and thought, on the sending-videos-through the mail model, I wonder how they were able to make the leap to say, "We have this process optimized, but it's not the future. Time to build a new model"--meaning internet streaming.

There's a word for this kind of behavior, and it's not a nice word: cannibalization.

One of the most repugnant terms in the language--referring to one of the greatest human taboos--is used when a company's new products take sales away from its older products. Perhaps this helps explain why companies go to such great lengths--even imperiling their long-term success--to avoid it.

The problem is, the marketplace is a bit like the jungle. If you don't eat your own, someone will eat them for you. And this has happened again and again. One example: GM's abandonment of the EV1 electric car just a few years before Toyota introduced the Prius. To survive, companies will have to get rid of that taboo against cannibalization and act more like Netflix.

[Another aside. I keep wondering if the Kindle is a similar eating-your-own innovation. But something tells me Bezos always knew he was going to get deep into distribution of electronic content, even back when he was just selling books.]

I have a suggestion for marketers. If you want to get approval to introduce a better product, instead of referring to "cannibalization," call it "upselling."

(Photo: crushed EV1s courtesy of EcoBlog)

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