What Innovators Can Learn From Netflix

Netflix Co-founder and CEO Reed Hastings has written a new book about building the video-streaming powerhouse that now has nearly 200 million subscribers globally, as of the end of July. In the book, he freely admits that his formula might not work for every company.

But the one thing that might work is taking a page from the innovation playbook that Netflix seems to have written and followed over the last 22 years.

It’s the playbook on using technology and a new business model to turn something that consumers didn’t really want to do into something they no longer had to do, while getting the same — or an even better — result.

For anyone seeking inspiration on rethinking their business and better serve their end customers in the face of, or despite, the global pandemic, they might want to consider that outcome as their innovation “North Star.”

‘I Don’t Want To, But I Have To’

If you wanted to be among the first to see the sequel to the 2000 movie blockbuster “Meet the Parents” starring Robert DeNiro, Ben Stiller, Barbara Streisand and Dustin Hoffman, you had one and only one choice: stand in line at a movie theater ticket window, buy a ticket, load up on popcorn and soda and Junior Mints, and take a seat.

The sequel, “Meet The Fockers,” released in December of 2004, was among the top-grossing films of 2005. It is also pretty hilarious. Watching it at home in the comfort of the living or family room wouldn’t be an option until nearly two years later: August 22, 2006, when the DVD was finally released.

That’s pretty much the way movies and DVDs rolled out for the better part of the early to mid-2000s.

Studios didn’t release popular films like “Meet the Fockers” on DVD until 12 to 16 weeks after they had premiered in movie theaters. For popular first-run hits, the studios would drag it out much longer to maximize box-office sales and profits.

Netflix was founded in 1998 to give consumers a mail-order alternative to schlepping to video rental stores to get their videocassettes and, soon, their DVDs. The growing popularity of DVD rentals in the early 2000s introduced more competition into the market, making them more affordable for more consumers. That, in turn, increased demand for more DVD titles to satisfy the consumer’s desire for watching video programming at home. At their peak in 2005, DVDs were a $16.3 billion business, representing 64 percent of the home video entertainment market.

In 2007, Netflix introduced streaming services to further scratch that consumer itch. As more people had fast broadband connections at home, the popularity of this new “video on demand” service increased. Apps on mobile phones and tablets with 4G connections introduced even more flexibility to consumers to watch movies and other video content anywhere they wanted.

Between 2008 and 2019, the DVD rentals market dropped like a stone. In 2010, Blockbuster declared bankruptcy, a decade after famously telling Netflix, which then had $5 million in annual sales, to get lost when they suggested that Blockbuster buy them.

In 2017, Netflix was reported to have had as many U.S. subscribers as cable television, covering 73 percent of the country’s households.

In 2020, movie studios, motivated by the pandemic’s hit to movie theatre attendance and the hockey-stick growth of streaming subscribers, reversed a decades-old rule that now only gives movie theatres 17 days, or three weekends, of first-run movie exclusivity, down from what was once a three-month head start.

Since January of this year, Netflix has added roughly 26 million new subscribers to its platform, globally, and 10.1 million in the April to June timeframe alone.

Netflix is the story of the classic, but the always so-much-harder-than-it looks, ignition strategy, laid out over more than two decades. A combination of forces — Netflix’s own content and technology innovations and advances in hardware and software — helped them consistently attract more eyeballs. And those eyeballs helped Netflix buy more content — and more content helped get even more eyeballs. Cheaper and higher-quality HD flat-screen TVs, the near-ubiquity of fast broadband at home, and powerful tablets all turbo-charged consumer adoption and usage over time.

A lot has happened over the last 20 years to give consumers more ways to watch movies in the comfort of their own homes while giving content producers more incentives to offer consumers more choices about what to watch.

Today, consumers can pop open the Netflix app on one of the many connected devices that are now in the hands and the living rooms of almost every person and household in the U.S. — and a growing audience in every other part of the world — and binge-watch whatever they want.

Netflix the platform became the catalyst for a powerful yet subtle shift in how people could consume video content. They turned something that consumers didn’t really want to do (go to the DVD rental store) into something they no longer had to do, while still getting the desired (or even better) outcome.

‘I Don’t Have To, But I Want To’

Over the last five years or so, we’ve seen confident, employed consumers in a very strong economy shift how they spend their money. Money spent on things gave way to money spent on experiences: going out to eat, traveling, going to concerts and other live events.

Those experiences didn’t fall into the bucket of things consumers had to do, but what they wanted to do — and do with their families and friends. The experience was the product, and consumers were all in.

Until March of 2020.

The pandemic has largely put a pin in most, if not all, of those activities.

Take eating out in a restaurant.

When the physical economy locked down, so did restaurants. Sales plummeted, and many restaurants reported losing 80 percent to 90 percent of their sales overnight. They scrambled to offer takeout and curbside pickup to get some sales in the door.

Four times as many consumers used an aggregator to order food from a restaurant at the end of August than they did in March — but most will tell you that it’s no substitute for the experience of being at a restaurant and eating that same food.

The one thing PYMNTS has heard consistently in the 10 studies of a national sample of more than 25,000 U.S. consumers, which have been conducted since March 6, is that consumers want to go back to eating at restaurants. As a close second to seeing family and friends, more than three-quarters of consumers consistently say that going to a restaurant is the physical-world experience they miss the most.

Not surprisingly, innovators are hard at work devising digital-first experiences for consumers making their “don’t-have-to-but-want-to” decisions about going back to a restaurant, with the impact on their health an important driver of those decisions.

QR codes in restaurants, which show menus and put ordering and payment into the hands of consumers, have eliminated the need to touch a menu or the check in the plastic billfold that once defined the checkout ritual at the end of every meal.

Socially distant settings in largely outdoor dining areas have helped mitigate consumers’ fears about the virus and brought consumers back to restaurants. Eager to break their quarantine routines, consumers are filling restaurants to whatever capacity they can accommodate, according to the requirements of the states in which they operate.

The question now for consumers, innovators and restaurant operators is whether this digital-first technology is enough to get the “don’t have to but want to” consumer back into their regular Friday and Saturday night dining-out routines.

Just like ordering food from a restaurant isn’t the same as eating it in the restaurant, neither is eating in a restaurant where the dining experience is now defined by COVID-protocols, many say.

Part of the dining-out experience is the experience: the vibe of a crowded, bustling restaurant scene, often with patrons crowded around the bar. It’s a vibe that’s impossible now with current capacity constraints.

Many COVID protocols also make the dining experience itself very different — bare tables, more restricted waiter/diner interactions — so that the ambiance-inspiring artifacts that consumers once enjoyed are no longer part of it.

As cooler weather makes outdoor dining less of an option — and the CDC has recently cautioned consumers that indoor activities, like eating in restaurants, carry a higher risk of being exposed to the virus — it’s hard to know how or when consumers may feel comfortable, digital-first technology options notwithstanding, with getting back into their pre-COVID restaurant routines.

Dining out, though, is just one example of the consumer’s “don’t have to but want to” activities that brands can meet with digital-first solutions to keep consumers engaged.

Traveling, going to live concerts or attending sporting events are also areas where we’ve seen innovation emerge to meet consumers in their digital-first bubbles. Fortnite now hosts concerts inside of its gaming ecosystem. Live sports are still being played, but to a virtual and not physical audience. Consumers are buying or renting RVs or packing the kids in the car and traveling, while sticking close to home instead of flying on airplanes to faraway places.

Using innovation to move consumers more into the “want to” camp comes with a unique set of challenges, some easier to overcome than others. Consumers can still satisfy their wanderlust and get out and see new places. They can still watch the Pats on TV, like many of them always did. Piped-in fan cheers and field noise — and few shots of empty stadium seats — doesn’t really degrade the home viewer’s experience.

In other cases, like eating in a restaurant, digital is an important enhancement to, but not a substitute for, the experience that the consumer really, really wants to have.

And let’s face it: For many physical activities that people didn’t have to do, but wanted to do, it’s been very hard to come up with solutions that make them want to nearly as much. And that’s been a real drag on the economy, with no apparent solution absent a vaccine or other consistently implemented safety measures, which do not appear to be on the near-term horizon.

‘I Have To, But I Don’t Want To’

Here we are in September of 2020.

Walmart is testing the drone delivery of packages weighing less than 6 pounds into consumers’ backyards.

Consumers can buy cars online and have them delivered to their driveways without ever talking to a car salesperson or going to a dealership to sign paperwork.

Sellers from anywhere in the world can list products on dozens of online marketplaces and reach new customers who would never find them any other way.

Consumers need a paper cashier’s check for real estate closing costs.

What’s wrong with that picture?

In the days before COVID-19, going to the bank to get a cashier’s check to cover closing costs was always inconvenient, but was the means to an important end. Consumers may have grumbled, but they always made the time, went to the bank and got it done as instructed.

In the throes of a pandemic, the paper cashier’s check is an example of unnecessary, time-consuming friction. Did I mention, unnecessary?

Of course, with enough digging around and persistence, banks may offer to process a wire to arrive the day before closing, but at a price. The bank that a colleague interacted with last week charged him $30 to send a “wire” from his account to the lender’s account, which happened to be at the same bank. The funds were guaranteed to arrive before 3 p.m. the day before closing (which was at 4 p.m.), but not instantly.

He said he was more than happy to pay that fee, since it avoided what would have become an hour-long excursion to and from a branch to get that quaint paper artifact. The local branch near him was closed, so he would have had to drive much farther to a nearby town to complete that transaction.

Keep in mind: All the lenders cared about was making sure they had their money before signing on all of those dotted lines. They didn’t much care how they got it.

A lot of consumers probably would have put on their masks and spent the time to hoof it to and from the branch to get a cashier’s check. Maybe they didn’t know they had an option (it took digging to find that option for that bank, I am told). Maybe they weren’t sure the money would get there in time, or maybe they didn’t want to spend the $30 required to process an electronic payment.

This is just one example of the “have to but really, really don’t want to” category of activities that are ripe for innovation — and in need of digital-first solutions that satisfy all stakeholders.

In some situations, the absence of suitable digital-first solutions carries far greater consequences than spending a few hours trekking to and from a bank branch.

As we saw over the course of the pandemic, and even now, consumers who needed to see a doctor, didn’t. Telehealth usage is up, but many patients remain concerned about going to the doctor’s office for routine visits or to treat something more severe. As further evidence that consumers aren’t going to the doctor, there are unspent balances in many HSA accounts. As doctors report, it isn’t that people aren’t getting sick or having strokes or heart attacks or other serious medical problems — they just aren’t seeking treatment.

Consumers who have to pay for their purchases in the store don’t want to use cash, nor do they want to touch a terminal in any way. Not all consumers have contactless cards or feel comfortable using digital wallets to pay. Innovations such as online ordering for curbside pickup and QR codes for in-store checkout give consumers payment options that give them more control over their experience. It also keeps them from doing something they increasingly say they don’t want to do: Go into stores to buy retail products. Nearly two-thirds of consumers still say that going into the physical store to shop makes them uncomfortable due to fears of being exposed to the virus.

Businesses don’t want to be paid by check any more than buyers now want to send those checks. Moving money efficiently between accounts has been technically possible for a very long time — yet checks were easy for senders, and so receivers took them to get money in the door. The popularity of virtual cards has soared over the course of the pandemic, as both buyers and suppliers seek certainty around cash flow and the ability to move detailed data with the money being sent and received. Flexibility around terms and working capital now provide even more incentives for each side to get on board.

What makes many of these “have to, don’t want to” situations so interesting is that they are rife with inertia — the sacred cows that have stuck around for years or more just because the status quo was familiar, and change seemed hard.

Yet, as the pandemic has exposed, it’s also where the opportunity for digital-first innovation can be so profound.

Getting FIT® to Innovate  

Two months ago, I first introduced the FIT® framework to provide insight into why consumers’ and businesses’ shift to digital has been so sharp over the course of the pandemic — and why so much of that shift seems so permanent.

The FIT® framework examines and quantifies the three vectors that influence the trajectory of innovation one way or the other: Friction, Inertia and Time.

In the case of the pandemic, given its unexpectedly long duration, consumers and businesses have become highly motivated to eliminate the friction of doing business in the physical world with physical payment methods and manual and paper-centric processes. They knew they lost a lot of valuable time as a result of that friction – but it was a hassle to go to the trouble of establishing digital accounts, methods and processes. That created inertia: They wanted to move, but just couldn’t get over the hump. But keeping consumers and employees safe from being exposed to the virus, and mitigating the impact to business operations that paper-based methods introduced to a distributed workforce, got them over the hump — it countered that inertia.

The longer the pandemic remains — which, according to the latest PYMNTS consumer and small business research, could be until the end of summer 2021 — the less likely that consumers and companies will go back to the old ways of doing business.

Thinking that inertia will work in reverse means ignoring the reality of the jump discontinuity that the pandemic has created — and the new, digital-first path that consumers and businesses are now traveling.

The Netflix Innovation Inspiration

We’ve observed a rapid rise of innovation over the last six months, in an effort to help businesses of all types and sizes navigate the devastating impact of the pandemic.

Much of that innovation has been critical to keeping businesses operating by introducing digital into experiences that were once largely physical in some way.

Six, now going on seven, months into the pandemic, it’s time to shift focus, and to take innovation up a notch or three by examining how the FIT® framework can help turn the things consumers don’t want to do, into the things they no longer have to do to get a better outcome.

Eliminating friction and saving time, of course, is what all innovators strive to do; it’s table-stakes for any successful company and essential for any platform worth its ignition strategy. But overcoming inertia is the hard part.

Introducing digital-first experiences to consumers and businesses that have to, and want to, do things is relatively straightforward — and overcoming inertia is an obvious payoff for embracing a new experience. And in many areas, shifts to digital had already started and the pandemic fast-forwarded its adoption, like ordering groceries, teaching kids, buying cars and settling on homes online.

But where innovation has the potential to make its greatest impact is where Netflix showed us how to forge that path: turning a “don’t want to” into “a don’t have to” experience.

The pandemic has created a new opportunity to break the inertia that has held innovation hostage for so long.

Innovators have greater incentives now to make consumers and businesses want to use digital solutions for things they have to do but don’t want to do, and for things they don’t have to do but want to do. It’s now up to innovators to find those opportunities for digital solutions — knowing that if they succeed, consumers and businesses, having overcome that inertia, will happily leave the status quo in the rear view.