1. NETFLIX: HOW WATCHING
MOVIES CHANGED FOREVER
Jess & George

2. Why is Netflix Breakthrough? - Outline
• Extreme customization for each user account
• Constant communication of that customization to the users
• Able to rapidly innovate new ideas into working products
• Completely and irreversibly changed the video renting industry for
the better
• Dominates the entire online content market when using
consumption of bandwidth as a metric
• Despite constant apocalyptic rumors for the last decade Netflix has
continued to succeed and typically overpowers its competitors
eventually

3. Cinematch – What is it?
• Currently 23 million subscribers in 47 countries generate 4 million
ratings per day
• The Cinematch algorithm has been adapted in such a way that 75%
of all movies and TV shows viewed on Netflix are chosen due to some
sort of recommendation
• Cinematch communicates personalization through several different
focuses…
• Diversity
– Cinematch is designed to provide recommendations that fit both the
possible different moods of an individual or possibility of many family
members using one Netflix account

4. Cinematch – What is it?
• Awareness
– Netflix reminds you that their product is being customized for you to promote trust in
their product and to get customers more involved in helping the rating system work
– The extremely specific genre’s and placement of your user name in in the Top10 category
are part of the awareness strategy
• Explanation
– There are constant reminder’s that the recommendations are based on your taste
preferences and previously viewed and rated movies and not the interests of Netflix
further increasing your trust in the product

5. Cinematch – What is it?
• Similarities
– “Similarities” is used very broadly in that it can be between movies or
between members and can be from ratings, whether or not the video was
viewed to completion, sequences of different videos viewed, etc.
– Similarities between friends are used in other countries by connecting
through Facebook, but the Video Privacy Protection Act prevents the same
feature from existing in the USA
• The resulting output to the customer mostly comes in the form of
customized rows that show either your Top10, Customized Genres, or
Similar Titles
• Each title in each row is also displayed according to how Cinematch
thinks you would rate that title based on your ratings and your
taste preferences

6. Cinematch – Creating Customer Satisfaction
• At the end of 2010 (before the Netflix blunder in separating their
products and increasing prices) customers were surveyed to
determine what websites pleased their customers the most and
Netflix and Amazon tied for first with a score of 86% satisfaction
(Source: ForeSee)
• Netflix is not afraid of failure, despite the constant apocalyptic
rumors, and perceives their failures as a sign that they are
constantly trying to innovate to improve the Netflix experience
• The Netflix mantra on failure is basically that if you’re going to fail,
fail cheaply, and know when you’ve failed and when you’ve gotten it
right
• Netflix’s Product Development Cycle
– Hypothesis: “Algorithm/feature/design X will increase member engagement
with our service, and ultimately increase member retention”
– Design a test: This might mean building a full scale product or just building
a prototype to test for positive or negative response
– Test it: Prototypes and products are tested on actual members and
compared to a control group

7. Cinematch – Creating Customer Satisfaction
• Features of the Netflix Product Testing
– The main metrics used are customer engagement and retention, but Netflix
claims to use “zillions” of other metrics
– Products can be tested with hundreds of thousands of test subjects and can
be tested in two test cells or twenty test cells with different variations of the
product
– At any given time Netflix is testing about a dozen different products on it’s
customers without them knowing
– Both failures and successes improve Netflix’s product intuition and increase
their chances of hitting it out of the park with the next hypothesis
– They eliminate the tyranny of “or” choices by ensuring that they can test
many different approaches to a problem
• Does the customer-centric development process and customer-zation
employed by Netflix make it breakthrough?

8. Cinematch – The Netflix Prize
• In October 2006 Netflix offered a $1 million prize for anyone who could improve
Cinematch’s movie matching abilities by 10%
• Final products were reduced to their most valuable components, adapted to provide
real-time analysis, and optimized to handle Netflix’s billions of ratings as opposed to
the 100 million used in the competition
• From the final winner only 2 or the 107 algorithms used in BellKor’s program were
added to Cinematch and because during the competition Netflix launched streaming
service they switched to using many different types of data as opposed to just ratings
• Was the money and tens of thousands of man hours really worth it for this
innovation?

9. End of The Netflix Prize – A Loss of a Brilliant
Innovation Strategy
• The Brokeback Mountain Factor
– The development model of outsourcing to free lance developers or inspiring
teams of developers to form and compete with each other was a brilliant
strategy to keep Netflix at the fore-front of development
– It had to be shutdown because it was quickly discovered that you could
correlate the “anonymous” ratings data to other available data
– Using the date a rating was made and the movie rating data could be
compared to public ratings on IMDb during the same time and the identity
of the users could be discovered along with fairly accurate assumptions
about their sexual orientation and political views
– The law suites the followed and increased interest from the FTC have
prevented Netflix from ever running another program like this
• The change in data being collected
– After the launch of the Netflix streaming service in 2006 the data collection
included more than just ratings
– Even if the Netflix Prize program would have continued it would have
needed to be completely revamped to include all of the additional data
available from streaming

10. Cinematch says Jess should
watch…

11. Netflix by Mail – Eliminating Managed
Dissatisfaction
• What was the POG for Netflix’s mail service?
– Video stores cannot stock large quantities of new releases because demand is so fleeting
that it is not cost effective
– Video stores accept that a certain amount of dissatisfaction must exist when customers
cannot rent the movies they desire
– Video stores have to impose late fees that seem outrageously high to ensure that their
videos are returned in order to maintain their ability to predict whether or not they will
be able to rent a given movie to a customer that desires it
• How has Netflix eliminated the need to manage dissatisfaction?
– The video queue
• Eliminates customers realization that they aren’t getting the movie they wanted
when there aren’t any available copies in inventory
• Allows customers to store movies they want to see rather then deciding every time
they enter a store

12. Netflix by Mail – Eliminating Managed
Dissatisfaction
• How has Netflix eliminated the need to manage dissatisfaction?
– The change in Blockbuster film preferences
• In video stores 80% of the movies rented come from 200 “blockbuster”
titles at any given time
• Due to the Netflix Cinematch system this preferences for blockbusters
was changed so that 80% of all movies came from 2000 titles
• With less demand for extremely popular films Netflix could carry less
copies of new releases and still provide a much higher number of people
with their first choice of movie
– The subscription service
• Completely eliminated late fees and thus eliminated another reason
customers could be dissatisfied
• Eliminates the guilt felt by customers who are late returning movies

13. Netflix Streaming (2006)
SET Factors
Product Opportunity Gap
So we’ve made it easier to get DVDs without leaving your home… now it’s time we let
you get movies without needing a DVD…
Technology:
Expansion of Bandwidth
that would allow for
quality image streaming
with minimal (or no)
buffering
Social and Economic:
Advent of the
“staycation”

14. The Importance of Bandwidth
to Netflix’s success
Technology:
Expansion of Bandwidth that would
allow for quality image streaming with
minimal (or no) buffering
“We took our spreadsheets and we figured
we’d get 14 megabits/sec to the home by 2012,
which turns out is about what we will get… If
you drag it out to 2021, we will all have a
gigabit to the home.” -R Hastings, CEO

15. Netflix Streaming: Features
Crushing managed dissatisfaction one stream at a
time…
•Unlimited Streaming of both movies and TV
shows for a monthly subscription fee (can
select a plan with just streaming or can
combine with DVD-by-mail)
•Cinematch uses the survey as well as your
previously viewed material to help you find
more TV shows or movies for you to stream
•New contract will allow users to stream
DreamWorks films (2013); continuously
trying to expand streaming content
•Exclusive Streaming Content
•Lillyhammer
•House of Cards (2012)
•New episodes of Arrested Development
(2013)
“Binge Watching”

16. Netflix Streaming – Creating Unlimited Availability
• One of the major focuses of
Netflix is to make their service
available across as many
platforms as possible and to limit
their development cost in the
process
• In 2008 Netflix made their
application programming
interface (API) available to the
public allowing device makers to
program their own Netflix apps
• Netflix claims there service is
available on over 700 devices
today

17. Brand Management and the Envelope
• The Netflix brand is mostly centered around trust
• The red envelope has changed the emotions associated with video
renting from guilt and disappointment to excitement and
anticipation making a walk to your mailbox seem like Christmas
morning

18. Let’s Play a Game…
Amazon Prime
•Yearly Subscription
•Available on fewer devices
•Late in the game; trying to
play “catch-up”
•2000 titles
Xfinity Streaming
•Must have Xfinity and already be paying for
their cable service
•Limited archive, often has the “current”
shows but not “last season” shows
Cable “On Demand”
•Menu can be difficult to navigate
•Limited archive
•Most movies are pay-per-view; free movies are limited
to TV movies; can get movies with
HBO/Cinemax/Starz, but these are premium channels
for most cable plans
•Talk of Netflix partnering with cable companies
•Commercials; fast forward may be locked
Network Apps
•Only TV shows
•Each network has their
own app
•Limited archive
•Commercials
Walmart Streaming (“Vudu”)
•Purchased, not created
•Pay-per-view; limited selection of free videos
•Rumors of Walmart breaking into this business
were around in 2001; Vudu purchase in 2011 (10
year gap)
Blockbuster Streaming
•Blockbuster “Freedom Pass” tried to
compete with Netflix subscription, but
barely made a dent in Netflix’s success
•Talks of Blockbuster streaming service
has been around for a while and it has
only recently gotten off the ground

19. Qwikster: Sign of Demise or a Small Blemish?
• Lost 800,000 subscribers in the third quarter
• Regained 600,000 subscribers by Dec 31st 2011
(2/3 of those lost)
• Currently trading $101.15; dropped to around $64
through December 2011 but then has been going
up since then and consistently between $100-
$120
Too much too soon?
• Weaning customers in: isn’t that
incremental innovation?
• Was the Qwikster brand too undeveloped
for marketing?
Was it really as stupid as people say it was?
• Now that we’ve been studying Netflix’s business,
we can appreciate that these are different
companies; perhaps the true issue was
communication with the subscribers
Phasing out DVDs
• People are speculating that this was
partly to phase out the DVD
service; was this the right action for
the desired results?

20. The Qwikster Failure
• Why should a separation of the mail and streaming businesses work?
– The business strategy for each services is becoming increasingly different
because the competitors for each product are totally different
– The costs associated with each product are not the same so the prices must
be different
– The streaming business is expected to completely take-over the mail service
eventually
– The information collected by Cinematch for the two services is almost
completely different