The Mesh - Lisa Gansky [52]
Of course, many companies won’t embrace the Mesh. Their business models might be currently working just fine to generate shareholder profits. The necessary cultural and technological shifts may be seen as too wrenching or costly. But corporate executives ignore the Mesh at their peril. The competitive advantages the Mesh offers in today’s information-soaked environment will pose a persistent and growing threat to traditional business models. I had a front-row seat as the Internet uprooted earlier models. I sat in business meetings where major executives resisted or denied what was happening. With the Mesh, it’s déjà vu all over again.
Netflix slays a movie dragon.
To illustrate, let’s return to Blockbuster Wayne Huizenga, as I mentioned, grew highly profitable enterprises by recognizing the advantages of share platforms. Whether he was dealing in Dumpsters or videos, his core strategy was to invest in products that customers could use over and over again. He acted on the advantages companies gain through multiple transactions with customers. Through its chain of stores, Blockbuster collected information on what videos were being rented, and in what areas, which allowed the company to efficiently manage its stock. Through Blockbuster club memberships, the company kept in touch with customers and rewarded them with discounts. Blockbuster outgrew its competitors (many of which copied their basic strategy), and looked set to dominate the movie rental market for years to come. Then it all came tumbling down.
Netflix used what I’d call a textbook Mesh strategy—if a Mesh textbook existed—to beat Blockbuster. First, Netflix paid close attention to Blockbuster’s vulnerabilities with its best customers. Netfix knew that Blockbuster’s Achilles’ heel was late fees. Blockbuster’s revenue model depended on the fees, but customers hated them. Late fees were irritating to pay, like parking tickets, and created anxiety around running the videos back before the noon deadline. Worse, its best customers were the most likely to be punished by the fees. Netflix realized that if it could create a profitable business model that didn’t require late fees, it’d win.
The then-in-progress shift to the DVD format presented an opportunity. Netflix realized DVDs could be safely and inexpensively delivered by the post office. Its customers wouldn’t have to rush down to the rental store, hoping that a new release would still be available. They wouldn’t have to wait in line behind a guy arguing with his girlfriend, only to reach an underpaid clerk who’d clearly rather be somewhere else. And they wouldn’t have to pay a late fee, because there weren’t any late fees. Instead, Netflix introduced a subscription model that allowed customers to watch and return movies at their own pace.
What clinched Netflix’s advantage, though, was that it functioned as an information business. By creating a Web-based share platform where people could buy a subscription and queue up their movie choices, Netflix executives knew they could really get to know the customers. Early on, Netflix began using a customer’s prior selections and ratings to suggest other videos that might be of interest. As the service developed, the company added layers of information to inform a user’s choices, such as reviews from people in the network whose profile of selections and ratings were similar. Recently, it sponsored a contest awarding a million dollars to anyone who could significantly improve the movie recommendation service. Thousands of teams from more than a hundred nations competed.