The Value of Innovation

Chapter 17Implementing and Sustaining ROI

In 2012, Fortune magazine featured Reed Hastings, Netflix founder and CEO, as its business person of the year. Founded in 1999, Netflix is now the world’s largest online DVD rental service and video streaming firm, with more than 100,000 titles in its library, 60 million subscribers, and annual revenues of more than $4 billion. In 2002, the year Netflix went public, prime competitor Blockbuster had revenues of $5.5 billion, 40 million customers, and 6,000 stores. Yet only eight years later, on September 23, 2010, Blockbuster filed for bankruptcy. Netflix was added to the S&P 500 shortly after.[1]

When Netflix went public in 2002, a Blockbuster spokesperson said that it was “serving a niche market. We don’t believe that there is enough demand for mail order – it’s not a sustainable business model.”[2] In 2005, as Netflix began moving into the streaming of videos over the Internet, the chief financial officer of Blockbuster said, “We don’t think the economics [of streaming] works well right now.”[3]

But before these public dismissals, there was a private one. In 2000, Reed Hastings flew to Dallas to meet with the senior executives at Blockbuster. He proposed that they purchase a 49% stake in Netflix, which would then become the online service provider for Blockbuster.com. Blockbuster wasn’t interested. Blockbuster didn’t have to buy Netflix—though it could have—to rent videos by mail. It had all the resources needed to crush a freshman ...