THE STUDY OF NETFLIX

BUSINESS STRATEGIES

 ARTICLE TITLE :- The Netflix Recommender System : Algorithms, Business Value and
Innovation
 AUTHORS : Carlos A.Gomez-Uribe, Neil Hunt.
 PUBLICATION : ACM Transactions on Management Information Systems on December
2015
 ARTICLE NO: 13
 ABSTRACT

This article discusses the various algorithms that make up the

Netflix recommender system, and describes its business purpose.
We also describe the role of search and related algorithms, which for
us turns into a recommendations problem as well.
We explain the motivations behind and review the approach that we
use to improve the recommendation algorithms, combining A/B
testing focused on improving member retention and medium term
engagement, as well as offline experimentation using historical
member engagement data. We discuss some of the issues in
designing and interpreting A/B tests. Finally, we describe some
current areas of focused innovation, which include making our
recommender system global and language aware.

PREVIEW

It all began in April 1998, when Netflix started renting out DVD’s by mail.
Only a year later Netflix changed its pay-for-use model into a subscription
model. Nearly a decade later, Netflix changed their proposition to a
streaming service, which changed the way millions of people spend their
free time.

There are new entrants in the market, such as Amazon Prime, Hulu Plus
and Facebook Watch, yet Netflix is by far the leader, serving 125 million
customers and generating 11.7 billion in revenues in 2017.

 The initial business model of Netflix

When software engineers Reed Hastings and Marc Rudolph founded

Netflix in 1997, video rental stores dominated the home entertainment
 market. Hastings was frustrated that the market was not customer-friendly,
with charging the customers high fees for late returns as the culprit.
They saw an opportunity to do rentals differently and Netflix began
renting out DVD’s by mail in April 1998, which was a game changer in
the video-renting market and a huge gamble, there VHS dominated the
market and only 2% of the American households owned a DVD player at
that time. Reed and Rudolph knew if the market reached 20% of
households, they would have a viable business. They had the foresight to
take the leap and their vision was right: eventually 95% of all households
had a DVD player!

 From renting DVDs to a subscription model

The first business model was to let people rent videos by selecting it online and
having it delivered to their door. This service was unparalleled at that time and a
big shift in the industry. A year later, Netflix introduced a subscription model,
where customers could rent DVD’s online for a fixed fee per month.

From the launch of their subscription model in 1999, Netflix gained 239.000
subscribers in its first year and went on to build a customer base of 1 million
subscribers by 2003. As of today, Netflix is by far the number one online player of
series and movies, with 11.7 billion revenues in 2017 and 125 million customers
who all pay a monthly fee.

The key trends that are driving the exponential growth and are
implemented in the current business model of Netflix are

Technology: available to watch content seamlessly on different devices;

Comfort: people don’t have time to go out and shop for movies, people want
comfort where content is presented to them (personalized), people who are
frequent renters and movie lovers, and people who want to get the best value for
money

On demand: being able to watch content anywhere and on any time you want

Subscription addiction, low cost monthly fee and simple structure

 Data driven: not only used for recommendation but also pro-actively used to
create content that fits personal preferences.

Also, apart from being one of the pioneers of the industry with their subscription
model, the value proposition is yet another element which helped this particular
service to become as popular as it is today. In fact, there are a total of four
elements that are making all the difference.

 Affordable price (every fourth household in the US has a Netflix subscription,

that’s why they can sell so cheap)
 Accessibility (on all devices, when and where you want)
 Original content (invest in own shows, based on the analysis of their own
customer data)
 Large amount of high quality content in many different genres

When Netflix evolved their business model, an important part of this was to gain
more insight into their customers’ preferences and create a community of fans
with fitting content for everyone, at any time. They evolved their algorithm to an
open source initiative because they understood that with more data and the
technological knowledge of more people, the Netflix experience would become
much better. Already in September 2009, a prize of $1M (called The Netflix
Prize) was awarded to team ‘BellKor’s Pragmatic Chaos’ for improving Netflix’s
recommendation model.

In 2013, Netflix started to develop their own production and shows, based on the
analysis of their own customers’ data. This way, Netflix understood way better
than their competitors what their customers would like next and acted upon this.
House of Cards was the first big Netflix Original that was made this way. Where
studios were only wanting to make a pilot, Netflix already knew based on their
data, that this series would become a hit and immediately signed up for two
seasons!

They currently make use of and contribute to a large number of open source
technologies and even have their own Open Source Software Center. In 2017,
Netflix open sourced Vectorflow in 2017, which is a deep learning library.

All these elements above were combined and led to the current business model
of Netflix.
The Netflix model keeps evolving and changing the entertainment industry. In
December 2017, Netflix rolled out a new recommendation algorithm that knows
which image will make you click ‘play. It serves up unique images to its
100million plus customers. For example, when you have watched mostly
romantic movies in the past, Netflix will show you an image of the two lead actors
kissing, while if you are more into comedy, you’ll likely get a shot of a funny
character in the movie.

Netflix is very successful because they exactly know what customers want, when
they want it and on what device. Also, the company is bold and courageous
enough to keep changing their business model into the most optimal future and
not afraid to cannibalize their current business model. We’re very curious what
their next game changing story will be!