Netflix: Online Rental of DVDs - From Clicks to Bricks & Flix

Netflix offers online rental of movie DVDs. The company was founded in 1998 and within 5 years had acquired more than one million subscribers (making it grow faster than AOL). It presents a new model for value appropriation in the entertainment sector and has strategic implications both for the movie studios as for the largest movie rental chain. Netflix uses the strengths of each of its building blocks: the highly flexible and adaptable nature of the web to customize its service to the consumer. Customers can develop lists of movies they would like to watch and the web site has potent data-base software that allows to analyze customer profiles and come up with suggestions for new movies. The agreement with the United States Postal Service allows the company to diversify the logistics risk and revenue-sharing agreements with the major movie studios allow both partners to appropriate more value than under traditional set-ups (i.e., upfront payment of copies). The case makes clear that a thorough understanding of the underlying customer needs and flawless operations management are a pre-requisite for the existence of this company. The case analyzes Netflix's demand-based management of its delivery and return logistics. It does so in the context of the company's revenue-sharing agreements with the movie studios and allows to identify key challenge in this setup. It shows how a very lean structure (the company had a headcount of less than 300 in 2002, generating sales of $150 million - or almost $1 million per employee) and a mix of "old" and "new" economy can be used to design a very successful business model.