When a new technology comes along, it's hard for companies that mastered the old one to repeat the performance with the new one. As I wrote in my 1997 book, The Technology Leaders, the key is to adapt your business model -- using new technology -- to deliver ever-higher levels of value for customers -- rather than obsessing over your stock price.
Consider Netflix CEO, Reed Hastings. Netflix's latest profit report is proof that Hastings has mastered a different set of skills than the ones that he used to get the company off the ground. In the third quarter, Netflix's earnings quadrupled as its original programming lineup helped attract 1.3 million more U.S. subscribers.
Hastings has done what few entrepreneurs can-- he has adapted effectively to fundamental changes in technology that both threatened the way he did business in the past and offered a better value for his customers.
And Hastings’ success offers three important lessons for your start-up.
1.Build a delivery model that offers consumers more value. Rather than focus on preserving your profits, your startup should keep its focus on how to create value for customers.
That’s what prompted the initial rise of Netflix. In September 2010, when Blockbuster went bankrupt, Netflix was riding high. Blockbuster did not adapt well to Netflix’s strategy of charging a flat fee for unlimited DVDs mailed to peoples’ houses.
That DVD-by-mail business worked well because Hastings was able to buy the DVDs in a retail store (copyright law allowed him to rent out those DVDs) and deliver them in a more consumer-friendly model of no late fees and big selection [that] overpowered the immediate convenience that Blockbuster offered of going to a corner store to pick up a movie for a night.
Netflix’s original business strategy enabled it to win customers in a way that was impossible for its biggest rival to copy.
2. Take a hit to reinvent your business. If you get successful with your first business model, you will be sorely tempted to milk it for everything it’s worth. But if a new technology comes along that delivers better value to consumers, you must rip your business out by its roots and use that new technology to stay ahead of your customer’s changing needs.
But by September 2011, things were not looking so great for Netflix’s streaming video business model. After all, in July 2011 Netflix angered customers by raising rates as much as 60%.
The new deal made customers pay $16 a month for one DVD out at a time plus Internet-streaming - up from $10 a month for the combined package before the new rate went into effect for existing subscribers at the beginning of that month.
And the pricing changes that triggered a customer backlash in 2011, caused its stock to plunge 80%.
Unfortunately for Netflix, it was a far different proposition to build a successful online streaming business. That’s because Netflix was in a much weaker bargaining position with the owners of the digital videos -; it had to engage in painful negotiations with studios and they had no incentive to cut Netflix a break -; especially after watching Netflix eat their lunch with DVDs.
And this negotiating challenge was reflected in Netflix’s spiking subscription costs -- the money it paid to license the content that it streams to consumers and mail the DVDs.
3. Learn from your mistakes and invest in new skills. One reason it is so hard for a company to reinvent itself is that it has to give up profits in the short run to do it. Another reason is that unless you are extremely versatile, you may not be able to figure out the skills you need to win in the new business and make the investments in people and capabilities to get those skills.
But Netflix has done what most technology companies have not. It went beyond its original capabilities and developed skills to win in online streaming. Specifically, Netflix decided to compete with content providers like HBO and develop its own content.
That original-content strategy included a new season of "Arrested Development," a U.S. remake of "House of Cards," and a new series "Orange is the New Black."
But that original content is expensive -- Netflix spent $100 million on its two seasons of "House of Cards" and Netflix expects to double its spending on original content in 2014. But so far, Netflix has made that investment pay off.
With 30 million paid U.S. subscribers, Netflix has surpassed its rival, HBO's 28.7 million.
If I were writing a second edition of The Technology Leaders, Netflix would be a leading example.