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Lesson #3: “Never underestimate the competition”

Article Overview: Netflix has grown to become the largest movie rental by mail service in the U.S., but its path to success has not been without its hiccups. Indeed, Hastings admits that one of his biggest mistakes came in underestimating the capacity, and strategy of his competition.

Lesson #3: “Never underestimate the competition”

Netflix has grown to become the largest movie rental by mail service in the U.S., but its path to success has not been without its hiccups. Indeed, Hastings admits that one of his biggest mistakes came in underestimating the capacity, and strategy of his competition.

He first learned that lesson in 2002, when Hastings admits that if he could do just one thing over again, it would be "going public later than we did."

"We went public in 2002, and by publishing our financials, we let Blockbuster see that this was a profitable business," says Hastings. The result? "[Blockbuster] entered two years later. If we had stayed private for another two to four years, not as many people would have understood how big a business this could be."

That was mistake number one for Hastings. Mistake number two was in believing that Blockbuster was not in it to win it. "We erroneously concluded that Blockbuster probably wasn't going to launch a competitive effort when they hadn't by 2003. Then, in 2004, they did," says Hastings. "We thought, ‘Well, they won't put much money behind it. Over the past four years they've invested more than $500 million against us."

Netflix has been able to grow at a tremendous rate despite the initial poor judgment call. Now, however, Hastings is wary of never making the same mistake again.

"The most difficult thing is anticipating the threats ahead of time," he says. "We've got a great head of steam, fast growth, big earnings, customer growth, all kinds of good things, but we've watched a lot of companies rise and then fall, especially in Silicon Valley. So we work very hard to kind of game-theory it out: what could happen if all of these things happened, how we'd react in that scenario, strategic planning, anticipating what will come up."

Beyond Blockbuster, Netflix is also up against the likes of WalMart, and that means coping with fear and derision. "Fear because we're fighting Wal-Mart, which is the world's largest company, and Blockbuster, which is much bigger than us," says Hastings. "Derision in that we've been competing with them for more than two years already, and we have a 95 percent market share. Our service works better, and we continue to invest to make it better than theirs, so we keep a steady eye on them. But we have so much more momentum and are so focused on a better consumer proposition that we're not too worried."

Keeping an eye on the competition for Hastings also means knowing in which directions to take his own company. "We see that there is a big market in advertising-based video that Hulu and Google's YouTube and others will be very competitive in," he says. "We are going to focus on commercial-free subscription, which is not the largest segment, but it is a big enough segment for us to grow in for many years."

It also means being realistic about what his company can achieve. When asked why Netflix does not directly market the "dump your cable and save money" message, Hastings replied, "Well, no one dumps their cable. They expand to get the larger cable broadband package. Cable is the best provider of broadband out there, so it is not a realistic message."

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Article Tags: blockbuster, hastings, hiccups, mail service, mistake number, profitable business



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Think and Grow Rich - Hi Moira, What a great post! I completely agree with it and it really is too easy to underestimate those 3 points but once we learn to use them the sky is the limit. I am currently reading Think and Grow Rich by Napolean Hill. Have you read that book?
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April Contest feedback - FYI, next competition should have a cut off time based on a timezone...say EST since that's the timezone your in Evan. Just a thought so that the competitors have some guidelines too. That was an Exciting April competition for me. Trying to maintain my spot and keeping the posts as helpful to the forum readers. It also got me to write more freely as I often get writers block.
Re: First Brag of 2011! - First of all a belated happy birthday to David I am pleased that you had a good day. As for putting your new podcast blog forward for the APG competition, that was a great idea as it will help you to get it marketed quickly. The last competition that APG had helped me bring my Alexa ranking down by about 1,000,000 so it is worth taking part in it, because even it you don't in one of the prizes just improving on your business is a win. MichelleJ


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