How Digital Transformation Propelled Netflix To Eminence?

The crusade toward digitization over the past two decades has rearranged how businesses operate today. The topography is such that 91% of firms have pivoted their business strategy to a digitally-driven approach. Amongst this section of enterprises, one company rose to prominence: Netflix. The digital transformation of Netflix, a subscription-based snail-mail DVD rental company, turned it into a mainstream video streaming service platform. It disrupted how the world consumed entertainment and offered an efficient solution. 

Instead of waiting in queue and organizing a get-together, users could now watch a movie on supported devices at their convenience. This elevated customer satisfaction and blew up all revenue charts. The numbers are such that last year, its gross profit margin grew to a record 43%, and in November 2021, its valuation reportedly touched $300 billion. The following article elucidates how the digital transformation of Netflix established its authority and led it to eminence.

The Eventful Timeline of Netflix

Founded by Reed Hastings and Marc Randolph in 1997, Netflix commenced its business as a subscription-based DVD rental company. The idea behind Netflix, as framed by Hastings and Randolph, was a rendition of an e-commerce platform, like Amazon, but exclusively for movies. Customers would buy the subscription, wishlist the movies for rental, and get the DVD delivered to their doors in about one business day. Under the monthly subscription plan, users could watch however many movies they wanted.

Initial Years As A DVD Rental Company

The online DVD-by-mail model was already an ingenious move back in the 90s. It offered an emphatic resolution by enabling users to rent and watch movies online from the comfort of their homes rather than having to visit the video store every time. At its launch, Netflix didn’t have a wider movie catalog for users to choose from, and the start was rather difficult.

1. In a timeline of two years from its onset, Netflix could only amass 300,000 subscribers.
2. The high operational cost of shipping DVDs through the US Postal Service withdrew Netflix into a financial crisis.

The situation got so worse that Hastings was forced to offer stakes up to 49% to one of its competitors, Blockbuster, and Amazon. Neither of the negotiations could pass through. Blockbuster, during that period, was a leading business in the movie-rental industry. However, unlike Netflix, it had physical stores where people could walk into and rent or purchase DVDs. Comparatively, its business model was conventional to that of Netflix.

Netflix pulled a one-eighty by cutting dependency on the postal service and building a logistics web chain with over 50 warehouses for DVD distribution. Alongside operational reforms, Netflix also deployed the recommendation system— Cinematch, in 2000 for DVD rental. A systematized evaluation of the users’ DVD-rental history would display better movie recommendations to enhance customer engagement. The online rental model disrupted the physical video store establishment and catapulted Netflix’s number of subscribers to 6.3 million by 2006.

This success in the logistics and movie rental industry, however, did not entrap Netflix into settling over its business model. With the seismic transition of enterprises towards the dot-com business model, Netflix’s focus had already shifted from logistics to cloud and analytics.

Netflix 2.0 — Start of Video Streaming Service in 2007

From the seed idea of a DVD rental business to a multi-billion dollar streaming platform, Netflix went international. The onset of the 21st century witnessed a rise in high-speed internet and a subsequent drop in costs. The advancements in the world of tech thrust the video-on-demand (VOD) market in the 2000s and Netflix was the first to seize it. 

Initially, Netflix planned an analog approach as the replacement for DVD rental. For that, the focus was to develop a portable device that would download movies for the users to watch later. This method, despite offering quality, scaled down on user convenience and was, thus, terminated. Eventually, Netflix transitioned towards developing a direct streaming platform in 2005, and in the next two years, the product was ready.

From only a thousand movies available for streaming in 2007, Netflix upscaled to over 10,000 in the next two years. The rise in popularity of video-on-demand (VOD) catalyzed Netflix’s growth outside of the United States. Thereafter, the expansion was so swift that by 2016, Netflix had conquered the global market. Its subscribers tally clocked over 100 million by the end of 2017.

Netflix’s promptness in transforming its business model from a snail-mail DVD distribution company to a leading video-streaming landscape sealed its success. Businesses must go for digital transformation if they operate on conventional methodologies and plan to upscale.

But the major question is: how was the Netflix digital transformation actually brought about?

Digital Transformation of Netflix

By the late 2000s, Netflix had a sizable market cap in the media and entertainment industry. The digital transformation of Netflix disrupted the market and established a new and more efficient order. This was fueled as high-speed internet penetrated further and as Web 2.0 incentivized ease of use and end-user interoperability. Let’s take a closer look at the initiatives Netflix took to digitally transform itself.

Netflix Recommendation Algorithm 

As a snail-mail DVD rental platform, Netflix had already deployed a recommendation system – Cinematch to consolidate customer engagement and keep the movie request queue thriving. But the transition to direct streaming required that the recommendation algorithm be revamped. The newer objectives were set on making the streaming platform more captivating and enhancing the accuracy of movie recommendations. To reform the Netflix recommendation algorithm, the roadmap traversed was as follows.

1. Availability of Cache Data — The streaming platform left behind lots of cache data that was accessed to better the algorithm. The data, explicit, through likes and wishlist options, and implicit, through user behavior were extrapolated into recommendations.
2. Metadata implementation — All content on the streaming platform was assigned with distinctive metadata. The metadata from the collected cache was further used to compile identical metadata of other movies. For instance, the metadata could be covered in the movie genre like thriller or romance, or the actors. On this basis, movies with similar components were thus recommended.
3. A/B Tests — Apart from these, Netflix goes over the board to improve customer experience. This is done through the A/B tests which is a manual evaluation of how users interacted with the content. To do so, Netflix picks a random set of users and classifies them into A and B to monitor their behavior against given layouts. The layout that records more interaction is then rolled out across the platform.

Integration With Amazon Web Services (AWS)

Netflix has highlighted the reasons why it chose Amazon’s cloud services – AWS as its computing platform. From its website and software applications that run across devices to its recommendation algorithm and A/B testing infrastructure have all been developed and deployed on AWS. Even its datasets are stored on AWS. And the reasons were:

1. Opting for an external entity for data synchronization — Netflix’s immense growth in turn demanded incessant scalability. So to remain focused on the front end, Netflix decided to hand over its database architecture management to Amazon.
2. Opens up the space towards innovation and improving business — The handover of data center management to Amazon allowed Netflix to focus solely on innovation and product development.
3. Better horizontal scaling and predictability — Netflix can instantly access usage statistics and predictions through Amazon AWS and accordingly maneuver their business targets.
4. Futuristic application through cloud computing — Netflix has prioritized innovation and already put bets on cloud computing as one of the revolutionary techs. 

Defining UI Design With AI Integration

Netflix has also incorporated the power of artificial intelligence in its systems. The user interface design, specifically, the generating of movie thumbnails and further personalization is done through AI tools. AI analyzes the thousands of frames from a said movie and ranks them on the scale from the most clickable to not at all.

The rankings are devised based on the analytical data retrieved from what other users are clicking on. For instance, the thumbnails can be based on users’ likenesses of any actor, genre, or a specific still from a scene.

Features of Video Streaming App Like Netflix

Apart from innovation and promptness with regard to changing business atmosphere, Netflix’s popularity was also extended due to its excellent software and mobile app platforms. The features provided on these platforms added to customer satisfaction and experience. Let’s take a detailed look at these.

1. Multiple profiles — A single subscription plan on Netflix allows users to create multiple profiles on Netflix to retain and save their watch behavior. This further enables appropriate recommendations as per the algorithm for each profile.
2. Downloads — To enable users to watch movies or TV series on the go, for instance, in remote locations with low connectivity, Netflix allows users to download.
3. Search Feature — Netflix also allows users to perform manual searches on the platform to find and watch movies and TV series of choice.
4. Different subscription models — Netflix provides different subscription models to adjust all sections of users and widen the target audience across different regions.
5. Parental Control — While Netflix does provide kid-only profile access to the platform, it also enables parents to put up a security lock on mature content.

Netflix Business Model: Recalibrating Revenue Source

Netflix’s online DVD snail-mail venture and logistics growth brought its competitors — Blockbuster and Family Video to bankruptcy and/or the brink of it. Yet it didn’t stop at that. It upscaled itself into a video streaming service platform. As of early 2023, Netflix’s total number of subscribers is projected to surpass the staggering mark of 225 million.

The transition of Netflix can be classified into two streams: technological and analytical. On the technological aspect, Netflix, as previously mentioned, partnered with Amazon for the operation of its computing infrastructure. Through AWS, Netflix could easily work on scalability by deploying large datasets on a number of servers more efficiently. This also helped them to take out valuable time for product innovation and business development.

On the other hand, analytics and data assessment aided Netflix in the personalization of content better. This is strengthened by meticulous monitoring of how users interacted with the content put on the platform. At the back of this apparatus rests metadata-driven aggregation of recommendations and AI-powered segmentation of the user interface.

“When Netflix’s DVD-in-mail business finally started to grow, it did not stop there. It adapted to the trends in technology and reinvented its core model to improve customer satisfaction. ”

— Twinkle Kalkandha, Head Of Marketing

Partnership With Media Production Houses

In addition, Netflix started partnering with media and movie production companies for them to host their movies on its platform. This was done as an attempt to diversify its content library. Initially, this cost hefty amounts as the cost of the movie’s marketing and reception by the audience had to be borne by Netflix. It wasn’t soon till Netflix realized this. 

The partnership approach was remodeled. Now, it’s such that Netflix contracts a movie based on its reception by the audience. This not only cuts down the marketing costs but also lowers the expenses on hosting. 

Netflix also ventured into the self-production of originals earlier in the day. Today there are more than 3000 Netflix originals movies and TV series. Self-produced movies have returned wider margins of profit.

Netflix has capitalized on technological advancements throughout its history. It has never shied away from leveraging technological wonders, even if that’s a competitor’s product. From Amazon’s cloud computing to social media marketing on Facebook, Netflix mastered the art of collaboration. It has practically brought television screens into the palm of our hands. And in doing so, has maintained an exponential growth in revenue. 

Take a look at the graph sketching Netflix’s valuation over the years below.

Analyzing The Cost of Netflix-like App Development

Broadly, the cost of Netflix-like app development would rely on two significant sections: app complexity and design cost, and service cost. The UI/UX design of a streaming app must be streamlined as per the recommendation algorithm to elevate user engagement.

App Design — The process of mobile app design for Netflix was streamlined with a simplified approach. The current UI is a digital representation of stacked genre-based shelves we see in a physical video store. Every sample of content is placed in a horizontal queue of a specific genre for viewers to cast attention and steer across efficiently. On the other hand, to jump across genres of content, users can scroll vertically. Take a look at the graphic below representing the app design of Netflix. 

Therefore, to render a thematic app design across multiple devices and platforms like Android and iOS the cost is likely to dilate. iOS app development cost would practically be more.

Cost of service — The cost of mobile app development, whether you outsource the streaming app project or build an in-house team, can be estimated to range from $10000 to $25000. If the requirements demand further scalability, cross-platform support, customization, and high traffic management, the cost can rally up.

How Appventurez Can Help With The Digital Transformation Of Your Business?

As the world’s economy becomes more and more digitally driven, the brick-and-mortar way of carrying out business is coming to a halt. While enterprises have already adopted digital transformation, it is imperative to sketch a blueprint that resonates with your business model. At Appventurez, not only do we meticulously handle projects outsourced for digital transformation but also construct a custom business model accordingly.

We offer world-class product delivery that provides a flawless user experience and meets market standards, based on the expertise gained over the years through hundreds of mobile app development projects. Collaborate with Appventurez today for on-time product delivery and monitoring post-production outcomes.