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The Netflix Business Model: What to Learn From Netflix’s Industry Disruption
Just as Netflix disrupted the media landscape to find success, all businesses must innovate or risk becoming obsolete.
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The past 20-plus years have been a fantastic journey in the world of technology, changing the complexion of most businesses that survived the ride. Netflix, for one, went from a modest and now defunct DVD-rental subscription model to a digital media powerhouse that has forever changed how we view entertainment.
Netflix’s ability to pivot, stay ahead of the competition, set trends and recover from downturns provides lessons for all businesses seeking success, growth and longevity in the digital age. We’ll take a closer look at the evolution of the Netflix business model, how it disrupted the media landscape, and what we can learn about digital transformation and innovation from the company’s growing pains and successes.
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The evolution of the Netflix business model and its history of disruption
Netflix’s evolution is a modern business success story with plenty of twists and turns. Here’s a brief history of the company and how it disrupted the entertainment industry:
- Snail-mail DVD subscription service: Netflix started its snail-mail subscription service in 1999 to allow movie and TV fans to rent films and shows via DVD. Internet speed was slow, and there was nowhere near today’s digital infrastructure, so watching entertainment via the internet was far from being a reality. Streaming technology, as we now know it, didn’t exist, and Netflix was solely about ordering your movies online and having them delivered to your mailbox — a new way to access DVDs.
- Almost an early exit: Many business experts believed that Netflix’s DVD rental business wasn’t a scalable model and would die on the vine. Netflix feared the same. In 2000, the company sought a $50 million buyout from Blockbuster, but Blockbuster wasn’t interested. According to a Built In excerpt of Netflix co-founder Marc Randolph’s book, That Will Never Work, Blockbuster executives “laughed us out of the building.”
- Fine-tuned business model: In the following years, Netflix figured out how to fine-tune its distribution model for fast mail delivery. Still, users had to plan their entertainment at least two days ahead of time — for example, they had to order movies on a Wednesday for the DVDs to arrive in time for weekend viewing. Video stores like Blockbuster continued to prosper for last-minute needs.
- Pivot to streaming video: As technology improved in the late 2000s and even more so in the 2010s, Netflix started providing streaming video for its ballooning customer base, which welcomed the new service enthusiastically and began ditching Blockbuster and its ilk. Streaming video wasn’t an entirely new idea, and competitors lurked on the sidelines, but Netflix’s ample, established audience and cutting-edge technology gave the company advantages in this burgeoning arena. Blockbuster tried to follow Netflix into streaming, but it was too late for both the video rental chain and its old-school peers.
- Content giant: With viewers enjoying more streaming entertainment, Netflix branched out into original content in 2009, setting the company off on a new path of creating award-winning movies and series. In time, fierce competition emerged from Hulu, HBO Max, Apple and many more services, impacting its success. However, the Great Netflix Correction in 2022, which involved a massive loss of subscribers, proved to be only a temporary hiccup.
- Closure of the DVD division: In 2023, Netflix became a streaming-only service as it finally ended its DVD-by-mail service. According to official company statements, Netflix shipped its final DVDs on September 29, 2023, concluding 25 years of the iconic red envelope service. This came at a time when demand for streaming services greatly reduced the demand for physical media like DVDs and Blu-rays. Netflix was poised to focus only on the present — with an eye on the entertainment technology of the future.
Netflix’s journey demonstrates the power of digital transformation in practice. According to Netflix’s 2023 SEC filing, the company generated $33.7 billion in revenue for 2023, representing a 7 percent increase from 2022’s $31.6 billion. The streaming giant reached 260.3 million paid memberships globally as of December 31, 2023, adding 29.5 million net new subscribers during the year.
Most recently, Netflix’s Q4 2024 results showcased continued momentum. According to official company reports, the brand had a record-breaking performance, reaching roughly 302 million paid memberships by adding 19 million subscribers in the fourth quarter alone. Revenue for Q4 2024 reached $10.2 billion, with the company projecting 2025 revenue of $43.5-$44.5 billion.
What can businesses learn from Netflix’s success?
Here are some lessons businesses can learn from Netflix’s continued success:
Embrace disruption rather than resist it.
Netflix didn’t just adapt to digital transformation — it led it. According to Harvard Business School professor Clayton Christensen’s foundational theory of disruptive innovation, new companies often enter at the bottom of an existing market and eventually displace established market-leading firms thanks to their innovations. Netflix exemplified this by starting with a DVD-by-mail service that initially seemed inferior to video stores but eventually revolutionized entertainment consumption by reimagining the subscription model, pivoting to online streaming, and turning itself into an award-winning content producer and household name.
Businesses that want to follow in its footsteps should differentiate themselves from the competition by staying one step ahead in technology, service and operations.
Invest in data and technology infrastructure.
Netflix’s evolving recommendation algorithm and content delivery network demonstrate the importance of technological investment. Today, the company operates its own global content delivery network (“Open Connect”) to stream content worldwide efficiently. According to its SEC filings, Netflix invested $2.7 billion in research and development in 2023, separate from its $13 billion in content spending, helping the brand maintain its competitive edge through continuous innovation.
Netflix is now building its own advertising technology platform, rolling out first-party ad tech in Canada and planning expansion to the U.S. in 2025. This vertical integration strategy reduces reliance on third parties while creating new revenue streams. Similarly, you should look for ways your business can seize opportunities to expand its offerings and provide something unique.
Focus on customer experience over competition.
Rather than simply competing on price or content volume, Netflix prioritizes the member experience. The company’s data-driven approach to content creation and personalized recommendations creates a sustainable competitive advantage and builds customer retention and customer loyalty.
Try getting customer feedback and insights into your business so you can improve your systems and services, retain existing customers and attract new ones.
Build scalable business models.
Netflix’s subscription model provides predictable revenue streams while allowing for global scaling. When the company decided to go international, it didn’t just roll out the same platform of shows and movies to everyone; it researched each country’s demographics to customize the user experience. Today, Netflix streams in more than 190 countries, but its specific offerings vary. The company’s operating margin improved to 21 percent in 2023, up from 18 percent in 2022, demonstrating the scalability benefits of their digital-first approach.
In your business, scale carefully, as Netflix did. Avoid growing too quickly and research your customers’ varied needs instead of taking a one-size-fits-all approach.
What can businesses learn from Netflix’s growing pains?
The Great Netflix Correction of 2022 was an eye-opener for the industry. Netflix lost more than 200,000 users in the first quarter — the first time it had lost subscribers since 2011. By that June, its stock price had fallen by 68 percent.
Perhaps more surprising than Netflix’s setback, however, was its comeback. Here’s what businesses can learn from the company’s growing pains:
Adapt pricing strategies based on market feedback.
Netflix implemented password-sharing restrictions and introduced ad-supported tiers in response to subscriber losses. These changes, while initially controversial, helped the company return to growth by addressing revenue-per-user concerns.
Consider how consumers are responding to your pricing strategies. You shouldn’t be afraid to set new prices for your services or change your pricing model to foster long-term sustainability.
Double down on quality during difficult times.
Rather than cutting content spending during the downturn, Netflix maintained its investment in original programming. This strategy paid off with hit shows like “Wednesday” and “Stranger Things” continuing to drive subscriber engagement. Furthermore, Netflix’s leadership remained committed to its streaming-first strategy despite market pressure.
Companies that maintain strategic focus during disruption are more likely to emerge stronger. If you know what your business does well and what your target audience appreciates, you should retain your long-term vision despite any short-term volatility.
Diversify your offerings.
Netflix now has more than 100 mobile games and is making them available on computers and internet-connected TVs. This includes tried-and-tested favorites like “Grand Theft Auto” and some inspired by its own shows, such as “Squid Game” and “The Queen’s Gambit.” Meanwhile, Netflix’s recent expansion into live sports, including NFL games and boxing matches, represents a strategic move to capture real-time engagement. The Jake Paul vs. Mike Tyson fight in 2024 became the most-streamed sporting event ever, demonstrating the potential of live content to drive subscriber growth and engagement.
Netflix’s efforts show how you can build on existing success by expanding into related product lines that complement your core offerings. And, thanks to a combination of all of these measures, Netflix has turned itself around. If it continues innovating and disrupting the status quo, the brand will remain a leader in the marketplace.
Examples of industry disruptions like Netflix
Netflix isn’t the only digital disruptor. Here are some other significant examples of innovation by companies that today are considered industry leaders.
1. Apple’s iTunes revolutionized music distribution.
Apple’s iTunes was the first major platform for providing widely distributed digital content, and the concept turned the music industry upside down. An antiquated system of music production, distribution and in-store sales gave way to a new method of paying for only what you wanted, such as a single song instead of an entire album and accessing it immediately via the internet.
Industry resistance to the iTunes distribution model was fierce, but Apple prevailed. Thanks to the company’s innovations, artists could even self-produce and release music without studios or physical stores. Today, iTunes has given way to the Apple Music app, which lets users stream and download millions of songs and access their personal music library, making it essential for every music fan.
2. eBay pioneered e-commerce.
eBay was founded in 1995 as AuctionWeb and went public in 1998. It was one of the first “killer apps,” becoming the core of the burgeoning e-commerce industry. The site’s online auction model quickly took hold and became a favorite of internet-savvy shoppers.
Initially, traditional retailers weren’t concerned because eBay was considered a place where people sold their junk. However, eBay became a formidable e-commerce player with a PayPal digital payment integration and the addition of more traditional online sales features, such as implementing a “Buy It Now” button to avoid auction haggling. Today, shoppers and online merchants may prefer Amazon, as evidenced by market share data from Electro IQ, but there’s no denying how eBay changed the commerce game.
3. Amazon transformed retail.
Amazon’s online book sales proved that the internet could house a hugely scalable retail platform that didn’t require a massive real estate and workforce investment. Still, many traditional retailers didn’t see the promise initially. The thought of shipping costs, packaging and returns gave them a headache, and adoption was slow.
However, Amazon began selling more than just books, and the concept exploded. At the same time, shipping companies, such as UPS and FedEx, saw the promise of this digital retail world boosting their businesses, too. Today, Amazon is the undisputed e-commerce leader, with offshoots such as Amazon Prime, Amazon Prime Video and its own digital devices like Amazon Alexa. There are even Amazon business features that help small businesses operate.
Recent financial data shows Amazon’s continued retail dominance. The company reported over $638 billion in net revenue for 2024, demonstrating the long-term value of digital transformation investments.
4. OpenAI and ChatGPT accelerated AI adoption.
For a long time, artificial intelligence (AI) was widely regarded as akin to robots taking over the world. But as it has developed and its use cases have grown, its value as a boost to human capabilities is gaining traction. Enter OpenAI’s ChatGPT, a chatbot released in late 2022.
Many have enthusiastically adopted the tool as the answer to generating content at scale. It can output human-like text and engage in conversation with users, making it a helpful assistant for tasks such as copywriting, dealing with customer inquiries and automating workflows. It can also offer insights and forecasts. Now, not only are other technology companies like Google, Microsoft and Meta racing to build a better chatbot, but everyday businesses are figuring out how best to incorporate AI tech into their operations for better efficiency.
Other industries facing digital disruption
The internet space isn’t the only sector undergoing massive changes. Here’s a glance at some other industries facing digital disruption, the companies doing the disruption and how businesses like yours may be affected.
Disrupted industry or corporation | Disrupter | Disruption |
|---|---|---|
Credit cards (Visa, Mastercard and American Express) | Mobile payments, like Apple Pay and Google Pay | Mobile payment platforms are creating cashless, frictionless payment experiences that bypass traditional card networks. While credit cards remain dominant, mobile payments are growing rapidly in adoption. Businesses should be prepared to have the middleman cut out of the payment game, leading to reduced processing fees and a streamlined sales process. |
Traditional technology companies (HP, Intel, IBM and Cisco) | Amazon Web Services, cloud information technology infrastructure services | Cloud infrastructure (computers and network) providers support a pay-as-you-use model (like renting movies). While traditional tech companies will always have a market, no longer will there be half-utilized hardware on the data center floor of large corporations. Instead, businesses will increasingly rely on cloud services. |
Airlines and transportation | Zoom and other video communication technology; Uber, Lyft | With the use of video teleconferencing services, such as Zoom, now the norm, businesspeople are becoming less inclined to travel for work meetings and presentations. If they do hit the road, they may skip the rental car and opt for a ride-share instead. |
Recording studios | Apple’s GarageBand and similar products | Recording studios worldwide have seen their profits dip dramatically as amateur production engineers can now record their own music with “good enough” quality and release it themselves. However, studios will likely always exist for musicians who don’t want to do things do-it-yourself-style. |
Kodak | Digital photography services like Shutterfly and Google Photos | Kodak reinvented itself as a manufacturer of print production technology with a workforce of more than 60,000 at its peak in the 1980s. But it couldn’t keep up with the times and declared itself bankrupt in 2012, selling its Kodak Gallery site to Shutterfly — one of many digital image-sharing businesses that have changed how people interact with their photos. |
Comcast, Time Warner and Verizon | Satellite, wireless, cellular technology | While these businesses are deeply entrenched in internet operations, they’ll need to adjust their business models. One day, wired infrastructure will be defunct, and we’ll see more of what Google is doing with Google Fiber. |
Keeping an eye on disruption in your industry
Digital technology has been a massive disruptor in many industries, including retail, entertainment, communications and travel. Trying to track industry trends and predict their impact is complicated. However, seemingly unrelated or new innovations from rivals can damage your business or industry if you don’t take notice — and you can be sure someone will. Netflix’s evolution is a prime example of that.
The company’s willingness to abandon its DVD business in favor of streaming and later add advertising tiers despite premium positioning demonstrates the strategic courage required for successful digital transformation. Sometimes, businesses have invested so much in infrastructure that it’s almost impossible to turn the ship, so getting an early start is crucial. No matter what your industry is, keep an eye on digital innovations and look toward the future to keep your business not just afloat but ahead of the pack.
Kimberlee Leonard contributed to this report.
