#2 From DHM to Product Strategy

In 2007, Netflix’s exclusive content effort, “Red Envelope Studios,” failed. But by 2012, with its economies of scale, Netflix had a hard-to-copy advantage through its original content.

The next step is to tease out high-level hypotheses that combine delight, hard-to-copy advantage, and margin. Achieving two or three of these objectives with a single strategy is at the heart of an effective product strategy.

Below, I outline a dozen of the high-level theories that Netflix explored over fifteen years, along with a brief description of each. Half of these strategies failed. But many of the winners combined delight, hard-to-copy advantage, and margin enhancement.

  • Personalization. Today, Netflix’s personalization delights customers in hard-to-copy, margin-enhancing ways. Over two decades, the percentage of recommendations that customers choose increased from 2% to 80%, making it easier for customers to find movies they’ll love. Personalization also supports the business by enabling Netflix to predict the number of members who will watch original content, allowing Netflix to right-size their original content investment.
  • Easy. Netflix wasn’t simple at launch but became simpler over time. Netflix learned to add features that customers value and remove those that do not. A surprising example in 2018: the decision to remove movie reviews. Now that members can quickly hit “play” or “quit” anytime, they no longer need reviews.
  • Social. Netflix experimented with “Friends” for six years. The hypothesis was that friends would suggest great long-tail movies (creating both delight and margin) but also create a hard-to-copy, network effect. The effort engaged only 6% of members, however, so Netflix cut it in 2010.
  • Unique movie-finding tools. In 2005, the vision was that personalized previews would begin to play on each member’s homepage, delivering both delight and margin. (The personalized choices would be lower-cost, long-tail titles.) The effort failed, however. Customers found the previews annoying, and the experiment did not move any of its proxy metrics.
  • Price and Plans. Given the need for ongoing business model experiments, there was non-stop price and plan testing. Today, prices range from nine to sixteen dollars (US).
  • Ads/Used DVD sales. In 2006, Netflix explored two alternate business models — advertising and used DVD sales. Both businesses generated profit but were killed in 2008 when Netflix began to deliver higher-margin through its core DVD rental business.
  • Next-day DVD delivery. A source of delight for members: DVDs arrived the next day in the mail. Netflix achieved this through a network of automated shipping hubs. It took Blockbuster years to replicate this capability.
  • Streaming. It’s an obvious win today, but it was unclear when Netflix should launch its streaming service and how to acquire content. Today, there’s hard to copy advantage in the technology that Netflix employs to encrypt and deliver video. And customers love watching movies instantly — anytime, anywhere.
  • Entertainment. In 2005, the Netflix product team worried it was building an undifferentiated, “automated vending machine.” Ultimately, Netflix tested “Max” — an animated host on the PlayStation — but the experiment failed. The incremental increase in delight did not outweigh the cost of the effort. And “an automated vending machine” was on-brand for a service whose brand promise is “movie enjoyment made easy.”
  • Open APIs. In 2006, when Facebook, LinkedIn, and others opened their Application Programming Interfaces to enable partners to innovate on their platforms, Netflix followed suit. The intent was to let a “thousand flowers bloom,” but none did. Later, however, the APIs became the foundation for Netflix’s device ecosystem.
  • Device ecosystem. Netflix launched streaming in January of 2007 on PC-based computers. The Mac followed shortly, but members wanted to stream movies to their TVs, which required partnerships with hardware manufacturers. In late 2008 Netflix launched on Xbox. Later, Playstation, Wii, Roku, Samsung, and nearly all DVD and Blu-ray manufacturers followed. By 2012, Netflix had critical mass with hardware partners; they created a hard-to-copy network effect that also delights customers who enjoy watching “anytime, anywhere.”
  • Exclusive DVD content. During the DVD era, Netflix tested exclusive content via “Red Envelope Studios,” but without the economies of scale Netflix has today, the effort failed.
  • Original content. Netflix launched its first episodic TV series, “Lilyhammer,” in 2012. By 2013, its $100M investment in “House of Cards” delivered a hit.
  • Interactive stories. In 2019, After experimenting with children’s “choose your own adventure” videos, Netflix launched an adult branching story movie: Black Mirror’s “Bandersnatch.” It’s early days for this experiment, so it’s hard to evaluate its effectiveness. We do know, however, that an interactive version of “The Unbreakable Kimmy Schmidt” will launch soon.
  • High-quality video & sound. One of the early lessons at Netflix was the importance of staying focused on making the core product better. Netflix’s continued effort to improve both video and sound quality is a good example, and the technology required to do this is quite hard-to-copy. And, today, Netflix generates higher margins through its higher-priced, Ultra HD plan.

All of the efforts above are motivated by the desire to improve customers’ experience in ways that build a hard-to-copy, margin-enhancing experience. Here’s a quick summary of what worked and what didn’t, along with an analysis of the DHM model. (A “check” means it accomplished the goal.) Note the strategies that deliver against a combo of delight, hard-to-copy advantage, and margin — these ideas build substantial long-term value for Netflix. The outcome of the ideas at the very bottom — interactive stories and stories enhanced by AR/VR — are unknown at this time.

Think of product strategy as hypotheses about how you hope to delight customers in hard to copy, margin-enhancing ways. The strategies in green accomplished all three. Those in yellow accomplished 1 or 2 of the objectives. The strategies in red failed to delight and consequently did not deliver either hard to copy advantage or margin. The two last strategies are current/future experiments — outcome unknown at this time.

Netflix did not test all of the ideas above in parallel. Each year Netflix took on about 4–6 product strategies. Here were the significant efforts in 2005:

  • Personalization
  • Easy/simple
  • Social
  • Margin-enhancement
  • Unique movie-finding tools
  • Next-day DVD delivery

Each of these efforts had a dedicated “pod” made up of engineers, designers, product managers, and data leaders.

Product Strategy Exercise (#4)

Given your product’s potential “delighters,” hard-to-copy advantages, and business model explorations, what are four to six hypotheses you’d like to test in the next year or two?

In the following essay, I’ll demonstrate how we fleshed out the six high-level hypotheses from 2005 to form a cohesive product strategy.

Essay #3: The strategy/tactic/metric “lockup”.

Enjoy,

Gib

Gibson Biddle

www.gibsonbiddle.com

PS. NEW! Check out my cohort-based “Product Strategy Workshop” on Maven.

PPS. Here’s an index of all the articles in this series:

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Gibson Biddle

Gibson Biddle

Former VP/CPO at Netflix/Chegg. Now speaker, teacher, & workshop host. Learn more here: www.gibsonbiddle.com or here: https://www.linkedin.com/in/gibsonbiddle/