Netflix at a crossroad: a time for

reinforcement or another reinvention?

Michael S$.$ Lewis and Robin Ayers Frkal

I

n April $2022,$ Netflix co$-$CEO Reed Hastings and his executive team held its

first$-$quarter earnings presentation. Going into this meeting, Hastings was dealing with

some problematic financial results. Netflix missed its projected growth of new

subscribers for the first quarter of $2022$ and lost $200,000$ subscribers. This forced Netflix to

lower its future growth projection. Of this news, Netflix$$s stock plunged $35\%.$

Losing subscribers was not the only problem facing Netflix. The streaming market was

changing, becoming saturated and more competitive. New demand was increasingly

harder to find. In one year, Netflix lost $23\%$ market share. Could Hastings explain this

situation, and more importantly, did he have a strategy to fix it$?$

Company background

In $1997,$ Hastings and Marc Randolph co$-$founded Netflix, reconceptualizing the video

rental store as an online store. The idea was simple. Instead of going to a video rental store,

customers would request a DVD to rent on their website, which would then be mailed to

them. Once the customer returned the DVD via postal mail, Netflix would ship the next

selection on the customer$$s list $$ no hassle, no driving to a brick$-$and$-$mortar store and

perhaps most importantly, no late fees.

Although there were some early struggles, Netflix began to grow. Much of this growth and

success could, arguably, be attributed to its innovation, particularly radical innovation. In

$2000,$ Netflix introduced a personal recommendation system, a radical innovation that gave

consumers a personalized product experience. Shortly after that, Netflix reinvented its

business model from a traditional pay$-$as$-$you$-$go to a subscription model. By $2006,$ Netflix

had grown its customer base to five million. But the innovations did not end there. In $2007,$

Netflix introduced perhaps its most radical innovation, online streaming. By $2012,$ Netflix

had reached $25$ million subscribers. But with online streaming, Netflix had to negotiate

licensing agreements with movie production studios to stream their content. Content

suppliers gained considerable negotiating power, so in $2013,$ Netflix moved into the movie

production business and created its content.

By $2016,$ Netflix had reached $100$ million subscribers. By $2021,$ Netflix had reached over

$220$ million subscribers, becoming the market leader.

Although these radical innovations helped Netflix become a market leader, these

innovations mainly occurred when Netflix was a new entrant trying to differentiate and find

success. Now that Netflix is a market leader, radical reinventions might be risky. But a new

market reality was beginning to take shape. With over $85\%$ of households subscribing to at

least one streaming, finding new subscribers was becoming increasingly difficult. As a

result, the competition was increasing, particularly from big tech companies like Amazon

Michael S$.$ Lewis is based

at the Grenon School of

Business, Assumption

University, Worcester,

Massachusetts, USA.

Robin Ayers Frkal is based

at the School of Business,

Nichols College, Dudley,

Massachusetts, USA.

Disclaimer: This case is

intended to be used as the

basis for class discussion

rather than to illustrate either

effective or ineffective handling

of a management situation. The

case was compiled from

published sources.

DOI $10\mathrm{.}1108/$TCJ$-08-2022-0152$ Emerald Publishing Limited, ISSN $1544-9106$ j THE CASE JOURNAL j

and Apple and movie production studios like Disney and Paramount. These movie studios

were once content suppliers for Netflix and now have become competitors.