So, it's often assumed that the Blockbuster managers, leaders, executives were simply ignorant. One of the most powerful thoughts to emerge from this model, from Clayton Christianson's disruption model, is that it's not stupidity, it's not ignorance that leads most companies that are undertaking sustaining innovations to ignore the possible threat of disruption. In many case studies, which you will find in a lot of business books, and even in business classes, that's the assumption, is that anybody could have seen that coming. What Blockbuster was focused on doing was satisfying the demands and needs of existing customers, and in fact, their best and highest paying customers. Now, we could talk for a long time about what those customers might have looked like in terms of what they wanted, what they were willing to pay, how many movies they consumed, etc. But most customers at the time wanted the convenience of being able to pick up a movie at the last second on impulse, and were completely happy with the model Blockbuster provided. The Netflix market was a tiny segment of the market, and it was unclear that they were going to be a company that would succeed. We have the benefit of hindsight. So, it was not stupidity. What the problem was for Blockbuster and Hollywood and other companies like that in your part of the world was that their strength became their weakness very, very quickly. The convenience, which was a pro, or a sustaining innovation that they offered, adding more and more stores, actually became a weakness in a digital world. Because as DVD's, which stored a lot of information on a small disk, became more popular, having a large physical location became less and less important. As high speed internet became more and more important and more widely utilized, it became even less important to have a physical or tangible copy of the movie that you were attempting to watch. But what they needed at the time in late '90s, to satisfy their already existing customers, was to continue building physical locations. That became like a big weight around their neck that weighed them down. That great strength became their weakness because they couldn't get rid of, fast enough, the real estate when the time hopefully came. It's very difficult to tell a business that's making a lot of money, you should simultaneously continue to satisfy these very high paying and very profitable customers for a technology that is not very good. Not even close to good enough at achieving the average customer's utility or demands or needs. And so, what the model shows, though, is that what starts out as not good enough eventually does become good enough. Do you see where the green line eventually crosses or intersects with the dashed red line? That's the point at which the demands of the customer are met by this disruptive innovation in a product or service. And by then, the sustaining or incumbent company, that's undertaking sustaining innovations, is taking very seriously the threat of the disruption, but by then, it's usually too late. So we've seen disruption occur in multiple industries over the centuries. And we'll continue with this Netflix example and show you how it is that they've emerged to the place that they are today. What did they do to get better? Well, over time, the performance of a company like Netflix did increase. The green line had an upward slope. What they did is they added more movies. They added better recommendation performance, in terms of hitting on target what it is you really wanted to see as they added more customers and were able to use the data to predict. They added faster turn around times. They added more distribution centers. Which is, again, a physical real estate problem, ironically. And so, they were able to get the movies to you faster. They added more copies of the newest films, so you had to wait less time to have your most preferred movie come to you. They got better and better. Not only that, by the mid-2000s, as Netflix continued to move up the green line, they're still below the red dash line which shows the performance that the average customer expects, but by the mid 2000s, they are very successful at developing a related line, which is high-speed internet delivered movies, using no physical copy of a film. But simply delivering it over high-speed internet. Now, not all people in the United States or the world have access to high-speed internet. But as technology has improved, this has become more and more of their main strategy, and as where we sit today in 2015, it is the majority of how the highest percentage of their video delivery is via high speed internet. In some parts of the world, you only know that version of the market. You may not be familiar with the DVD part of this story. Netflix still has some cons. The content owners, the owners of the media which we want to consume, the videos themselves, don't release many videos, and haven't historically released many videos to Netflix until after they're released in video stores. So in 2003, for example, you might have to wait for a movie to come to Netflix, whereas it may already be in your Blockbuster store four weeks before. As TV shows began to be consumed in a binge manner as DVDs became popular, Netflix also have the issue of lag time where more TV shows were released to DVD before they were to a streaming service like Netflix, or a DVD distribution service such as Netflix. So they still weren't, and to some degree, actually aren't good enough. The other disadvantage that Netflix has in today's society is comparing them to a new competitor. We probably can see from this model that Blockbuster and Hollywood are dead. They have been disrupted by Netflix and other related services, such as iTunes, Hulu, other services in your parts of the world. Cable companies, pay per view movies, there were lots of competitors. RedBox and other DVD kiosk services, so there are a lot of competitors in this market segment. Netflix, you probably would argue today, is competing against cable and satellite companies. A lot of people in a lot of parts of the world find that cable companies' offerings are over-serving them. And that's a key part of understanding this model is being over-served. Most of us, or many of us, think that we pay too much for our cable or satellite service, and we're being over-served in that we don't need all of the channels. We can't possibly watch all of the channels that we actually are paying for. And so, the cable industry or cable sector or satellite sector in the United States is actually, as we sit in March 2015, being disrupted by companies like Netflix and related companies. How are they doing it? Well, Netflix, for example, is still not as good of a product offering as the cable companies or satellite companies for many people. For example, Netflix doesn't have live news or live TV or live sporting events. It still has the lag time or the delay time. So many people would like to cut the cord or to get rid of cable or satellite and go only to Netflix and related services, such as iTunes. Or perhaps other even pirating sites that you might use, we're not advocating. I recognize they exist, though. But many people can't do that because they don't have live events through these services always. So, Netflix is still not good enough. What are they doing though? What can we tell from their actions that seems to speak to their strategy? Well, if you've followed Netflix, you know that one thing they're doing to compete is gaining monopolistic or exclusive access to some studio's films or content or TV shows. Just like historically, some cable companies have had that exclusive access. What else are they doing? They are also creating content. They have their own TV shows. Some of you may be familiar with a show called House of Cards which is very popular around the world. That's a show than Netflix produces, makes. It is the studio. And so, you can see from Netflix that it is crossing this red line in some aspects, and meeting the average customer's demands and even exceeding it. And so, for most companies, it's too late by the time a disruptor crosses the green line to truly take advantage of the disruptive technology. So this will end the Netflix case. We're going to go through another case, in the next part, to try to further understand this model and to integrate it into our understanding of strategy.
