I recently started watching Season 2 of Daredevil (a bit late I know, but I was hooked to Archer for a while there) and as I watched that incredible staircase action scene, I was struck by how awesome it was that this was a top-notch, A-grade show that had gone live in some 190 countries—at the same time!

And I thought about why I enjoy Netflix so much—it’s their smooth and reliable recommendation engine that, to me, makes all the difference. When I watch or rate a show, Netflix recommends something relevant and interesting, something I am very likely to enjoy. And the recommendation can be a documentary, a Japanese or Korean film, an older Hollywood film from a couple decades ago—and it still somehow ends up being relevant. This is actually a bigger deal than many people realize.

I remember my struggles to watch classic world cinema back in the day. These VHS tapes were not easily available to buy. Only a few select stores in faraway bigger cities would stock them, and I had only sporadic access to those, either in logistical terms or financial. If you were to buy each tape, the cost would add up rapidly.

But then DVDs took off, and a few DVD rental stores came up in the town. Sadly, though, their selection was still not quite what I had been hoping for. Since a rental store is physically limited in terms of the audience it can serve, I as a customer was forced to share the collection with a fixed set of people, many of whom, I surmised, had little interest in world cinema. And I for my part had little interest in those gory horror movies that everyone else seemed to enjoy. (I did learn to enjoy this genre later, but back then I was looking for something different.) The limited selection was often a point of frustration for me, but it took the rise of Netflix. 2.0 to show that this problem was caused to a great extent by the physical distribution model where each store had to cater to a fixed set of people.

When your store space is limited, you naturally focus on serving the highest number of customers possible per square foot of retail space. Which means your ‘niche’ collection ends up being a small shelf where people who want something different will go, hoping to find something good. If someone wants a large selection of something very different, they are out of luck. They are forced to share this store with a few thousand people within the radius of a few miles.

Redbox is a good example of this limitation. The automation is a good idea. The self-serve kiosks offer convenience and reduce costs, and let customers carry out transactions at any time of the day or night. And payment is automated and easy too. All great so far. The big problem with the Redbox service is their inability to customize their collection in any meaningful way for any subset of their customers. The selection is customizable by only one criterion: geographical location. Well, you could say their collection was also customizable seasonally, in that they could stock more movies related to the holidays in December and so on, but that is in the very nature of the entertainment and media business, so it’s probably not that big a factor.

Netflix, started a few years before Redbox, certainly did not begin as the worldwide online streaming empire that it is today. But the ability to get there was very much there I think, from its very inception. Unlike Redbox, which did as good a job as it could with its physical retail space model, Netflix chose a different path, one that very likely contained the seed of its later digital transformation. Instead of stores or kiosks, Netflix chose to distribute its content through the DVD-by-mail model.

On the face of it, Redbox and Netflix began by being in the same business—renting out DVDs to people, and charging them rental fees for this service. But the critical difference is that by opting for the DVD-by-mail model, Netflix ensured it did not have the big limitation that Redbox had accepted for itself. Since you could be anywhere and get any DVD by mail, Netflix was able to serve its customers in a wholly different way.

And when the right technologies came along, Netflix simply had to swap ‘mail’ for ‘streaming,’ and a worldwide launch was not too far off.

There are of course many other things Netflix has done right, including phenomenal uptime, great service, focus on creating its own original content, and more. And there is no denying that those factors all have played a major role in Netflix’s success. But it is interesting to see Redbox and Netflix get into the same business at the beginning, and see how their early choices impacted their growth later.

Redox is still trying their hand at the streaming business, and I hope they get somewhere with it after failing the first time round. But it’s going to be a long, hard journey for them. And they will have to begin by recognizing that they are currently in the business of providing entertainment, but they need to instead get in the business of recommending entertainment and then providing it.

*This article was originally published on December 23, 2016 in LinkedIn, and can be accessed at The real business of NETFLIX

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