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DISRUPTIVE INNOVATION IN THE VIDEO STREAMING INDUSTRY: THE CASE OF NETFLIX

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The idea of disruptive innovation has garnered considerable attention over the years among both academics and practitioners although a common misunderstanding about its basic principles, as well as the lack of a definitive theory, persists. This research aims to analyse the correlation between the video streaming platform industry and the concept of disruptive innovation. Netflix, which used video streaming to introduce a completely new and disruptive business model, will serve as an example to explore this connection in more details. The presented paper will examine and analyse the existing literature around the concept of disruptive innovation, including contributions, and points of view of several authors, in order to achieve a comprehensive understanding. Aim of the reserach is to analyse Netflix's success adopting the theories presented in the literature review to evaluate whether it can fit into the definition of disruptive innovation.
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DISRUPTIVE INNOVATION IN THE VIDEO
STREAMING INDUSTRY: THE CASE OF NETFLIX
1
Table of Contents
INTRODUCTION ............................................................................................. 2
LITERATURE REVIEW ................................................................................... 4
INTRODUCING THE CONCEPT ................................................................. 4
DEFINING DISRUPTIVNESS ...................................................................... 5
THEORIES AND ADAPTATIONS ................................................................ 7
EVALUATING THE DISRUPTIVENESS OF VIDEO STREAMING ............... 10
THE CASE OF NETFLIX ............................................................................ 10
NETFLIX AS A DISRUPTOR ..................................................................... 11
INFERIOR PERFORMANCE .................................................................. 12
NOT VALUED BY MAINSTREAM CUSTOMERS ................................... 12
SIMPLER AND CHEAPER OFFERINGS ................................................ 13
PRICE-SENSITIVE CUSTOMERS AS MAIN TARGET .......................... 13
FROM LOW-END TO MAINSTREAM ..................................................... 13
VIDEO STREAMING IMPLICATIONS IN ONLINE ADVERTISING ............... 15
CONCLUSION ............................................................................................... 17
REFERENCES .............................................................................................. 19
2
INTRODUCTION
The existing academic literature indicates that emerging media technologies
are transforming how people engage with television (Ellingsen, 2014;
Tefertiller, 2018). Currently, various media companies provide streaming
services with high-quality content, accessible through a variety of digital
devices (Groshek and Krongard, 2016).
Although a growing proportion of individuals are choosing this form of
technology, rather than traditional media (Pwc, 2019), it represents a highly
competitive branch of the industry. Several brands like Amazon Prime Video,
Youtube and Netflix are constantly innovating their technology to offer their
consumers an extensive media catalogue (Tefertiller, 2018).
Furthermore, over time, such organisations implemented their offer, by
introducing mobile applications, based on a customised recommendation
system to enhance the users experience, retain existing consumers and
attracting new ones (Camilleri and Falzon, 2020).
This research aims to analyse the correlation between the video streaming
platform industry and the concept of disruptive innovation. Netflix, which used
video streaming to introduce a completely new and disruptive business model
(Christensen, Raynor and McDonald, 2015), will serve as an example to
explore this connection in more details.
The presented paper will firstly examine and analyse the existing literature,
including contributions, and points of view of several authors, in order to
achieve a comprehensive definition of disruptive innovation.
3
Subsequently, Netflix's success will be analysed and, adopting the theories
presented in the literature review, it will be evaluated whether it can fit into the
definition of disruptive innovation. Finally, in the last section, the impacts that
video streaming technology is currently having, and will have in the future, on
digital marketing will be discussed.
4
LITERATURE REVIEW
INTRODUCING THE CONCEPT
The idea of disruptive innovation (DI) has garnered considerable attention
over the years among both academics and practitioners (Christensen et al.,
2018), although a common misunderstanding about its basic principles, as
well as the lack of a definitive theory, persists (Christensen, 2006; Raynor,
2011).
The concept was originally introduced by Christensen in the 1990s, when he
examined the failure of hard disk market leaders in competing with new
entrants (Christensen, 1997). He also outlined the idea that emerging
technologies can generate a new market, or fundamentally alter an existing
one (Nagy, Schuessler and Dubinsky, 2016).
In other words, DI is identified as a phenomenon able to successfully convert
a product or service which was previously so complex and cost intensive that
relatively few individuals could have access to it, making it cheaper and more
accessible to a wider audience (Christensen, 2012).
Hence, as outlined by Charitou and Markides (2003), Danneels (2004) and
Adner (2002), DI is a process that enables the expansion and development of
new markets, as well as the introduction of new functions which, in turn, lead
to the disruption of existing dynamics.
However, talking about a new technology which approaches a market, it is
appropriate to differentiate between sustainable and disruptive. The former is
an innovation which aims at the same audience and brings improvements in a
product or service’s attributes that customers already value; while disruptive
5
innovation, on the other hand, introduces a completely new product, often
with low performance than what the market offers, and aims to serve different
customers positioned at the bottom of the market, e.g. price-conscious and
unsophisticated users, and then ascending over time (Bower and
Christensen, 1995; Cohan, 2020).
However, despite Christensen's research was essential for the coinage of DI
and contributed to show the impact of the innovations on business dynamics,
some outstanding points remained unresolved (Govindarajan and Kopalle,
2006).
In the last 20 years this concept seems to be erroneously applied, and the
lack of information led to an oversimplification of the term (Christensen,
Raynor and McDonald, 2015), commonly applied to identify any scenario in
which industries are shocked by a new technology (Christensen et al., 2018);
however, there is much more to consider (Danneels, 2004, Markides, 2006).
DEFINING DISRUPTIVNESS
Christensen (1997) argued that DI are generally more affordable, easier and,
in most cases, more comfortable to use; but what are the key attributes a
technology must have to be considered disruptive?
An examination of Adner's (2002), Charitou and Markides' (2003) and
Govindarajan and Kopalle's (2006) contributions emphasises the identification
of five essential attributes, established by Bower and Christensen (1995), that
an innovation must possess in order to be defined as disruptive:
6
1. the innovation is under-performing in terms of the features expected by
mainstream customers.
2. It offers new attributes, but which are not originally appreciated by the
mainstream segment.
3. The new technology is generally easier and less expensive than the
existing one.
4. Once introduced, the new entrant targets the low end of the market, in
particular price-conscious and not-sophisticated segments.
5. Further advances over time enhance its performance, enough to meet
the mainstream customers’ needs, attracting a greater portion of users.
In other words, DI indicates a technology that offers a new set of innovative
features, but which are initially underappreciated, compared to existing
products (Christensen, 1997). However, although the existing literature
agrees that disruptive innovation induces significant market responses (Nagy,
Schuessler and Dubinsky, 2016), at what point can a technology be classified
as disruptive?
During the initial phase, the disruptiveness of an innovation is often difficult to
perceive (Henderson, 2006); however, over time, its performances tend to
overcome those of the dominant technologies (Bower and Christensen, 1995)
until, ultimately, dominate the market and attract the attention of a larger
number of segments (Guo et al., 2019). Therefore, DI is not a single event but
an ongoing process (Christensen and Raynor, 2003).
7
Manyika et al., (2013) have contributed to the definition of the characteristics
of DI, identifying some key attributes required to be classified as such. As
stated by them, a disruptive innovation typically:
1. leads to changes in terms of both cost and performance.
2. Improves the overall effectiveness.
3. Has a wide outreach, impacting multiple areas of companies across
the globe, as well as the population's lifestyle habits.
THEORIES AND ADAPTATIONS
As specified by Kumaraswamy, Garud and Ansari (2018), DI follows a
particular path in which the technology would be considered disruptive
regardless of whether it fails or not. In general, Danneels (2004), summarises
Christensen’s works by arguing that disruption happens when the entrant
overtakes the incumbent. Nevertheless, there might be some exceptions in
which well-established companies can survive by focusing on satisfying their
own customers (Yu and Hang, 2010). Hence, as Schmidt and Druehl (2008)
argue, DI might have a significant influence on the market without entirely
transforming it.
In a general perspective, explains Danneels (2004), disruptive innovations
alter the competitive landscape among companies, by bringing a new
performance dimension in which products were not competing previously.
Overall, most of the cited authors support Christensen’s ideas, even though
they presented their slightly different perspectives. For instance, Danneels
(2004) criticised the lack of a precise and consistent definition of DI; while
Tellis (2006) emphasised the difficulty in differentiating an underperforming
8
technology from one which is initially less performing but then results to be
disruptive. In this regard, Markides (2006) argues that Christensen's principle
should not be used to explain all sorts of DI, since each innovation can
produce a variety of competitive effects which might, subsequently, lead to
the creation of different types of markets.
However, some experts argue that it is fundamental to deal with this
phenomenon in a multidimensional perspective, since external influences,
such as countries’ economic conditions and legislative context, could
potentially affect the success of a disruptive innovation (Wikhamn and
Knights, 2016).
Following a detailed examination of the above-mentioned authors' inputs and
contributions to outline a comprehensive description of DI, the framework
which seems to be the most appropriate to present a coherent explanation of
the concept is the Disruptive Innovation Model, introduced by Christensen,
Raynor and McDonald, (2015).
Figure 1, Disruptive Innovation Model (Christensen, Raynor and McDonald, 2015)
9
The presented graph combines the long-term performance trends required by
the various customer segments, considering customers willingness’ to pay (in
blue), and of the performance of the alternative technologies, showing how
the new product will improve (in red).
In particular, while incumbents are mainly focused on strengthening their
products or service for their more exigent, and often more lucrative, users,
they tend to ignore the necessities of the less sophisticated ones. Entrants
approach the market by targeting the segments that have been previously
ignored, providing them functionalities, often at a lower price. At this point,
incumbents tend not to respond vigorously, while the new technology, already
adopted by the lower segment, gradually ascend towards the higher ones.
Once the latter begins to embrace the new offer, a disruption has materialised
(Christensen, Raynor and McDonald, 2015).
In other words, in accordance with the presented graph, disruption appears in
the intersection point between the new technology's performance trajectory
and the one of the performances required by the mainstream market.
10
EVALUATING THE DISRUPTIVENESS OF VIDEO STREAMING
THE CASE OF NETFLIX
Netflix is considered as one of the most disruptive video streaming platforms,
which revolutionised the well-established cinema industry by providing users
a broad range of premium material at an unprecedented low rate
(Christensen, Raynor and McDonald, 2015).
Founded in 1997, revolutionising the film and online streaming industry
(Levin, 2019), Netflix is a digital service, which has offered a premiere
alternative to traditional rentals. However, another feature that has elevated it
to a unique level of innovation, as mentioned by Alsin (2018), is the creation
of its own material.
Netflix originally targeted early adopters and provided a DVD rental service by
mail (Satell, 2014). Thanks to this, consumers were able to browse a
collection of movies and select the desired one; the DVD was then dispatched
directly to the home address.
However, Netflix soon realised that the shipping costs per customer far
exceeded its net revenues; hence, they subsequently introduced, in 2007, a
subscription-based online streaming service (Voigt, Buliga and Michl, 2016).
Nowadays, its platform is used by over 200 million people across the world.
An essential component of their service was to provide a more convenient
way of renting movies, as well as to eliminate “delays fees” that Blockbuster,
the market leader at that time, charged for returning DVDs after the deadline
(Mcalone, 2015).
11
In other words, Netflix's business model was designed to allow users to rent
movies directly from home and it addressed the lower end of the market,
which had been overlooked by Blockbuster (Christensen, Raynor and
McDonald, 2015).
The graph beneath (Figure 2) illustrates Netflix's evolution from its beginning
to its success, in comparison with the performance of its rival Blockbuster,
which faced a steady decline from the moment Netflix established itself in the
medium to high end of the market.
Figure 2, Netflix vs Blockbuster (Cloud Technology Partner, 2017)
NETFLIX AS A DISRUPTOR
To assess the disruptiveness of Netflix, the definition introduced by Bower
and Christensen (1995), presented in the literature review, has been adopted.
Below is outlined an explanation of the five core features that the platform
must have to be defined as disruptive.
12
INFERIOR
PERFORMANCE
Online streaming quality less performant than existing DVD
rental services (Cohan, 2020).
NOT VALUED BY
MAINSTREAM
CUSTOMERS
At the time it introduced the postal service, the company was
not targeting the mainstream customers of its rival
Blockbuster, who were only interested in new material on
demand (Mcalone, 2015).
SIMPLER AND
CHEAPER
OFFERINGS
No late fee, only registration cost (Mcalone, 2015).
DVDs delivered by post directly to the customer's home
address (Voigt, Buliga and Michl, 2016).
PRICE-SENSITIVE
CUSTOMERS
Main target: early adopters/segments that have been
overlooked by Blockbuster (Christensen, Raynor and
McDonald, 2015).
FROM LOW-END
TO MAINSTREAM
Huge transformation in 2007: introduction of the streaming
platform.
High-quality and cost-effective content attracted Blockbuster's
mainstream customers (Christensen, Raynor and McDonald,
2015).
Table 1, The key features of Netflix's disruptiveness (Author, 2021)
INFERIOR PERFORMANCE
In 2007, Netflix introduced a new online streaming service, the same year that
Apple launched the iPhone. Consumers, who until then purchased DVDs,
were unable to watch movies on their smartphones. Thus, many of them were
attracted by this new service and started to adopt it. However, at that time,
the online video and audio streaming quality was considerably weaker than
on DVDs (Cohan, 2020).
Hence, it can be observed that the introduced technology is underperforming
in comparison to the established one.
NOT VALUED BY MAINSTREAM CUSTOMERS
Mcalone (2015) argues that a major reason why Netflix can be described as
DI is because, at the time Netflix introduced the postal service, did not target
the mainstream clients of its rival Blockbuster; in fact, these users were
13
asking for renting new releases on-demand, a service that Netflix did not
originally provide.
SIMPLER AND CHEAPER OFFERINGS
As mentioned above, Netflix was designed to offer a more convenient and
simple rental service.
Contrary to Blockbuster, which applied late charges if a customer exceeded
the return date, Netflix’s only costs were subscription fees (Mcalone, 2015).
Moreover, once users finished a DVD, they simply returned it and requested
another one, which was delivered directly to their home address, enhancing
the customer's experience (Voigt, Buliga and Michl, 2016).
PRICE-SENSITIVE CUSTOMERS AS MAIN TARGET
Related to the second feature, it is relevant to mention that Netflix's target
audience was initially the lower end of the market, where unsophisticated
customers were located, i.e., those who were looking for movies, but not
exclusively for new releases.
Christensen, Raynor and McDonald (2015) argue that Netflix can be defined
as disruptive innovation since it targeted market niches which were ignored
by the industry leader, offering an inferior, but cheaper, alternative.
FROM LOW-END TO MAINSTREAM
As previously indicated, Netflix's initial business was aimed at price-sensitive
customers. However, the huge transformation occurred in 2007, when it
introduced the streaming platform. Here, Netflix succeeded in attracting
Blockbuster's main audience by offering an extensive selection of high-quality
and cost-effective content (Christensen, Raynor and McDonald, 2015).
14
Hence, an increasing number of users started embracing and appreciating
the new functionalities, leading the incumbent, unable to react promptly,
towards a continuous decline into bankruptcy, declared in 2012 (Cloud
Technology Partner, 2017).
In other words, as Rodriguez (2017) suggests, the reason why new entrants
tend to succeed quickly, is related to the fact that their biggest rivals ignore
them, since initially they do not compete for the same customers; however,
once they begin to attract more sophisticated users, the incumbents are often
not responsive.
An examination of the above characteristics, considered essential by
practitioners and academics, helped the presented study to conclude that
Netflix can be defined as disruptive, since its path and peculiarities support its
identification in each of them.
15
VIDEO STREAMING IMPLICATIONS IN ONLINE ADVERTISING
Over the past year, the use of video streaming platforms in Europe has grown
at an unprecedented rate, partly due to the Covid-19 crisis, which, due to the
continuous lockdowns, led citizens to seek new leisure options. Several
studies have shown that during this period, British users tended to watch an
average of two to six hours of video content per day (Media, 2020) and Netflix
registered a 16 million new subscriber growth in just the first three months of
the year (BBC, 2020).
The rapid expansion of video streaming platforms has had a major impact on
digital marketing and, in particular, on advertising, amplifying the opportunities
through the introduction of a new way of delivering content, which goes
beyond traditional TV (Shaw, 2020).
Thus, whereas previously audiences were forced to watch several
commercials, often out of their own interest, video streaming marked the
transition to a new concept of advertising, denoted as OTT, or 'over-the-top'
advertising (Cox, 2021).
Considering the numbers of users embracing streaming, more and more
marketers are now evaluating and adopting this opportunity. In particular,
Rowan (2020) identified three advantages that are increasingly driving brands
to invest part of their budget in OTT ads:
1. Personalised advertising OTT gives brands the ability to target their
audience more appropriately than traditional TV, by relying on users'
online browsing information and purchase history.
16
2. Multi-channel retargeting OTT advertising enables to retarget
customers through various channels, including website and apps, to
supplement the overall cross channel communication cycle.
3. Campaign tracking contrary to traditional TV commercials, OTT
enables brands to track the success of the advertising campaign.
17
CONCLUSION
The expression “disruptive innovation” was originally presented by
Christensen in the 1990s and indicated as a process which transforms a
complicated and expensive product, accessible to only few people, in a more
affordable and available one (Christensen, 2012).
Over the years, various authors have tried to contribute to the definition of this
concept, adding their own ideas, opinions, and criticisms, to create a common
and explanatory description of the term (Christensen, Raynor and McDonald,
2015). However, despite its importance, relatively little academic studies have
been conducted on its characteristic (Govindarajan and Kopalle, 2006).
In the presented paper, Netflix has been used as a video streaming platform
example to assess whether it could correspond to DI theory and be defined
as such. Hence, after having applied the five fundamental characteristics
introduced by Bower and Christensen (1995), it can be defined that the
chosen technology fits in every part of the definition of disruptive innovation.
However, although some platforms such as Netflix do not allow commercials
so as not to annoy the audience, video streaming is still changing the
landscape of digital marketing advertising, with the introduction of OTT ads
(Shaw, 2020).
This is a new method of advertising that offers different benefits, and in which
viewers are not oppressed by multiple commercials while watching a movie,
as is the case on TV, but with this new concept, advertisements are targeted
at a specific audience, identified through the analysis of data about their
online browsing behaviour (Rowan, 2020).
18
However, this trend seems to be continuing in the future, leading marketers to
approach this type of advertising (Hudgens, 2021) since, as illustrated by
Pwc’s research (2019), in the next years an increasing number of people will
adopt video streaming and, particularly the young generation, will tend to
distance themselves from the traditional television.
19
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