How to Startup: Disrupting Yourself Before Others Do

Welcome to this edition of "How to Startup," where we dive into real founder stories that offer practical lessons for early-stage ventures. This time, we examine a company that has become synonymous with entertainment, but whose journey involved multiple reinventions, challenging giants, and a willingness to disrupt its own successful business model—along with a very public lesson on how not to communicate major changes.

Founder Spotlight: Reed Hastings, Co-founder & Executive Chairman of Netflix

The Beginning

The origin story often starts with Reed Hastings facing a hefty $40 late fee for a rented VHS tape (Apollo 13) from Blockbuster in the mid-90s. Whether perfectly true or not, it captures the customer frustration that fueled the initial idea. Teaming up with co-founder Marc Randolph, Hastings launched Netflix in 1997, initially offering DVD rentals by mail on a pay-per-rent basis.

They soon realized the pay-per-rent model wasn't working effectively. The real breakthrough came around 1999 when they shifted to a monthly subscription model: pay a flat fee, rent as many DVDs as you want (a few at a time), with no late fees. This model, combined with the growing adoption of DVD players, set the stage for challenging the brick-and-mortar dominance of Blockbuster.

Early Challenges

Taking on the established video rental kingpin was anything but easy:

• Logistical Hurdles: Building an efficient nationwide system for mailing millions of DVDs back and forth, handling sorting, and minimizing shipping damage was a massive operational challenge.

• Consumer Education: Convincing people to wait for DVDs by mail instead of instantly grabbing them from a local store required changing habits.

• Profitability: The subscription model's economics were initially challenging, balancing postage costs, inventory acquisition, and subscriber growth.

• Competition: Blockbuster eventually launched its own competing (and largely unsuccessful) DVD-by-mail service, posing a direct threat. Netflix even famously offered to be acquired by Blockbuster for $50 million in 2000, an offer Blockbuster declined.

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Turning the Corner (and Pivoting Again, and Again)

Netflix steadily gained ground through operational efficiency, its popular subscription model, and its pioneering recommendation engine ("Cinematch") that kept users engaged. But Hastings and the team were already looking ahead:

• The Streaming Revolution: Anticipating the inevitable decline of physical media, Netflix began investing heavily in streaming technology long before it was mainstream. They launched their streaming service around 2007, initially as a free add-on for DVD subscribers. This willingness to cannibalize their profitable DVD business was crucial.

• The Content Powerhouse: As streaming grew, Netflix faced escalating content licensing costs and the risk of studios pulling popular shows and movies. Their next bold pivot, starting significantly around 2013 with "House of Cards," was into producing high-budget original content. This gave them control over their library, created exclusive draws for subscribers, and allowed them to leverage viewing data to inform creative decisions.

• Global Domination: Continuous international expansion turned Netflix into a global entertainment platform.

Through foresight and a willingness to make bold, future-facing bets, Netflix disrupted itself multiple times, staying ahead of competitors and technological shifts.

Advice for New Founders from Netflix's Experience

• Think Long-Term: Focus on where your industry is heading, not just where it is today.

• Be Willing to Disrupt Your Own Business: Don't be afraid to invest in new models that might eventually replace your current cash cow, before a competitor does.

• Leverage Data Intelligently: Use data to understand customer behavior and inform strategic decisions, from product features to content creation.

• Cultivate Adaptability: Build a company culture that embraces change and can pivot when necessary (Netflix's famed culture deck emphasizes this).

• Innovation is Continuous: Don't rest on your laurels; constantly look for the next evolution of your product or service.

Mistake to Avoid: Mishandling Communication During Major Strategic Changes (The Qwikster Fiasco)

In 2011, Netflix made a major strategic error that serves as a textbook example of how not to manage change. In an attempt to separate its legacy DVD business from its growing streaming service, Netflix abruptly announced it was splitting the services: streaming would remain Netflix, while DVD-by-mail would become a separate entity called "Qwikster," requiring a separate subscription and website.

The move was logical from an internal perspective (treating the businesses differently), but the execution and communication were disastrous. Customers saw it primarily as a poorly explained ~60% price hike for those who wanted both services, coupled with the inconvenience of managing two accounts.

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Why It Happens

• Internal Echo Chamber: Leadership becomes convinced of a strategy's brilliance and fails to anticipate the external customer perspective or emotional reaction.

• Underestimating Customer Inertia: Assumptions that customers will easily adapt to significant changes without clear benefits or empathetic communication.

• Poor Messaging: Communication focuses on the mechanics ("what") rather than the rationale or customer value ("why"), often sounding tone-deaf.

• Flawed Execution: Rolling out the change in a confusing manner (separate sites, unclear billing) adds friction and frustration.

Potential Consequences

• Massive Customer Backlash: Angry users vented publicly, canceled subscriptions (Netflix lost ~800,000 US subscribers), and damaged brand loyalty.

• Brand Trust Erosion: The move felt arrogant and dismissive to many loyal customers.

• Stock Price Plummet: Netflix's stock price fell nearly 80% in the months following the announcement.

• Internal Disruption: Dealing with the public relations crisis and operational reversal consumed significant internal resources.

How to Avoid This Mistake

• Explain the "Why" Clearly: Communicate the rationale behind major changes transparently. If possible, frame it around long-term customer benefit or necessary adaptation.

• Empathize and Acknowledge: Understand the change from the customer's viewpoint. Acknowledge potential inconveniences or downsides.

• Pilot and Test (When Feasible): Test major changes with smaller user groups first to gauge reaction and identify problems.

• Segment and Tailor Communication: If a change affects different users differently, tailor your messaging accordingly.

• Ensure Smooth Execution: Make the transition process as seamless as possible. Provide clear instructions and readily available support.

• Listen and Be Flexible: Monitor customer feedback intensely after a major change. Be prepared to iterate, clarify, or even backtrack if the negative impact is overwhelming (Netflix quickly killed Qwikster, though kept the price separation).

Quick Tips

• Product Development Tip: Integrate communication planning into your roadmap for significant feature changes or strategic shifts. How will you explain this to users?

• Marketing Tip: Always view major announcements through your customers' eyes. Ask: "How will this impact them, and how will they perceive it?" Frame accordingly.

• Finance Tip: When modeling major strategic changes, factor in potential risks like customer churn, negative PR impact, and the cost of potential rollbacks or adjustments.

Conclusion

Netflix's remarkable success is a story of relentless innovation, strategic foresight, and the courage to disrupt its own business model multiple times. From DVDs by mail to global streaming and original content production, they consistently placed bets on the future. However, the Qwikster episode provides an invaluable lesson for all startups: even the smartest strategic moves can fail spectacularly without clear, empathetic communication that respects the customer's perspective. Build for the future, but bring your customers along with you.

Until next time, keep adapting, keep innovating, and keep communicating!