“Disruption” is a process in which a small company with few resources successfully challenges the incumbent business leaders. When the established leaders only focus on their most profitable consumers, and disregard the need of their smaller consumer, the entrants can make a move upmarket. They can improve their operations, while protecting their advantages that drove their early success. When the ordinary consumer starts to adopt and buy the entrants products in volume, disruption has happened. Therefore, a disrupted industry is an industry in which a disruptive innovation has taken place and where the incumbent firm has taken on the new business model of the disrupter. A great example of an industry that was disrupted is the movie rental industry.
One of the biggest movie rental companies was Blockbuster. At its peak, Blockbuster employed 84,000 people worldwide and had around 9000 stores. Blockbuster provided the entertainment, but also completed the experience. The revenue streams for rental industry companies were based on rental fees and all the food and beverage sales. But late-fees were their biggest revenue stream. Blockbuster paid a lot for the licenses and inventory of the movies, renting their shops and paying their employees.
In 2000, Netflix proposed a partnership to Blockbuster. Blockbuster rejected this immediately, they did not think Netflix could offer them real advantages. Blockbuster’s disadvantages for customers: extra fees if you returned videos late. Netflix’ advantages: no stores and no rent to pay, a larger variety of videos and subscriptions instead of paying per video, so there were no ‘late-fees’ for their customers. Because videos were sent home by mail, it was a bit slow. Still, people slowly became enthusiastic. The same happened with video streaming in 2007. Initially, internet connections and streaming quality were bad and it only attracted a few customers, but when quality improved, disadvantages disappeared. As more people tried it, more became enthusiastic and spread the word. Netflix became a great success and drove Blockbuster into bankruptcy!
The future of the movie-rental industry: the video-streaming industry. Traditional TV will cease to exist and all forms of video watching will happen through online services; the amount of time people under 35 spend watching traditional TV has been cut in half since 2010. Netflix has an advantage by collecting data from their customers. Based on this, content creation can be steered into a certain direction. Youtube Red, Hulu and Amazon are existing competitors of Netflix. Disney has broken its ties with Netflix and is going to stream through ESPN, while Facebook is working on its own streaming platform, called Facebook Watch. Netflix’ CEO Reed Hastings expects that in 10 or 20 years there will be a lot more operators offering streaming services. Netflix’ goal will be to keep the largest slice of the pie, they know they won’t be the only ones offering this service.
