In 1997, when Netflix introduced DVD video subscription rentals by mail, it set into motion an approach that turned the entire industry on its head. Bricks and mortar companies ranging from Blockbuster to locally owned video stores were slow to respond to Netflix, and their businesses headed into a steady decline. Most are closed today. Soon Netflix had a near exclusive lock on DVD subscription by mail. So what did they do? They looked into the future and realized they must disrupt the channel they had created by moving their distribution method online. How they came to that conclusion and what they did provide lessons for any business, including any small business enjoying success today who hasn’t considered what threats tomorrow holds.


Why small businesses (and big ones, too) dislike change

It is hard to convince anyone who runs a business that the approach they built from scratch must start changing radically today if the company is to be around in ten years.

It is even more challenging when the successful business is in the enviable situation described by large companies as being a “cash cow”—an established company in a predictable niche that has a business model that gets more and more profitable each year as the business grows steadily. The only hitch? It grows a little less each year.

For a small business, the desire to stick with what works can be so overwhelming that “change” becomes an ugly word that people are afraid to utter around the owner.

In big corporations, the kind like Netflix became ten years after it began, the company’s leaders aren’t able to live in a state of denial. Former fanatical investors stopped investing in Netflix, and its stock fell dramatically when they began to doubt that Netflix could maintain the high revenues and earnings associated with its legacy business model while competing for a new approach then emerging: video streaming over the internet.

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The pain of change

The mail-delivery version of Netflix peaked at 20 million DVD subscribers. But it wasn’t a competitor that caused the DVD subscriber base to start falling (it’s now down to 5.3 million mail subscribers). It was Netflix itself. Netflix began offering DVD subscribers videos streamed directly into their homes via the Internet. The company then upped the stakes when others like Amazon, Apple and media companies entered the market: They started investing billions of dollars into creating content themselves—a high-stakes gamble that has resulted in some winners like the series House of Cards.

The result? Today, eight years after introducing video streaming, Netflix has 65 million subscribers and aggressive plans to grow their network worldwide.

But here are some surprising ironies:

  • Those remaining 5.3 million DVD subscribers are the only part of the company that is profitable today.
  • The profits from DVD rentals are what is funding the effort to expand the Netflix streaming network.
  • Netflix executives wanted to sell-off the DVD rental business, but investors wisely balked.
  • Despite contracting to 25 percent of its former size, Netflix executives forecast the DVD by mail model will continue indefinitely.

Lessons in change from Netflix

As explored in an article appearing on NYTimes.com, here are some of the key lessons one can learn from how Netflix is winning because it embraced change, but also how it failed along the way.

Change is expensive.

Even when the streaming model was embraced, the need to invest in original content was not fully anticipated.

Mistakes happen.

When a company is innovating in a volatile marketplace, not everything works. For Netflix, the necessary changes to cut expenses in one area of the business while investing heavily in another is an approach guaranteed to expose mistakes. The ability to recognize those mistakes and adjust is the key to success.

Change can’t be a sometime thing.

“Embrace change—that’s what I’ve learned here at Netflix,” Hank Breeggemann, general manager of Netflix’s DVD division, who has worked for the company for 13 years, told NYTimes.com. “If you don’t like change, this is the wrong place. Something is going to change every single day,” he said.