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Disruptive innovation - How one company disrupted the whole industry

Research · January 2020

DOI: 10.13140/RG.2.2.30372.50565

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Kamila Lechmanová Ieva Vedeikytė

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Abstract

The way internet changes organizations and their structures have been visible to the eye for a
while now. Digitization does not only change companies but also challenges their whole
existence, constantly pushing them to prove themselves. The concept of digital disruption can
be a sign of an end for the traditional companies which do not adapt fast enough.
Our paper focuses on the identification of factors that could foretell the future of a company
by analyzing the case of Netflix and Blockbuster. Examining the factors of disruptive
innovation theory, project life cycle and technological life cycle our findings revealed how
Netflix revolutionized the film industry itself over the years, as well as what Blockbuster
lacked and ultimately required in order to survive. Furthermore, our paper looks beyond
Netflix’s AI solutions to reveal a glimpse of what is to come.

Keywords:
Digitization, Disruptive innovation, Innovation, Netflix vs Blockbuster, Film production and
distribution
 Table of content

​Introduction 8
How does the usage of AI impact the lifespan of Netflix? 12
Literature review 13
Disruptive innovation 13
Innovator’s dilemma 14
Disruption and value proposition 15
Leadership 16
Independent film distribution and digital technologies 16
Hypotheses 17
Theoretical framework 18
Disruptive innovation theory 18
Project life cycle theory 21
Technological Life Cycle 22
Methodology 24
Research philosophy 25
Critical rationalism 26
Research approach 27
Research strategy 27
Research design 27
Case study 27
Data collection 29
Data leading to the problem formulation 29
Data collection of literature review 30
Primary data 30
Secondary data 31
Reliability 33
Validity 33
Delimitations & Limitations 33
Limitations 33
Delimitations 34
Analysis 35
Blockbuster 36
Initiation 37
Planning 37
Execution and Control 39
Closure 41
Home entertainment industry environment prior to Netflix 43
 Netflix 44
Gap in the market 45
Strategy 46
Innovation 48
Future 48
External environmental implications 49
A lost opportunity 50
Next digital disruption - Netflix’s AI-related solutions 53
Introduction 53
Initiation 55
Planning 56
Execution and control 59
Closure 60
Netflix’s innovations in connection to digital disruption 61
Discussion 63
Conclusion 66
Bibliography 70
Glossary

Artificial Intelligence (AI)

Machines that simulate human intelligence and are programmed to think like humans and
mimic their actions are referred to be artificial intelligence (Frankenfield, 2020).

Big Data

Large, diverse sets of information that grow at ever-increasing base, which often come from
multiple sources and in multiple formats are known as Big Data (Segal, 2019). The
relationship between different type of data is reviewed by data analysts that determine
whether a correlation exists, which can then turn​ it into actionable information (Ibid.).

Cache

Cache stores recently used information for quick access in later usage (techterms.com, 2013).
Computers can incorporate several different types of caching in order to improve the
performance and run more efficiently (Ibid.).

CineMatch

CineMatch is Netflix’s web algorithm which processes information from the database and
determines which movies/videos would a customer like ​(Wilson and Crawford, n.d.)​. The
algorithm examines the movie ratings, a current queue of movies, movies which the customer
already saw (and did not rate), combined rations of all Netflix users.

Free trial

A product or a service that is offered to potential customers for free for a certain period of
time ​(Cambridge English Dictionary, n.d.)​. The meaning of this offer is to let the customer
try the product before he invests money in it (buys it) to see if he likes it or not.

Machine learning

A field of artificial intelligence, machine learning, is a concept that a computer program can
learn and adapt to new data without human interference (Frankenfield, 2018).
Netflix ecosystem

An ecosystem is a network of actors that help each other to survive and thrive ​(Wieringa,
2019)​. Netflix ecosystem consists of studios, consumers, investors, Netflix itself, platforms,
and competitors.

Proxy

A proxy server is a gateway between the user and the internet. It is an intermediary server
separating end users from the websites they browse ​(Petters, 2020)​. These servers provide
different levels of functionality, security and privacy.

Recommender Systems Algorithms

Machine learning algorithms in recommender systems are providing suggestions for users by
utilizing historical interactions and other attributes (Kordík, 2018). Large scale recommender
systems are used in the video-on-demand, retail or music streaming (Ibid.).

VPN

Is a Virtual Private Network, which enables the user to create a secure connection to another
network over the internet ​(How-to-Greek, 2019)​. This type of connection can be used to
access region-restricted websites, shield the browsing activity, etc.

Word-of-mouth recommendation

Word-of-mouth advertising is one of the most credible forms of advertising because the
person puts their reputation on the line they make the recommendation with nothing to gain
(Entrepreneur, n.d.)​.
Introduction

In order to describe the current period of time in the history of commerce, you might come
across the word “unique”. It is so, because of the significant transformation of traditional
methods of production that are being replaced by new virtual ones almost on a daily basis
(Frank, Röhrig and Pring, 2014)​. The ideas that were perceived as a fantasy or vision a few
decades ago now dominate the market. Except for introducing revolutionary ideas, e-business
also changed our customer perceptions and expectations. Walking the aisles in Magasin or
Jysk feels inefficient or impersonal after buying goods at Amazon. Waiting on a call to talk to
some institutions, having to renew a passport or filling out any paperwork feels like we are
stepping back to our parents’ world. One of many effects that technology-led companies had
on our lives is that for many, the in-person has become impersonal and the virtual so intimate
(Ibid.). In order to understand and explain why does the shift happens when successful
companies continue to make the choices that drove their company’s success, we need to
research the roots of the phenomenon called digital disruption.

The classical scenario of the effect of digital disruption applied to any market might sound
like a cautionary tale of the modern age. The story begins with a successful company that
does all the “right” things, like asking its customers about their wants and needs regarding
new technology, hears them when they say no and continues to do the business as usual
(Gans, 2016). The company prefers not to enter unknown waters because it is scary and
dangerous for the business they are used to. However, by doing the “right” thing, the market
leader misses its boat and the story twists. New technology is introduced by a new company
or a start-up and the company is known for its tradition and success fails to adjust (Ibid.). The
phenomenon of digital disruption had entered the stories of many thriving companies (Ibid.).
Some people might see it just as a “camera thing” in case of Sony and Kodak, a “book thing”
in case of Amazon and Borders, a “mobile phone thing” in case of Apple and Nokia or a
“movie rental thing” in case of Netflix and Blockbuster ​(Frank, Röhrig and Pring, 2014)​.
However, all of these stories have the same pattern, each of these industries was facing
disruption and some companies did not manage to react accordingly. Hence, not fulfilling
customer expectations cost them success and in some cases, the whole business.
Over the past decade, 5 technology-led companies have collectively generated more than ​$​4
trillion of market value ​(GmbH, 2020)​. Amazon, Apple, Facebook, Google and Netflix
managed to modify customer expectations and established new operating models by
introducing new technologies. In the process, the prior industry leaders, such as Nokia,
Motorola, Borders, Blockbuster and Tower Records, lost on average around 90% of their
2003 enterprise value (Ibid.). Thus, it is clear that the tremendous value migration that was
forceful or final for the prior leaders was caused by the disruption made by the other set of
the company (Ibid.).

One exemplary case of the effect of digital disruption is how Netflix changed the movie
rental industry. When Netflix launched its initial service in 1997, it was not appealing to most
of Blockbuster’s customers ​(Christensen, Raynor and McDonald, 2015)​. Their movie rental
delivery service via U.S. post had ​an exclusively online interface and a large inventory of
movies, but ​it did not offer the comfort and expediency that customers found in Blockbuster’s
stores (Ibid.). Netflix still found its audience in the ​early adopters of DVD players, and online
shoppers (Ibid.). Hence, during these years, Blockbuster and Netflix were not competing,
because they filled different needs and had different target groups (Ibid.). However, new
inventions allowed Netflix to shift its service to streaming the movies over the Internet and
their on-demand, low-price, high-quality approach attracted the Blockbuster’s core audience,
which caused Blockbuster’s collapse (Ibid.). One of the main reasons why incumbents like
Blockbuster was not able to counterattack the disrupter, is because disruption is often a slow
process and the company did not react effectively to the trajectory that Netflix was prior to
their release of upgraded service (Ibid.). The case of Netflix and Blockbuster shows digital
disruption in its true light, full of generality and complexity, as a real eye-opener for
successful companies.
Problem Formulation

The field of digital disruption is heavily studied, yet there is no general answer to the
questions why does it occur or how can we predict it. One proven aspect of digital disruption
is that digital tools and platforms reduce costs, so disruption might occur at any level, big or
small, and in any industry (McQuivey, 2013). Our interest is in researching how could the
case of Netflix and Blockbuster be used for the edification of the digital disruption to other
companies and industries.

The paradoxical reality of disruption in the case of the video is that instead of being replaced,
the video business is getting much bigger (Ibid.). Hence, digital disruption does not always
shrink industries, it might expand them (Ibid.). Movie production and movie rental
companies are now a shadow of their former selves. But at the same time, more people have
access to movies at more times on more platforms and devices than ever before. More
individuals are engaged in creating movies and there is so much more content to watch.
When digital tools enter an industry, it creates more of everything (Ibid.).

However, for some incumbents, it is too difficult to develop a coherent and proactive strategy
to react to new opportunities brought by online services. One of those companies is
Blockbuster. In 2004, Blockbuster and its 9000 stores dominated the movie rental market in
multiple countries and it only took it two decades to achieve it (Gans, 2016). By 2010, it was
forced out of the market that was radically changing, which made Blockbuster file for
bankruptcy with its number of outlets shrinking to just a third of its peak number (Ibid.). On
the other hand, Netflix, established in 1997, was just a DVD-by-mail company before the
Internet came (Ibid.). A couple of years after, in 2000, Netflix even offered Blockbuster to
buy them for a mere $50 million (Ibid.). At that time leadership in Blockbuster did not see
Netflix as an opportunity or a thread, which made them pass the offer. Currently, in 2020,
Netflix is worth over $15 billion dollars ​(Forbes, 2020)​. Netflix’s strategy of redefining how
content is provided to customers implied a new value chain structure, which completely
aligns with the definition of the business model innovator (Salvador, Simon, Benghozi,
2019).
Netflix did not absolutely overtake and replace the traditional way of doing business, but it
caused the reinvention of the movie rental industry (Ibid.). As ​Blockbuster founder David
Cook said,

“​It didn’t have to be this way. They [Blockbuster] let technology eat them up.​ ”
(Frank, M., Röhrig, P. and Pring, B., 2014).

Our research question is therefore focused on the phenomenon of digital disruption,

specifically on the case of Blockbuster and Netflix. We aim to answer what caused this
phenomenon to happen, how it influenced the activities of the companies and what can other
companies do in order to avoid being disrupted. The research question is:

How the digital disruptive innovation of Netflix impacted the lifespan of Blockbuster?

The video production market has experienced a grand shift in recent years. Today video
content includes memes, adverts, music videos and Netflix series, which can be accessed at
any time through connected mobile devices everywhere their holders go (Monaci, 2016). One
of the greatest influencers and disruptors of traditional video content production are new web
players - SVOD (Subscription Video On Demand) platforms (Ibid.). These players, Netflix,
Hulu and Amazon with Amazon Instant Video, are strongly connected to ICT (Information
and Communication Technology) assets, which gave them a secure position on the market
(Ibid.). The consolidated position on the web allows them to monitor and manage online
markets without excluding possible developments in traditional distribution channels, e.g.
cinemas or pay television (Ibid.). These SVOD platforms caused a revolution in video
production, which completely redesigned the market and caused a failure of multiple other
platforms. Our first sub-question therefore is:

How did Netflix’s digital disruptive innovation influence traditional ways of doing
business performed by Blockbuster?

Many successful companies, such as Blockbuster, believed that their strategic and tactical
positions on the market meant that they were immune to the changes happening around them
(Frank, Röhrig and Pring, 2014). They underestimated the power of trends and assumed that
the disruption others were suffering in the form of digitalization would not affect them and
their industry (Ibid.). However, their industries were not different. Digitalization causes a
value migration not only in highly technology-related fields but in everything else, too (Ibid.).
Whether you are choosing the right hospital for your surgery, the right bank for your savings
or the right video distributor for your tonight’s movie. In all cases, the digitalization level of
the company you are going to choose is a criterion to consider even though the products or
services might be the same (Ibid.). Hence, if a company ​neglects to wrap their widgets with
digits, to build a digital business ecosystem, it risks being vanished by a company that will
use the technology and data it has access. Netflix used both data and technology it had
available to provide a personalized experience for the viewers, which influenced the lifespan
of other video distributors. Thus, our second sub-question is related to Netflix’s digital
innovations and their effects:

How did the innovations introduced by Netflix influenced

the conditions for surviving on a market as a video distributor?

Our third sub-question is connected to one of the key strategic factors that Netflix uses in
order to assure the loyalty of the community, which is targeting unique and personalized
content by using AI (Magnotta, 2020). Currently, Netflix is one of the top ten leading
companies in AI research and its application (Ibid.). Netflix does so in order to use AI and
machine learning for analyzing large datasets to learn specific behaviours, which is allowing
computers to recognize patterns and learn new actions without being explicitly programmed
(Ibid.). Nowadays, AI is helping Netflix to match content with the audience more effectively
(Ibid.). They use algorithms based on neural networks to learn and classify users’ preferences
(Ibid.), which is why Netflix can recommend you just the right movie for your Sunday
evening. Except using AI for personalized content, it can be used for writing scripts or editing
movies, which might be the innovation that could change the video production industry once
again. In consideration of massive investments in AI that Netflix is doing and the all-purpose
usage machine learning and AI has, we would like to focus on researching how does this
innovation influences Netflix’s company and what are the prospects of using this technology
in Netflix services in the future. Hence, our third sub-question is:

How does the usage of AI impact the lifespan of Netflix?

Literature review

Disruptive innovation
To begin with, the term disruptive innovation started to be used by Christensen in the mid
‘90s (Bower & Christensen 1995, Christensen 1997, Christensen & Raynor 2003). Ever since
then, digital disruption started to be the topic of discussion. For example, Brown (2003), sees
it as something that changes social practices and the way we live. Furthermore, based on
Vesti, H., Rosenstand, C. A. F., & Gertsen, F. (2018), digital disruption refers to disruptive
processes, e.g. digital services or products, powered up by digitalization, consumed by digital
users. Lettice and Thomond (2002), see it as “​A successfully exploited product, service or
business model that significantly transforms the demand and needs of an existing market and
disrupts its former key players​”. Assink (2006), seems to agree with the definition, however
adding a finishing sentence where digital disruption creates whole new business practice or
market with significant societal impact. Another explanation is in the eyes of innovation
management where digital disruption is faced as the next future change over the course of 2-5
years with strategies and business models (Ibid.). Moreover, it is associated with digital
transformation, industry 4.0, or digital technologies with potency to cause disruption. Despite
all other definitions, Christensen’s view seems to cover it all: “​Disruption describes a
process whereby a smaller company with fewer resources is able to successfully challenge
established incumbent business.​ ” (Christensen et. al. 2015). Even though there are many
explanations and corrections on what digital disruption really is, Vesti, H., Rosenstand, C. A.
F., & Gertsen, F. (2018), in their digital disruption literature project, claim that there is no
academical definition for digital disruption, only an association with an unclear definition.

In fact, digital disruption covers all industrial sectors healthcare, logistics, retail, service and
information, production, and entertainment industries, etc. Moreover even, governmental,
political, economic, social, and cultural areas.

In comparison, digital disruption and traditional market disruption have been compared in the
“​Characterizing digital disruption in the general theory of disruptive innovation”​ by Haase,
Louise Møller; Gertsen, Frank; Johansen, Stine Schmieg; Rosenstand, Claus Andreas Foss in
2017. In the traditional disruption, the role is simple, establish a new value chain by creating
innovation. However, in digital disruption the purpose is different. Digital disruption servers
as a mere mediator between digital suppliers and users/customers, rearranging existing value
chain, e.g. recombining existing solutions. When it comes to the organizational structures,
traditional disruption often includes independent organizations competing against each other.
However, digital disruption prefers collaboration and interdependencies. Their business
models also differ. Digital disruption takes a slice of the value and creates engaging
customer/user interaction in an exploiting, mutually beneficial. Whereas, traditional
disruption is about finding niches in the market. In the case of Netflix and Blockbuster, the
speed of digital diffusion prevailed. Since digital disruption is all about exploiting digital
channels, fast penetration of the market is essential. As for the traditional method, the speed
is often restrained due to logistics, pointing into slow market penetration.

Innovator’s dilemma
Moreover, Christensen (2016: 99) pointed out not every innovation has to be disruptive, so
how can managers actually determine and control the upcoming changes? In Christensen’s
innovator’s dilemma, five principles were outlined to help answer that question.

1) Resource dependence (the basis for investments, discovering potential market segments)
2) Growth conditions (decisions based on immediate profitability)
3) Failure as a step towards success (launching a product/service needs to be inexpensive and
flexible in order to lower the risk of failure)
4) Organizational capabilities,
5) A distinction between technology supply and market demand
(Christensen, 2016: 99)

The innovator’s dilemma talks about how to spot the weaknesses within an organization and
creating an organization which capabilities align with its customers rather than prevent the
work of other innovators. Gilbert and Bower (Lundgaard, S. S., & Rosenstand, C. A. F.
2019), point out that, the way how digital disruption is framed can determine whether a new
business is a threat or an opportunity. Moreover, Markides and Charitou argue that keeping
two business units separated can lead to a miss on a possible alliance between them.
Skog, Sandberg, and Wimelius (2018) proposed a definition of digital disruption as a rapidly
unfolding process for value creation recombining resources or creating new ones. And so
recognizing the core of innovation in restructuring processes. The aim of their study was to
explore how and why digital disruption occurs for future actors. Their findings show, that
strategies must be adapted to new challenges. Focal companies may experience critical
changes in strategies, which may interfere with investment choices. Once digital disruption
arises, it brings both challenges and opportunities. It may also push actors and repurpose the
logic and create a new digital disruption process. Interestingly, companies must prepare that
during these challenges a possibility of managing dilemmas such as cannibalization of
previously successful businesses.

Disruption and value proposition

Furthermore, Stewart, Schatz, and Khare see digitalization as something beyond a simple
work improvement, but rather something challenging why organizations exist and what
values they propose. An understanding of what digital disruption is can decide on whether the
company survives or not. Their findings suggest, that low complexity organizations with low
levels of digitalization are initial targets for digital disruption. They have divided disruption
into two levels, the first-order and second-order disruptions ​(Skog, Sandberg and Wimelius,
2018)​. First-order disruptions occur after digitization of a product or service providing
enhanced value proposition such as reduced cost of operations, enhanced service to
customers and improved performance of companies in the sector. Second-order disruptions
occur when the business model of a particular good or service is destabilized, and a new
business model emerges to displace it - causing rendering of networks, values and
investments and rethinking of value propositions. Based on this, they have proposed a
framework to determine in which areas a risk can occur, emphasizing it is important to ask
the right questions.
Leadership
Another article by professor ​Stonehouse and doctor in economics ​Konina presents what
impact did digital disruption have on different business spheres. They have concluded that in
order to succeed in digitalization, companies need to reorganize their organizational
structures from the hierarchal down to the network-based agile teams. The main concern is
put on the decision-maker - CEO, who should possess modern qualities such as informed
decision making, fast execution, hyper-awareness, advanced knowledge of digital tools
(Stonehouse and Konina, 2020)​. As they see, the main problems of digitalization are usually
lacked skills in order to determine the correct digitalization strategy; difficulty finding the
right high-tech skills; lack of willingness to cannibalize existing revenue and business
models; lack of trust in digitalization.

Independent film distribution and digital technologies

Article by Keith Kehoe and John Mateer (2015) further argues how digital technologies
disrupted independent film distribution in the UK. As they figured, business is shifting from a
supply-led to a demand-led market. With Porter’s value chain framework, they continue to
describe the interconnected value-creating activities during a company’s lifetime (developing,
manufacturing, delivering and supporting the product, supplier activities and customers).
What they found out, was that there are two ways how digital technologies affect the value
chain of film distribution. Firstly, a changing relationship with a new type of consumer
(active audience), and secondly, the opportunity to explore new business models which this
technology facilitates. Overall, the environment became increasingly challenging due to
changing economics and the decline of home video. It is also challenging the traditional
distribution periods (“exploitation windows” - exclusive periods of time within specific
market regions to enable repeated commercial exploitation of a film’s intellectual property
rights in order to maximize revenue (Ibid.) in a way which doubts their relevance in this time.
However, the film distribution is still at an early stage of adapting and adopting new
technologies with one unanswered question - the economic viability of new distribution
models.
Hypotheses

1.) Traditional ways of video production and distribution were revolutionized by Netflix
and its digital innovations.

2.) Delayed implementation of innovative means successfully utilized by Netflix failed

for Blockbuster

3.) Netflix’s strategy for causing next digital disruption of the video distribution industry
is based on extensive Big Data research and application of AI-related solutions.
Theoretical framework
The theoretical framework will conduct three concepts: disruptive innovation theory
examining how proactiveness reshapes market trends; project life cycle will present stages of
company development (from initiation to destruction), while technological life cycle - stages
of technology development.

Disruptive innovation theory

The commencement of disruptive innovation theory was in the early 90s when American
academist Clayton Christensen investigated technology development curves and found out
differences between traditional and innovative establishments of production.

​Figure 1. S-curve development (Christensen, 1992).

As Christensen noticed, over time traditional technologies require more time and effort to
improve performance, while, in contrast, new technologies adoption takes significantly less
time to adjust and increase improvements. Indeed, according to Figure 1, while developing
one traditional technology, simultaneously several innovative technological decisions can be
established which generate ever-growing performance. The curves portrayed the situation
within the market of already existing businesses and new entrants: Christensen was trying to
uncover what kind of effect new entrants have in the market, how it changes incumbent
entities and vice versa (Rosenstand, et al., 2019).
According to Christensen, disruptive technologies can be referred to as any newly occurred
technological solutions that provide distinctive values from the mainstream (traditional)
technologies (Yu and Hang, 2010). Christensen portrayed the process by drawing lines
representing the progression of technological development of both disruptive innovations and
mainstream devices. In the early development stages, disruptive technologies are inferior in
comparison to mainstream technologies, which already conduct to loyal mainstream
customers. Production based on disruptive technologies can serve so-called low-demanding
customer groups who value nonstandard performance. Later on, constantly evolving and
developing technologies reach the main focal point by when disruptive innovations can
sufficiently serve and satisfy mainstream customers. However, traditional technologies keep
evolving too, but as it is usually concerned with large amounts of production, it ends up
over-serving customers who over time change values and lose interest in the previously
praised technological solutions. This process is when disruptive innovation occurs - when
new innovative technology, started as inferior to mainstream technology, developed to the
point of serving mainstream customers and replacing traditional technologies (Ibid.). The
model of disruptive innovation is represented in Figure 2.

Figure 2. The disruptive innovation model (Christensen, 2003)

Subsequently, Christensen and Raynor (2003) in the book ​‘The Innovator's Solution’ replaced
the term ​'disruptive technology' to ​'disruptive innovation' thus broadening the comprehension
of disruption phenomena. Many adherents of Christensen's concepts attempted to enhance
and thoroughly explain key elements of disruptive innovation theory.
According to Adner (2002) claims, the primary causes why mainstream customers rely on
such innovations is the decreasing utility gained from sustaining technologies, the shift of the
values towards new inventions and affordable prices. An exceptionally significant
contribution was made by Govindarajan and Kopalle (2006), who determined specific
measurements of disruptive innovation: low-end and high-end disruptions. Low-end
disruptions are recognized by low prices and target to over-served customers while high-end
disruptions offer sufficiently higher-priced production. To understand this phenomenon, they
have used the example of cellular phone implementation. Back when it was introduced, only
the corporate executives preferred a new, portable and convenient device regardless of the
high price. Meanwhile, mainstream customers were still utilizing land-line phones since they
relied on reliability, costs, and coverage. However, over time, the cellular phone was
developed in a way it could offer proficient coverage for a suitable price for mainstream
customers, which was the cause of disruption (Yu and Hang, 2010). Govindarajan and
Kopalle (2006) also made several measurements of how people rely on disruptive innovations
and, therefore, they have emphasized four steps: 1) an inferior against traditional attributes, 2)
offering new values to attract a new segment of customers, 3) lowering prices, 4) infiltrating
in the market from niche to mainstream (Ibid.).
Following the model of disruptive innovation theory and key elements of comprehension of
how it does work, we will be able to implement concepts into our project to answer the main
research questions. With Christensen's linear disruptive innovation model, we will be capable
to identify the shift of mainstream customers - from mainstream market shark Blockbuster to
fresh startup Netflix - and what were the causes behind it. Moreover, following Christensen's
linear model of disruption development rates and duration to adjustment, we will estimate the
time dimension when the disruptor outweighs and overtakes the incumbent's role in the
market, specifically orientating on the main Blockbuster and Netflix clash case. The theory
will let us thoroughly examine how Netflix infiltrated itself into the major market by
four-step measurement executed by Govindarajan and Kopalle.
Project life cycle theory
As the Project Management Institute (2013) stated ​'a project is a temporary endeavour to
create a unique product, service or result'​. Every organization is seeking to produce
something that would be different than any other commodities in the market - new or
improved. However, the term ​'temporary' accentuates that projects occur within the finite
time frame - they have both starting and, eventually, ending point (Turner, 2007: 527).
Based on this, we have implemented a project life cycle theory to examine Blockbuster's and
Netflix’s management cycles - from initial development to closure (if reached the last stage).
Moreover, there are several stages companies go through in between initiation and
destruction. Researchers identify different numbers of stages, thus Gardiner's (2005)
suggestion of four stages life cycle appears to be the most appropriate in this case: initiation
and definition, planning, execution and control, and closure (Turner, 2007: 529).
Nevertheless, stages can be affected by every unique organization, e.g. regulatory framework
or shaped by the industry they work within, however, a generic stage model can be applied in
principle to every project (PMI, 2013: 38). Indeed, each of the stages will be briefly described
in the following sections.
First stage - initiation and definition. In this stage, it is necessary to identify opportunities or
problems of the market to estimate the feasibility of the project. Companies have to clarify
goals, sort out legal requirements, contracts in order to commit the beginning of the business
(Turner, 2007: 536).
Second stage - planning. During planning processes, it is crucial to identify the means to
achieve project goals. In this stage companies schedule work and resources, set up target
groups and define tools and techniques to establish the project (Ibid.).
Third stage - execution and control. Execution associates with the project's set up and start
up. It considers internal processes - arranging and motivating staff, communicating strategies.
Control stage requires attentive tracking of the processes of the company to assure that plans
are executed. Any changes within the company or the whole market are constantly considered
and implemented if needed (Ibid.: 537).
Lastly, the fourth stage - closure. It refers to the process of winding down activities, finalizing
documentation, statements, disbanding resources, etc. In principle, this stage reveals the end
of the company - shutting down production or service provision, summing up outcomes and
examining what went well and what failed (Ibid.: 537).
When considering our research, the project life cycle theory can be applied to both
Blockbuster and Netflix - as Turner (2007) outlined the theory explains nearly every
enterprise from its starting point to the shutdown. Taking Blockbuster, we will examine the
stages the company went through: the initiation - what goals did the company set, what was
the market situation back then and what opportunities it provided; planning stage to analyze
the means company employed to achieve goals; execution and planning stage will uncover
what activities were ongoing in the company, how it was changing within the company and if
it was shaping the market overall; while last stage examination will provide with the
understanding of what were the causes of Blockbuster's destruction. Netflix case analysis will
be slightly different as it is still ongoing: we will outline the market situation they started in,
to figure out whether there were any challenges or rather opportunities; then we will move on
emphasizing the purpose of Netflix and how it was sought. Simultaneously, the AI practices
Netflix is implementing will be analyzed to perceive future possibilities for the company.

Technological Life Cycle

The Product Life Cycle concept can be applied at various levels, from a single model or
specific product to the life cycle of a whole industry or the life cycle of a product form, like
technological life cycle (Hollensen, 2015: 411). Technological life cycle, or TLC, is a life
cycle of a total product category or technology, which usually presents multiple product life
cycles under one technology life cycle (Ibid.). Application of TLC model on product form,
specific product or specific technology of a product, involves an analysis of definable groups
of direct and close competitors as well as core technologies related to the product (Ibid.).
These attributes of the technological life cycle make the model more stable and easier to
identify and analyze (Ibid.).

TLC has five main stages that all are identified by different features (Dalum, Pedersen and
Villumsen, 2002: 4). During the introduction phase, the product faces high uncertainty about
technologies and markets and a high risk of sunk costs (Ibid.).
In the second phase, early development, dynamics of the market accelerates and even though
the technology is still costly and the market is uncertain, the technological trajectory is
already rising (Ibid.). The next stage, full development is determined by stabilized market
dynamics as well as standardized product and process innovations (Ibid.). In the maturity
stage, market structures are stabilized and a possible technological revitalization might arise
(Ibid.). Lastly, the decline stage is characterized by a contraction of the market,
rationalization and exit strategies (Ibid.) of the video rental industry changed based on
Netflix’s technological innovations.

Since our project is focused on disruptive innovation presented by Netflix, technological life
cycle model is applicable in multiple events related to the development of the technology of
the studied company. With TLC we can examine how the life cycle of the video rental
industry changed based on Netflix’s technological innovations. Technological life cycle will
be used for analyzing the Netflix’s subscription model as well as the application of AI-related
solutions to the existing video distributing services.
Methodology
To define what methodology is, Somekh and Lewin (2005: 346) summed it up as a rule
creating process of principles, theories, and values defining an approach to research.
Meaning that not only the plan of doing the research is the key, but also the approach, data
and many other criteria that have to be taken into consideration.

In order to understand how each part of this section fits with the other, we decided to use the
Honeycomb of Research Methodology. The reason being is, that most of the research
methodologies apply a linear style of thinking ​(Wilson, 2013: 7)​. The linear style of thinking
presents a lot of research methodologies which showcase a structure points in a specific order
which a researcher may not necessarily consider well structured (Ibid.). This is why the
Honeycomb Research Methodology fits well into this research, as it not only shows the
structure points but also considers that the researcher’s thought process is not always linear.
This method consists of six key elements (Ibid.: 8):

1. Research philosophy
2. Research approach
3. Research strategy
4. Research design
5. Data collection
6. Data analysis techniques

These will be the bullet points you can find in our methodology section.
 Figure 3. Honeycomb Research Methodology (2005:8)

Research philosophy
An understanding of philosophy is essential as it shows how we approach our research. Mark
Easterby-Smith (Ibid.) explains why should understanding of philosophy be emphasized.
Firstly, it helps to clarify the research design by taking into consideration a type of data
required as well as how it is gathered and interpreted. What is more, the knowledge of
philosophy can help recognize different types of designs and determine which would fit best.
Lastly, after identifying the design a researcher needs to adapt it according to principles of
different knowledge structures (Ibid.). Overall, philosophy lets us think about our own roles
as researchers.
Critical rationalism
The school of critical rationalism has been centred around Karl R. Popper in the 19th century
(DIIS, 2011). This approach is characterized by the “​trial and error​” method, which is
applicable in all scientific disciplines (Ibid.). When a researcher finds himself in a
problematic situation theory is proposed to solve the problem. What is more, Popper suggests
that the efforts should be focused on displaying the falseness of the theory which is certain to
create new inquiries that we can approach, however, with increased knowledge (Ibid.).
Musgrave (Encyclopedia, n.d.), on the other hand, points out that one cannot both use and
criticize theories at the same time. Rationality comes from cooperation - criticizing shouldn’t
focus on theories but rather follow social rules. Meaning, that theories should be used to
falsify statements and not otherwise. He claims, that no evidence can justify whether theory
shows the truth or not. If a researcher believes in the theory then it is justified, not by claim.
In our case, we have chosen theories which might not be true, however, they can be justified
throughout our research and hence they are applicable. As this philosophy enables us to be
critical to ourselves, we will apply our rationalism whilst analysing the case. Furthermore,
knowledge and truth are said to be objective, they exist independently of social mediation or
perception of an individual (DIIS, 2011), which means they are value-free. As our research
takes data mainly from past events, we strive to stay as distance ourselves from the data to
maximize its reliability. Moreover, to question the answers we acquire can raise us getting
closer to the truth and so this approach seems to be well fit for our purposes.
Research approach
In accordance with Egholm (2014: 71), the starting point of critical rationalism is upon
deduction, where hypotheses arise from the well-known theories and have to be falsified
through empirical research. Essentially, the deductive approach arose from Popper, as he
rejected the notion that knowledge arrives from pure sense experience, but rather from
observations that are theory-based - ​'it is a net to catch the world: rationalize, explain, and
master it' (Popper in Egholm, 2014: 79). There are certain ways to execute a deductive
approach model: a suitable set of theories is determined, thereafter the examination, proper
hypotheses are established, though it is essential to formulate them in a scientific manner, i.e.
that they could be rejected in the final. Afterwards, there is an investigation: logical forms of
theories are applied concerning the gathered data to come up with results of the research. In
the final, research results are summed up and tested towards hypotheses to either reject them
or approve (Popper, 1992: 10). Thus, the deductive approach moves from a general rule
(theory) to a more specific statement (observation), and hence the outcomes of the data
analysis reveal whether the concepts of the theory approve or decline made hypotheses
(Egholm, 2014: 80).

Research strategy
In relation with our research approach, deductive thinking is concerned with developing
hypotheses based on existing theory, and then design a research strategy to suitable to test
these hypotheses (Wilson, 2013: 36). This type of research is associated with the quantitative
type of strategy. However, as our research depended on the historical facts of the situation we
decided to include both the quantitative and the qualitative data.
Research design

Case study

Bryman (2016: 60), presents a case study as an in-depth detailed analysis of a single case
organization. Its main purpose is to understand the phenomena for its actions (Ibid.). As
recommended (Bryman, 2016: 62), we will describe the conditions and circumstances which
would portray the situation and highlight how important the context of the phenomenon is.
To understand what a case study is, Yin ​(Wilson, 2013: 137) explains that a case represents
an inquiry that investigates a contemporary phenomenon within its real-life context, while the
boundaries between phenomenon and context are not evident. In our research, we strive to
understand the process and situation which led Blockbuster’s downfall by identifying
variables that impacted it.

Figure 4. Research strategy (Yin 2003)

Firstly, by reflecting on Yin’s research division we have formed a research question that
would reflect the problematic of our research. Moreover, while Yin introduces three types of
case studies (exploratory, descriptive, and explanatory) (Ibid.), our paper fits into the
explanatory area. Our reasoning is, that the data we need in order to explore the situation span
over the years, thus our research is happening over time and the explanatory design is the
way to go (Ibid.). Further factors, for example, our research question, focus on the “How”
rather than other forms.
Data collection
Data, raw materials of research, makes data collection and methods used in relation to it one
of the key points in any research (Bryman, 2016: 10). Data collection is based on gathering
relevant data about the studied subject, which can be then interpreted and refined into
conclusions (Walliman, 2011: 83). Even though we are surrounded by data every day from
multiple sources, like the Internet, television or newspapers, a collection of data for research
purposes is usually not very straightforward (Ibid.). In order to apply the most effective and
appropriate methods of data collection, we had to consider various methods of acquiring both
primary and secondary qualitative data and selecting the most suitable ones for our research.

Figure 5. Data collection process

Data leading to the problem formulation

When we decided to focus on digital disruption phenomenon, we firstly contacted an

organization Digital Hub Denmark, which focuses on supporting and strengthening the digital
growth environment in Denmark, for getting more information about digitalization in general.
During our meeting with Claus Rosenstand, professor at Aalborg University and an employee
of Digital Hub Denmark, we came across digital innovation theory and learned about
different cases when one company with digital innovation disrupted whole industry, so-called
digital disruption phenomenon. For the continuation of the study, we examined accessible
studies, articles and books regarding various cases of digital disruption.

We decided to examine Netflix and Blockbuster case since it is oftentimes regarded as an

ideal digital disruption example. Another reason for selecting this case was Netflix’s
extensive investments into AI-related solutions, which are potentially capable of rapidly and
efficiently improving products, companies and whole industries. Thus, during our
decision-making process regarding our case study subject, we also considered that these
innovations might be Netflix’s opportunity of causing another digital disruption.

Data collection of literature review

Subsequently, we have made our literature review based on data explaining innovator’s
dilemma, disruptive innovation and its attributes - value proposition and leadership and lastly,
digital technologies in video distribution. Our data sources came from studies of various
scholars, including articles from Clayton Christensen, a professor at Harvard Business
University, who is said to be the founder of digital disruption theory ​(Dillon, 2020)​, as well
as articles and books from Claus Rosenstand, a professor at Aalborg University, whose
significant part of the research is concerning digital disruption (Aalborg Universitet, 2020).
We also used researchers of academics from different areas, like the article from Skog, D.,
Sandberg, J. and Wimelius, H., who all are researchers at Umeå University’s Department of
Informatics​. We then formulated our hypotheses based on these findings.

Primary data

After completing the literature review, we discussed collecting qualitative primary data, in
the form of interviews, which would be subject-specific. Collecting primary data should only
be done if the data is required in order to investigate the research problem (Walliman, 2011:
88). Since our research analyzes the roles of two companies in a past event and the current
and future innovations of one of the companies, we thought of conducting interviews with
experts in fields of digital disruption research and AI and Big Data. However, gathering the
data about the innovations and their potential of becoming the next digital disruptors of the
video distribution industry became infeasible since all of our questions could have only be
answered by multiple Netflix’s employees from their research and development centres as
well as business centres and it might even require access to confidential information. Hence,
we decided to only collect accessible secondary data from Blockbuster’s and Netflix’s
reports, other researchers’ studies and online available information from Netflix’s website
and its employees.

Secondary data

Collecting secondary data is always a must in social science research (Walliman, 2011: 83).
Utilizing existing data is a viable option for researchers who may have limited time or
resources (Johnston, 2014: 619). While some studies use them as background and to gain an
idea of the current theories and ideas, other studies, for example, historical studies, rely
greatly on secondary data for the whole project (Ibid.: 84).

In our project, we only collected secondary data, since as in most historical studies, primary
data was not available and we found secondary data to be sufficient for answering the
research question and for falsifying the hypotheses. In order to secure the reliability of our
findings, we used diverse sources of information. Our sources varied in fields of study,
ranging from the law sector, which examined Blockbuster failure as a bankruptcy case study,
and management field, that focused on business model evolution of Blockbuster and Netflix,
to communication department, which exposed “The Netflix Effect” and analyzed Netflix as a
definitive media company of the 21st century. Furthermore, we used different articles as data
sources from reliable newspapers and magazines like The Washington Times, New York
Times, Forbes, Business Insider or International Business Times. Lastly, for ensuring the
credibility of data analyzed we used information published by companies themselves in a
form of Blockbuster’s and Netflix’s reports from the year 2002 to 2019. We also used other
data sources for analyzing Netflix’s innovations that the company made available, like the
Netflix Research website, Netflix Investors web page or Netflix TechBlog. For understanding
Netflix’s strategies, we used some information from Netflix’s employees, like the article
about how Netflix makes its algorithms reliable by Justin Basilico, Research/Engineering
Director at Netflix.

One of the main disadvantages of using solely secondary data sources is that ​the secondary
researcher did not participate in the data collection process and does not know how the data
were gathered (Johnston, 2014: 625). However, in our research, we endeavoured to only use
reliable and credible data by using companies’ own publications and other peer-reviewed data
sources.

Qualitative content analysis

The technique of content analysis, which we decided to use in our research, has roots in the
study of mass communication, but over the decades' researchers from many fields, including
management, political science or sociology have used content analysis. Content analysis has
many definitions that reflect its historical development (White and Marsh, 2006). In our
study, we accept a broad-based definition by Krippendorff (2004), who says that content
analysis is

“a research technique for making replicable and valid inferences from texts to the contexts of
their use" (Krippendorff, 2004, p. 18).

Application of content analysis allowed us to use the rules of inference, to move from the text
to context and to the research question (White and Marsh, 2006). Hence, after analysing our
collected data, reports, articles and studies, our sub-questions were answered, which led to
answering the research question.

In order to have a “truth value” in qualitative content analysis, four criteria have to be met;
credibility, transferability, dependability, and confirmability (Ibid.). We aimed to fulfil the
credibility aspect by only gathering data that reflected all the important factors that our
research question contained. For making the findings applicable from one context to another,
thus fulfilling the transferability, we conducted the reliability test. Dependability factor
addresses that replicability is stability after discounting the conscious, unpredictable but
rational changes in findings during the repetition of study. Lastly, the conformability criterion
is met if data support the conclusion. Regarding our study, we believe that the collected data
provided useful evidence for testing hypotheses and answering research questions and the
conceptual consistency between observation and conclusion was met as well as the rest of the
criteria.
Reliability
Wilson (2013: 145) describes reliability as a measurement to estimate to what extent the
outcomes of the research are stable and consistent. The research is considered to be reliable
when it is repeatable, meaning if analysis, made under the constant circumstances, will
provide the same results. Essentially, the main purpose of reliability is to decrease occurring
errors and biases, thus to approach reliability test it is suggested to conduct strong case study
data collection to broaden the knowledge of the research problem-related aspects (history,
behaviours, facts, etc.); make a formal preview of the collected database to directly access to
research evidence without glancing to reports, and maintain the chain of evidence, i.e. to
create a track for external observers from research question formulation to the conclusion
(Ibid.: 147).

Validity
Validity is concerned about ensuring the relation between the research object and research
means: it measures how precisely chosen methods investigate the problem. Wilson (2013:
149) argue that in order to obtain validity, it is needed to define operational measurements,
more precisely, to ascertain that collected literature findings accurately reflect on the main
research object. Valid research outcomes can be generalized to a broader extent, for instance,
when analyzing the general concept. When there is a lack of validity, findings of the analysis
cannot be carried out further than the initial research (Ibid.).

Delimitations & Limitations

Limitations

The condition that influenced the data collection, decision-making processes and writing of
the project was the situation in which it was written. During the time of writing the project, a
global COVID-19 pandemic occurred causing global social and economic disruption, which
also influenced the writing of this project. Our data sources became limited by only using
accessible data and not collaborating with an organization focusing on the studied subject -
Digital Hub Denmark. Because of the situation, the process of writing the project was mostly
done remotely and group meetings were only conducted digitally.
Also, the project has been done without any contact with the Netflix, Inc. or Blockbuster
LLC. This happened due to the limits of time, resources and accessibility. However, both
companies are public, hence, the direct contact might prove to be pointless since most of the
accessible non-confidential information is available on the Internet.

Delimitations

In our research, we have only focused on two theories, disruptive innovation theory and
project life cycle theory, and applied one of the possible philosophies of science, critical
rationalism. If the past events were studied from a different angle and focus was other than on
the digital disruption phenomenon, the findings might differ. The project is also bounded by
its business perspective, however, the multidisciplinary study could have been done if the
case was examined by another academic discipline, like sociology, economics or
communication.

Another boundary we set was focusing only on two companies and their relation, but if we
considered more companies in the video distribution industry or more cases of companies
from different fields that might have experienced digital disruption, it would have influenced
the research greatly. The reason for not making broader research or comparative case study
was its time-consuming factor as well as resource constraint.

Lastly, when analyzing Netflix’s potential in causing another digital disruption, only its
AI-related innovations had been studied. Hence, if we incorporated other innovations
introduced by the company, a more complex conclusion could have been made.
All of these decisions of setting the boundaries for the research were made with the intention
of acquiring the most relevant and reliable findings.
Analysis

Home entertainment industry environment prior to 2000

The history of the home entertainment industry starts in the 1970s when the first home video
rental store was opened in Los Angeles and movies in VHS format were for the first time
released by contemporary movie studios (Ciccone, 2017). In 1985 David Cook founded
Blockbuster and in one year the company went public (Ibid.). In the 1980s, major video
stores created the Video Software Dealers Association that aimed to defend retailers’ rights
under U.S. copyright law to rent movies (Ibid.). A few years later, in 1988, Blockbuster
became the top video retailer in the U.S. with $200 million in revenue and more than 500
stores (Ibid.). However, the rise of the Internet in the 1990s and 2000s rapidly created new
markets and physical rental stores bean struggling to compete with streaming and mailing
platforms (Davis and Higgins, 2013).

Before the Internet had changed the world, the movie distribution had six major “windows of
the exhibition” (pbs.org, n.d.). The first premiere was in theatres and stayed there for two
weeks or two months and sometimes even for twelve months (Ibid.). The theatrical release
used to be the most important stage in the lifecycle of a movie, since it was the most
profitable window for the studios and the reviews impacted its performance on other
platforms (Ibid.).

However, according to September 2000 research report by an international investment bank

ABN Amro, the second platform in the movie distribution chain, worldwide video rentals and
sales outperformed theatres and accounted for 46 per cent of the total wholesale revenue for a
released movie, while global box office only accounted for 26 per cent (Ibid.). Annual video
rental revenues exceeded the theatrical box office receipt for the first time back in 1998
(Ciccone, 2017). During this time, the home video window was protected for about six
weeks, meaning that the only place where consumers could rent or buy the movie was on
video or DVD (pbs.org, n.d.). In the home-video industry, consumers’ demand for most
rentals peaked in the first three weeks of the availability and then it dropped off rapidly
(Ibid.). This was one of the reasons why movie distributors, video rental shops, relied on an
unorthodox revenue stream, late fees, which boosted companies’ earnings and even became
their largest profit generator (Ibid.).

In 2000, the home-video market was booming. According to Randy Hargrove from
Blockbuster “DVD has been the fastest-growing commercial electronic in history” (The
Washington Times, 2003). 90 per cent more movies and music videos were shipped, than in
1999 (pbs.org, n.d.). According to Ernst & Young’s report of the DVD Entertainment Group,
182 million movies and music videos were shipped in 2000 and consumer spending on video
was about $20 billion, while movie ticket sales accounted for only one-third of that amount,
$7.5 billion (Ibid.).

Once the exclusive home-video window closed, studio films were made available on
pay-per-view (PPV) venues, on cable and satellite TV systems (Ibid.). However, windows at
this point were not “exclusive”, because the film was always available on video after its
initial availability. After the PPV window expires, the movie was then shown on premium
cable channels like Showtime or HBO (Ibid.). Later on, after approximately 18 months that
the movie was available on premium cable, it appeared on network television for one or two
runs (Ibid.). Finally, the movie then goes into syndication, which means that it appears on
other network televisions or a cable network than in the original network and cable television
window.

Blockbuster

In this section, we will present Blockbuster Inc., according to measurements of the project
life cycle theory to analyze the rise of the enterprise, determining purposes, means, and
outcomes. The analysis will start with the year 1985 when Blockbuster was established,
means and strategies will be discussed to perceive how the company by the time of late 90s
became one of the market giants with respectively 9000 video rental shops in the US, 84 000
employees worldwide, 65 million registered customers, and approximately 5,9 billion dollars
profits, and ending with 2010 when Blockbuster’s activities were shut down permanently
(Ash, 2020).
Initiation

Following the project life cycle, the first stage entails the initiation. At this stage, enterprises
consider market opportunities and try to identify precocious problems, if there are any
(Turner, 2007).

Back in the mid-80s, when film rental production was engaged to the videocassette recorder
(VCR) industry, to become a part of such a market, enterprises had to step up with solutions
to provide a wider range of products, differentiating than competitors. Indeed, the initial
founder of video rental shops & demand movies supplier Blockbuster - David Cook was just
the right person: software programming skills and comprehension of databases allowed to
make extensive movie offers and greater values in comparison to local competitors
(Greenberg, 2008: 128). Cook was studying the potential of video stores and hence perceived
the phenomena of people wants - movies, independently their release date, i.e. people wished
to easily get access to films which are no longer presented in movie theatres, therefore he
realized that the well-franchised chain could grow up to 1500 stores across the country (Ash,
2020). Cook estimated the opportunities of the contemporary market, thus he was capable to
take advantage of the situation and come up with the most lucrative solutions. The first video
rental store of Blockbuster was opened in Dallas on October 19, 1985, and according to
Cook, was astonishingly successful as it was already overcrowded. The distinctive aspect
back then was a huge range of tapes Blockbuster could offer to its customers - on the first
day, the store had over 8000 tapes covering 6500 titles (Ibid.).

Planning

As the project life cycle theory outlines, the second stage includes processes of planning,
defining target groups, setting goals, and means to achieve them (Turner, 2007).

The target group of Blockbuster is not specifically determined, however, the company
emphasized customer relation management (CRM) strategy that concerns to build
relationships with specific segments to maintain highly valued customers (Blockbuster,
2004). Customer segmentation benefited the company in several aspects: first, interactions
through direct marketing communication channels refined efficiency and effectiveness of
both traditional (direct mails) and non-traditional (emails) communication tools; second,
CRM strategies implementation enhanced store visits and customers' retention rates, which
consequently increased business activities (Ibid.). However, Acton (2010; 2011) argued that
certain target groups of Blockbuster customers can be distinguished: generally, the products
they served were aimed at movie watchers and video game enthusiasts. Considering
demographic features, the primary focus aimed at lower-middle-class customers as they
preferred rental over purchase and were directly involved in the management development
processes, while upper-class customers selected buying movies or games.

Having goals is a necessity to define the main focus areas of the business. The primary
concern of Blockbuster was to increase the profitability of the retail business though to attain
the main goal, they set a number of sub-objectives: 1) inventory investments (store designs
according to location, etc.); 2) increase of the average selling price; 3) reduce expenditures by
leveraging advertisements by film studios and direct marketing tools; 4) enhance labour
productivity in domestic stores (Blockbuster, 2004; 2005).

Moving on, as essential as goals determination is defining means. From the beginning of
Blockbuster, it was perceived that concentration to customers will enable effective
operations, increase profitability, and development of innovation (Blockbuster, 2004). It is
often argued that Blockbuster was providing not only everyday-watch movies but either
experience. The company employed special features, for instance, design of the store aligned
to bookstores - tapes were displayed on shelves so customers themselves could pick
whichever movie they wanted. Magnetic sensors on movie and game tapes was a new
solution to discourage theft. Moreover, unlike the competitors, they came up with an
innovative barcode system allowing to track up to 10 000 video home system (VHS)
cassettes, meanwhile, other companies could only track about 100 of VHSs (Ash, 2020).

Blockbuster accentuated the role of various customer reach channels, including both
traditional (direct mails) and, later on, non-traditional (emails) means. The company made
major investments in advertisement campaigns - approximately 250 million dollars were
spent on advertising in 2002, of which 203.3 million in the United States and approximately
47 million dollars outside the country (Blockbuster, 2004; 2005).

Later on, technological advances in the market impelled the development of Blockbuster
communication channels. In 2004, the company launched its website ​blockbuster.com that
granted users information about ongoing movies, games, special offers, subscriptions,
and suggestions according to the user's evaluation of selected movies. Monthly subscribers
were permitted to explore massive arrays of newly released movies and already known
collections and order deliveries of the best ones. This was deliberated as a splendid
alternative for users who faces difficulties with store locations (Blockbuster, 2006).

Extending competition encouraged Blockbuster to employ several alternative tools to attract

customers: video vending machines, located in supermarkets, convenience shops, and
pharmacies let customers purchase highly-discounted movies and games. Vending machines
were considered more entertaining than profitable (Ibid.).

The company was offering disposable DVDs that allowed unlimited amounts of movie
previews for a certain period and afterwards became unplayable. Subsequently, Blockbuster
started download-to-burn DVDs program, enabling users to purchase and download movies
and games content through Internet platforms into their personal devices (Ibid.).

Execution and Control

In accordance with Turner (2007), the execution and control stage focuses on establishing
strategies, executing business activities and marketing processes, observing, and
implementing changes within the company.

Throughout time, Blockbuster initiated several strategic activities to enhance retail business.
Ever since Netflix introduced an unlimited preview of selected movies for a monthly
subscription, to keep on a track Blockbuster launched the same principle-based subscription
program: customers purchase Blockbuster movie pass™ that allows in-store borrowing
unlimited amount of chosen movies or games to a certain period. By 2004, the subscription
program covered 25% of Blockbuster locations in the US and gathered more than 2 million
subscribers (Blockbuster, 2004; 2005).

Great focus was dedicated to the development of movie and game trading concepts. It
enabled users of Blockbuster to trade either new or used DVDs and games in exchange for
discount offers or merchandise. The company recognized that the broader flexibility of the
retail product gathers more customers, consequently improving movie and game retail
business and increasing profit. The concept was sufficiently fast-growing - for instance, the
game trading model increased the gross profit of 240 million dollars by the year 2006
(Blockbuster, 2004; 2005; 2006). Despite the new concepts, the company was attempting to
re-develop old features to improve customer satisfaction. As is known, the system within
Blockbuster stores was relatively simple - customers pick up whichever movie they want to
see, pay at the checkout, and afterwards had to return the cassette before the rental deadline to
avoid receipts of late fees (Ash, 2020). Late fees were concerned as one of the main profit
sources - at the time when Blockbuster value peaked to 3 billion dollars, 800 million were
collected out from late fees, however, the customer satisfaction rates were vulnerable since
the majority were discontented with the additional 40 dollars payment if the product was
returned slightly after the deadline (Ibid.). During the time of 2004-2005, the company
implemented a special ​'no late fees program' to eliminate customers' complaints in movie
rental experience, and, simultaneously, produce differentiating services in comparison to
competitors (Blockbuster, 2005; 2006). The annual reports of Blockbuster did not record the
outcomes of the program, rather kept outlining the significance to both the company and its
users. Indeed, there were accusations for false advertisements as the company kept collecting
late fees even after the policy implementation (Advameg Inc., 2020).

Moving on to internal management processes, the chief executive post of Blockbuster was
not constantly evolving though whenever there was a replacement, it brought changes. As
mentioned above, Blockbuster was founded by David Cook, who initiated the opening of the
first video rental store in the US in 1985. After the bust of his oil and gas company in Texas,
Cook utilized his analytical and computer software skills to investigate the video rental field.
He comprehended the fragmentation - most of the rental stores were modest family
businesses with merely a few selections of former hits. The establishment of a new chain of
film rental stores required huge investments since disruptors were charged 70 dollars per
tape, thus Cook sold his oil and gas company to commence Blockbuster activities. One year
after the initial store opening, Cook deducted over 6 million dollars to set a distribution centre
to enhance further development of the business and new stores expansion, however, during
the same year the press released numerous of controversial articles of Cook's management
skills, outlining the bust of the previous company, which, consequently had a negative impact
on company’s reliability rates and profit - Blockbuster summed up the year 1986 with
a record of 3 million dollars loss (Advameg Inc., 2020).
Later years, Cook sold one-third of the company to stakeholders, resulting in a change of
CEO post - Wayne Huizenga, one of the investors, took the chief manager's role. The primary
difference between Cook and Huizenga was their comprehension of the company's future:
Cook saw the growth through franchising and selling Blockbuster's computer system to
individual enterprises, meanwhile, Huizenga sought to expand growth through the ownership
of the stores (Ibid.). Huizenga's main goal was to make Blockbuster a dominant player in the
rental industry by opening new and franchising purchased former competitors' stores. Under
Huizenga's management, sales were increasing rapidly: at the end of the year 1987,
Blockbuster corporated 133 stores and had the fifth-biggest video retail chain with a profit
growth from 7 to 43 million dollars (Ibid.). New Blockbuster stores were opening every 17
hours (Moran, 2018), therefore after 3 years of the first store launch, there were already 400
locations nationwide. Nevertheless, the constant emergence of new technological devices,
e.g. cable television, made Huizenga feel threatened, concerning the Blockbuster
video-in-store model, thus to escape the possible shack, the company was sold to Viacom for
8 billion dollars in 1994. Viacom was known as the proprietor of extensive channels of cable
television and film production (Nickelodeon, MTV, Comedy Central). Ownership of
well-recognized brands seemed to assure stability, however, after two years Blockbuster's
value decreased twice (Ash, 2020).

Closure

The fourth stage of the theory reflects on the destruction process of the company. The
presence of business entities is various, though regardless of the sales volume, brand or
profitability, eventually, all companies come to an ending stage where outcomes and
consequences are summed up and generally discussed (Turner, 2007).

At the beginning of 2010, Blockbuster incurred precarious profit losses: in comparison with
the revenue of the year 2004 that peaked to 6 billion dollars, summed profits of 2010 were
solely 3.2 billion, as well as indebtedness of nearly one billion dollars. The increasingly
competitive environment within the market negatively affected business operations and raised
awareness of future perspectives (Blockbuster, 2010). On July 1, 2010, Blockbuster was
delisted from the New York Stock Exchange, and, finally, at the end of the same month, on
July 23 signed the bankruptcy file (Blockbuster, 2011). In August 2010, Blockbuster had
approximately 1 billion dollars in total assets and 1,5 billion dollars in total debt (Davis and
Higgins, 2013). After announcing the bankruptcy, remaining Blockbuster assets were sold to
the television broadcasting company 'Dish Network'. The company was aiming to recover
Blockbuster's brand and continue rivalry against Netflix, however, as the primary
Blockbuster’s competitor had already gathered massive amounts of users, 'Dish' was
incapable of restoring previous features, thus the plans were dropped. In 2013, it was decided
to shut down the remaining stores in the US and decline rent-by-mail services. Ironically, the
last movie, rented at a Blockbuster store, was ​'This is the end' ​by Seth Rogen. (Harress,
2013).

The dramatic end for Blockbuster was caused by ignorance for the ever-changing
technological environment and implementation of out-dated strategies. When executives of
Blockbuster were concerned about expanding chain of stores nationwide, Netflix founder
Reed Hastings was releasing DVD deliveries by mail programs, and while Blockbuster was
catching up with the same initiative, Netflix launched monthly online subscription offers for
unlimited previews. In 2001, Blockbuster had a contract with Enron for online
video-on-demand service establishment. The platform was created and successfully tested
with customers, however, Blockbuster top-management was too focused on physical stores
and their lucrative profits, therefore the video rental company cancelled the contract and
stepped out of the possibly first major video streaming development (Ash, 2020). Essential to
mention that if Blockbuster would have made the opposite decision 20 years ago, its destiny
may have differed. In 2000, Reed Hastings offered the company to buy Netflix for 50 million
dollars. That year, Blockbuster obtained massive 800 million dollars profit gain after
collecting late fees, however, to the management, the price of Netflix's proposition seemed to
be overestimated, thus Blockbuster decline the purchase (Harress, 2013). Now, Netflix counts
up to 20 billion dollars in revenue and more than 165 million active subscribers (Netflix,
2019), meanwhile, on July 31, 2019, the last Australian Blockbuster store was permanently
shut down, leaving the store located in Bend, Oregon as the only Blockbuster store in the
world (Porter, 2019).
Home entertainment industry environment prior to Netflix
The video distribution market had dramatically changed in the 1990s and 2000s the same as
all other forms of entertainment (Lusted, 2012). When the world got digital, people started
listening to music differently, read magazines, books and newspapers in different forms and
all in all, the entertainment became easier to access and more immediate, sometimes nearly
instantly available (Ibid.).

One of the first innovations that attempted to change the process, by distributing the video to
the consumer instead of the consumer coming to the video distributor was Murphy’s Express.
A Californian video store founded by John and Joann McMahon innovated their services by
having drivers that delivered videocassettes to customers’ homes (McDonald and
Smith-Rowsey, 2016: 7). Despite its prescience, the small, bright and hyper-local business
had to close in 1994 as the competing media options and various logistical roadblocks
outgrew them (Ibid.).

Shortly after, when more and more people were starting to own computers and were getting
online, Stuart Skorman founded Reel, a dotcom that combined a recommendation system
“Reel Genius” with the convenience of home delivery (Ibid.). The Internet boom changed the
environment as well as the consumer’s behaviour. Many consumers that wanted to watch a
movie at home no longer wanted to drive back and forth to a video store. In 1998, Skorman
sold Reel.com to Hollywood video for $100,000,000 (Ibid.). However, the logistics of
Reel.com were unconsidered and the cost of mailing VHS tapes turned out to be too costly,
which resulted in the shut down of the Reel.com branch in 2000 (Ibid.).

Learning from the mistakes of others, Blockbuster Video saw the $100 million loss of
Hollywood Video as evidence that online rentals and sales were not worth the trouble and it
continued in its traditional model (Ibid.). These events paved a way for Netflix in one sense,
which launched in 1997 and fastly changed the traditional home video rental market (Ibid.:
27). Unlike all of its competitors, Netflix made a foundational decision to rent and sell DVDs
only (Ibid.).
For a person to get a movie from Netflix, he simply needed to visit the Netflix website, create
an account and make a list of movies he wanted to watch (Lusted, 2012). Netflix then mailed
the first movie on the list to the customer and also included a postage-paid envelope (Ibid.).
The customer then mailed the movie back to Netflix, which sent him the next movie from the
customer’s list (Ibid.). Hence, Netflix subscribers had a continuous supply of the movies they
wished for. Netflix also offered to its customers to put on their lists movies that were not
released yet and once they were available, Netflix shipped them out (Ibid.). This unique
service offered customers to skip waiting in the queue for a cinema ticket or a VHS cassette,
always provided them one of the movies they wished to watch and offered them access to
movies sooner than anyone else.

Netflix was aware of its assets and aimed to keep its customers happy and active in using the
company’s services. Hence, Netflix had to provide sufficient services to satisfy the needs of
all types of customers. According to its co-founder Reed Hastings, three groups of people
were Netflix’ users, “One group likes the convenience of free home delivery, the movie buffs
want access to the widest section of, say, French New Wave or Bollywood movies and the
bargain hunters want to watch 10 or more movies for 18 bucks a month.” (Ibid.).

Hastings and Randolph, founders of Netflix, wanted to exploit the power of the Internet and
revolutionize the traditional home video rental market (Ciccone, 2017). They achieved it by
launching the world’s first online DVD rental service in the U.S., collaborating with
Amazon.com, where customers were redirected for buying the movies they have already seen
and most importantly by launching their subscription model (Ibid.).

To sum up, the movie distribution environment used to be quite stable and organized.
However, people’s wants to access any video from anywhere while using any device
disrupted the whole structure and traditional ways of video distribution. Internet
infrastructure provided an answer to these needs and made transporting video traffic possible
in a cost-effective manner without compromising the quality of experience (Paul, 2011). In a
matter of a few years, a successful business in a home entertainment industry changed from a
local video rental store to a website with innovative architectures, clever algorithms and
compression techniques for distributing video across networks (Ibid.).
Netflix
Netflix had started back in 1997 as an idea of renting and selling DVDs over the internet by
Reed Hastings and Marc Randolph ​(Netflix, 2019)​. Hastings, stumbled upon the idea when
he paid $40 fine after returning an overdue videotape of Apollo 13. Nowadays, Netflix’s
revenue reaches above $20 billion whilst more than $19 billion comes from streaming. What
is more, Netflix’s assets estimate at around $33 billion, and so with over 100 000 titles in the
library, Netflix is one of the main video streaming platforms today ​(Netflix, 2019)​.

Gap in the market

Netflix’s history goes back to 1997 when Reed Hastings found himself paying a $40 fine to
Blockbuster’s rental service. This fine was a catalyst for Hastings to realize the
inconvenience of going back and forth to DVD rentals and so the first idea of Netflix was
born. Netflix’s premise was to becomes the greatest DVD mail service ​(Netflix, 2009)​.
Hastings was aware of the convenience Netflix offers, moreover when combined with the
selected library of more than 14,500 titles Netflix had a competitive advantage distinguishing
the company from the traditional vide rental outlets ​(Netflix, 2002)​. With Netflix’s
proprietary system on its website, the customer could get to movies which he did not even
have to know about. By the end of 2002 ​(Ibid.)​, a visible comfort of using the internet opened
new doors for video rental service and so the idea of internet streaming started to take shape
in 2004 (Netflix, 2004). Netflix did maintain a successful record by innovative practices
however, it also became dependent on a few external technologies (to watch Netflix on TV a
customer needs an internet cable). To ensure that the customer would get to watch Netflix
anytime anywhere, they have put an extra effort to make it available on various devices
(gaming consoles, DVD and Blu-ray players, streaming players, TV) ​(McDonald and
Smith-Rowsey, 2016: 241)​. As the internet became Netflix’s way how to get to the world, it
also brought new regulations. Media (film/TV) has been licensed on a region-by-region basis,
while platforms are licensed separately (Ibid.). These regulations also bring exclusivity -
competitive advantage of getting to regions that can be off-limits for other platforms. To get
to unavailable platforms, users use VPNs, for example, the user from China wants to watch
Netflix so he uses the VPN to connect to a USA network (his network gets labelled as
American) and gains the ability to access the platform. This way, VPNs became a rising
problem for Netflix, because right holders pressure an implementation of technical measures
in order to detect and block these proxy users. Moreover, piracy-based video offerings bring a
new thread to paid video streaming and/or paid video distribution generally (Ibid.). When the
means of distribution become offered for free Netflix and other streaming/video renting
platforms can expect a negative impact on the business. As the business is as competitive as
prone to change the internet doesn’t offer just the possibility of reaching a wide audience but
also options to access pirated content or even entertainment videos ​(Netflix, 2019)​. And so,
Netflix as a DVD rental/streaming service is highly dependent on the attraction and retention
of users, so the marketing of brand and product awareness plays a big role. If Netflix fails to
bring in new users or keep the current users attracted, the company’s bills may overweight its
earnings as in every business. To avoid such an end, Netflix invests an extensive part of its
earnings into online advertising (online campaigns, banners, etc.) and other channels
(influencer marketing, Amazon, etc.) to offer free trial through their platforms ​(Netflix,
2002)​. In 2009 ​(Netflix, 2009)​, Netflix’s CEO stated the same primary goal to be the greatest
internet movie service.

In conclusion, we can see that Netflix filled in the gap by offering DVDs delivery right to the
door, expansive DVD library, and internet streaming. By being able to offer comfort and
affordable price point, along with personalized recommendation system CineMatch Netflix
had prevailed advantageous for now.

Strategy

Netflix’s means to achieve its goals and outdo the problems of the market will be portrayed
here. From 2002 Netflix started to implement its proprietary system for personalizing movie
recommendations for each subscriber. They have developed it by utilizing a rating system
which builds up a profile of each person’s movie interests and dislikes to optimize a DVD
recommendation. The idea was, to dismiss the original recommending system based on
someone else's’ movie taste and instead provide the truly personalized movie selection for
each user ​(Netflix, 2002)​. Furthermore, Netflix’s value proposition is their library and
customer comes first (as most of their user attraction comes from personal referrals) ​(Netflix,
2004)​. In 2004 (Ibid.), Netflix’s main means of customer satisfaction was to enhance the
subscriber experience and their operating efficiency. They have automated the process of
tracking and routing of their titles, meaning that they continuously monitored, tested and
ideally improved the efficiency of distribution and processing the inventory management
system. Moreover, when it comes to title acquisition, Netflix was/is aware they need to build
relationships with the film entertainment providers in order to increase their “​originals​”
(Ibid.) (movies/series available only at Netflix) as it is a factor which attracts new users and
helps to keep the current users. Moreover, Netflix started to offer its service across all the
platforms to broaden its distribution. In 2006, they have realized that there are vast amounts
of platforms which can serve as new means of reaching the audience and be at reach not only
on TV ​(Netflix, 2006)​. Moreover, as Netflix’s service is offered through their website, they
often improve its functionality by boosting the value-added features (networking feature or
queue management). By 2008 ​(Netflix, 2008)​, they decided to innovate further and
implement online streaming of movies, which meant investing in their website, content,
distribution and customer care. For example, they need to keep their website optimized and
user friendly as they want people to spend more time on their website, navigate across it
easily and raise their interest in other website features. As streaming started to appear
attractive to customers, they have invested more in content and by the end of 2008 Netflix
operated with 12 000 movie and TV choices (Ibid.). Next milestone to achieve was to stream
content without any commercial interruption (Ibid.). We assume that every customer can get
irritated by being interrupted during a movie and so eliminating this factor could make
Netflix even more attractive. Lastly, to achieve their goal, Netflix promotes their service by
various marketing programs including online promotions, TV or radio advertising, package
inserts, direct main or promotions with third parties (for example, Amazon) (Ibid.). They also
engage consumer electronic companies, which are Netflix’s partners, to offer free trials and
generate new subscribers for their service. This way the customers can try Netflix for a few
days for free and decide whether they want to stick with it. What is more, the initial target
group of subscribers in 1998 was predominantly middle class technically oriented male. The
period has changed quite a bit and the new Netflix target group consists of women (Ibid.). As
women take more than half of their subscribers, they have also found out that the economical
status (household income) is half of what it used to be in 2000.
In conclusion, nowadays Netflix’s means to be the leading film distributor is highly
dependent on optimizing their recommendation system so users utilize Netflix’s library as
much as possible. Moreover, with their experience, they gained by increasing efficiency in
delivering DVDs to doors Netflix knows that current streaming service requires steady
internet servers in order to deliver an excellent loading speed for the users. What is more,
Netflix puts attention on their website to increase the value-added features for their
customers. Furthermore, preserving the relationships with film providers is an essential way
how Netflix grows its library - the bigger the library, the bigger chance there is the content
customer wants to see. While offering a big selection of content is surely important, Netflix
made sure it is available to the customer through any platform there currently is, as well as
invest a big portion of money into marketing and awareness. Lastly, when talking about
subscribers, the target group has changed quite a bit over the years and women started to
become the majority, with lower income than before. They also appear to be serving a
low-end disruption as their services aimed at middle-class households - now the household
incomes appear to be even lower.

Innovation

Netflix became one of the top streaming services over the years with considerable
adjustments to market changes within the company itself ​(Tom’s Guide, 2020)​. Their vision
was to change the way how people access and view the movies, and so they themselves had
to keep up with the ever-changing market. During the DVD movie rentals, Netflix shipped
more than two and a half million DVDs a week ​(Netflix, 2019)​. By adjusting to the market’s
needs they have created an innovative approach that kept customer’s attention. Moreover, by
targeting the right audience at the beginning (tech-savvy) they have introduced a niche
service that later started to transformed into a standard (along with the target group).
Furthermore, by constantly communicating previous & current strategies and financial state
through annual reports they have established a reliable profile among the public.
Future

During a project’s lifetime, leaders have to examine what went well and what has failed.
Netflix had received a positive reaction after their door-to-door DVDs rental service, by
spotting the inconvenience of self-delivery Netflix created a comfortable way for people to
rent movies. In 2005 ​(Netflix, 2005), they have adjusted their price point from $19.99 to
$17.99 as the way how competitors can actually outdo Netflix is by offering the same or
relatively close the same service for less. They have noticed and prioritized the ability to
consistently provide subscribers with value and quality experience when they select, receive,
view and return titles as well as provide accurate recommendations through their system
(Ibid.). Netflix did come across criticism for slow delivery, poor value service, competitors
being better at providing value or experience, and customer service not being at a satisfactory
level (Ibid.). Netflix has since then invested in resolving these issues and even taking them to
another level. By 2009 (Netflix, 2009), Netflix become highly rated in online retail customer
satisfaction by independent surveys (Nielsen Online) and all of the ten consecutive surveys
conducted by ForeSee/FGI Research. Intellectual property is a hazard Netflix cannot avoid
and so they have admitted they encounter disputes over rights and obligations concerning
intellectual property. Since then, they have invested in copyright and trademarks and patents
(McDonald and Smith-Rowsey, 2016: 82)​. however, the company still cannot promise there
will not be any further issues with new content. Since the investment into streaming content,
the subscriber viewing and positive word-of-mouth have increased and so continuous service
improvements enhanced member satisfaction and retention. Moreover, their “​internet on
every screen​” electronic ecosystem has broadened over time to increase the type of devices
capable of streaming content from Netflix ​(Netflix, 2012)​. Lastly, the overall adoption of
internet TV caused stagnation in subscribers of cable and satellite paid TV, while the use of
DVR has climbed (Ibid.). Because of this, Netflix has taken upon the chance to implement
downloading titles for offline viewing.

Nowadays, Netflix looks at its 167 million paid streaming members in over 190 countries
who utilize the freedom of watching anything anywhere on any internet-connected screen
(Netflix, 2019)​. Since 2007 ​(Netflix, 2012)​, Netflix developed an ecosystem for
internet-connected screens and added an increasing amount of content. Overall, Netflix has
been innovative over time while reflecting and listening to their customers. As Netflix’s
earnings highly depend on customer satisfaction, it is essential they implement the right
matters at the right time. Netflix has also helped to battle piracy by streaming the content for
a monthly subscription fee instead of making the customer pay for each title. As Christensen
pointed out, new technologies take less time to adjust and increase improvements than any
traditional technology. Netflix proved to fast with generating solutions and their
implementation as well as self-reflection.

External environmental implications

According to conventional wisdom, Netflix Inc.’s business model was only supposed to work
unless and until a recession hit ​(Lachapelle, 2020)​. However, because of the global
coronavirus pandemic that hit the world, we are currently in the stay-at-home recession,
which influenced Netflix’s number of subscription, which has more than doubled the amount
analysts expected (Ibid.). People worldwide sought ways for entertainment during the
lockdowns and therefore Netflix reached a record and attained nearly 16 million of new paid
subscribers in three months, which was well above 7 million company had expected (Ibid.).
Although Netflix’s base grew on a remarkable pace, the company is not expecting this to last.
Company’s executives have stated that in the second half of the year they expect

"viewing to decline and membership growth to decelerate as home confinement ends, which
we hope is soon" (Ahmed, 2020).

According to our findings, Netflix has a strong position on a video distribution market and
with the global pandemic and upcoming social and economic crisis, its model is expected to
last and the company is expected to be one of the least impacted media companies by
COVID-19. It is so because their business is a near-perfect fit for a population that is in
lockdown. Hence, an option for further research about the company could be regarding how
they dealt with the situation, how they will sustain the growth and if there is an option of
another digital disruption coming because of the special circumstances.
A lost opportunity
During Netflix’s beginnings in 1997, Blockbuster was the undeniable leader of the video
rental industry ​(Forbes, 2014)​. With Antioco at the lead, the company flourished however,
nowadays the case of Blockbuster and Netflix is taken as an exemplary case study to reveal
the functions of hidden networks to avoid Blockbuster’s downfall. While Netflix’s method
was more of an extension of video renting service with few obvious disadvantages at the time
- people were not so used to the internet and so without a retail location it was hard to raise
awareness of the service, moreover receiving DVDs by mail lacked speed in the beginning
(which was fixed later by adding more warehouses), Hastings approached Blockbuster to sell
Netflix for $50 million (plus Netflix would run Blockbuster’s online services) ​(Ibid.)​. It is
understandable that with thousands of retail locations, millions of customers, marketing
budgets and successful operations Blockbuster dominated the competitors. Blockbuster did
not accept Netflix’s offer (Ibid.). Even though Blockbuster was a tremendous player, the
company had a weakness Antioco was not aware of. The company earned a big portion of
money from late fees - a penalization of their customers. Whilst Netflix offered its customers
to watch content as long as they wanted with minimal travelling required (they just had to
send it). In 2004 Blockbuster launched an online DVD rental platform reaching 2 million
subscribers by 2006 (Ibid.). By Netflix’s convenient service, Blockbuster had to alter its
business model. However, after Antioco left the company in 2007 the online platform idea
had to be abandoned (Ibid.). Furthermore, in 2010 Blockbuster filed for bankruptcy with $1
billion in losses (Ibid.).

So, in the beginning, Netflix faced a lot of uncertainties as a rather niche start-up business.
Since people were not used to using the internet in their everyday life, Blockbuster had
understandable doubt of closing a deal with Netflix. Moreover, the idea of sending the DVDs
by mail was rather a comfortable solution however, as penalty fees became a source of
income for Blockbuster, Netflix would eliminate the need for them. However, as we pointed
out, Netflix attracted its customers by a word-of-mouth recommendation and as they were
aware of, marketing played a big role in their business - the more people knew about them,
the better the business got. Netflix’s service could be obtained by not leaving the house and
so it became very convenient for the customers. Furthermore, as every introduction phase,
Netflix had its loss factor in net income but quickly recovered in 2003.

Figure 6. Netflix performance measurements (Netflix, 2005)

As we have portrayed, video rental market had accelerated over the years, even more, when
the customers started to become more prone to using the internet. Further optimizations
needed to be made to keep the product lucrative to new customers, otherwise, it would be
deemed to be abandoned. It appears that Blockbuster failed at the maturity stage as it took the
company too long to realize the possibility of further innovation. It seems that Blockbuster’s
leaders failed to comprehend a niche idea that took the market by a storm, moreover, it failed
to construct a network that would execute the online renting platform idea as well.

To reflect on Govindarajan and Kopalle, Netflix firstly starred seemingly as a high-end

disruption due to their target audience because by reaching out to tech-oriented people with
relatively high income they failed to see that most of their subscribers have actually way
lower household earnings. Therefore, we can say that Netflix was a low-end disruption with
low prices (Blockbuster charged $5 per single title, while Netflix charged $19.99 for a month
of whatever you wanted to watch). At first, Netflix would have seemed to be inferior as a
new service towards the more traditional Blockbuster, however, by offering new values and
opportunities to customers (and knowing how much they depend on the customer), it outgrew
Blockbuster rapidly. As out theory mentioned, mainstream customers tend to rely on
innovations of traditional services mainly due to decrease of utility from current technologies
(since a lot of new technologies which are created are not really practical or useful, customers
tend to stick with what already works), values which the company provides, and of course the
price. The price point has also been lowered probably due to local market changes (taxes or
inflations) ​(Netflix, n.d.)​.

Next digital disruption - Netflix’s AI-related solutions

Introduction

The current trend of digitalization is expected to change the future of every company and
transform it into a tech company (Ciccone, 2017: 91). The same services will be delivered in
new ways and businesses that will not adjust will probably end up being disrupted. History of
Blockbuster and Netflix proves that every business should understand and adopt these tools
and the phenomena, otherwise it might not be able to keep up with the speed of its
competitors (Ibid.).

One of Netflix’s strengths was and still is their access to customers’ data, which enabled them
to build a customer-centric business and provide personalized service for each customer
(Ibid.). Back in 2013, ​Joris Evers, the company’s director of global corporate
communications, claimed that

“There are 33 million different versions of Netflix” (Carr, 2013).

At that point, Netflix had 33 million subscribers (Ibid.).

As digital innovation theory suggests, while a company is developing one ​traditional

technology, several innovative technological decisions can be established (Rosenstand, et al.,
2019). In Netflix case, it is keeping the subscription model and their own production, while
adding AI-related solutions. Netflix invests heavily in machine learning research in many
areas in order to innovate the products and their distribution ​(Netflix Research, n.d.)​. Main
research areas are connected to the personalization of content, optimizing their production
and advertising (Ibid.).
According to the project life cycle theory, every company aims to produce something that
would be different than any commodities in the market (Turner, 2007: 529). Netflix has
already managed to do it in past by being the ​world’s first online DVD rental service and
becoming leading entertainment distribution service, but to keep its leading position, it is still
trying to change the way we watch television (Adalian, 2018). Netflix operates on a quite
simple principle, long understood by tech giants like Amazon or Facebook:

“Growth generates growth, which generates more growth” (Ibid.)​.

In Netflix case, when the company adds more content, the company gets new subscribers and
existing ones watch Netflix for more hours (Ibid.). When they spend more time watching, the
company has access to more data on their viewing habits, which enables Netflix to improve
its future programming (Ibid.). ​Ted Sarandos, Netflix’s chief content officer explained the
logic by saying

“​More shows, more watching; more watching, more subscriptions; more subscriptions, more
revenue; more revenue, more content​” (Ibid.).

So far this approach worked spectacularly well. Netflix went from 33 million subscribers in
2013 to 125 million after their first own production of “​House of Cards​” series and by the
predictions of Wall Street analysts the company is expected to get 200 million subscribers by
the end of 2020 and 300 million by the end of 2028 (Ibid.). The current number shows that
Netflix got more than 15 million new subscribers during the first quarter of 2020 and has
more than 182 million paying streaming subscribers in total worldwide ​(Number of Netflix
subscribers 2020 | Statista, 2020)​.
 Figure 7. Number of Netflix subscribers worldwide from 2011 to 2020 - in millions
(Statista, 2020)

While aiming to maintain its members and attract more subscribers, Netflix is competing with
many forms of entertainment, like linear networks, pay-per-view content, video gaming, web
browsing or video piracy (Netflix Investors, 2020). All of these forms are improving and
Netflix strives to win more of members' "moments of truth", which are the moments when a
member can choose to relax or share the experience with friends or family, but he chooses
Netflix instead.

Hence, in order to keep its leading position and lure many “​moments of truth,”​ the company
needs to develop new technological solutions that would provide distinctive values from the
traditional technologies, so-called disruptive technologies. To analyze the potential of
AI-related solutions in becoming a disruptive technology, we will analyze Netflix’s
innovations by mainly using the project life cycle model and partly technological life cycle
model.

Initiation

During the initiation stage of the product life cycle, companies often clarify their current and
future business goals ​(Turner, 2007: 536)​. In the case of AI-related innovations of Netflix’s
current products, subscription to their streaming services and own movie production,
the initiation stage of the PLC model allows us to examine what are Netflix’s goals with the
current innovations and what business problems are AI-related solutions aiming to solve.

Historically, personalization has been the most well-known area, where machine learning
powers Netflix’s recommendation algorithms (Netflix Research, n.d.). The basic idea behind
the most well-known feature of Netflix is that users who watch Movie A are likely to watch
Movie B. The business problem that this feature aims to solve is to keep viewers engaged and
make them continue in the monthly subscription for a longer period (Yu, 2019). To solve this
problem Netflix uses large-scale precise data about the watching history of users with similar
tastes to recommend the movies they might be interested in watching next (Ibid.).

Another way of how Netflix aims to keep viewers active on the platform and encourage them
in continuing in the subscription is by using thousands of video frames from an existing
movie for generating a personalized thumbnail that would have the highest likelihood of
resulting in a click (Ibid.). These calculations are based on what you have previously clicked
on and what other viewers with similar viewing history clicked on.

Moreover, Netflix uses AI-related solutions for optimizing its production of original movies
and TV shows in Netflix’s rapidly growing studio (Netflix Research, n.d.). In order to be
time-effective, data can help to optimize scheduling according to actors and crew availability
(Yu, 2019). These data can also help during movie production for being cost-effective and
sustaining budget for venues, flight and hotel costs (Ibid.). Lastly, data are used for location
scouting by analyzing the production scene requirements, like day versus night shots or
likelihood of weather event risk in a location, and then suggest where and when best to shoot
a movie set (Ibid.). In this case, Netflix applies more of a data science optimization rather
than a machine learning model, which makes predictions based on past data (Ibid.).

After the movie is made, quality control checks need to be done, which for example check
when sync of subtitles to sound and movement are off (Ibid.). These checks are
time-intensive and laborious processes when done manually, so using historical data for
post-production makes checks more efficient (Ibid.).

Lastly, machine learning also enables Netflix to optimize video and audio encoding and to
decide when to cache regional servers for faster load times during expected peak demand.
It is highly important for Netflix business purposes to predict bandwidth usage as its in-house
Content Delivery Network accounts for more than a third of North American internet traffic
(Netflix Research, n.d.).

Planning

The planning processes of the PLC model underline the importance of identification of the
means used for achieving project goals (Turner, 2007: 536). Many presume that the
company’s vaunted algorithm is where the decision-making process starts, because of the
company’s Silicon Valley roots ​(Adalian, 2018)​. However, as Sarandos, Netflix’s chief
content officer, and Holland, Netflix’s vice-president of original content, explain, they
downplay the role that data plays at almost every opportunity (Ibid.).

“​You have to be very cautious not to get caught in the math because you’ll end up making the
same thing over and over again​,” Sarandos says (Ibid.).

Data that Netflix gathered are just a representation of the past, but Netflix does not base their
decisions solely on them (Ibid.).

According to Barmack, head of the company’s international-originals team, there are three
buckets that influence a decision,

“The data, the art, and the regional sensitivity” (Ibid.).

Hence, the means used for achieving project goals do not just include ​many different
algorithmic approaches, but also consider the values of art and loyalty to the customer’s
vision.

So if Netflix produces a successful show like the Spanish crime thriller ​La Casa de Papel
(known in the United States as ​Money Heist​), which is primarily popular in non-English
speaking countries and lacks the attention in the U.S., United Kingdom and Canada, Barmack
and his team need to consider more than the data they have in order to decide if the show
could be remade in an English-speaking country (Ibid.). Decision-makers need to consider
sensitivity, so the show would not lose its status and keep the audience interested while
bringing the data into the decision and finding another way of repurposing the themes of the
show in English-speaking countries. In the end, Barmack found a solution in the show’s
co-creator Álex Pina’s idea, who suggested that every season should be more dramatic, which
would lead to taking the show to the U.S., where the same crew would steal from Fort Knox,
a place where is a large portion of the United States' official gold reserves (Ibid.).

Even though Netflix uses other than data-related means for making decisions and achieving
their goals, machine learning is still one of the main tools for improving subscriber’s
experience and optimizing the service end-to-end (Netflix Research, n.d.). Netflix uses
machine learning in many areas, where they prototype, design, implement, evaluate and
produce models and algorithms through both offline experiments and A/B testing (Ibid.). In
order to display how these algorithms work, we take an example of applying a new algorithm
in Netflix’s recommendation system.

Traditionally, Netflix used to introduce new technology-related means for solving business
problems by gathering an extensive set of data about its viewers, then running a new machine
learning algorithm against the current production system through A/B test (Netflix TechBlog,
2017). Randomly picked members in group A got the current production experience while
members in group B got the new algorithm (Ibid.). If engagement with Netflix got higher in
group B, Netflix released a new algorithm for the whole population (Ibid.). However, as
illustrated below, this approach might cause regret, which means that over a longer period of
time, it will not maintain a better experience for members (Ibid.).

Figure 8. Batch Learning Model (Netflix TechBlog, 2017)

To avoid this regret, Netflix introduced a new approach, online machine learning (Ibid.). For
artwork personalization, Netflix applies specific online learning framework, bandit learning,
which firstly unifies population of hypotheses, then chooses a random hypothesis ‘​h​’, acts
according to ‘​h’​ and observes outcome and re-weights the hypothesis, then it chooses another
hypothesis ‘​h​2​’ and repeats the process (Basilico, 2017). This machine learning solution is
used for selecting images that would achieve project goals. Since Netflix expects different
members to react differently to the images, this tool can be enhanced when using large data
sets to create contextual bandits for personalizing images. We can depict how bandit learning
would recommend a contextual personalized thumbnail on an example of Good Will Hunting
movie. If viewer A watched many romantic movies, Netflix will recommend this viewer next
movie, Good Will Hunting, displaying Matt Damon and Minnie Driver on a thumbnail
(Netflix TechBlog, 2017). Whereas, if viewer B watched many comedy movies, he might get
a recommendation for the same movie as viewer A, but with an artwork containing a
well-known comedian, Robin Williams (Ibid.).

Figure 9. Contextual bandits to personalize images (Netflix TechBlog, 2017)

Considering the data that Netflix has available about a viewer, including his ratings, searches,
dates when the movie was watched, on which device it was watched, when was the program
paused, what the viewer rewatched and where is the viewer located, Netflix has incredible
power in recommending the right movie for keeping the engagement of its subscribers as well
as using this data for pre-production, production and post-production of movies according to
gathered data (Yu, 2019). By applying Big Data and machine learning just into its
recommendation system, Netflix can influence about 80% of the content streamed (Ibid.). All
in all, as the company estimates, its algorithms save Netflix about $1 billion a year in value
from customer retention (Ibid.).
Execution and control

The third stage of the PLC model, execution and control, is associated with the project’s set
up ​(Turner, 2007: 536)​. According to the technological life cycle, this stage, full
development, has standardized market dynamics and product and process innovations
(Dalum, Pedersen and Villumsen, 2002: 4). When analyzing the full development stage of
Netflix’s AI-related solutions, we focus on how are these innovations, powered by means
defined above, arranged and controlled.

Netflix started gathering data more than a decade ago, when they were a DVD service
company, by asking its customers for their age and gender and recommending them shows
based on this information (Adalian, 2018). After a couple of years, Netflix VP of product
Todd Yellin found out that age and gender were far less reliable in predicting future DVD
requests than user’s past viewing history (Ibid.). Currently, if a customer hits a play button
once, it tells Netflix more information than if the company knew that you are a 34-year old
woman or 71-year old man (Ibid.).

So instead of tracking age or what country the viewer lives in, Netflix puts together a
360-degree profile of each user and classifies the user into one of the 2000 microclusters that
each Netflix user falls into (Ibid.). While it is not a direct parallel, Netflix’s version of the
demographic ratings, so-called taste communities, are essential for the company for making
sure that their production is resonating with the groups of viewers coveted by advertisers
(Ibid.).

Used in advertising, recommendations, optimization of the production or improving

streaming quality. Big Data is unquestionably part of the Netflix DNA and the key to all of
these attributes that are vital for Netflix’s business purposes. According to Holland, Netflix’s
vice president of original content, Netflix applies findings from Big Data even when a big
star or producer walks into their building with an undeniable pitch (Ibid.). Usage of internal
subscriber data is not that different from the traditional way TV network uses its data,
however, Netflix’s large data sets allow it to be vastly more precise, which gives the
company an enormous competitive advantage. According to this data, Netflix can predict
how large
its audience might be for a specific show or a movie and also to reveal which areas and
genres are opportunistic (Ibid.).

Closure

The last stage of a product life cycle is usually closure or by technological life cycle, a
decline stage (Dalum, Pedersen and Villumsen, 2002: 4). This stage is characterized by the
shrinking of the market, consecutive adoption of exit strategies by a company, which results
at the end of the product or specific innovation (​Turner, 2007: 537)​. The life cycle of
Netflix’s technology, its AI-related innovations, are not expected to reach the process of
winding down activities, the closure, since data science insights are one of the main means
that the company uses for constant improvement.

Furthermore, Netflix does not just use the algorithms it has available, but continually
develops new ways of utilizing the accessible data for business purposes. For example,
regarding their main AI-related area, personalization, Netflix plans to develop new
algorithms that would handle cold-start by personalizing new titles and images as quickly as
possible by using techniques from computer vision, which would be able to acquire, process,
analyze and understand digital images as the human visual system does (Netflix TechBlog,
2017). Another opportunity is extending this personalization approach across other types of
artwork and evidence that influence customer behaviour, such as synopses, metadata and
trailers (Ibid.). Lastly, in order to optimize personalization feature, Netflix also needs to work
with artists and designers to develop ways for using visually descriptive language that would
make the title more compelling and personalizable (Ibid.).

Netflix’s innovations in connection to digital disruption

In order to determine whether Netflix’s AI-related innovations are the next digital disruption
of video distribution, we need to analyze described innovations in relation to disruptive
innovation theory.

According to Christensen, founder of the theory, traditional technologies require more time
and effort to improve the performance, while new technologies can rapidly adjust and
increase performance (Rosenstand, et al., 2019). Thus, there are two types of innovation:
sustaining and disruptive (Ciccone, 2017).

Disruptive technology is a new technological solution that provides distinctive values from
traditional technology (Rosenstand, et al., 2019). Usually, disruptive innovation comes from
needs that exist in niche markets, that are neglected by current market offerings (Ciccone,
2017). Netflix’s innovations are technological solutions that provide values for the company
in a form of large data sets that can be used for the creation of distinctive values for
customers than the traditional technology offers, since its machine learning engine can
predict wants and needs of a customer better than traditional broadcasting companies do.

Application of disruptive innovation might make the company appear as if it is doing

everything wrong because the company is dedicating resources to niche and unproven
opportunities, which results in temporary losses, but it is a winning strategy for the future
improvement (Ibid.). Disruptive innovation is not concerned about maintaining the traditional
performance key indicators, but rather, it looks into the future of the company (Ibid.). In
practice, when disruptive technology emerges, it usually only serves low-demanding
customers that value non-standard performance and later on, when it is fully developed, it
becomes capable of satisfying mainstream customers (Rosenstand, et al., 2019). Netflix’s
application of AI-related solutions did not experience the temporary losses that are expected
to arise when applying disruptive innovation. Also, most of the innovations are related to the
current stage of Netflix, for improving its recommendation system, catalogue and movie
production-related issues and aim to serve all the customers, not just a low-demanding part of
them.

On the other hand, sustaining innovation improves products based on feedback from past and
current customers (Ciccone, 2017). It reduces defects and aims to make the product more
powerful, while disruptive innovation always leads to lower performance and makes the
product less effective (Ibid.). While sustaining innovation has positive short-term effects as
satisfies customers’ needs, it might bring the company to failure in the future (Ibid.).
Netflix’s AI-related innovations are mainly focused on the improvement of the existing
products of the company, like movie catalogues or personalized recommendations and their
purpose is to satisfy customer needs of recommending desired movies, offering high
streaming quality and personalizing the movie catalogue according to the viewer.

The core of the innovator’s dilemma is choosing whether is innovation sustaining or

disruptive. As outlined above, Netflix’s innovations have attributes of both types of
innovation. However, these solutions are coming from a market insider, since Netflix is a
leader of the movie streaming world, they are focused on satisfying current customer’s needs
and evaluated according to traditional performance key indicators, which is sustaining and
maximizing the number of subscribers. Hence, Netflix’s innovations can be defined as
sustaining innovation.
Discussion
With our findings, we have come to discuss our hypotheses from the beginning of this
research. As our paper addressed quite a number of situations we shall talk discuss each
hypothesis separately.

For our first hypothesis, the traditional ways of video production and distribution have
changed significantly. Digitization brought new access to watching visual content, which
automatically raised the demand for it. Therefore, new means of production were needed in
order to satisfy this demand. For instance, the digitization supported the independent indie
movies production however, it also gave access to more affordable ways of producing
animated content. Thus, we have a few reasons why. Firstly, the traditional ways of video
production and distribution changed because of Netflix who invested in innovation of their
methods. As we revealed, one of the main sectors into which Netflix invests is the production
sector. Because of its AI implementations, Netflix found a way how to supply high-quality
movies for a low cost. As their method of utilizing the data, they gathered helps them to
understand what their audience wants they can use the data for pre-production, production, or
post-production processes. Therefore, when looking back, we can confirm the first part of our
hypothesis to be true, as other companies did not use their data with such high profiling of
their audience.

Furthermore, content distribution is another topic we had assumptions about. As content

distribution came hand in hand with the new value proposition of Netflix (convenient
door-to-door delivery, optimized website for delivery), one could simply point fingers at
them. However, to further elaborate, as digitization and the rising comfort of using the
internet came Netflix was just the first one to adapt. Digitization offered the tools to everyone
and Netflix could be just to company with the vision to do it. Companies such as HBO were
on the market for a while and they had the same capacity (even bigger than Netflix as a
start-up) but perhaps they lacked the innovation spirit. Netflix did indeed revolutionized the
production and distribution and thus changed the traditional ways however, the technology
was there for everyone. The way Netflix utilized its methods and analyzed the market made it
succeed and bring new ways to the film market.
With the second hypothesis, we were assuming that initiatives Netflix began, did not work for
Blockbuster since the company belated their implementation. As we presented in the first
analysis section when Blockbuster was established, the video distribution industry relied on a
relatively new VHS concept, therefore the company managed to adapt to the market trends
and overtake leader's role while offering variety and volume to its customers.

The company's bureaucracy believed in the sustainability of the retail model, thus the analysts
and managers proposing inventive technological solutions were incapable to persuade the
top-management. As the analysis findings outlined, the founder of Blockbuster David Cook
was trying to foresee online perspectives, while Wayne Huizenga believed in physical store
efficiency. Consequently, Cook left, and Huizenga was implementing the retail chain model,
simultaneously counting rapidly growing revenues without realization of the possible burst.
Initial research of peer-reviewed sources led us to Markides and Charitou statement about
Innovator's Dilemma - they emphasized the possible occurrence of the missed alliance if
business units are separated. Essentially, Blockbuster and Netflix were participants of the
same video distribution market, however, at first, companies did not intercept each other's
roles, contrary were proposing different models. Konina and Stonehouse discussed the causes
of digitalization failure, thus as the main issue, they identified a lack of skills and trust
towards disruptive innovation appropriation to the business.

When Netflix initiated streaming service, Blockbuster was mainly concerned with
investments into traditional technologies to maintain its primary model, and once the
company decided to adopt innovation, it was too late to achieve the same outcomes as the
core competitor. On the other hand, the beginning of the video rental in-store model was
highly profitable, thus the initial investment into the new model or alliance with inventive
concepts based company meant uncertainty. We can argue, that over-estimated confidence of
the management, reliance on the traditional model, and ignorance of prospects streaming
provides were the causes of delayed implementation of innovative disruptive solutions, that
later on, impacted the company's collapse.
To test our third hypothesis, we had to discover whether Netflix’s Big Data and AI-related
solutions have the potential of becoming the next digital disruptor of the video distribution
industry.

As we outlined in the last part of the analysis, digital disruption is a new technological
solution, which only finds a small base of supporters and it cannot serve a large audience
right away. The application of developed Netflix’s AI-related solutions reduces defects and
makes the company more powerful, which can be observed on the growing number of
subscribers. Also, since their innovations were applied to existing products and systems. The
extensive investments the company made were more focused on sustaining its leading
position on the movie distribution market and upgrading their products and software, rather
than disrupting the traditional way of doing business.

Hence, same as other well-established companies, Netflix prioritized innovating their current
technology instead of facing high-switching costs, incurring losses and creating distinctive
values for their customers. Thus, Netflix’s AI-related innovations are a sustaining innovation
and we do not expect it to become the next digital disruptor of the industry. However, we
have only analyzed the innovations that were already developed or the ones that the company
publicly referred to developing. So even though the AI-related innovations that were
examined are not expected to become digital disruptors, Netflix might develop disruptive
digital innovations in confidentiality, which will once again reshape the video distribution
and production market.
Conclusion
In the following section, we will briefly sum up theoretical and methodological tools that
contributed to answering our main inquiry of digital innovation impact on initial market
incumbents, particularly concerning the case of Blockbuster and Netflix.

Our research idea arose from the meeting with Digital Hub Denmark professor Claus
Rosenstand and his presentation of digital disruptive innovations that are currently
re-establishing various areas, from robotics and VR to food production or forest fire
prevention systems. We gained an understanding of the phenomena of how new technologies
are reshaping people's habits, however, our focus was drawn to find out the position of
traditional technologies and their survival through changing market trends. Further research
on the subject led us to the concrete case of Blockbuster and Netflix. We discovered that
before Netflix's emergence, Blockbuster was the leader of the video rental industry, however,
the movie streaming era started by Netflix impacted destruction of the former giant. After the
general discussion of the case, we raised a question of how was the presence of Blockbuster
challenged when Netflix began implementing innovations of online streaming, hence it
became the main focal point of our inquiry. The research question was followed by several
sub-questions considering the threat, Netflix caused to traditional video distribution industry,
initiatives, that helped Netflix to outweigh incumbent competitors and its ongoing practices
to improve the viewer's experience.

Initially, we examined dozen of researches, scientific articles, and literature projects to obtain
ground knowledge and get more perspectives on the main subject. Later, according to
findings from prior researches, a theoretical framework was built, conducting disruptive
innovation and project life cycle (PLC) theories. Disruptive innovation theory granted us with
knowledge of how new entrants consolidate in the market and over time outweigh
mainstream business authorities, while PLC let us comprehend the phenomena of enterprises
lifespan from the initiation to closure. The research methodology was structured according to
the honeycomb model that provides the researcher with greater flexibility, in comparison
with the strict linear model structure. Subsequently, we had to determine research philosophy,
therefore as we were not striking to interpret events, rather explain the causes of the case, we
selected critical rationalism - value-free philosophy, claiming the probability of theories,
meaning that knowledge is continually fulfilled, thus it proposes many decisions to an
inquiry. Deductive approach guided us when formulating hypotheses: after examination of
the theories and collected literature, we developed three hypotheses, which, later on, have
been tested according to the research findings. Then, as reliability and validity measurements
suggest, the researcher has to conduct a proper database to present the set of sources used to
analyze the topic. Lastly, we reflected upon the limitation and delimitation factors of the
research.

Moving on, the following will provide answers to the main research question, as well as
sub-questions. The first sub-question sought to understand ​how did Netflix’s digital disruptive
innovation influence traditional ways of doing business performed by Blockbuster.
According to research findings, Blockbuster was based on video rental in-store principle,
while Netflix started as a company, providing DVDs by mail deliveries. Blockbuster was
considered as a market giant, serving mainstream customers and Netflix was a niche, mainly
utilized by low-demanding customers. However, once Netflix introduced an online streaming
service, a prosperous Blockbuster business model was threatened, since mainstream
customers began slowly shift to a convenient innovation. Thus, to adjust to a market change,
Blockbuster implemented the website, based on the same principles as Netflix's.
Nevertheless, the video rental in-store model was not rejected, in contrast, managers of
Blockbuster believed that the traditional way is more profitable than innovative, therefore
were investing more into opening new stores than developing online streaming service.

The second sub-question was concerned about ​how did the innovations introduced by Netflix
influenced the conditions for surviving on a market as a video distributor.

The distinctive feature of Netflix was its concern to provide an affordable service that would
include a wide range of movie choices and comfort for customers. As the findings revealed,
Netflix delivered DVDs by mail, from door to door, even though the company received
criticism for late deliveries or poor customer service, the model was still highly appreciated
as it was convenient - customers did not have to leave the house to get a DVD. Moreover,
Netflix was constantly investing to resolve customer satisfaction issues, therefore, later on,
the company introduced innovative online streaming service thus reshaping the market trends
of the video distribution industry.
The third sub-question intended to answer ​how does the usage of AI impact the lifespan of
Netflix.
As the data analysis revealed, Netflix makes heavy investments into AI practices to grant
personalized content to the platform's users, consequently maintaining customer retention and
boosting numbers of monthly subscriptions; and refine their original production of series and
movies. As the PLC theory outlines, every enterprise eventually arrives at the closure stage
when the company’s activities are shut down, nevertheless, the AI implementation in
Netflix's business model contributes to foresee prospects to improve business performance
thus enhancing the company's lifespan duration.

Finally, the main research question considered ​how the digital disruptive innovation of Netflix
impacted the lifespan of Blockbuster.

As the research findings revealed, when Netflix was established, Blockbuster was already a
giant company with massive revenues plus both companies performed distinctively -
Blockbuster was based on video rental in-store while Netflix delivered DVDs by mail, hence
the lifespan of Blockbuster was not affected. However, Netflix's managers were always
thinking ahead and executed innovative strategies reshaping the market and customers'
preferences, meanwhile, Blockbuster management got trapped in the momentary pursuit of
profitability without measuring prospects and threats on time. Top-management of
Blockbuster was underestimating perspectives of online streaming, as they saw store business
as the main source of profit. Even when Netflix suggested to sell their company to
Blockbuster, managers rejected the offer due to neglect and ignorance of innovation.
Eventually, when Netflix released its video streaming online service, attracting millions of
subscribers, Blockbuster's prosperity and leader's role were in danger. Even though the
company tried to implement the same online streaming initiative as the core competitor, late
and insufficient response did not rescue Blockbuster, contrary led to the fourth stage of PLC.
Just like the initial founder of Blockbuster David Cook summed up,

‘‘It didn’t have to be this way. They [Blockbuster] let technology eat them up’’
(Frank, M., Röhrig, P. and Pring, B., 2014).
Further research

As for the future, our research problematics could be approached from various other
standpoints. By focusing solely on value proposition a deeper understanding of
Netflix’s strategy and Blockbuster insufficiency could reveal a pattern for future
decision making. Moreover, research about Netflix’s structure would be another way
how to pinpoint certain steps and perhaps draw a framework for decision-makers.
Lastly, as lack of business intelligence and analyses was one of the findings, a
thorough look at customer behaviour, market analysis, and perhaps even sampling
done (if one can get to such data) could unveil practices other businesses can learn
from.
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