In 2011, Netflix CEO Reed Hastings, was about to undertake the biggest gamble in the company’s history. Netflix was to participate in the auction for Media Rights Capital’s drama series House of Cards, produced and directed by David Fincher and exec produced by and starring Kevin Spacey. Behind the decision to participate was his bold vision to transition Netflix from being a channel which distributed video to becoming an original content producer. In the process, Netflix would be competing with the likes of industry veterans like HBO & AMC.
During the auction Netflix won the rights by bidding an astounding $ 100 million for 26 episodes of House of Cards (13 episodes per season & 2 seasons). In an industry where the fate of the second season depends on the success of 1st season, the terms of the deal were unprecedented to say the least. To understand what gave Reed Hastings the confidence to make this bid, it is important to understand the fact that Netflix is first and foremost a software company and therefore data analytics play a very crucial role in the DNA of the company. Reed Hastings was already a successful tech entrepreneur before he started Netflix and he brought all his knowledge of managing a technology company to Netflix.
One of the ways most well known ways that data analytics helped Netflix is by improving the predictability of titles. Netflix launched a competition, The Netflix Prize to develop the best collaborative filtering algorithm to predict user ratings for films, based on previous ratings without any other information about the users or films, i.e. without the users or the films being identified except by numbers assigned for the contest. Through this competition, Netflix could improve the accuracy of its predictions by more than a 1000 basis points (1).
The Netflix team embedded the use of A/B testing to successfully design its website & test its streaming services. What makes this achievement notable, is the fact Netflix is experienced through an extremely diverse set of channels – Broadband, 4G wireless, 3G wireless etc.
Netflix was able to capitalize on its deep analytics strength and its direct feedback from millions of users around the world while it contemplated the decision to bid for House of Cards. Its analytics team had 3 key data points which were instrumental in making the decision:
- The British version of “House of Cards” which was already available for viewing on Netflix was well watched.
- Those who watched the British version “House of Cards” also watched Kevin Spacey films and/or films directed by David Fincher.
- A lot of users watched the David Fincher directed movie The Social Network from beginning to end.
Netflix ended up winning the auction and House of Cards became the first of many blockbuster series that have so far premiered on Netflix. Data analytics was also a key factor when Reed Hastings planned to switch resources almost exclusively to the streaming part of the business from the DVD rental business.
These incidents highlight the competitive advantage that Data analytics has brought to Netflix. It also emphasizes the fact that companies with superior analytical ability and superior access to customer data will become very hard to beat.
(1) Wikipedia : Netflix