A tale of 2 disruptions – Netflix and Youtube

The disruption theory (from Clayton Christensen) suggests that you have to find asymmetry of motivation which roughly translates to “don’t go after existing market and try to replace strong incumbents with your disruptive technology”.  He gave examples of a lot of companies from diverse industries ranging from electronic hard drives to steel manufacturing.  I want to compare 2 companies that saw the same potential disruptive power of the internet to distribute digital video in circa 2006.

YouTube chose to empower people to create their own video and easily distribute them to their friends and families via the internet.  They probably (I am guessing) did not know how to make money at the time but they knew that it was cool and people want to do it.  They ended up making money from ads on the popular videos and share revenue with the content producer.  YouTube is clearly going after completely new market with no existing incumbents.

Netflix saw the same disruption and went after the on-demand movie subscription service via the internet.   Netflix ended up competing with cable TV subscription because they are offering relatively compelling content at much lower cost.  I was one of the so called “cord cutter” back in 2009 time frame because there was a lot of value in Netflix for $10/month (streaming and DVD).  I can do the all you can eat streaming for older movies and get the new movies from DVD.  Netflix did really well for a couple years and stole a lot of subscribers away from the lucrative $90B plus cable/satellite TV business.  But the weight of the cable TV industry finally caught up and created problems for Netflix.

Some could make the argument that Netflix is offering low cost disruption.  But I argue against this because the incumbents are not fleeing to the higher margin business.  They are all fighting Netflix.  Netflix now has to explore option to re-position themselves to avoid head on battle and figure out how to leverage their 20m+ subscribers.


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