Netflix - How it has "Innovated" itself out of the hole that nearly became its grave!

Netflix is near to my heart. Perhaps I am a bit biased but not because I love their $8.99 a month unlimited streaming plan that allows me to watch movies and TV shows to my heart's content. It's actually because I started Chapter 1 of my book, Living in the Innovation Age, with an interesting anecdote about Netflix that illustrated just how critical constant and continuous innovation is for all companies. Things looked pretty bleak for Netflix back in late 2011. About 18 months ago, Netflix was spending much time trying to save face. Netflix had awkwardly unveiled plans to raise prices and separate into two companies - a DVD mailer called Qwikster and a streaming entity still under the Netflix name - and lost millions of customers in the process. Not surprisingly, the share price fell from $298 to $52.81. Things were so bad that in a Saturday Night Live skit, Jason Sudeikis played the role of Netflix's CEO Hastings apologizing to consumers while at the same time unveiling increasingly complex businesses, culminating with Nutqwakflikster - a nut, insurance, and movie seller, mocking their recent Qwikster debacle.

But as I said, that was back in 2011. As documented in a recent Businessweek article, Netflix has mounted one of the all-time great comebacks. First quarter results show that revenue rose 18 percent from the same period last year to $1.02 billion, while the company added 2 million subscribers in the U.S. alone, dispelling widespread fears that its growth had slowed. And shares of Netflix are back above $200 being hailed as one of the best-performing stocks of the year. The article goes into quite a bit of depth on what has been going on at Netflix over the past 18 months.

Here are three key takeaways that I believe have contributed to their awe inspiring success:

Cloud Computing - Netflix has bet its future on cloud computing and Amazon's cloud platform. At any moment, Netflix draws upon 10,000 to 20,000 servers running in Amazon data centers somewhere. Being an early pioneer, Netflix has been forced to build from scratch much of the software it needs to survive. Since it relies on Amazon for data centers, its 700 engineers focus on coming up with tools for, say, automating the ways in which thousands of cloud servers get started and configured.

Original Shows - The biggest bets Netflix is making now are on its original shows. The company won’t disclose how much it paid for two seasons of House of Cards, though the Hollywood blog Deadline.com says it was about $100 million. Other original content includes Hemlock Grove, Arrested Development, and Orange Is the New Black.

Creativity and Innovation - Netflix is best known for the 1 million bounty that it offered to the person or group that could improve its ratings-based algorithm the most. A prime example of an open innovation contest, the winning team, a collection of independent engineers from around the world, built Netflix a better prediction engine. Netflix is always testing things - better recommendations, using avatars for interaction, voice guidance, etc. This mindset is at the crux of Principles 2 (Innovation is a Journey, Not a Destination) and 3 (Innovation is "Where No Man Has Gone Before") that I discuss in my aforementioned book.

The Bottom Line
Netflix is an excellent example of a company that has come back into relevance after everyone had given up on it. It did so, not by trying to doing the same things over again or finding new ways of cutting costs. Rather it rethought its business model with new technology platforms, new content, and new ideas. In other words, Netflix innovated! 

The Legal Side of Innovation - Who needs Soap Operas Anyway?

Over the past few months, I have written several blog posts about a topic that I call the "Legal Side of Innovation" and I first covered in my book, Living in the Innovation Age. The "Legal Side of Innovation" is a phenomenon in which companies are increasingly using patents and other intellectual property (IP) as a way of attacking each other in highly innovative and competitive areas such as smartphones and tablets. Essentially, IP law has become a double-edged sword that on the one hand protects an innovator's hard work and yet on the other hand creates impediments in the very road to innovation that it seeks to promote.

The legal battle between Apple and Samsung has become the technology world's version of steamy afternoon soap operas. As the never ending saga of twists and turns continues, Apple is now asking a court to force Google to turn over its Android source code as part of its patent litigation against Samsung. Apple, as part of its second patent-infringement lawsuit against Samsung, argues that Android is used in all of Samsung’s allegedly infringing products and “provides much of the accused functionality” in Apple’s claims. Meanwhile Matthew Warren, a lawyer for Google who also represents Samsung, claims that Apple made a “strategic decision” in filing its case “to keep Google off the complaint.” to ensure that Google doesn't have the same legal rights that Apple and Samsung have with respect to “reciprocal discovery.”

Now, isn't this a story that can match any of the love-hate triangles on today's soaps?!

The Bottom Line

By now none of us should have any doubts that the "Legal Side of Innovation" is real and here to stay. Hmmm... might be an interesting career opportunity here - a new caped crusader who is a dry, boring, attorney by day and a dynamic, cool innovator by night. :)

The "First Class" CIO - A Sequel

A few months back I had written a white paper on the struggles that CIOs face as they try to establish themselves as "equals amongst equals". In other words, many CIOs are viewed as second-tier executives in their organizations, less equal than other CXOs. The paper is aptly titled The "First Class" CIO - Three strategies to help ensure the CIO's seat at the executive table.

In the past few days, I have seen two blog entries in HBR on the same subject. The first entry, titled "How CIOs Can Keep In Step With CEOs", discusses the dissonance between corporate IT and the C-suite. The entry cites new research, conducted with HBR, The Economist, CEB, and TNS Global, which reveals that CEOs believe CIOs are not in sync with the new issues CEOs are facing. It states that CEOs often believe that CIOs do not understand where the business needs to go and how IT should support strategic goals. The second entry, titled "Three Ways CIOs Can Connect with the C-Suite", provides three simple steps CIOs can take to begin repairing the dissonance between business and IT, and guiding their organizations into the 21st century.

I hope you enjoy my white paper (if you have not read it already) and these two blog entries. I'd love to hear your thoughts on the subject.

Innovation Metrics

Innovation metrics is always a hot topic and a welcome ice breaker in any cocktail party (at least at my house). It's a topic that I discuss at length in my book, Living in the Innovation Age (TekNirvana, 2011). In Chapter 9, titled "Knowing What to Measure – Picking the Right Innovation Metrics", I explain how picking the correct mix of innovation metrics is key to inducing the desired behavior. That's because, as I explain in the chapter, what you measure will most certainly have an impact on how your organization behaves and views your innovation initiatives. Some of the more common innovation metrics include:

• Return on Investment (ROI)
• Total Research & Development (R&D) budget or total research and development headcount
• Number of ideas submitted by employees
• Percentage of sales from new products or services

While all of these metrics can be valuable for driving investment in innovation and evaluating results, each metric by itself provides a narrow view of the total innovation picture. Additionally, each metric by itself can induce both positive and negative behavior. For example, consider the seemingly straightforward and innocuous metric ROI. While ROI is most certainly a meaningful measure, it might cause an organization to avoid a potentially risky but highly lucrative market in the long term in favor of a lower potential but more measurable market in the short term.

Scott Anthony recently posted a blog entry titled "How To Really Measure a Company's Innovation Prowess" in HBR, which also addresses the topic of innovation metrics. Since the primary purpose of innovation for private companies is financial impact, Scott discusses Return on Innovation Investment (ROII) as a reasonable, aggregate measuring stick for innovation. Not surprisingly, ROII is calculated by taking the profits or cash flows produced by innovation and dividing that figure by the cumulative investment required to create those returns. ROII can be further sub-divided into three more micro metrics as follows:

1. Innovation magnitude (financial contribution divided by successful ideas)
2. Innovation success rate (successful ideas divided by total ideas explored)
3. Investment efficiency (ideas explored divided by total capital and operational investment)

While ROII and its sub-divided forms appear to be reasonable measures, the challenge is always having the data to actually calculate them. The lack of common definitions and publicly available statistics makes bench marking difficult. Simple questions, like "what defines an idea?" or "what does 'success' mean?" need to be answered in consistent ways - a concept that I discuss in my book as well.

The Bottom Line

Defining the right metrics for your innovation efforts is both an art and a science. It can especially be tricky since there is no single answer that is appropriate for every organization, which means that the optimal set of metrics will vary from company to company. Therefore, the best approach is to use a balanced mix of metrics that focus on the entire innovation life cycle from inputs to outcomes.

Let there be [more] light...

Innovation is not just a fancy term for entrepreneurs to make more money with new ideas and products. Innovation has real value in helping improve the lives of people and our society as a whole. This is an area that I focused on in my book, Living in the Innovation Age (TekNirvana, 2011). One fascinating example of this was how students from the Massachusetts Institute of Technology created the solar bottle bulb – a simple, yet effective innovation that costs less than $3 and only requires a one-liter soda bottle filled with a mixture of purified water and bleach to provide approximately 55 watts of daylight. This innovation solves a challenge faced in numerous poorer communities with cramped settlements of small metal roofed houses that do not get any sunlight in their homes.

Businessweek recently covered the story of an innovator who has created one more way that the poor can get clean and cheap light. Better yet, this one doesn't require daylight, which means it can provide light even after sunset. Kerosene lamps used in many developing countries in addition to posing fire hazards and injurious to health are also a major expense for many of the world’s estimated 1.5 billion families without electricity. Poor households typically spend at least 10 percent of their income on kerosene, as much as $36 billion a year worldwide, according to the World Bank. British industrial designer, Martin Riddiford, has figured out a way to use gravity instead of kerosene. He has created GravityLight - a pineapple-size lamp powered by a 25-pound weight that falls about six feet in a half-hour and shines slightly brighter than most kerosene lamps. The catch - once the weight reaches bottom, it must be manually lifted to repeat the process since GravityLight ingeniously uses human power stored as potential energy. GravityLight is slated to have its first field tests this summer in Africa, Asia, Latin America, and the Middle East. Once Riddiford’s team works out the final kinks, the basic model is expected to retail for about $5. Not bad at all.

The Bottom Line
Innovation can help proactively improve the quality of life for those less fortunate. Even simple innovations such as enabling members of poorer communities to get daylight in their homes or providing a safer, cleaner, and cheaper alternative to kerosene lamps can substantially improve the lives of those who live in under developed parts of the world.