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February 2003 |
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outbound
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BY
MITCH MAC DONALD, EDITORIAL DIRECTOR
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battle of hastings
AS MY 14-YEAR-OLD WOULD SAY, “ ITWASLIKEBOOM!” (PLEASE KEEP in mind that pauses and punctuation make only cameo appearances in the vocabulary of many male adolescents.) In terms of economic cycles,though,it really was like an explosion. Bang. Boom. Flash. When the dust settled, the business landscape was littered with the debris of dozens and dozens of Internet-based dot-com companies that, just a few months earlier, seemed certain to change our world. Pets.com? Gone. Egghead.com? Gone. Kozmo.com? Gone. The list could fill this page and several more. There were, though, a few new Web-based businesses that withstood the blast. The companies within this group have a number of things in common: They pay attention to building revenue, not just venture capital investment. They provide a needed product or service. In many cases, they provide a traditional product or service in a non-traditional, more efficient, Web-based manner. And,almost without exception,they pay extraordinarily close attention to their logistics operations. One of the best examples, perhaps, is an online DVD video rental firm called Netflix. Founded in 1998 by now-CEO Reed Hastings, Netflix does what it does better than anyone else. Hands down. I know this first-hand. In late 1999, we got our first DVD player at home. After the unit was installed and operating, I turned to the pile of warranty cards and instruction manuals that littered the floor. One was a little postcard promoting a free trial membership with a company called Netflix.“Free” being the operative word, I gave it a whirl. After the free trial, for $19.95 a month, Netflix allows me to rent an unlimited number of movies. All I do is go to their Web site, build a list of movies that I’d like to see and wait for the U.S. Postal Service to deliver them. Once they arrive, I can keep them as long as I’d like. When I’m done with a film, I simply slide it into its pre-paid return mailer and send it back. When it arrives at Netflix, their system automatically sends me the next title on my list. Could it be any better? Well, it turns out, it can. Over the course of the first year, there was roughly a 7-to 10-day lag between the time I mailed a mo vie back and the arrival of a new one. Around the middle of 2001,I noticed that this lag time essentially disappeared.Why? Netflix went online with 10 new distribution centers at key locations throughout the United States. Today, the company enjoys a commanding 95-percent share of market in the burgeoning online DVD rental business. Its success has led the likes of Walmart.com and Blockbuster.com to enter the fray. This, of course,hasn’t escaped the attention of Netflix management, including Reed Hastings. He might be concerned, but he certainly is not alarmed. After all, he has a secret weapon: Figuring that these new competitors will very likely struggle to “get their logistics right,” Hastings plans to bring another 12 DCs online this year to further solidify Netflix’s position. In announcing the plans to double its DC operations, Hastings told stock-market analysts that Netflix’s logistics operation will make a genuine competitive difference. Netflix’s rental turnaround time for the average customer, he said, has fallen from 14 days in December 2001 to two days. And that time lag is likely to drop further: Putting 12 additional DCs into service, Hastings says, “will bring overnight DVD delivery to about 70 percent of our subscribers.” With this attention to logistics operations, Hastings says, NetFlix expects to maintain at least a 50-percent market share as time goes on. Not bad for a com pany that didn’t even exist five years ago and has taken on established retail powerhouses like Wal-Mart and Blockbuster. Not bad in a market that already accounts for one- third of the total video rental business (up from 15 percent in 2001). Not bad for a company that is poised to have over a million subscribers paying about $20 a month a piece in the near future. The moral of the story? Attention to logistics operations can make the difference between a dot-com and a dot-bomb.
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