Netflix: Cannibalise the DVD Business

You are the CEO of a publicly-traded mail-order DVD rental company. ~$1B in annual revenue, profitable, market leader. Your business is at peak: 7M subscribers, ~95% gross margin on each DVD rented through the postal system. Wall Street loves you.

Two facts on your desk this quarter: 1. Broadband adoption just crossed a threshold — ~50% of US homes have connections fast enough to stream low-quality video on demand. 2. Internal R&D has built a working streaming prototype. It works technically but the catalog is tiny (~1,000 titles vs. your 100K+ DVD catalog) and the content licensing terms for streaming are brutal — studios will charge 3-5x more per stream than per DVD rental.

Your CFO presents three scenarios for the next board meeting.

The principle: The hardest strategic move is cannibalizing your most profitable business before someone else does. Companies that protect the profit pool always lose to companies that race themselves into the next one. The Innovator's Dilemma isn't a theory — it's a calendar problem.