Linear business models are based on the following logic: take natural resources, make products for consumers that eventually become waste.

Circular business models on the other hand contribute to a circular economy and are designed to achieve three key things.

Virtualisation is a type of circular business model that is about replacing a physical product with a virtual or digital solution. Do you remember when you had to go to the store to purchase a physical CD to listen to your favourite music? – today you can jump on Spotify and have millions of songs at your fingertips.

An example of this type of business model is Netflix.

Circular Business Model Example – Netflix

In 1998, Reed Hastings and Marc Randolph launched Netflix as an online DVD rental service where they would post the DVD’s to your home.

According to Netflix, the first DVD it shipped on March 10th, 1998 was Beetlejuice. Since then, the company has shipped over 5.2 billion DVDs.

In 2007, Netflix successfully virtualized their business model by slowly replacing physical DVDs with online streaming.

This video explains this business model transition using the business model canvas.

Finally after 25 years, Netflix is closing down its DVD-by-mail service for good in 2023.

The impact of virtualisation on the production of DVD’s has been profound.

Between 2005 and 2009 there was an average of 2 billion DVDs sold every year.

In 2022 this was down to just 300 million DVDs worldwide.

So virtualisation has helped to eliminate the need to manufacture almost 2 billion DVD’s every year and all the materials and energy that would have gone into them.

The Importance of Considering Sustainability Impacts both Positive and Negative

In the video we noted that the sustainable business model canvas has you look at the sustainability impacts of your idea – both the positive and negative.

Whilst the environmental impacts of eliminating a physical product are generally positive it is also important to consider unintended consequences.

The shift from DVD to streaming might seem clear cut, but it’s anything but.

Researchers from the Lawrence Berkeley National Laboratory and McCormick School of Engineering decided to look into it. Using life cycle analysis tools, they were able to estimate the primary energy use and greenhouse-gas emissions associated with watching video via streaming or on a DVD. The results were not as clear-cut as some might have believed:

The charts show that streaming is about on par with DVD watching as long as you get your DVD via the postal system (which is how Netflix began). If you have to drive to a store to get it, this skews things pretty clearly in favor of streaming in both the energy used and CO2 emitted.

Researchers from the University of Michigen looked at this comparison through a different data lens. They used the TRACI method which is an environmental impact assessment tool. It provides characterisation factors for Life Cycle Impact Assessment (LCIA), industrial ecology, and sustainability metrics. The assessments quantify the potential impacts that inputs and releases have on specific impact categories which include:

• Ozone depletion;
• Climate change;
• Acidification;
• Eutrophication;
• Smog formation;
• Human health impacts; and
• Ecotoxicity.

Using the TRACI method the environmental benefits of moving from DVD’s to streaming is more clear cut.

This case study demonstrates the importance of understanding the data and making sure you understand what you are aiming to achieve.

Conclusion

Whilst Netflix’s virtualisation business model has no doubt helped to eliminate the need to manufacture almost 2 billion DVD’s every year and all the materials and energy that would have gone into them it is important to consider the broader impacts of your initiative.

On balance moving from physical DVD’s to streaming has an environmental upside.  However if your goal was carbon reductions then in this example there is still some work to be done in the other parts of the supply chain like data transmission services moving to more renewable energy to reduce carbon emissions..

The big lesson from this case study is to make sure you consider both the positive and potential negative impacts of your idea.