Case Study: Netflix

Netflix is a company known for their ability to allow people to stream shows and videos on

almost any device for a low monthly subscription. Like most companies Netflix has also experienced it

share of ups and downs with their customers. Currently, “Netflix is the world’s leading Internet television

network with over 50 million members in nearly 50 countries enjoying more than two billion hours of TV

shows and movies per month, including original series. For one low monthly price, Netflix members can

watch as much as they want, anytime, anywhere, on nearly any Internet-connected screen. Members can

play, pause and resume watching, all without commercials or commitments” (Netflix.com: Company

Profile, 2015).

To understand how Netflix got to where they are now it is important to know about the

companies background what issues they have been able to overcome. “Reed Hastings co-founded Netflix

in 1997” (Netflix.com: Officers & Directors, 2015). The idea behind Netflix was to offer online movie

rentals without late fees. By 1999 Netflix launched its subscription service with their DVD-by-mail

service (Netflix.com: Company Overview, 2015) this service allowed customers to rent DVDs based on

the Netflix library based on their monthly subscription and within the terms of the subscription

agreement. “Netflix has been using the CineMatch system, introduced by Netflix in February 2000, to

make recommendations” (MIT Technology Review, 2009). How Netflix uses CineMatch is that

“CineMatch develops a map of user ratings and steers you toward titles preferred by people with tastes

that are most like yours” (Gallaugher, 2009, p. 6). In 2002, “Netflix makes its initial public offering (IPO)

on NASDAQ under the ticker NFLX with 600,000 members in the US” (Netflix.com: Company

Overview, 2015).

By 2006 Netflix launched its Netflix Prize challenge stating that one individual or group that

could improve CineMatch’s ratings accuracy by 10% would receive a $1 million prize this lead to a lot of

publicity for Netflix (Gallaugher, 2009, p. 8). With broadband Internet connections reaching more and

more households, Videos on demand through the Internet has becoming a viable media for movie

distribution thus displacing video disc mailing (Zhu, 2001, p. 274). Because of this Netflix changed their

business model to where subscribers could now stream movies. The goal with offering the streaming

option was to try to get their subscribers to switch to streaming, “the online streaming push also helps the

company reduce its postage bill for mailing DVDs” (The Associated Press, 2010). In 2007 “Netflix

introduces streaming, which allows members to instantly watch television shows and movies on their

personal computers” (Netflix.com: Company Overview, 2015).

Netflix Value Chain

Inbound logistics is used by gaining licensing of popular TV/movie titles

Operations included building and managing their website and working to improve the streaming platform.

Outbound logistics is used by making sure servers and their website functions properly.

Marketing and Sales are done though the online and Television advertisements. Netflix also offers a one

month free trial.

Service includes maintaining customer relationships by providing top rate titles and website functionality

(speed, usability, customer service).

While Netflix got a good start in entering the streaming market they were still faced with how

they were going to get their content to the Television set and other devices that consumers used. “Apple

has its own hardware solutions in Apple TV, the cable companies delivered OnDemand though their set-

top boxes, and now Amazon has Tivo. The Netflix solution was to think beyond one hardware partner and

recruit many” (Gallaugher, 2009, p. 13). By 2008 Netflix has partnered with consumer electronic

companies to incorporate Netflix on their devices “while the first generation Roku device has received

positive reviews, Netflix hopes access to its service will eventually be built into all sorts of devices,

including DVD players, televisions, and game consoles” ” (Gallaugher, 2009, p. 14). By 2009 Netflix had

reached over 10 million subscribers and now offered over 100,000 titles on DVD (Breakingnews.com,

2015).

“In Mid-June 2011, Netflix announced a new price plan that effectively raised the monthly

subscription price by 60 percent for customers who were paying $9.99 per month for the ability to (1)

receive an unlimited number of DVDs each month (delivered and returned by mail with one title out at a

time), and (2) watch an unlimited number of movies and TV episodes streamed over the Internet”

(Thompson, 2012, p. C-127). Not only would the subscription plan price go up but there would be a

separation of the streaming service and the DVD-by-mail service. Customers responded to this price

change and separation of subscriptions in a negative way. Netflix CEO Hastings decided to continue the

streaming process though the name Netflix, Inc. and to move the DVD-by-mail services to the website

Qwikster.com (Thompson, 2012, p. C-128). This caused even bigger upset with customers and Netflix’s

stock prices took several hits. Hastings quickly abandoned the idea of changing the DVD-by-mail service

to Qwikster.com stating that “it is clear that for many of our members two websites would make things

more difficult. So we are going to keep Netflix as one place to go to for streaming and DVDs”

(Thompson, 2012, p. C-129). Slowly Netflix was trying to rebound from their mistake and make things

right with their customers.

By 2012 Netflix has been able to successfully expand internationally starting in Canada in 2010,

then moving into Latin America and the Caribbean. Also in 2012, “more than 700 different devices were

capable of streaming content from Netflix” (Thompson, 2012, p. C-132). While Netflix had become the

leader in Internet streaming rivals soon appears after seeing the opportunities that streaming content

provided. “Netflix’s two most important subscription-based instant streaming rivals included: Hulu Plus

and Amazon Prime Instant Video” (Thompson, 2012, p. C-135). This breakdown of what the competition

is offering and for what price shows us that the cost for a Netflix subscription is very close to what the

competition is offering. The main differences are in what content the different subscriptions give to

consumers based on the different networks that each one is associated with and the different original

content that each one provides.

Competitors Price Service

Amazon Prime

Instant Video

$99/year or

$8.25/month

Their Prime member ship includes: = free two-day shipping,

access to Prime music and Prime Instant video. Their Instant video

service offers original content, personalized recommendations via

recommendation algorithms, and is associated with networks.

Hulu Plus $7.99/month Offers current content and past shows, on multiple devices and

with fewer commercials.

Netflix Strategy

Netflix has developed a strategy which has made them the leader in online subscription services

for streaming entertainment. Their strategy includes:

Providing customers with a wide selection of TV and movies to titles to choose from

“Acquiring new content by building and maintaining mutually beneficial relationships

with entertainment video providers” (Thompson, 2012, p. C-140).

Provide easy to use technology for customers to order and identify what it is they wish to

view.

Providing options for subscribers to choose between streaming and DVD-by-mail

services.

“Spending aggressively on marketing to attract subscribers and build widespread

awareness of the Netflix brand and service” (Thompson, 2012, p. C-140).

Promote “rapid transition of U.S. subscribers to streaming delivery rather than mail

delivery” (Thompson, 2012, p. C-140).

“Expand internationally” (Thompson, 2012, p. C-140).

Netflix has chosen to outdo rivals on the basis of differentiation by offering a wider product

selection and value in their added services. “Netflix and analysts say the streaming service has heaps of

customer data that help it offer the right programming and a better user experience” (Martin, 2012). They

also utilize technological superiority by continuing to enter each new technology market as they are made

available to consumers. “Mindful of the market for kids consuming media on iPads, Netflix this month

unleashed movies and TV programs that target children 12 and under viewing video on the popular

tablet” (Martin, 2012).

Since the beginning, Netflix had a focus on gaining and making new content available to

subscribers. “Over the years, Netflix has spent considerable time and energy establishing strong ties with

various entertainment video providers and leveraging these ties to both expand its contents library and

gain access to new releases as early as possible-the time frame that Netflix gained access to films after

their theatrical releases was an important item of negotiation for Netflix. Also…Netflix has successfully

negotiated exclusive rights to show a number of titles produced by several studios” (Thompson, 2012, p.

C-141).

The software technology that Netflix has developed was a large part of the strategy. This software

has made it easy for a subscriber to preview movies based on category, ratings, and various other filters.

It also allowed for a subscriber to rate the titles that they had previously viewed and receive

recommendations based on the titles they previously rated highly. This service continues to be highly

successful with a good portion of titles being viewed coming from the recommendations provided. By

giving subscribers a choice between the DVD-by-mail and streaming services this helped to sustain those

subscribers who may not have high-speed Internet in their areas or who simply like receiving the DVDs

in the mail. With a large percentage of consumers having the capacity for streaming the strategy to get as

many subscribers as possible to switch to the streaming-only services helps in reducing costs associated

with postage incurred when mailing costing is included in the to and from with customers.

The company keeps an aggressive marketing and advertising strategy by offering free one month

trials to their services to all new customers.

The main strategy Netflix’s has used to increase profits as been through international expansion.

Not all foreign markets have such strong capabilities for streaming. In Latin America, Netflix ran into

multiple issues with a lack of Internet, lack of capable devices that can be used to watch Netflix, few

Internet connections, and not all households used credit cards as often in online commerce” (Thompson,

2012, p. C-146). However, the company continues to move into new segments, diversify geographically

and has had considerable success in many areas. “Given the strong response to the launch of the

company’s services in the UK, the company planned to enter another European market in Q4 of 2012”

(Thompson, 2012, p. C-147).

Five Forces Model

The Porter’s Five Forces Model for Netflix and the movie rental industry is important. The

rivalry among established companies that Netflix faces is with Amazon Prime Instant Video, Hulu Plus

and Redbox. This makes the competition intense since there are several companies all competing with

new companies joining in all the time.

There are also many methods for consumers to obtain a movie which also increases rivalry

among companies. Consumers have four options to choose from: in-store rental, online selection and mail

delivery or online DVDs-by-mail service, Kiosk rental, or streaming via Video on Demand. Comparable

products can be found at many different locations and costs to consumers are low in switching among

these options. Netflix has a large level of capital and has been able to achieved economies of scale which

sets them apart from the competition. “Firms enjoy scale economies when they are able to leverage the

cost of an investment across increasing units of production. The firm with better scale economies is in a

position to lower prices, spend more on customer acquisition, new features, or other efforts. Smaller rivals

have an uphill fight, while established firms that try to challenge Netflix with a copycat effort are in a

position where they’re straddling markets, unable to gain full efficiencies from their efforts” (Gallaugher,

2008, p. 10).

The threat of new potential entrants is moderately low. This is largely due to very high cost or

capital requirements resulting from obtaining the product needed. The branding and image of the largest

firms in the industry also causes difficulty in entering this market. The key players in the industry include

Red Box, Hulu Plus and Amazon Instant Video. A new company attempting to enter would have to spend

a lot of money on marketing and advertising to try to gain a competitive edge over these key players in

the industry.

The threat of substitute products is high in this industry and costs must be kept low in order to be

competitive. Substitute products to the movie rental industry are wide in number and include physically

attending a movie, watching television, surfing the web, download movie content illegally, or even

playing a video game. Technology has tremendously aided to increase this threat of substitute products

now that more consumers are able to research for the best available deal.

The bargaining power of new buyers is high. Highly price sensitive customers have a lot of power

since there is little to no switching costs and customers have a large amount of options. Because of this

companies have to be aware of this price sensitivity and a possible lack of brand loyalty.

The bargaining power of suppliers is moderately high. Normally suppliers are able to impose a

price increase on their products or reduce the quality of products supplied which may decrease a

company’s overall profitability (Andriotis, 2004, p.132). This proves to be true in the movie rental

industry as their suppliers are the studios who make the movies. In 2013, Netflix was forced to remove

Nickelodeon and MTV television shows from their selection due to an expired contract with Viacom

(Lieberman, 2013). Recently Netflix has “decided not to renew a deal with distributor Epix” (Lee, 2015).

Netflix has also tried to lessen the power of suppliers be adding all original content such as their

popular series titled “The House of Cards” (Cohan, 2013). Large companies in the industry such as

Netflix are able to produce leverage due to the large volume of product they demand.

Key Success Factors for Netflix

Technology is the largest factor today affecting company’s abilities to prosper in the marketplace.

“Digital technologies and, especially, the Internet are profoundly reshaping the motion picture industry.

Video-on-demand heightens the trend toward digitization and disintermediation” (Zhu, 2001, p. 273). It

has large impacts on strategy elements, product attributes, resources, competencies, competitive

capabilities, and marketing achievements that spell out the difference between being a strong competitor

and a weak competitor. Technological advancements and reduction in Netflix infrastructure resources has

helped them to lower operating costs however they are required to have great content quality within its

services in order to keep subscribers happy. With their innovative strategies, Netflix has been able to

handle the competition.

“Technological innovation is in many industries [and is] the most important driver of competitive

advantages [for companies]” (Rothaermel, 2008, p. 222). These technological factors can increase

competitive intensity and can lead to a lower profit margin, causing the industry to move towards mass

customer distribution so that profits can be made with large volume subscriptions. Netflix’s success is in

“its extensive exclusive content [which] is paramount and represents one of the key metrics… [that]

influences revenues” (Rauta, 2014). Netflix has also done a great job in creating a “database that…

can satisfy everybody’s tastes when it comes about movies and TV series” (Rauta,

2014).

While Netflix has a strong mail delivery position the future of content delivery is through

streaming. According to Netflix long-term view, “Over the coming decades and across the world, Internet

TV will replace linear TV. Apps will replace channels, remote controls will disappear, and screens will

proliferate. As Internet TV grows from millions to billions, Netflix, HBO, and ESPN are leading the way”

(Netflix, Inc.: Netflix’s View, 2015).While Internet TV is only a very small percent of video viewing

today, Hastings thinks it will grow every year because The Internet will get faster, more reliable and more

available.

Marketing related success factors lead to developing a company’s strategy. These include proving

better customer service, customer guarantees, user friendly websites, and clever advertising. “By the

convenient and easy-to-use online platform they put at their customers disposal, Netflix creates an

automated-services type of relation. Hence, the company needs to focus on continuous service

improvements that will enhance subscribers’ satisfaction and retention rate” (Rauta, 2014).

Netflix has already made progress in their business model by going beyond the traditional ad-

supported content and subscription service and including their reach to the international market. “The

average American watches more than five hours of live television every day” (Hinckley, 2014).With

online streaming the opportunity to revolutionize the way product accompanying content is delivered and

introduced to viewers is changing. “The opportunities are boundless when one thinks of how awesome an

experience it would be if we can realize the full potential of combining streaming video and e-commerce

– a next-generation Home Shopping Network layered on top of any content” (Gao, 2012).

SWOT Analysis

STRENGTHS

First Mover Advantage:

Netflix was able to be set apart as an industry leader in streaming entertainment services. “Upon

launch Netflix benefitted greatly from a first mover advantage in both DVD by mail and streaming movie

delivery, essentially inventing both markets. Adding to this was the fact that the content providers were

not yet sure what they had with streaming video, and seemingly took an experimental approach to this

new distribution channel” (Culp, et al., 2012, p. 10).

Optimize Content Suggestion:

By optimizing the system for making recommendations to the consumer, Netflix has grown their

library viewership up to 85% of the titles per quarter. This increase in title rental provides greater value of

their library and could be perceived as a value added benefit by the consumer, giving the company a

competitive advantage (Thompson, 2012, p. C-143).

Revenue Sharing Agreement:

Netflix made agreements with certain content providers that allowed them to participate in profit

sharing or for Netflix to pay-per-usage for content. “Netflix has …crafting a business model that creates

close ties with film studios. Studios love Netflix because they earn a percentage of the subscription

revenue for every disk sent out to a Netflix customer. In exchange, Netflix gets to buy the studio’s DVDs

at cost. Netflix is able to find an audience for a film without the studios spending a dime on additional

marketing. It’s a win-win for both ends of the supply chain. These supplier partnerships grant Netflix a

sort of soft bargaining power (Gallaugher, 2008, p.5). This allowed Netflix to keep a lower overhead on

content, providing more financial stability and flexibility.

Netflix-Ready Devices:

“The company has been living up to its name by building a subscription-based streaming video

service and partnering with a wide range of device manufacturers to get Netflix clients built in to their

devices.” Many device manufactures will even include a Netflix buttons on their device remotes that will

automatically launch the Netflix app (Duncan, 2011). The added benefit in this is that Netflix current

subscribers will no longer have to search for their Netflix icon to access it and non-subscribers will now

be aware of their product. By having a Netflix button on devices it not only shows trust among other

companies but strengths the brands loyalty among users of their services.

WEAKNESSES

Bargaining Power of Suppliers:

Since most popular films that consumers would consider valuable are produced by only a handful

of larger studios, among large suppliers there is little competition. This lack of competition prevents

competitive pricing and increases the supplier’s control of licensing agreements and associated costs.

There is also uncertainty in content cost because suppliers can extort millions in contract re-negotiations

and extensions based on what their future predictions are based on market trends. “For example, back in

2008, Netflix convinced Starz to make a deal for $30 million a year. When it came back to the table in

2011, $300 million wasn't enough for the network” (Greenfield, 2013). An increase in cost this huge

could have serious effects to overhead and the company’s bottom line.

Management Missteps:

Poor public relations and communications with consumers caused concerns over the price and

company’s plans for restructuring carried a negative sentiment with consumers. Not only did Netflix

loose customers from this situation but they also experience several declines in their stock values which

demonstrated a lack of faith in the management decisions and overall loss of some of Netflix customer

base. “Even though the management’s missteps were the primary reason behind the decline in Netflix’s

stock price, there is no denying that this was also the period when the competitive threat strengthened in

the U.S. The competitors utilized this window of opportunity to bolster their advances and several new

competitors with deep pockets emerged” (Trefis Team, 2012).

Content Storage and Delivery:

Netflix uses Amazon AWS cloud computing services to store content and stream content to

customers. With Amazon entering the Pay‐Per-View and Streaming Video market, the growing

competition between Netflix and Amazon could create a conflict of interest concerning a core function of

their business (Harris, 2013).

OPPORTUNITIES

Increasing Infrastructure Capacity:

“ISPs like Time Warner repeatedly try to switch to capped bandwidth plans, despite widespread

customer opposition to what is basically price gouging” (Auerbach, 2015). With the Global Internet

traffic expected to increase by 3 times over the next 5 years, increasing ISP’s capacity is vital for

supporting the customer demand for Internet services such as streaming video content. “Virtually every

city in the home broadband “Speed Leaders” ranking has seen an annual increase in its top speed offering

since 2012. However, those speed increases have not resulted in dramatic shifts in the ranking of U.S.

offerings compared to those in other countries. Most Asian and European cities provide broadband

service in the 25 to 50 megabits per second (Mbps) speed range at a better value on average than North

American cities with a few key exceptions” (Kehl, et al., 2014).

(Garber, 2012)

Opportunity for International Growth:

While the United States is the primary geographic market segment for Netflix in terms of mobile

broadband it ranks in at “18th, with a download speed of 11.68 Mbps. (Sag, 2014). With high-speed

Internet access readily available in many countries, international expansion is an attractive strategy for

streaming content providers.

Growth of Independent Studios:

With the growth of independent film studios, streaming content providers such as Netflix can deal

directly with the smaller studio to make exclusive content. With its spot-on statistical analysis and built-in

audience, would be in an incredibly unique position to become not only a leading distributor of

independent films, but also a notable funder of these films” (Hardy, 2013).

THREATS

Rising Competition:

“Netflix, Inc. (NASDAQ:NFLX) is facing increasing competition from players like Time

Warner’s HBO NOW and Hulu, but UBS AG (NYSE:UBS) believes the U.S. streaming firm will

continue to expand globally” (Jain, 2015). With the increase in demand for online streaming content

Netflix will have to work hard to keep above the competition.

Increase in Internet Fraud:

With online fraud on the rise, some customers may be reluctant to provide their sensitive payment

and personal information on content provider websites. “U.S. citizens reported losing more than $550

million in 2009 in Internet fraud, falling prey to a variety of increasingly sophisticated scams, according

to a report by the Internet Crime Complaint Center” (Los Angeles Times, 2010). These fraud cases have

even hit Netflix, a particularly clever phishing scam targeted Netflix users by encouraging them to contact

the scammers who were posing as customer service representatives (Casti, 2014).

Recommendations

I recommend that that Netflix start partnering with several multi-channel television providers to

offer its streaming content alongside well- known premium channels such as HBO and Showtime. By

doing this Netflix will be able to grow its subscriber base and help offset its costs. Such a move could also

help strengthen and broaden Netflix subscriber base, by providing additional communication channel to

customers. Broad-based media (TV and Radio) is important as well because this is the field where Netflix

can find potential customers the company [could use to] suits their needs [for digital video content] at an

affordable price. “Regarding strategic partnerships, they have their specific importance which should not

be underestimated and have to be looked at as a long term strategic plan” (Rauta, 2014).

The other recommendation I have is for Netflix to keep going strong with their International

Expansion Plans while still giving their U.S. views great content. Netflix stands to gain the competitive

advantage in the international arena with its expansion plans. This advantage comes from Netflix size,

economies of scale, and early mover benefits in many international markets. The benefits from a

successful international expansion outweigh the risks; however “Netflix has to create an international

library that would have enough content to be appealing in each country. As streaming content needs to

licensed separately for each market, Netflix faces difficulty in providing foreign subscribers access to

comparable content available to U.S. subscribers” (Warren, 2011). With these issues to consider Netflix

must diligently manage its efforts and control its costs in their international plans.

Netflix Where Are They Now?

While the mistakes that Netflix has made hurt them they have been able to rebound back. By

2013 Netflix “stock more than tripled, it has won three Emmy awards, and its U.S. subscriber base grew

to nearly 29 million” (McCord, 2014, p. 71). Netflix has been slow to grow its subscription base back but

with a lot of work they have been able to see growth in the international market. “Netflix Inc. said its

Internet TV service grew to 65.6 million subscribers…thanks to popular original shows such as

“Daredevil” and “Orange Is the New Black. The strongest growth was in international markets, where

subscribers jumped 2.37 million to 23.3 million” (BloombergBusiness.com, 2015).

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