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Netflix Case StudyKatherine McLarneyGBA 490

ContentsExecutive Summary2 Stretegic Issues and Options:2 Recommendations:3Industry Analysis:5PESTEL Analysis:8Legal:8Five Forces Analysis:9Driving Forces:10Key Success Factors:11Strategic Group Map:12Financial Analysis:13SWOT Analysis:16Netflix Current Strategy:17Weighted Competitive Strength Analysis:19

Executive SummaryThis report was commissioned to examine the current state of Netflix and make recommendations for areas of improvement to enhance Netflix sales, contain costs, or refocus Netflix present strategy. The information in the Industry Analysis (page 4) draws attention to the growing video on demand market and Netflix place in the market. Strategic Issues:Netflix is facing a number of strategic issues, which can be found in depth on page 4. The most pressing issues are summarized below:Decreased Domestic Customer Retention: Customer retention has been a pressing issue since 2005, when the subscription cancellation rate began to increase. The current management referred to this as the churn rate and believed this was not an issue as long as the number of new subscriptions was higher than the number of canceled subscriptions. During the period of July 2011-December 2011, there was a net loss in the number of subscribers. This is a pressing issue that directly affects the profitability of the firm should be addressed if Netflix wishes to continue to retain its market share in The United States. There is also a trend of increasing utilization of content from internet-streaming but a decrease in the purchase of internet-streaming video on demand, indicating that a larger portion of consumers are receiving access to internet-streaming services for no cost. Decreased Overall Financial Strength:Netflix is currently facing a decrease in financial strength as a result of heavy investment in markets abroad. In the past two years, the gross profit margin, operating profit margin, net profit margin, total returns on assets, and return on stock holder equity have all declined, this is detailed on page 12. The decrease in financial strength in a concern for Netflix as the decrease in financial strength is caused by expansion into the United Kingdom and Latin America as well as rising costs to show streaming content. There is little bargaining power with suppliers because there are few suppliers, movie studios and those who provide licensing for movies, and the content if critical to Netflix operation.Options:Offer reduced prices for long-term commitments:As a way to reduce the churn rate, Netflix would offer a reduced price equal to Amazon Prime ($79 per year) paid annually and automatically renewed each year. A long-term commitment that is automatically renewed may increase customer retention. The discount for a long-term commitment would also provide a competitive advantage in that Netflix would be a lower cost per year than Hulu Plus. Commission a Report on Subscription Cancellation Netflix should commission a report for internal understand the cause of the cancellation of subscriptions and analyze trends to find any contributing factors to the cancellation. While this report would be both labor and time intensive, it would provide insight into consumer patterns and Netflix could adjust its model to address major factors leading to subscription cancellation. End Expansion in Latin AmericaLatin America was responsible creating a loss of $23.3 million dollars in the third quarter for Netflix. While the current management believes there is a market in Latin America, despite the region lacking critical components for success. Latin America does not have a highly developed Internet infrastructure, there is little to no culture acceptance of video streaming, there are high costs of obtaining licensing for content in native languages, and there are far fewer devices with the capability to host Netflix. By putting the expansion in Latin America on hold until the infrastructure to support internet-streaming video on demand is in place, Netflix can focus on customer retention in domestic markets and continued international expansion into other markets that share the same similar infrastructure as Canada. Increase Price of Service:Increasing the price of service could compensate for the increase in the cost of content acquisition and boost financial strength. If chosen, the supplier, or the movie studios should do this with ample communication of the increased costs, and that the CEO wishes he didnt have to raise the price but was left no choice after the movie studios increased the price. Through ample and genuine communication, Netflix potentially could avoid the reaction of consumers when the DVD Delivery plan and internet-streaming video on demand plan were separated. Recommendations:In order to continue to have a strong profit margins and be market leader in the domestic market Netflix should:Commission an Internal Report on the Net Loss of SubscribersIf Netflix wishes to be an industry leader, they should seek to understand the loss of subscribers in order to increase their value proposition to ensure a net gain of customers after each quarter. The loss of customers due to subscriber cancelations has been a trend since 2005, and if Netflix does not address this trend they face the risk of loosing their market share. An industry report would investigate the cause of subscription cancelation and issue recommendations about how to contain the causes to preserve market share and increase Netflix profits. End expansion in Latin AmericaNetflix should end expansion in Latin America because the infrastructure to support internet-streaming video on demand is not currently available. internet-streaming video on demand is a scale economy and the cost to further acquire additional licensing that appeals to the Latin American culture. Netflix should instead focus on expansion in countries that have similar characteristics to Canada where they have already successfully launched. If the management of Netflix still wishes to be a first mover in the region, they should continue to monitor to the region until it meets agreed upon benchmarks that indicate the infrastructure to launch IS VOD is present. Offer reduced price for long-term commitments and allow a contract priced option to preserve members prices In order to preserve market share and customer retention, Netflix should offer a one-year subscription price. This will provide guaranteed revenues per year and protect Netflix from the substitution effect. In order to build back customer trust after the attempted spin off of Netflix DVD division, Netflix should also consider allowing customers to lock in their rate for a period of 3 years if they are a yearly membership subscriber. By allowing customers to lock in their price, Netflix will begin to rebuild damaged relationships with its customer base and also decrease the churn rate because subscribers would be less likely to cancel if they knew they would be saving money by continuing to subscribe to lock in their price .

Industry Analysis:Industry growth potential The video on demand industry has a high potential of growth in the coming years. As an emerging industry, The NPD Group believes that the market will continue to grow because of the belief that internet-streamed rentals have a better value and better selection than traditional movie rental methods. As internet-streaming only accounts for one out of six video on demand rentals, the industry is poised to continue expansive growth as more consumers begin to be attracted by the value-proposition of streamed rentals and the wider product breadth offered through Internet streaming video on demand. Businesses within the industry have the potential to grow through the acquisition of exclusive content, building partnerships with complimentary companies to bundle TV Subscription and internet-streaming video on demand, and expanding technology to make the interface easier to use for older generations. Industry Risk & Uncertainty:There is a moderate degree of short-term and long-term risk and a moderate level of uncertainty in the video streaming industrys future. Piracy is a major concern for movie studios, and a majority of Netflix and other internet-streaming services movie selections are available online as a result of the pirating of the copyrighted material. As a major concern for movie studios, this could lead to strained relationships between the streaming service and the movie studios or the supplier. If a strained relationship between the suppliers were to develop, the selection of movies could decrease and result in the loss of part of industry value proposition centered on the breadth. The reduction in the breadth would lead to a reduced viability of the video-streaming industry. As new technology emerges, prior technology becomes obsolete. Long-term any industry involving a product that is significantly reliant on technology has moderate long-term risk due to the threat of new technology replacing the prior technology. This is evident with DVD replacing the VHS, and video streaming offering the same product as DVDs with increased convenience, and often at a lower price. There is also a moderate level of uncertainty in the movie the video-streaming industry because of the range of potentials futures for the emerging industry. Two areas of uncertainty are the future degree of global recognition of streaming technology and the time-line for widespread consumer adaption of Internet streamed video on demand services. Currently, there is not the technology infrastructure to support internet-streaming video on demand services abroad in most countries, however with the evolution of technology there is the potential for revenues to be realized abroad if the culture is accepting of the new technology and there is wide-spread consumer understanding of the value proposition. The other area of uncertainty is the time-line for widespread adaption of video on demand services. While the number of consumers utilizing video on demand services is expected to increase, there is not a definitive timeline for widespread usage. Netflix Competitive Position:Netflix has a competitive presence in the internet-streaming video on demand industry. Netflix has a majority of the market share of the video-streaming industry with over 56% percent of streaming-rentals. Netflix enjoys competitive advantage over its rivals. Both Hulu Plus and Netflix offer some high-definition programming at $7.99 per month, however Industry Analysis (continued):Hulu Plus shows a commercial during its content. Hulu Plus lacks Netflix content breadth with only 15,425 titles in its content library compared to Netflix 60,000 titles. Netflix has worked with consumer electronic device makers to have a Netflix button in the remote controls, which allows for ease of access to Netflix and an increased consumer awareness of Netflix. The case does not mention Hulu Plus being integrated in remotes so it is assumed that Hulu Plus does not have this competitive advantage. (Chart 1)Netflix and Amazon both offer the same amount of content to subscribers, however the majority of Amazon Primes content is only accessed through paying a fee per title in addition to the yearly subscription price. The billing and price of Netflix and Amazon Prime differ, Netflix is a monthly fee of $7.99 and Amazon Prime is yearly fee of $79. Amazon Prime differentiates itself from Netflix on the other product offerings including: free two day shipping on all amazon orders, one Kindle e-book per month. Despite the increased product offerings, Amazon Prime only has around 15% of total number of subscribers of Netflix. (Chart 1)Netflix ability to capitalize on industry opportunities or the vulnerabilities of weaker rivals:Netflix is poised to capitalize on the weaknesses of its rivals. Through offering a wider content selection than both Amazon Prime and Hulu Plus, Netflix is able to attract customers through a wider selection at a comparable price to Hulu Plus and offering monthly billing rather than yearly billing as is the case with Amazon Prime. While Netflix does not offer the additional products and services that Amazon Prime does the numbers of the subscribers show that the additional perks are not appealing to the majority of consumers, and by choosing Netflix subscribers fees can be used towards a wider content library instead of the costs associate with the additional product offering. NetflixHulu PlusAmazon Prime

Titles in Content Library60,000 titles15,425 titles17,000 titles included with the subscription and 42,000 titles for an additional fee

Monthly Cost:$7.99$7.99$79 per year, billed annually

Advertisements:NoYesNo

Amount of Streaming:UnlimitedUnlimitedUnlimited

Free Trial Period:One MonthOne WeekOne Month

High-Definition:With Apple TVMany EpisodesNot Mentioned

Subscribers:23.4 MillionNot Mentioned3.5-5 Million

Global Presence: Yes Not MentionedNot Mentioned

We also make the assumption from the case that Netflix is the only internet-streaming video on demand service abroad. Having a profitable business segment in Canada, Netflix has the distinct advantage of being the first internet-streaming video on demand service abroad and finding a successful strategy demonstrated by the expansion in Canada. It should be noted that despite the success in Canada, Netflix is currently not profitable in other countries where they have attempted expansion. Chart 1: This chart compares the product offerings of Netflix and their 2 major video-streaming rivalsIndustry Dominant Economic Characteristics: Market Size:

Annual Sales Revenue:$1.1 Billion

Total Volume:40 Million Consumers

Scope of Competitive Rivalry:

The geographic area over which most companies compete in the video-streaming segment is global, only limited by internet connection. However for physical movie rental, geographic area is regional, limited by movie delivery times through traditional mail services. Having a presence In foreign markets has not previously proven to be instrumental to success of either video streaming or physical movie rental. However, in this emerging industry it may become increasingly important and reduce overall costs.

Market Growth Rate:

The market growth rate in the industry is expected to increase in 2012 to 3.4 Billion movies viewed via a video on demand service.

Degree of Product Differentiation:

Video on Demand providers are not highly differentiated by the movie titles offered due to movie studio bargaining power to avoid giving exclusive rights to just one company in order to fully realize the revenues of each film.

Number of Companies in the Industry:

Physical DVD Rental:3: Blockbuster, Redbox, Netflix

Subscription Based Video on Demand:3: Netflix, Hulu Plus, Amazon Prime

Number of Buyers:

In 2011, there were 40 million users of video on demand services. There are 134 million potential users with access to the technology in place to enjoy video on demand services.

Product Innovation:

Product innovation exists through the continued experimenting of the timing of movie releases by movie studios. Opportunities exist to overtake rival firms by cultivating relationships with movie studios to allow the video on demand provider to be the first to offer streaming content of movies.Product innovation also occurs in the form of content provided for various age groups, including expanding the products offered for children.

Supply and Demand Conditions:

Due to the nature of the video on demand product, significant issues with supply shortages do not exist as the product offered, videos on demand, can be viewed by multiple viewers at the same time. There are multiple firms offering video on demand services, some as complementary products for already subscribing members, others charging a fee per movie or a flat subscription fee.

Technology and Innovation:

Technology is key to success in the video on demand industry, all services require significant technological infrastructure in place for users to stream videos on their own devices. Advancing technology through the creation of easy to navigate interface, algorithms to accurately recommend movies, and increased compatibility of devices all are keys to allowing a video on demand service. Technological advances are driven by research and development, with multiple firms heavily investing in technology and product innovation in order to secure and retain a spot as an industry leader with a large market share.

Scale Economies:

The video on demand industry is characterized by economies of scale in purchasing, advertising and building technological systems. The fixed costs can be spread out over multiple users to lower the percentage of revenues reduced by the fixed overhead costs.

PESTEL Analysis:Political:

Changes in movie regulations that limit content shared online

Economic:

Currency fluctuations that would impact profit Changes in credit card processing fees that would impact profit Changes in disposable income of consumers that would impact revenue

Social:

Change in the knowledge and usage of technology by different age demographics that would change number of subscriptions Change in the time spent watching videos that would change the number of subscribers or value placed on the internet-streaming video on demand Change in the consumer assigned value of videos reducing the number of consumers interested in watching videos

Technological:

New technologies emerging that limit certain video on demand services ability to be watched on devices New technologies emerging that make video on demand segment obsolete Internet Infrastructure changes or throttling that slow down or speed up certain firms content delivery to consumers

Environmental:

-

Legal:

Movie licensing changes that would change the availability of content Expanded legal liability for contributions to pirated movies that would change the ability to access content for subscribers and affect the number of subscriptions

Five Forces Analysis:Competitive Pressures Created by Rivalry Among Competing Sellers:Moderate Buyer demand is growing rapidly The products of rival sellers are moderately differentiated by content library The buyer experiences low costs when switching competitors Competitive Pressures Created by Threat of New Entrants:Moderate Buyer demand is growing rapidly, the industry is expected to increase in views The products of rival sellers are moderately differentiated by content library The buyer experiences low costs when switching competitors Competitive Pressures from the Sellers of Substitutes Products:Strong Good substitutes are readily available (i.e. Hulu Plus, Netflix, Amazon Prime) Substitute goods are attractively priced Features such as interface ease of use, movie recommendations, etc. differentiate substitutes. The end consumer has low cost to switch between internet-streaming video on demand providers The buyer experiences low costs when switching competitors Competitive Pressures from Supplier Bargaining Power & Supplier- Seller Collaboration:Fierce Movie Studios have a differentiated input that enhances the quality of the product and is critical to the internet-streaming video on demand There are some movie studio and internet-streaming video on demand providers that are collaborating to offer exclusive rights of certain movies There are few suppliers of certain moviesCompetitive Pressures Stemming from Buyer Bargaining Power & Seller-Buyer Collaboration:Weak Buyer switching costs are low A particular internet-streaming video on demand can deliver quality that is not matched by other brands Buyers are individuals and cannot easily negotiate as a group There are multiple buyers in the market place, one buyer is not critical to internet-streaming video on demand provider success

Driving Forces:Changes in the Long-Term Industry Growth Rate:The NPD estimated that share of video on demand rentals is expected to increase 3.4 billion views in 2012. The market share is continued to increase past 2012 due to customer perceived value of Internet streaming and customers perceive video on demand providers to have a better selection of movie titles than traditional movie delivery services.Increasing Globalization:Netflix has begun an aggressive campaign to promote customer understanding and awareness of streaming in untouched markets to gain market share. This campaign to increase understanding of video streaming may open the markets to companies and decrease the entry barriers to enter global markets for other firms in the industry. Technological Change and Innovation:Technological change is a major driving force in the industry. In 2012, there were 700 devices with television streaming capability built into the device, and television remote controls are adding devices to allow for a direct connection for video streaming services.Every major network broadcaster, multichannel TV provider, and premium movie channel have been investing in Internet apps for all types of Internet connected devices to position to be able to offer TV everywhere packages. Marketing Innovation:Both video on demand services and movie studios are working together to experiment with shortened release periods to discover revenues allowing movies to be shown on video demand services before they had previously been released for at home viewing. Entry of Major Forces:There may be a large influx of entry into the market by traditional television subscription services offering video streaming as a complimentary service to preserve their market share. Among the industry there is also a wide spread belief that the only way to compete effectively with Netflix Internet streaming service is to offer shows and movies at any time through a traditional television subscription.

Key Success Factors:1. Technology: Expertise in internet-streaming video on demand Technology Easy to use interface system to watch content

2. Manufacturing Related: Ability to achieve economies of scale High utilization of content library

3. Marketing Related Wide breadth of movie selection Well known brand name

4. Skills and Capability Related: Instant Delivery Global Distribution Capabilities Strong online user interface site that is easy to navigate Talented workforce to design technology and maintain relationships with suppliers

5. Other: Low costs that are able to meet customers expectations for value Strong balance sheet and access to financial capital to acquire content Convenience in ability to access ISVDO on multiple devices

Strategic Group Map:

Financial Analysis:Financial Analysis of Netflix

200020052007200920102011

Revenue:35.90682.201,205.301,670.302,162.603,205.60

Profitability Ratios:200020052007200920102011

Gross Profit Margin:0.020.320.350.350.370.36

Operating Profit Margin:-0.650.290.410.760.760.75

Net Profit Margin:-1.630.060.060.070.070.07

Total Returns on Assets-1.110.130.130.170.150.07

Net Returns on Total Assets-1.110.120.100.170.160.07

Return on Stockholders Equity:0.800.190.160.580.550.35

Growth Ratios:2000-20112007-20112009-20112011-2010

Capital Annual Growth Ratio:0.500.280.240.22

Liquidity Ratios:200020052007200920102011

Current Ratio:-1.772.081.841.641.49

Leverage Ratios: 200020052007200920102011

Total Debt to Total Assets Ratio:-0.380.310.330.400.40

Long-Term Debt to Capital Ratio:there is no information about any long term debt in the case

Debt to Equity Ratio:-0.610.491.141.341.91

Long Term Debt to Equity Ratio:there is no information about any long term debt in the case

Other Ratios:200020052008200920102011

Dividend Yield on Common Stock:there is no information about the yearly average price of common stock

Price-to-Earnings Ratio:there is no information about the yearly average price of common stock

Dividend Payout Ratio:there is no information about dividends per share in the case

Internal Cash Flow:884.96%40.52%26.97%16.61%7.28%-0.71%

Gross Profit Margin:= (Revenues- Cost of Goods Sold)/ RevenuesThe gross profit margin is an indication of a Netflix financial health computed by using the formula above. The gross profit margin is an indication of the amount of money Netflix will have to pay for additional expenses and savings after accounting for the cost of goods sold. Netflix gross profit margin has decreased by 2.345% from 2010 to 2011, and signals that the firm has a decreased profit margin despite the increase in revenues.

Operating Profit Margin:= Operating Income/Sales RevenuesThe operating profit margin signals how much of Netflix revenue is left after paying for variable costs of production, such as technology and development, general expenses, marketing costs, among others. Netflix should have an operating profit margin of at-least the industry average, which is not provided in the case. Since we do not have the information about the industry average operating profit margin, we can look at the trends within Netflix to see that between 2010 and 2011, the operating profit margin decreased by -.6%. While this is not a major change, the operating profit margin should be continually monitored to ensure that Netflix continues to make a profit in the years ahead. Net Profit Margin:= Post-Tax Net Profit/Net SalesThe net profit margin indicates how much of each dollar earned by a company is transformed into profits. An increase in the net profit margin will indicate that a companys financial health is improving. In the period of 2005 to 2010, Netflix net profit margin was volatile. Of most pressing concern is the 5% decline from 2010 to 2011, which indicates that Netflix was earning 5% less on every dollar earned. Total Return on Assets:= Net Income+ Interest Expenses + TaxesTotal returns on assets are a ratio that is used to measure how a company is using its earnings, or the earnings for each dollar of the assets of company.Capital Annual Growth Ratio:= (Ending Value/Beginning Value)(1/Years)-1The capital annual growth rate is way to look at growth of a company but instead of growth per year the capital annual growth rate averages the growth over a number of years to find the rate of return if it had been a steady investment. Netflix higher annual capital growth rate over 11 years compared to its capital annual growth rate over two years demonstrates that the majority of the growth of the company was fueled in the first few years. Current Ratio:= Current Assets/Current LiabilitiesThe current ratio indicates the ability for a company to pay off its debts. A current ratio over one indicates a company is able to take care of its obligations. Netflix current ratio of 1.49 indicates that they are capable of paying of their debts for the current year and is sufficiently investing excess assets. Internal Cash Flow:= Operating Cash Flow/Sales Ratio

Total Debt to Total Assets:=Short Term Debt + Long Term Debt/ Total Assets The total debt to total assets ratio when compared overtime shows if a companies financial risk profile is becoming more or less risky. The gradual increase in the total debt to total asset ratio has shown that Netflix is taking on more debt and becoming financially riskier.Debt to Equity:=Total Liabilities/Stock Holder EquityThe debt to equity ratio shows a firm liquidity.

SWOT ANALYSIS:

Netflix Current Strategy:Netflix currently deploys a best-cost provider strategy, in which Netflix balances low cost and product differentiation. This strategy allows Netflix to be a provider that offers a product that is appealing to broad markets and targets buyers willing to pay a fair market price for performance and functionality. The evidence that Netflix is deploying this strategy is made evident by Netflix offering a larger amount of titles in its content library at a price that is equal to its rivals. Netflix current strategy is not currently effective in helping Netflix reach its long-term goals. The following key indicators discussed below influence the conclusion of Netflixs current strategys lack of effectiveness.Decreased Trend in Customer Acquisition and Customer Retention: Netflix spends heavily to attract new customers and offers a free one month trial, with the hopes of having gained additional customers, this strategy works well as demonstrated by the graph below in acquiring customers but does not ensure the long-term retention of customers. Netflix marketing strategy is based off acquiring customers at a higher rate than the number of canceled subscribers. This strategy does not seem to be effective as shown by the large number of cancelations from July 2011- December 2011 that led to a net loss of subscriptions. Graph 1: This shows the trend of subscription additions and cancelations between 2000-2011Decrease in Overall Financial Strength::Netflix is currently facing a decrease in financial strength as a result of heavy investment in markets abroad. In the past two years, the gross profit margin, operating profit margin, net profit margin, total returns on assets, and return on stock holder equity have all declined, this is detailed on page 12. The decrease in financial strength in a concern for Netflix as the decrease in financial strength is caused by expansion into the United Kingdom and Latin America.Another contributing factor the decrease in financial strength is the rising costs to show streaming content. There is little bargaining power with suppliers because there are few suppliers, movie studios and those who provide licensing for movies, and the content if critical to Netflix operation.Continued Strong Focus on Continuous Improvement Activities:Netflix is committed to continuous improvement activities as their current CEO noted in his post to consumers when he stated the reason for the spin off Netflix DVD rental division to Quikster was to allow Netflix to focus on rapid improvements in its streaming technology. Netflix is looking to improve all three of its product offerings by improving domestic streaming technology, actively looking to expand its international presence through improvement of content offered abroad, and the enhancement of value added to the Domestic DVD by Mail service by expanding its offerings to allow video game rentals in addition to DVD rentals beginning in 2011.Decreased Image and Reputation Among Customers:Despite the aggressive spending by Netflix to attract and retain new customers, Netflix faces a strained relationship with its customers due to lack of communication and increases in the price. In 2011, Netflix announced a new pricing plan that resulted in an increase in the total price paid for over half of their customers, by separating the mail by DVD service from the video streaming service, which would increase the cost of a comparable plan by 59.98%, from $9.99 to $15.98. This move by Netflix alienated many customers who posited negative comments on social media about the move. The result of the pricing change resulted in the loss of an estimated 600,000 subscribers who canceled their membership during this period.

Weighted Competitive Strength Analysis:

NetflixHuluAmazon Prime

KSF/ Strength Measure:Weight:Rating:Weighted:Rating:Weighted:Rating:Weighted:

Other Products Offered:0.110.110.190.9

Advertisements during Content:0.180.810.180.8

Cost:0.2515161.2

Global Presence:0.271.410.210.2

Selection:0.210240.840.8

New Product Innovation:0.261.220.451

Sum of Weights:1

Overall Strength:6.52.64.9

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