Netflix Case Analysis

Competitive Dynamic and Rivalry Case Study: Netflix

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Netflix Case Summary Netflix, an on-demand streaming and DVD-in-mail provider company, was founded in 1997 by Reed Hastings, Marc Randolph, and Mitch Lowe. Netflix launched its website on April 1998 and positioned itself to take advantage of the new DVD technology because the founders believed that DVD technology will eventually replace VHS as the preferred playback format. The company had it IPO on February 2002, selling 5.5 million shares of common stock and raising as much as $82.5 million in equity. To boost its brand awareness, Netflix provided a free rental coupon to consumers that purchased Toshiba, Sony, and Pioneer DVD players as well on selected Hewlett-Packard PCs and Apple computers. In terms of competition management, Netflix management is very initiative as they called an early truce with Amazon to preempt the rise of formidable competitor. In 2000, Netflix introduced online content streaming that allowed subscribers to watch movies and TV shows on their PCs at no additional cost, In 2009, its streaming library has grown eightfold and is compatible in many different devices includes PCs, Macs, Blu-Ray Players, Sony PlayStation 3, Xbox 360, TVs, Roku, and TiVo. By 2002 the company has signed revenue sharing agreements with an unprecedented 50 film distributors including Warner Home Video, Columbia Tri-Star, Dream Works, Artisan, and many more. Despite the growing revenues, the company is not without competition; strong competition was given from different players in the market such as Blockbuster, Walmart, and Redbox – with Blockbuster and Walmart in particular attacking Netflix’s DVD rental services. Despite the strong competition in the market, Netflix still

managed to double its subscribers and reach one million subscribers by February 2003 and continue to turn its customer base into profit. The new era of digital media brought the industry’s barriers of entry to be very close to non-existent, converting in the increased number of competitors for Netflix in the recent years. Since the switching cost between competitors is relatively low, it forces Netflix to move carefully in the competition as the subscribers are not particularly loyal to the brand, but to the content it provides. Thus as long as there are other competitors, offering a better services and with a lower fees, customers are more likely to switch to the competitors. To compete better in the market, Netflix does not only did revision on its subscription packages and price, but also to its distribution channels and partnership with its competitors such as Walmart and Amazon as well as with hardware providers such as Sony, Toshiba, and many other strong brands to ensure that its products and services are easily accessible and convenient to use. Netflix as a company, understands well its products and services and what actually matters to its customers. The management understands that time and money are the most valuable resources for the customers today, thus the management focuses in offering values to its customers through fast delivery, outstanding customer services, and updated contents. To encourage potential new subscribers, Netflix also did on and offline advertising from web-based banner ads to direct mail promotion. Netflix also offers a no-obligation first month of free service and a 10 percent discount in the first month to its existing subscribers after they stream content using particular device, such as Nintendo’s Wii. Netflix also shows its commitment on giving outstanding customer services by getting itself on the first place in 90 percent of polls measuring e-commerce customer satisfaction and American Customer Satisfaction Index (ACSI). Looking on its financial performance, Netflix largest part of its revenue is contributed from monthly subscription fees where its net income increased

by 40% and 39% in 2009 and 2010 respectively. The company took $200 million long term debt financing in 2009 and resulted in much higher debt ratios relative to its industry median. However, the strong position of Netflix in the industry is maintained by the outperforming performance of its profitability and operation ratios compared to the industry median. Netflix as a company carry high cash balance and has been primarily used to finance its stock repurchase program, content acquisition, delivery expenses, and capital expenditures related to information technology and automated equipment for operations, marketing, and fulfillment; thus leading to an increase on assets growth rate and a significant decrease on liability growth rate between 2008 to 2010. In April 2010, Netflix exceeded expectations by achieving outstanding first quarter results with grown subscriber base by 35% y-o-y as per Q1 2010. Despite all the good signs and performance by Netflix, questions regarding the business sustainability remains, especially since USPS, its delivery partner, was considering stopping Saturday delivery as way to staunch its financial losses. Another question is on the business model sustainability, with the close to non-existent barriers of entry, the number of worthy competitors are to be expected in the industry, especially with the growing demand for digital movie rentals provided by Internet and cable companies. To remain competitive in the market, Netflix has to also somehow deal with the 28 days delay on content release in Netflix website, after the original DVD of the movie released in the market by the major Hollywood studios and content providers.

Netflix Case Questions 1. Review Netflix’s organizational strengths. What core competencies have led to the company’s remarkable success? Under new industry conditions, will they qualify as

sustainable competitive advantages? Can anything be done to lengthen or strengthen the advantage(s)? Answer: We analyze the market industry of Netflix with Five Forces Porter’s framework below. Five Forces Porter Analysis

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Threat of new entrance is High. Netflix have many competitors for both online DVD rental and content streaming segment. In DVD rental by mail they have Magic Disc, DVD express, Reel.com, and also major studio companies that sell their movies in DVD format. In online content streaming segment there are direct and indirect competitors. Direct competitors such as VOD segment (Apple’s iTunes, Amazon.com, and CinemaCom), the ad supported segment (Hulu.com, Google’s Youtube, Google TV), and the subscription segment (Blockbuster Online). Netflix’s indirect competitors such as video package providers with pay-perview and VOD content. With the great amount of competitors we can see that there are

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low barriers of entry in the industry and high threat of new entrance. Bargaining power of suppliers is High. Netflix suppliers are the Amazon Web Services (AWS) as a server provider, content providers (major Hollywood studios), and US Postal Service (USPS) for delivery. Netflix and AWS is a mutual benefit partnership between Amazon and Netflix. We think the bargaining power is low for AWS as a supplier because when the partnership stopped Netflix could seek another option for the server. For USPS case, USPS postage rate increase and they cancel the delivery on Saturday, these factors will be an issue for Netflix’s price and time delivery. But we think USPS and AWS bargaining power is still considered low to medium. Meanwhile the bargaining power of content providers is considered high because the main key in Netflix industry is the contents. There are some challenges regarding content providers. In DVD rental segment we see that the content provider got revenue stream from DVD sales, in the future companies can self-distribute their products and

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maybe make it available for online streaming. Bargaining power of buyers is High. There are many competitors that customer can choose beside Netflix, also other substitute services or products. Beside of that, customer can easily switch their choice because there are high cost or constraint that prevent customer to choose other company or brand.

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Threat of substitute product is High. We can see that the there are some products or services that can substitute such as movie theaters, live streaming online video that have advantage in showing video in real time, and also other substitute is illegal video download which is can threat the sales of

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Netflix. Intensity of rivalry among existing competitors is High. We can conclude that the intensity of rivalry among existing competitors is high, because there are low entry barriers, and the presence of major players.

Netflix Core Competencies  First mover advantage Netflix have an advantage as a pioneer or first mover in this industry. They bring content directly to the customers by using online rental and offered many benefit for the customer, like low price packages, no due date, no late fees, etc. Netflix guaranteed that all DVDs titles would be in stock and delivered quickly and directly to their customer’s 

doorsteps via the USPS. Value added services Netflix have a patented extensive personalized video recommendation system based on user rentals, ratings, and reviews. Beside of that Netflix have extensive catalogue,

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outstanding service, and near constant innovation. Cost leader Netflix positioned itself as cost leader, proved by the products and services packages they had. Netflix combined subscription package streaming and DVD-by-mail content. It offers a uniquely compelling selection of movies for a low monthly price. With the condition of the industry and competitors we described in Five Forces

framework, we see that it is a fragile business, so Netflix have to keep maintaining their core competencies and always innovating. The customer in this industry are loyal to content and sensitive to price, therefore Netflix have to continue providing up to date selection of contents and in a reasonably price. 2. What are the greatest external risks facing the company? What measures can or should Netflix take to protect itself from these environmental threats? Answer:  Economical

Price can become sensitive matter for many people. Market competition is very tight, price become one of the important consideration for people. Because every company in the market offering the same product, Netflix have to consistent giving competitive price and services to keep customer loyal. 

Technology 1. Hacker and piracy can be major threat for Netflix long-term business. Netflix have to protect infrastructure and services from people or group of people who try to access their services. Piracy can cut business revenue. People will not pay for video if they can find freely in internet. 2. High Technology evolution. To keep stay in competitive, Netflix have to keep up to date to provide streaming method for every target segment market. People not only use Netflix services in game console, PC and video player. With the fast technology changing, Netflix has to keep chasing the changing in people behavior.

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Law Law play important role to keep Netflix and other content provider to survive in the business. Netflix has to push Law enforcement in hacker crime and piracy activities. Not only company can lose the business but customer also can be the victim of this activities. Customer put their personal information such as email, credit card number and address in the company server.

3. Evaluate the strengths, weaknesses, and strategies of the company’s primary competitors. Based on a thorough competitor analysis, what is the expected strategic intent of Netflix’s key rivals? Is the company prepared to respond to their potential competitive moves? Answer: SWOT of Netflix: Strengths : a unique recommendation system; fast delivery; provide a lot of library /movies; can be access instantly from Wii, PS3/Xbox 360, apple devices, Weakness

Roku and internet TV. : DVD is not sustainable by the time , it can be damage or lost, cannot catch up the process for making DVD to meet demand market, 28 days delay

negotiation with Warner Brothers, 20th Century Fox, and Universal. Opportunity : VOD, New business development such as creating virtual built in tied with Threats

programs, expand markets. : LIVE streaming online videos, low entry barriers to entry market, illegal download, Blue Ray

SWOT of Blockbuster: Strengths : The largest video rental chain, own 6,500 company with 62% located in America, already having a partnership with Samsung Electronics America collaborate with Samsung’s Next Generation with HD TV to rent just using button with the high internet connection, provides VOD service partnership Weakness

with TiVo. : High charges for monthly price and instant viewing more than one movies; no instant access on Wii, PS3/Xbox 360,ipad, iPhone or iPod touch, Roku,

Internet TV Opportunity : VOD, New business development such as creating virtual built in tied with Threats

programs, expand markets. : LIVE streaming online videos, low entry barriers to entry market, illegal download, Blue Ray

SWOT of Redbox: Strengths : Placing at automated Kiosks selected McDonald’s, supermarkets and convenience stores; customer can using debit or credit card to rent movies; can reserve movies using online; can pick up the movies at selected kiosk; can return the movie in any kiosk; free membership Weakness : Delay renting movie DVD’s after public release date. Opportunity : VOD, New business development such as creating virtual built in tied with Threats

programs, expand markets. : LIVE streaming online videos, low entry barriers to entry market, illegal download, Blue Ray.

The company already respond to their potential moves. They already aware about the trend market goes to digital era. They make an agreement with amazon.com, if there is any customers who wants to buy those videos. 4. Review cooperative strategies that have been used successfully by Netflix and its competitors in the past, then identify a set of goals that future partnership agreements should achieve to maintain the company’s position of market leadership. Answer: To be able to sustain the competition in movie rental industry, what Netflix and its competitors successfully did are: - Successfully capture market needs when there is a shifting in the market behavior. Since the era of technology is coming, Netflix was first mover who provide online movie rental. More than that, era of technology has brought a shifting in market behavior. -

People now prefer to watch movie online than borrowing it physically. Response attack from competitor with non direct attack, for example when Walmart offered lower subscription price, instead of lowering their price, Netflix was opened additional distribution centers to improve its service.

For future partnership, what should Netflix set are: -

Keep up to date with market shifting. Since the trend is shifting, Netflix should be able to catch new opportunity. Since technology is always changing, Netflix should be able to catch opportunity offered to the

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industry, like increasing service for its streaming content segment. Improving service, technology infrastructure and cost efficiency Since it is easy for customer to change service from Netflix to the other, Netflix should be able to improve its service from customer service and also improving its infrastructure for online streaming. From the other side, customer is really price concern, so Netflix cannot

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increase the price significantly. Maintain long term relationship with supplier like movie content provider and also USPS See the industry, it can be concluded that Netflix dependency to its suppliers are high. For example when USPS have consideration to close its operation in weekend, it directly affect Netflix operation service. And when suppliers have policy to publish their content 28 days after they published the DVD, what Netflix can do is just improving its service

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and do marketing effort so it not lose its competitiveness. Consider and develop a strategy for international expansion International expansion cost Netflix a lot and tons of challenge await. Netflix should carefully define strategy to sustain in international market like how to negotiate with foreign film studio, how to develop entry barrier and prevent wider piracy and illegal download.