Netflix Case Study

VODISNOWHERE. What do you see from the block of letters? Is it “VOD IS NOWHERE” or “VOD IS NOW HERE”? You are right if you guess the former and latter. That depicts the fast pace of technological development. VOD, which refers to Video-on-Demand, is the recent video streaming technology where pay-per-view programming merges with Internet downloading. Netflix, an online subscription-based DVD rental company, entered the video industry with disruptive technology of offering online video rental while the incumbent competitors like Blockbuster were offering retail rentals. The incumbent competitors eventually followed Netflix’s direction when their core competencies were sabotaged by Netflix’s strategy. Moreover, Netflix was a technological leader that invested in new technologies like VOD.

In this case study, we first address the pertinent problem faced by Netflix which is arriving at a decision regarding the optimal mode of entry into the VOD market. This decision in question will inevitably impact Netflix’s current position in the DVD rental industry as well as its existing business model and thus a thorough analysis of the corporation and the video market need to be made.

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A SWOT analysis was done on Netflix and its strengths and weaknesses, in particular view reveal its survival in the hyper competition of video industry where dynamic and complex uncertainties render competitive advantages not sustainable. Some strengths of Netflix’s current business model include its no late fee subscription model and proprietary recommendation system where customers can be recommended movies based on their preferences as well as the availability of the movies. The main weakness of Netflix remains to be delivery time as customers do not get to enjoy the instantaneous effect of receiving the DVD upon rental as compared to a brick and mortar store. The opportunities which Netflix could capitalize include leveraging on existing strengths such as, its brand, its recommendation system and its large market share of online customers to increase penetration of the young VOD market. Threats or risks faced by Netflix will be the huge capital outlay Netflix have to invest in to enter the relative young VOD market. The SWOT analysis done on Netflix eventually led to a recommendation aimed at arriving at a decision regarding to the problem statement. The recommendation will be forming short-term licensing arrangements with cable providers to reduce the risk profile of entering a relatively young and unknown VOD market. This recommendation will ensure that Netflix do not lack behind in VOD developments while not having to commit a huge investment upfront.

Problem Statement

Video-on-demand (VOD), a service that allows users to select and watch video and clip content over a network as part of an interactive television system, is going to be the next biggest thing in the internet. It is going to become a norm in the industry or public and is also a threat to Netflix existing business model, an online subscription-based DVD rental service, which depends on the internet to send out physical DVDs to their customers. How should Netflix enter the online video market? Any decision made on this issue would impact not just the Netflix existing business model but its ability to sustain its position as a giant in the media industry.

Analysis

But before we go into an in depth discussion, we first present Netflix’s current strengths, weaknesses, opportunities and threats and reveal some of their strategies used so far. After this we can be in a better position to determine how Netflix should respond to the Video On Demand trend.

Strengths of Netflix

Netflix offers prepaid subscription service whereby customers only need to sign up and pay a fixed subscription fee a month for unlimited duration rentals. Customers will now have no more worries of returning their movies late, as Netflix has abolished the late-fee system. This model enables Netflix to justify its slower delivery time in comparison to Blockbuster brick-and-mortar model. Instead of making it difficult for customers to unsubscribe its service, Netflix made the un-subscription process relatively easy and adopting the strategy of reclaiming churned customers rather than forcing dissatisfied customers to stay.

Netflix also offers a web portal with powerful features such as a proprietary recommendation system that was very accurate in recommendations, due to exploiting the knowledge of the choices made by the masses in its web portal as well as having the largest collection of movie ratings. Customers are recommended to movies based on their preferences as well as the availability of the movies.

Being the first company that venture into the online DVDs rental retailing, Netflix gain a first mover advantage. Netflix has gained a good reputation as well as a large base of customers over the years. Besides having a good and strong relationship with several major studios which enable it to acquire latest releases at a faster time and lower cost, Netflix also successfully gain resources from independent film studios whereby creating a niche in the market. Therefore, customers can get a whole wide range of movies (including those lower-profile and independent films as well as earlier released movies) from Netflix as compared to other competitors.

Weakness of Netflix

Although the prepaid subscription service did help Netflix to gain new customers and revenue, yet this model do not work with low volume customers (i.e. customers who seldom rent a DVD). High replacement inventory cost will occur since DVDs might get lost or damage during the mail transit.

The current business model that Netflix has is more likely to be sustainable if VOD technology is not going to emerge over time. However, if VOD technology is emerging over time, Netflix’s current model is not sustainable anymore. Even though Netflix has the largest movie rating library, independent films and well-known recommendation system, yet delivery time is still a weakness for Netflix in comparison to brick-and-mortar store like Blockbuster. Customers could not get the DVDs they want immediately. Furthermore, companies with VOD services such as cable providers can even deliver movies to customers faster than Blockbuster since customers do not have to go to the store to get the DVDs. Instead they just have to relax and sit in front of their television, select what they want to watch and the cable providers will straight deliver the movies to the customer’s television.

Opportunities for Netflix

With the fast pace advancement in technology, Netflix can easily source for the technology and infrastructure to provide VOD services to its customers. Moreover, Netflix can review on the current competitors in the VOD market to have a safer measure before entering into the market. Since Netflix already have an infrastructure for online customers, and that is their point of contact with customers, they could be at an advantage to change their business model to providing VOD online, or partner with Cable provider to deliver the VOD to customer via customers’ television set. In the event, if VOD is unsuccessful, Netflix’s losses can also be reduced to a minimal.

With the licensing agreement with cable providers, Netflix will be able to bypass the technology challenge of connecting the computer with TV easily, without having to spend time, cost and effort in solving the problem of developing a large infrastructure capital outlay to deliver video content to subscribers by themselves. Netflix can also capitalized on cable providers existing networks and infrastructure to further enhance on their services, especially their core DVD rental service. While cable providers can leverage on Netflix well known recommendation services in tandem with their own infrastructure. Netflix can even take advantage of cable providers’ new customer bases, introducing the customers to their core DVD rental service as an alternative choice.

Making good use of Netflix’s existing strengths such as, its brand, its recommendation system and its large market share of online customers to increase penetration of the young VOD market and ultimately differentiate the company’s business from stand-alone sites such as Vongo and MovieLink.

With VOD, the problems associated with inventory control such as damaged as lost DVDs might be eliminated. More people have higher purchasing power since more are buying high-price durable goods like big-screen HDTV. Hence, it created opportunity for Netflix to offer VOD to this market segment.

Threats for Netflix

Video streaming technologies had evolved drastically over the years to the recent VOD. Netflix knows, it is just a matter of time that VOD will become the public most commonly way of viewing media, but the unknown is that when will that be. If they continuingly be complacent with their existing model, they will lose out to the intense competition in the industry. The risk is, for how long they can leverage on their existing model, until they change their strategy before losing out market shares. Brick-and-mortar stores like Blockbuster will continue to enjoy its business with customers who want to get their DVDs on the spot and do not consume high volume of DVDs.

Partnering with a competitor would be challenging to Netflix. They will have to manage relationships with cable providers carefully and also to negotiate the details of contractual agreement as detailed as possible, so that any undesirable outcome in future will be at a minimal. With the fast advancement of technology, the likelihood of a satisfactory connection between a user’s computer and television might emerge shortly in the future. If Netflix is partnering with the competitor, Netflix might lose a large portion of the VOD market share.

Netflix have to spend time, cost and effort in solving the problem of developing a large infrastructure capital outlay to deliver video content to subscribers by themselves, if integrating of VOD service into its portal is being done. VOD content acquisition cost will be bore solely by Netflix. Currently, only limited online content available as all the major studios are quite reluctant to participate due to the concerns of piracy. In the event, if VOD is unsuccessful, Netflix’s losses will be a huge amount. Moreover, reputation of Netflix might be affected too. Simply by offering a new feature at no additional charges to customers means that there will be no additional revenue. Without additional revenue, it will be difficult for Netflix to justify costs associated with content acquisition and programming support.

The liberate U.S. law allows consumer to buy a DVD and rent it as many times as they wish. Moreover, the piracy issue is a major concern in U.S. Hence, it posed a threat to Netflix as there is no need to obtain license from content owners and Netflix’s sales would be affected.

Recommendation

We recommend Netflix forms short-term licensing arrangements with cable providers. We emphasize that the arrangements be short term, because while it is quite certain that the VOD trend will kick off, it is still not clear when it will become widely adopted enough to hit the critical mass for Netflix. Thus forming short-term arrangements effectively reduces risk for Netflix in a number of ways. First technologies that allow connections between a computer and a television set can emerge, making long-term licensing arrangements redundant. Second, by exploiting the cable providers existing cable network and infrastructure layout, Netflix avoids having to move away from its core competency and build its own one.

Apart from minimizing the various types of risks, there are some other advantages too. Most important among them is that, Netflix can gain quick penetration into the VOD market, leveraging the existing infrastructure of the cable providers. Also, Netflix can now tap into the customer base of the cable providers. Later it is explained how this new group of customers can be influenced to use Netflix’s services. The arrangements are mutually beneficial in that cable providers can access Netflix’s one of a kind proprietary recommendation system to improve their VOD offering.

Given that technological improvements can affect Netflix’s business model, it should pay close attention to the developments of online content availability and connectivity. It should make provision for the eventual adaptation of connectivity technologies when they become available.

When such technologies do emerge, Netflix can consider integrating the VOD service into its main portal after the contract with the cable provider has ended and also consider following marketing and ‘customer-grabbing’ strategy. Besides offering a 1 month free subscription to its existing DVD rental customers, Netflix also can offer the cable provider’s customers who want to view videos from Netflix’s web portal. This means, customers would initially choose videos from Netflix over other video providers. They would state their preferences and make a list of requested titles in their customer queue. In essence, by providing free subscription, we give customers the incentive to use Netflix, and experience firsthand powerful features of its web portal. At the end of one month, they are free to continue with Netflix or to choose other retailers. Given that many would be tied in to the web portal, it’s likely that a lot would choose to pay for Netflix’s service.

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