Netflix Case Study Essay
Reed Hastings founded Netflix in 1997 - Netflix Case Study Essay introduction. He noticed that there was a demand for the ability to rent movies. With a large customer base he figured there was no question that his company could fail. This began the online movie rental industry to a large scale. With one company becoming successful, it wouldn’t be but a matter of time before others began to catch on and begin to reap the benefits of someone else’s idea.
Reed Hastings has already been a success for beginning new companies. He first made a name for himself by going public with Pure Software in 1995 (netflix.com/PressRoom). After the development of this company he began to acquire several other companies and made Pure Software one of the 50 largest public software companies in the world by 1997; this until they sold to Rational Software in 1997. From there Hastings moved on to other projects.
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The other project in mind was Netflix. Hastings and a few colleagues formed Netflix in 1997, as formerly stated. Which by 1999, they had over one million subscribers in only three and a half years. Since the beginning of Netflix in 1997, they have battled many different forms of DVD entertainment competition. The competition ranges from simply going to the local video store, or actually going out to purchase a movie. It ranges too many other levels as well as many other mediums.
Through the beginning and even until today Netflix has been able to stay ahead of their competition; this mainly due to the seemingly flawless method of getting the product to the end user, and back. “No one is going to out-hare Netflix,” Hasting said. (Netflix-Maddox) With this bold statement, Hastings has been able to keep his word on it. He is able to keep his word mainly because of the intricate rental system involved, also because they have until recently been what seemed to be the best deal for renting movies.
Netflix seems to have a simple statement. “Our vision is to change the way people access and view the movies they love. To accomplish that, on a large scale, we have to set a long-term goal to acquire 5 millions subscribers in the U.S., or 5 percent of the U.S. TV households over the next four to seven years.” (Maddox, c-14) This statement appears to be plausible as long as they figure a way to keep the Blockbusters and the Wal-Marts of the world at bay.
“Netflix launched its movie rental service in 1999 with the goal of using the DVD format and the Internet to make it easier for people to find and get movies they will enjoy. As a result, our members can reliably discover and enjoy lesser-known titles. As we succeed, more people are watching more films, and filmmakers are reaching a larger audience. In turn, we believe they will produce more new films. Netflix strives to be the world’s largest and most influential movie supplier. (netflix.com/pressroom)”
* The first strategic issue that Netflix will need to cover is how to gain a larger consumer base. Without more members they will have a hard time keeping up with the competition. Many of their competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than Netflix does. Some of their competitors have adopted, and may continue to adopt, aggressive pricing policies and devote substantially more resources to marketing and Web site and systems development than Netflix does.
The rapid growth of their online entertainment subscription business since their beginning may attract direct competition from larger companies with significantly greater financial resources and national brand recognition. For instance in 2003 the extremely wealthy Wal-Mart used their online site to launch an online DVD subscription service, Wal-Mart DVD Rentals. With increased competition reduced operating margins may result as well as a loss of market share and reduced revenues. In addition, our competitors may form or extend strategic alliances with studios and distributors that could adversely affect our ability to obtain titles on favorable terms.
* There are new opportunities for the industry. With the advancement of technology many companies can take advantage of the Internet. Currently Netflix expects to spend $7 million-$14 million this year on its Internet Video-On-Demand offering, which it will launch during 2005. Along with opening more distribution centers, this will cut down on delivery costs and time. They expect Internet VOD to have little impact on its performance for several years. This will help compete against other members that are allowing the downloading of movies online. Because of this Netflix will begin a frontal attack as of 2005 with Video on Demand (www.biz-architect.com/netflix_vs_vod.htm).
* New Entrants are becoming a threat to the existing members of the industry. More companies are deciding that they can take action in online renting. After Netflix pioneered the online rental service. Since then other major companies like Blockbuster began offering a lower monthly rate in addition to in-store renting.
Netflix will not be able compete with in-store renting for the fact that they do not have brick and mortar establishments. With the new entrants in the industry the price of renting movies will become better for the consumers. In order to attract the biggest customer base the companies will need to battle over the best offer. As the competition occurs a few things can happen. First, the price of the membership will decline. Second, more movies will be offered.
* Netflix must also consider globalization as a potential area to gain market share. Currently Netflix is serving members throughout the United States and in the United Kingdom. There is already competition globally outside these two countries. Many of the companies in this industry already have locations around the world. For example, Blockbuster has sites in 25 countries, which are 2600 stores outside the United States alone (blockbuster.com).
This would mean that they would have to set a distribution centers in a foreign country and hire people to run the actual site. Once the centers are set up though, it would be feasible to promote the online service. Netflix would have to look the different tax rates, currency exchanges, and government regulations, along with different copyrights associated with the studios that supply the movies, before physically setting up this venture. If the rates of these foreign restraints were greater than that of its sales then Netflix would be operating in a loss.
* Something that the industry will begin to see is a change in the increase of technology over time. DVD’s have replaced VHS, which replaced Beta, which replaced 8 millimeter; eventually something will replace the DVD. With that said, all companies should be aware that eventually DVD’s will be outdated by some future technological advancement. They might be going in a better direction with Internet Video on Demand. It should be noted that the DVD would take a while to be replaced. Currently this technology is still fairly new and extremely reliable to the users.
Market Size/Growth Rate: The DVD market is one of the fastest growing markets, experiencing unprecedented growth since its debut in 1997. The growth was largely attributed to dramatically falling component prices. DVD recorders were forecast to surpass sales of DVD players by 2007, with an expected compound annual growth rate of 126 percent. DVD sales for 2003 were $11.4 billion.
Stages of the Life Cycle: The e-commerce movie rental industry is now in the rapid growth and takeoff position, in the business life cycle.
Scope of Competitive Rivalry: Rivalry is fierce between the top e-commerce movie rental agencies, which are Blockbuster Video, Wal-Mart, Movie Gallery, Walt Disney’s Movies on Demand, and Movielink’s Downloadable Movies. These rivalries all compete in global marketplace. The Geographic area of operations for the e-commerce movie rental industry is worldwide. With the advantage of not having a brick and mortar operation, subscribers can literally be anywhere in the world.
Number of companies in the industry: The online DVD rental agencies are fairly large and still new. There are two major companies that dominate the industry. (Netflix and Blockbuster) The four other companies listed in the previous section are rivalries of Netflix as well.
Buyer Needs: Buyer needs have changed since the opportunity of the e-commerce industry. In the online movie rental industry buyers are looking for the added convenience of not having to drive to the traditional brick-and-mortar outlet. Buyers are also looking for certain attributes such as, no due dates, and free shipping. We can predict that in the future buyers will require a new form of deliver such as downloading.
Pace of Technological Change: Advancing technology plays a vital role in the online movie rental industry. Industry members need strong technological capabilities to keep up with buyer needs.
Ease of Entry/Exit Barriers: Barriers to enter in the online DVD rental market were very low, but the barriers to profitability were extremely high. (Netflix-Maddox)
Degree of Vertical Integration: Members of this industry can gain competitive advantage by being partially integrated through their distribution channel.
Product Innovation: The online movie rental industry should focus on research and development to gain competitive advantage over rivals by being first to market with a new product. A new product for this industry will soon be VOD.
Degree of Product Differentiation: Rivals within the industry are causing price competition. Blockbuster Video recently just lowered there monthly rate under what Netflix charges for there cheapest subscription. The degree of product differentiation has not occurred with the physical product, but it is the service that is causing price competition.
Economies of Scale: In this industry, member can enjoy economies of scale in shipping activities and partnership agreements with studios
The five forces model is a tool used to diagnose the competitive pressure of the industry. The model assesses the strength and importance of each pressure from five different areas of the market. The five areas of competitive pressure are threat of rival sellers, potential new entrants, and firms offering substitute products, supplier bargaining power, and buyer bargaining power. To use the five forces model one must first identify the specific competitive pressures in each of the five areas, second one must evaluate the strength of each pressure, and last one must determine whether the collective strength of the five forces is conducive to earning profits.
The strongest of the five forces comes from rivalry among competing sellers. Firms will use any resource or weapon available to gain a better position in the market. The rivalry in the online DVD rental industry is high. In this industry rivals carry a weakly differentiated product, which makes the threat from rivals more intense. There are low costs to switch, which make it easier for consumers to shop around and have less brand loyalty. The only area in the online movie rental industry that has weak rivalry is in buyer demand. The industry enjoys an expanding buyer demand. In this fast growing market, rivalry is weak due to enough business being available to all members of the industry.
The threat of new entrants in the online DVD rental industry is strong. Industry members should be concerned with several factors that lead to strong threats of entry. Some factors include a large pool of potential candidates with available resources, low entry barriers, and high buyer demand. The industry is attractive to potential entrants because it is one of the fastest growing markets (Netflix, Maddox). There is significant pressure in the online rental business due to large market growth and profit prospects.
The most formidable force comes from the incumbent members entering new areas of the industry. Blockbuster is an incumbent industry member who began expanding into other product segments. Some attributes that Netflix have lead to a weak threat of new entrants. These attributes are; better distribution channels, strong lead of customer base, revenue and brand recognition, and patents that can stifle competition through licensing fees for service (Netflix, Maddox). New comers to the industry also face high barriers to profitability. Netflix may also enjoy a cost advantage from longer experience and technological know-how in the industry.
The threat of substitute products in the online DVD rental industry is moderate to high. A major threat for the industry is the idea that the DVD will no longer be the medium of choice for home entertainment and that consumers would soon be downloading movies and using On Demand (Netflix, Maddox). The substitutes for the industry are movie theaters, downloads, and movies On Demand. The threat of substitutes is strong when the substitutes are available and attractively priced.
There are certain competitive pressures that come from supplier bargaining power. If the supplier exercises bargaining power to influence terms or collaborate with sellers there can be a strong pressure. The suppliers of the industry are all of the studios that make movies. Suppliers have sufficient bargaining power when they know what the companies need to keep in inventory because of consumer demand. Each studio makes movies that are only available through them and that is a differentiated product, which gives the supplier more power because the companies can’t get the movie from any other studio. One area where suppliers have less bargaining power is if Netflix, or Blockbuster or any other competitor accounts for a big fraction of the supplier’s total sales.
Large retailers usually have more bargaining power than individual buyers. Buyers can demand concessions when purchasing large quantities. There are also not many buyers for the studios so each buyer is important to the supplier. Information is also readily available to each of the competitors to compare prices the studios are charging other buyers.
Netflix has become a dot-com success story. Netflix had to build software to help manage its complicated rental system. Using the Internet has extended the geographical area to where it is accessible anywhere in the United States. You can search and rent movies no matter what time it is, you don’t have to worry about the store closing. It doesn’t matter if there is a store near you or not.
They had to have to newest technology available to outwit their competition. How Netflix did this was buy making a wish list for viewers to see and eventually rent. Netflix will ship the movies free of charge with no due dates or late fees. One service that Netflix has is called CineMatch, which is a database for all the movies they carry.
CineMatch runs on two Sun 420 systems which generated thousands of predictions each second. CineMatch also collects information on the users’ preferences. Netflix built 15 distribution centers to accommodate the customers so they can receive their movie rentals in one business day of shipping. Netflix would ship from the closest distribution center. With customers having more access to the Internet, they will be more likely to order movies online rather than driving to the store and worrying about the late fees.
Changes in Buyers/Changes in Usage
With more users having access to the Internet, more people will be online renting. The home computer will become the next movie store. As the Internet is accessible people may start burning and copying movies from the Internet rather than renting and paying any fee at all. Netflix has mentioned adding and adult entertainment category to its website. Even though Netflix doesn’t want to attract that kind of clientele they have talked about it. This may mean that women will no longer be making up more than half of the subscribers to Netflix.
Seeing as how Netflix has come into the rental market people of different socioeconomic range have decided to enter as well. DVD’s are much more accessible to every class of citizens, not just the upper class. Netflix appeals to everyone’s taste. It appeals to movie fans because you are getting a deal if you watch a lot of movies. Like some people who only watch one movie a month, will lack interest in this deal. So they need to develop a deal for people who only watch 2 movies a month for an even lower price.
Changes in Cost and Efficiency
Netflix was first offering $20.95 a month for unlimited rental and three titles out at a time. The flexibility that Netflix offers now is great, the highest price is $39.95 which is for the avid movie goers, then it goes down to $13.95 for the most limited subscriber. Netflix has the highest efficiency out of all of its competitors because it has more than one distribution center. Netflix also lists your preferences and allows family members to use the account as well. Which means mom and dad can access movies that the kids can’t. Netflix started turning profit in 1999 and has had continued success with its growth rate from year to year.
Netflix has now lowered the subscriber cost to the amount each person may want to purchase. You can now decide what plan you want to subscribe to making it more efficient and cost worthy to rent movies. With Blockbuster treading on Netflix’s heels there is going to be strong competition for a long time. This means that each company that is in the Internet movie rental business needs to continuously be improving their systems to compete against each other.
Netflix Case Study Essay
VODISNOWHERE - Netflix Case Study Essay introduction. 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.
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.
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.
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.