A key business goal of reducing the cost of building the DVD library was achieved by stimulating demand on older and lesser-known movie titles, thus shifting demand away from higher cost new releases. This tactic resulted in a decreased average price of acquiring DVDs and improved asset utilization, leading to increased margins and profitability. To manage demand, Netflix created a proprietary recommendation system that replaced the manual one-size-fits-all promotion approach. This data-driven marketing plan delivered personalized recommendations across the entire movie library.
The recommendation system effectively delegated marketing tasks to subscribers by utilizing their individual preference data. This data was analyzed using an algorithm to align their preferences with ratings, resulting in a personalized list of recommendations. Moreover, by integrating the recommendation system with Netflix’s inventory management, a greater number of available movies could be suggested.
In 2006, less than 30% of total rentals were made up of new releases. The recommendation system, which was a key competitive advantage, succeeded in reducing the cost of building the DVD library and improving the subscriber experience. Netflix prioritized technology projects that targeted underperforming but valuable processes, focusing on enhancing customer satisfaction and delivering convenience and value. The success criteria used to evaluate these projects included same day delivery, subscriber growth, customer churn, library utilization, and subscriber queues. Examples of technology projects included the development of the search engine, recommendation system, and subscriber queue, which all aimed to provide a personalized customer experience and differentiate Netflix from traditional retail movie stores. These technologies also helped streamline operations and manage costs. To mitigate risks associated with technology projects, an iterative software development methodology and rapid prototyping were implemented to stay ahead of the competition in terms of speed to market.Netflix utilized a development approach to efficiently deliver feature enhancements and bug fixes. They recognized the proprietary nature of their technology and emphasized the importance of retaining in-house IT knowledge. Outsourcing strategic IT roles was not advised. To address the high cost and lack of expertise in developing supporting technology for VOD/online delivery channels, Netflix formed strategic partnerships with third-party technology providers. They viewed technology as a valuable asset in staying competitive and invested strategically to improve the movie renting process and enhance customer satisfaction.
The utilization of technology has allowed Netflix to establish a profitable business by taking advantage of the concept of uniform pricing and differential costs. Additionally, they have utilized technology to enhance their value proposition, overcome shipping delays, and reduce the cost of building their DVD library. By automating key processes, technology has enabled Netflix to offer a differentiated service that provides a competitive advantage over traditional retail stores. Some notable key processes, their supporting technology components, and the resulting competitive advantages include:
– Movie Discovery: The use of a search engine and recommendation system allows Netflix to match subscriber preferences to available library content. This provides a personalized experience that cannot be replicated in retail stores.
– Renting Movies: Through automated alerts and reminders, subscribers can easily manage their rental queues instead of having to rent each movie title individually. They are also proactively notified of status changes, such as when a movie is shipped.
– Payment Processing: With the integration of an electronic payment gateway, subscriber fees are processed automatically on a monthly basis. This technology has also enabled Netflix to test multiple pricing models, such as pay-per-title or various iterations of prepaid subscriptions.Netflix improved their demand and inventory management by integrating their inventory system with analytics, the subscriber queue, and recommendation components. This integration allowed them to effectively manage demand and inventory levels. They also used analytics to determine distribution center locations based on subscriber demographic data and rental patterns, as well as to understand the cost structure of acquiring and retaining subscribers. By mining data from subscriber queues, Netflix was able to forecast demand for movie titles and analyze the data to manage national inventory levels. This enabled them to serve the same number of customers as local retail locations at lower costs. Additionally, Netflix gained valuable insights into subscriber preferences and behaviors, which they used to develop targeted promotions. For example, they could offer poorer performing films to subscribers who had a history of renting titles in a particular genre that they had an affinity for.
Netflix has the opportunity to use the gathered information to generate additional revenue streams that go beyond their primary focus of movie rentals. Potential options include utilizing the data for targeted display ads on their website or selling the information to third parties.
In today’s market, consumers of premium entertainment content are shifting away from traditional television. The concept of digital convergence, which involves computers, mobile devices, and television coming together, is becoming more commonplace. Companies that can deliver content across all devices and create a uniform TV viewing experience will have a significant advantage.
Netflix should expand its core technology beyond just TV and the Internet, becoming platform agnostic. This can be achieved by developing cross-platform APIs and services based on SOA. Adopting a hybrid open/closed source development model would allow them to extend their platform reach and developer community without compromising their core technology’s proprietary secrets (such as search, recommendations, and queue management).
Netflix should invest in digital technologies, including digital rights management (DRM), ad serving, and social network features. These investments will help Netflix adapt to changes in customer viewing behaviors and maintain their dominance in the market as the digital future evolves.
