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Case Study: Netflix
Netflix is a company known for their ability to allow people to stream shows and videos on
almost any device for a low monthly subscription. Like most companies Netflix has also experienced it
share of ups and downs with their customers. Currently, “Netflix is the world’s leading Internet television
network with over 50 million members in nearly 50 countries enjoying more than two billion hours of TV
shows and movies per month, including original series. For one low monthly price, Netflix members can
watch as much as they want, anytime, anywhere, on nearly any Internet-connected screen. Members can
play, pause and resume watching, all without commercials or commitments” (Netflix.com: Company
To understand how Netflix got to where they are now it is important to know about the
companies background what issues they have been able to overcome. “Reed Hastings co-founded Netflix
in 1997” (Netflix.com: Officers & Directors, 2015). The idea behind Netflix was to offer online movie
rentals without late fees. By 1999 Netflix launched its subscription service with their DVD-by-mail
service (Netflix.com: Company Overview, 2015) this service allowed customers to rent DVDs based on
the Netflix library based on their monthly subscription and within the terms of the subscription
agreement. “Netflix has been using the CineMatch system, introduced by Netflix in February 2000, to
make recommendations” (MIT Technology Review, 2009). How Netflix uses CineMatch is that
“CineMatch develops a map of user ratings and steers you toward titles preferred by people with tastes
that are most like yours” (Gallaugher, 2009, p. 6). In 2002, “Netflix makes its initial public offering (IPO)
on NASDAQ under the ticker NFLX with 600,000 members in the US” (Netflix.com: Company
By 2006 Netflix launched its Netflix Prize challenge stating that one individual or group that
could improve CineMatch’s ratings accuracy by 10% would receive a $1 million prize this lead to a lot of
publicity for Netflix (Gallaugher, 2009, p. 8). With broadband Internet connections reaching more and
more households, Videos on demand through the Internet has becoming a viable media for movie
distribution thus displacing video disc mailing (Zhu, 2001, p. 274). Because of this Netflix changed their
business model to where subscribers could now stream movies. The goal with offering the streaming
option was to try to get their subscribers to switch to streaming, “the online streaming push also helps the
company reduce its postage bill for mailing DVDs” (The Associated Press, 2010). In 2007 “Netflix
introduces streaming, which allows members to instantly watch television shows and movies on their
personal computers” (Netflix.com: Company Overview, 2015).
Netflix Value Chain
Inbound logistics is used by gaining licensing of popular TV/movie titles
Operations included building and managing their website and working to improve the streaming platform.
Outbound logistics is used by making sure servers and their website functions properly.
Marketing and Sales are done though the online and Television advertisements. Netflix also offers a one
month free trial.
Service includes maintaining customer relationships by providing top rate titles and website functionality
(speed, usability, customer service).
While Netflix got a good start in entering the streaming market they were still faced with how
they were going to get their content to the Television set and other devices that consumers used. “Apple
has its own hardware solutions in Apple TV, the cable companies delivered OnDemand though their set-
top boxes, and now Amazon has Tivo. The Netflix solution was to think beyond one hardware partner and
recruit many” (Gallaugher, 2009, p. 13). By 2008 Netflix has partnered with consumer electronic
companies to incorporate Netflix on their devices “while the first generation Roku device has received
positive reviews, Netflix hopes access to its service will eventually be built into all sorts of devices,
including DVD players, televisions, and game consoles” ” (Gallaugher, 2009, p. 14). By 2009 Netflix had
reached over 10 million subscribers and now offered over 100,000 titles on DVD (Breakingnews.com,
“In Mid-June 2011, Netflix announced a new price plan that effectively raised the monthly
subscription price by 60 percent for customers who were paying $9.99 per month for the ability to (1)
receive an unlimited number of DVDs each month (delivered and returned by mail with one title out at a
time), and (2) watch an unlimited number of movies and TV episodes streamed over the Internet”
(Thompson, 2012, p. C-127). Not only would the subscription plan price go up but there would be a
separation of the streaming service and the DVD-by-mail service. Customers responded to this price
change and separation of subscriptions in a negative way. Netflix CEO Hastings decided to continue the
streaming process though the name Netflix, Inc. and to move the DVD-by-mail services to the website
Qwikster.com (Thompson, 2012, p. C-128). This caused even bigger upset with customers and Netflix’s
stock prices took several hits. Hastings quickly abandoned the idea of changing the DVD-by-mail service
to Qwikster.com stating that “it is clear that for many of our members two websites would make things
more difficult. So we are going to keep Netflix as one place to go to for streaming and DVDs”
(Thompson, 2012, p. C-129). Slowly Netflix was trying to rebound from their mistake and make things
right with their customers.
By 2012 Netflix has been able to successfully expand internationally starting in Canada in 2010,
then moving into Latin America and the Caribbean. Also in 2012, “more than 700 different devices were
capable of streaming content from Netflix” (Thompson, 2012, p. C-132). While Netflix had become the
leader in Internet streaming rivals soon appears after seeing the opportunities that streaming content
provided. “Netflix’s two most important subscription-based instant streaming rivals included: Hulu Plus
and Amazon Prime Instant Video” (Thompson, 2012, p. C-135). This breakdown of what the competition
is offering and for what price shows us that the cost for a Netflix subscription is very close to what the
competition is offering. The main differences are in what content the different subscriptions give to
consumers based on the different networks that each one is associated with and the different original
content that each one provides.
Competitors Price Service
Their Prime member ship includes: = free two-day shipping,
access to Prime music and Prime Instant video. Their Instant video
service offers original content, personalized recommendations via
recommendation algorithms, and is associated with networks.
Hulu Plus $7.99/month Offers current content and past shows, on multiple devices and
with fewer commercials.
Netflix has developed a strategy which has made them the leader in online subscription services
for streaming entertainment. Their strategy includes:
Providing customers with a wide selection of TV and movies to titles to choose from
“Acquiring new content by building and maintaining mutually beneficial relationships
with entertainment video providers” (Thompson, 2012, p. C-140).
Provide easy to use technology for customers to order and identify what it is they wish to
Providing options for subscribers to choose between streaming and DVD-by-mail
“Spending aggressively on marketing to attract subscribers and build widespread
awareness of the Netflix brand and service” (Thompson, 2012, p. C-140).
Promote “rapid transition of U.S. subscribers to streaming delivery rather than mail
delivery” (Thompson, 2012, p. C-140).
“Expand internationally” (Thompson, 2012, p. C-140).
Netflix has chosen to outdo rivals on the basis of differentiation by offering a wider product
selection and value in their added services. “Netflix and analysts say the streaming service has heaps of
customer data that help it offer the right programming and a better user experience” (Martin, 2012). They
also utilize technological superiority by continuing to enter each new technology market as they are made
available to consumers. “Mindful of the market for kids consuming media on iPads, Netflix this month
unleashed movies and TV programs that target children 12 and under viewing video on the popular
tablet” (Martin, 2012).
Since the beginning, Netflix had a focus on gaining and making new content available to
subscribers. “Over the years, Netflix has spent considerable time and energy establishing strong ties with
various entertainment video providers and leveraging these ties to both expand its contents library and
gain access to new releases as early as possible-the time frame that Netflix gained access to films after
their theatrical releases was an important item of negotiation for Netflix. Also…Netflix has successfully
negotiated exclusive rights to show a number of titles produced by several studios” (Thompson, 2012, p.
The software technology that Netflix has developed was a large part of the strategy. This software
has made it easy for a subscriber to preview movies based on category, ratings, and various other filters.
It also allowed for a subscriber to rate the titles that they had previously viewed and receive
recommendations based on the titles they previously rated highly. This service continues to be highly
successful with a good portion of titles being viewed coming from the recommendations provided. By
giving subscribers a choice between the DVD-by-mail and streaming services this helped to sustain those
subscribers who may not have high-speed Internet in their areas or who simply like receiving the DVDs
in the mail. With a large percentage of consumers having the capacity for streaming the strategy to get as
many subscribers as possible to switch to the streaming-only services helps in reducing costs associated
with postage incurred when mailing costing is included in the to and from with customers.
The company keeps an aggressive marketing and advertising strategy by offering free one month
trials to their services to all new customers.
The main strategy Netflix’s has used to increase profits as been through international expansion.
Not all foreign markets have such strong capabilities for streaming. In Latin America, Netflix ran into
multiple issues with a lack of Internet, lack of capable devices that can be used to watch Netflix, few
Internet connections, and not all households used credit cards as often in online commerce” (Thompson,
2012, p. C-146). However, the company continues to move into new segments, diversify geographically
and has had considerable success in many areas. “Given the strong response to the launch of the
company’s services in the UK, the company planned to enter another European market in Q4 of 2012”
(Thompson, 2012, p. C-147).
Five Forces Model
The Porter’s Five Forces Model for Netflix and the movie rental industry is important. The
rivalry among established companies that Netflix faces is with Amazon Prime Instant Video, Hulu Plus
and Redbox. This makes the competition intense since there are several companies all competing with
new companies joining in all the time.
There are also many methods for consumers to obtain a movie which also increases rivalry
among companies. Consumers have four options to choose from: in-store rental, online selection and mail
delivery or online DVDs-by-mail service, Kiosk rental, or streaming via Video on Demand. Comparable
products can be found at many different locations and costs to consumers are low in switching among
these options. Netflix has a large level of capital and has been able to achieved economies of scale which
sets them apart from the competition. “Firms enjoy scale economies when they are able to leverage the
cost of an investment across increasing units of production. The firm with better scale economies is in a
position to lower prices, spend more on customer acquisition, new features, or other efforts. Smaller rivals
have an uphill fight, while established firms that try to challenge Netflix with a copycat effort are in a
position where they’re straddling markets, unable to gain full efficiencies from their efforts” (Gallaugher,
2008, p. 10).
The threat of new potential entrants is moderately low. This is largely due to very high cost or
capital requirements resulting from obtaining the product needed. The branding and image of the largest
firms in the industry also causes difficulty in entering this market. The key players in the industry include
Red Box, Hulu Plus and Amazon Instant Video. A new company attempting to enter would have to spend
a lot of money on marketing and advertising to try to gain a competitive edge over these key players in
The threat of substitute products is high in this industry and costs must be kept low in order to be
competitive. Substitute products to the movie rental industry are wide in number and include physically
attending a movie, watching television, surfing the web, download movie content illegally, or even
playing a video game. Technology has tremendously aided to increase this threat of substitute products
now that more consumers are able to research for the best available deal.
The bargaining power of new buyers is high. Highly price sensitive customers have a lot of power
since there is little to no switching costs and customers have a large amount of options. Because of this
companies have to be aware of this price sensitivity and a possible lack of brand loyalty.
The bargaining power of suppliers is moderately high. Normally suppliers are able to impose a
price increase on their products or reduce the quality of products supplied which may decrease a
company’s overall profitability (Andriotis, 2004, p.132). This proves to be true in the movie rental
industry as their suppliers are the studios who make the movies. In 2013, Netflix was forced to remove
Nickelodeon and MTV television shows from their selection due to an expired contract with Viacom
(Lieberman, 2013). Recently Netflix has “decided not to renew a deal with distributor Epix” (Lee, 2015).
Netflix has also tried to lessen the power of suppliers be adding all original content such as their
popular series titled “The House of Cards” (Cohan, 2013). Large companies in the industry such as
Netflix are able to produce leverage due to the large volume of product they demand.
Key Success Factors for Netflix
Technology is the largest factor today affecting company’s abilities to prosper in the marketplace.
“Digital technologies and, especially, the Internet are profoundly reshaping the motion picture industry.
Video-on-demand heightens the trend toward digitization and disintermediation” (Zhu, 2001, p. 273). It
has large impacts on strategy elements, product attributes, resources, competencies, competitive
capabilities, and marketing achievements that spell out the difference between being a strong competitor
and a weak competitor. Technological advancements and reduction in Netflix infrastructure resources has
helped them to lower operating costs however they are required to have great content quality within its
services in order to keep subscribers happy. With their innovative strategies, Netflix has been able to
handle the competition.
“Technological innovation is in many industries [and is] the most important driver of competitive
advantages [for companies]” (Rothaermel, 2008, p. 222). These technological factors can increase
competitive intensity and can lead to a lower profit margin, causing the industry to move towards mass
customer distribution so that profits can be made with large volume subscriptions. Netflix’s success is in
“its extensive exclusive content [which] is paramount and represents one of the key metrics… [that]
influences revenues” (Rauta, 2014). Netflix has also done a great job in creating a “database that…can
satisfy everybody’s tastes when it comes about movies and TV series” (Rauta, 2014).
While Netflix has a strong mail delivery position the future of content delivery is through
streaming. According to Netflix long-term view, “Over the coming decades and across the world, Internet
TV will replace linear TV. Apps will replace channels, remote controls will disappear, and screens will
proliferate. As Internet TV grows from millions to billions, Netflix, HBO, and ESPN are leading the way”
(Netflix, Inc.: Netflix’s View, 2015).While Internet TV is only a very small percent of video viewing
today, Hastings thinks it will grow every year because The Internet will get faster, more reliable and more
Marketing related success factors lead to developing a company’s strategy. These include proving
better customer service, customer guarantees, user friendly websites, and clever advertising. “By the
convenient and easy-to-use online platform they put at their customers disposal, Netflix creates an
automated-services type of relation. Hence, the company needs to focus on continuous service
improvements that will enhance subscribers’ satisfaction and retention rate” (Rauta, 2014).
Netflix has already made progress in their business model by going beyond the traditional ad-
supported content and subscription service and including their reach to the international market. “The
average American watches more than five hours of live television every day” (Hinckley, 2014).With
online streaming the opportunity to revolutionize the way product accompanying content is delivered and
introduced to viewers is changing. “The opportunities are boundless when one thinks of how awesome an
experience it would be if we can realize the full potential of combining streaming video and e-commerce
– a next-generation Home Shopping Network layered on top of any content” (Gao, 2012).
First Mover Advantage:
Netflix was able to be set apart as an industry leader in streaming entertainment services. “Upon
launch Netflix benefitted greatly from a first mover advantage in both DVD by mail and streaming movie
delivery, essentially inventing both markets. Adding to this was the fact that the content providers were
not yet sure what they had with streaming video, and seemingly took an experimental approach to this
new distribution channel” (Culp, et al., 2012, p. 10).
Optimize Content Suggestion:
By optimizing the system for making recommendations to the consumer, Netflix has grown their
library viewership up to 85% of the titles per quarter. This increase in title rental provides greater value of
their library and could be perceived as a value added benefit by the consumer, giving the company a
competitive advantage (Thompson, 2012, p. C-143).
Revenue Sharing Agreement:
Netflix made agreements with certain content providers that allowed them to participate in profit
sharing or for Netflix to pay-per-usage for content. “Netflix has …crafting a business model that creates
close ties with film studios. Studios love Netflix because they earn a percentage of the subscription
revenue for every disk sent out to a Netflix customer. In exchange, Netflix gets to buy the studio’s DVDs
at cost. Netflix is able to find an audience for a film without the studios spending a dime on additional
marketing. It’s a win-win for both ends of the supply chain. These supplier partnerships grant Netflix a
sort of soft bargaining power (Gallaugher, 2008, p.5). This allowed Netflix to keep a lower overhead on
content, providing more financial stability and flexibility.
“The company has been living up to its name by building a subscription-based streaming video
service and partnering with a wide range of device manufacturers to get Netflix clients built in to their
devices.” Many device manufactures will even include a Netflix buttons on their device remotes that will
automatically launch the Netflix app (Duncan, 2011). The added benefit in this is that Netflix current
subscribers will no longer have to search for their Netflix icon to access it and non-subscribers will now
be aware of their product. By having a Netflix button on devices it not only shows trust among other
companies but strengths the brands loyalty among users of their services.
Bargaining Power of Suppliers:
Since most popular films that consumers would consider valuable are produced by only a handful
of larger studios, among large suppliers there is little competition. This lack of competition prevents
competitive pricing and increases the supplier’s control of licensing agreements and associated costs.
There is also uncertainty in content cost because suppliers can extort millions in contract re-negotiations
and extensions based on what their future predictions are based on market trends. “For example, back in
2008, Netflix convinced Starz to make a deal for $30 million a year. When it came back to the table in
2011, $300 million wasn't enough for the network” (Greenfield, 2013). An increase in cost this huge
could have serious effects to overhead and the company’s bottom line.
Poor public relations and communications with consumers caused concerns over the price and
company’s plans for restructuring carried a negative sentiment with consumers. Not only did Netflix
loose customers from this situation but they also experience several declines in their stock values which
demonstrated a lack of faith in the management decisions and overall loss of some of Netflix customer
base. “Even though the management’s missteps were the primary reason behind the decline in Netflix’s
stock price, there is no denying that this was also the period when the competitive threat strengthened in
the U.S. The competitors utilized this window of opportunity to bolster their advances and several new
competitors with deep pockets emerged” (Trefis Team, 2012).
Content Storage and Delivery:
Netflix uses Amazon AWS cloud computing services to store content and stream content to
customers. With Amazon entering the Pay‐Per-View and Streaming Video market, the growing
competition between Netflix and Amazon could create a conflict of interest concerning a core function of
their business (Harris, 2013).
Increasing Infrastructure Capacity:
“ISPs like Time Warner repeatedly try to switch to capped bandwidth plans, despite widespread
customer opposition to what is basically price gouging” (Auerbach, 2015). With the Global Internet
traffic expected to increase by 3 times over the next 5 years, increasing ISP’s capacity is vital for
supporting the customer demand for Internet services such as streaming video content. “Virtually every
city in the home broadband “Speed Leaders” ranking has seen an annual increase in its top speed offering
since 2012. However, those speed increases have not resulted in dramatic shifts in the ranking of U.S.
offerings compared to those in other countries. Most Asian and European cities provide broadband
service in the 25 to 50 megabits per second (Mbps) speed range at a better value on average than North
American cities with a few key exceptions” (Kehl, et al., 2014).
Opportunity for International Growth:
While the United States is the primary geographic market segment for Netflix in terms of mobile
broadband it ranks in at “18th, with a download speed of 11.68 Mbps. (Sag, 2014). With high-speed
Internet access readily available in many countries, international expansion is an attractive strategy for
streaming content providers.
Growth of Independent Studios:
With the growth of independent film studios, streaming content providers such as Netflix can deal
directly with the smaller studio to make exclusive content. With its spot-on statistical analysis and built-in
audience, would be in an incredibly unique position to become not only a leading distributor of
independent films, but also a notable funder of these films” (Hardy, 2013).
“Netflix, Inc. (NASDAQ:NFLX) is facing increasing competition from players like Time
Warner’s HBO NOW and Hulu, but UBS AG (NYSE:UBS) believes the U.S. streaming firm will
continue to expand globally” (Jain, 2015). With the increase in demand for online streaming content
Netflix will have to work hard to keep above the competition.
Increase in Internet Fraud:
With online fraud on the rise, some customers may be reluctant to provide their sensitive payment
and personal information on content provider websites. “U.S. citizens reported losing more than $550
million in 2009 in Internet fraud, falling prey to a variety of increasingly sophisticated scams, according
to a report by the Internet Crime Complaint Center” (Los Angeles Times, 2010). These fraud cases have
even hit Netflix, a particularly clever phishing scam targeted Netflix users by encouraging them to contact
the scammers who were posing as customer service representatives (Casti, 2014).
I recommend that that Netflix start partnering with several multi-channel television providers to
offer its streaming content alongside well- known premium channels such as HBO and Showtime. By
doing this Netflix will be able to grow its subscriber base and help offset its costs. Such a move could also
help strengthen and broaden Netflix subscriber base, by providing additional communication channel to
customers. Broad-based media (TV and Radio) is important as well because this is the field where Netflix
can find potential customers the company [could use to] suits their needs [for digital video content] at an
affordable price. “Regarding strategic partnerships, they have their specific importance which should not
be underestimated and have to be looked at as a long term strategic plan” (Rauta, 2014).
The other recommendation I have is for Netflix to keep going strong with their International
Expansion Plans while still giving their U.S. views great content. Netflix stands to gain the competitive
advantage in the international arena with its expansion plans. This advantage comes from Netflix size,
economies of scale, and early mover benefits in many international markets. The benefits from a
successful international expansion outweigh the risks; however “Netflix has to create an international
library that would have enough content to be appealing in each country. As streaming content needs to
licensed separately for each market, Netflix faces difficulty in providing foreign subscribers access to
comparable content available to U.S. subscribers” (Warren, 2011). With these issues to consider Netflix
must diligently manage its efforts and control its costs in their international plans.
Netflix Where Are They Now?
While the mistakes that Netflix has made hurt them they have been able to rebound back. By
2013 Netflix “stock more than tripled, it has won three Emmy awards, and its U.S. subscriber base grew
to nearly 29 million” (McCord, 2014, p. 71). Netflix has been slow to grow its subscription base back but
with a lot of work they have been able to see growth in the international market. “Netflix Inc. said its
Internet TV service grew to 65.6 million subscribers…thanks to popular original shows such as
“Daredevil” and “Orange Is the New Black. The strongest growth was in international markets, where
subscribers jumped 2.37 million to 23.3 million” (BloombergBusiness.com, 2015).
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