Case study on Net flix

1. Case Study
BUS 550
The Contemporary Firm
Aaron Contreras
CSUCI
www.netflix.com

2. Agenda
 Company History
 Company Financials
 Five Influencing Forces
 CineMatch
 Netflix’s Quantum Theory
 Challenges
 Conclusion

3. Who is Netflix
 Netflix is a internet TV company providing
online streaming content as well as
DVD/Blu Ray rentals direct to home
 CEO Reed Hastings
 Main headquarters located in Los Gatos,
California
 2,022 Employees at end of 2013

4. Company Timeline
 1997 - NetFlix.com founded to offer online movie
rentals
 1999 - Launches subscription and selling service
 1999 – Secures $30M in investment capital from
Group Arnault
 2000 - Launches personalized movie
recommendation service CineMatch
 2002 - IPO with ~850,000 members
 2006 – Announces Netflix Prize $1M for 10%
improvement in recommendation accuracy
www.netflix.com

5. Company Timeline,
cont.
 2007 – Netflix introduces streaming
 2008 – Partners with consumer electronic
companies to incorporate Netflix
streaming on their devices
 2010 – Launches in Canada
 2011 – Launches in Latin America and
Caribbean
 2011 – Announces Qwikster a separation
of online streaming services and DVD
rentals
 2013 – Original programing is started with
“House of Cards”
www.netflix.com

6. Company Financials
• Company is traded under NFLX:NYSE currently valued $322.08
(4/26/14)
• Had $4.3B in Revenues in 2013
• Spent over $3.04B in content in 2013
• As of Q1 2014 48M worldwide subscribers
• Announcement of Qwikster results in a 60% devaluation of Netflix
stock Announcement of Qwikster
www.yahoo.finance.c
om

7. Netflix evolved a progressive view
on culture and talent management
• Personal Management
– Hire the right people
• Have them use their logic
• If they hire the wrong person they part ways quickly
• Performance Reviews
– Elimination of Formal Performance Reviews
• Implemented peer reviews
• Team Rapport
– Strategy is understood by the team
• Company Culture
– Knowledgeable employees
• Understand the drivers of the business
• Human Resource
– Innovative approach
• Vacation and Absences are not tracked

8. Five Competitive Forces on
Netflix
Rivalry of
competitors
- Amazon Prime
- Hulu Plus
- Redbox
Threat of Substitute
Products
- Pirated On-line Content
- Gaming
Bargaining Power
of Suppliers
- Film industry
- Original Content
Developers
Threat of new
entrants
- Cost of entry is low
Bargaining Power
of new buyers
- Services for
competitors is
relatively similar

9. Is Netflix threaten by new
entrants
 Supply side Economies of Scale
◦ Cost relatively equal, lack of net neutrality may make it easier for
smaller firms
• Demand-side benefits of Scale
 Netflix large content library and extensive deals allows them to leverage deals
across the industry
 Customer Switching Cost
◦ Relatively Low
 Collaborative Filtering and Profiles increases consumer switching cost
 Capital Requirements
◦ Large content libraries and original content drives up capital
investment
 Incumbency Advantages
◦ Collaborative Filtering – Netflix has more history of collecting this data
on viewers
 Unequal access to distribution channels
◦ Not highly impactful
 Restrictive government policy
◦ Changes in policy on net neutrality could increase or decrease

10. Power of suppliers
 Netflix has leverage content from suppliers that otherwise
would not provide profit
 By Expanding their offering in the tail end of demand
increase Netflix profitability
 Netflix also obtains independent films which are not picked
up by large film companies.
 Licensing and windows play a large role in content
availability

11. Rivalry of Competitors
 Netflix
◦ Offers Original Content
◦ Subscriptions - $119.88/yr10
◦ Highly Personalized via CineMatch, Collaborative Filtering and Profiles
 Amazon Prime
◦ Offers Original Content
◦ Subscription - $99/yr10
◦ Some content available to purchase
 Hulu Plus
◦ Subscription - $95.88/yr10
◦ Original Content
◦ Ad supported
◦ Personalized via Recommendation Algorithms
◦ Associated with Networks
 Video On-Demand (VOD)
◦ Offers Original Content
◦ Cost is variable
www.netflix.com
www.amazon.co
m
www.hulu.com
www.comcast.co
m
www.timewarner.com

12. Threat of Substitute Products
 Netflix is on the benefiting side of
substitution
◦ On-line streaming is the substitute
product for in home DVD/Blu Rays as
these devices become commodities
 Increased access to content through
Piracy could be an influence for Netflix
 Increase in gaming communities could
detract viewers of traditional format
into more interactive content

13. Recommendations –
CineMatch
 DVD recommendations delivered based on
ratings
◦ Initially launched as part of the DVD delivery
service
 Basic Principle
◦ Captured likes and dislikes of categories –
Romance, Action, Foreign, etc.
◦ Based on viewers ratings it would suggest
movies
◦ Linked to distribution center and availability
◦ Claimed a 60% accuracy on selected options
from recommendations
◦ Netflix Prize ($1M) was for the first to obtain a
10% increase in accuracy
◦ Final algorithm was not implemented

14. Collaborative Filtering Netflix’s
Quantum Theory
 Current algorithms process petabytes of
information
 This has led to over 76,000 alt-genres
◦ Alt-genres are compilations of several larger
genres sliced into more specific targeted
audiences and tastes
 Micro-tagging is done by individuals trained
on Netflix’s Quantum Theory document (34
pages) on how to micro-tag for consistency
◦ Includes for all content measuring such things as
 “social acceptability” of lead characters
 Ending Type
 Romance

15. A reverse engineered version of
Netflix’s alt-genres categories
http://www.theatlantic.com/technology/archive/2014/01/how-netflix-reverse-engineered-
hollywood/282679/

16. Profiles have enhanced the
ability to personalize content
 Allowing profiles allows for more specific viewing
which allow for less mash up of preferences
 Urge you to develop different profiles for different
timeframes
◦ Daytime viewing
◦ Weekend viewing
 Linking these profiles to Facebook® allows for
further personalization as increased viewing
experiences also fostering a expanding network
www.netflix.com

17. Netflix faces a big challenge
against it’s future profitability and
expansion

18. Obvious position for Netflix is net
neutrality
 Netflix’s monitors
and publishes the
ISP providers with
the best primetime
delivery
 Netflix entered into
a peering deal with
Comcast for an
undisclosed
amount
 Potential impact to
customer

19. Conclusions
 Netflix knows your viewing habits
better than you do
 Competitors are developing with
slightly different business models
◦ Firms will need to rely on original content
and licensing agreements to edge out the
competitors
 Without net neutrality larger streaming
firms may need a long term strategy
on profitability impact due to peering
fees

20. Questions
1. What business decision resulted in a 60% stock devaluation
in Netflix’s history?
a. Amazon Prime Launch
b. Qwikster Annoucement
c. Blockbuster On-line Launch
2. What are potential substitutes for Netflix services/products?
a. Amazon Prime
b. Hulu Plus
c. Gaming
d. Pirated Content
3. How can peering with ISP’s affect Netflix customer service
experiences?
a. Slow internet speeds
b. Increase cost of subscriptions
c. Increase streaming performance

21. References
1. www.netflix.com
2. Netflix broke the rules and won according to stanford business school research. (2008,
Apr 16). Business Wire. Retrieved from
http://search.proquest.com/docview/444648479?accountid=10043
3. Mccord, P. (2014, Jan 20). How netflix reinvented HR. Businessline. Retrieved from
http://search.proquest.com/docview/1490574625?accountid=10043
4. Seitz, P. (2013, Mar 13). Netflix feature will test limits of facebook sharing. Investor's
Business Daily. Retrieved from
http://search.proquest.com/docview/1324599727?accountid=10043
5. Shalvey, K. (2013, Apr 12). Netflix files to disclose key data via social media some
investors may object follows up fast on SEC report saying facebook, twitter 'perfectly
suitable'. Investor's Business Daily. Retrieved from
http://search.proquest.com/docview/1325836202?accountid=10043
6. The Pragmatic Theory solution to the Netflix Grand Prize, Martin Piotte, Martin Chabbert,
August 2009
7. http://www.businessinsider.com/amazon-prime-versus-netflix-versus-hulu-plus-2014-4
8. Netflix Case Study: David Becomes Goliath, www.gallaugher.com, Copyright 1997-2008,
John M. Gallaugher, Ph.D.
9. The Five Competitive Forces that Shape Strategy, Michael E. Porter, Harvard Business
Review
10. How Netflix Reverse Engineered Hollywood, The Atlantic, Alexis C. Madrigal, Jan 02
2014, http://www.theatlantic.com/technology/archive/2014/01/how-netflix-reverse-
engineered-hollywood/282679/