NETWORK MARKETING

(Netflix Case)
By Gracie Lee (B94705011 ), Jennifer Huang (B94705035), Charles
Virgile (97749!19), "ic#las Valai$e (97749!!1), Vincen%
&#n%'#reau, (a)ien *al'er#
1) Would you buy Blocbuste! stoc o! s"o!t it at t"e ti#e of t"e case$ %o&
about Netflix$ W"y$
We would rather short stock of Blockbuster, since we conjecture that the price
of it will decline. Our conjecture is based on the following reasons:
A. Competitors: This is the main reason of our inference. Blockbuster is facing
challenges from both ! rental companies, such as "etfli#, and !O
industr$. We conclude profit of Blockbuster will shrink because of them.
B. %ource of !: According to the practice, mo&ie suppliers will authori'e !O
downloads or cable T! a few months after ! hit the market. (owe&er, it)s
not for sure that mo&ie suppliers will alwa$s follow this practice, thus, this
might be a potential threat to Blockbuster.
C. Canceling late fees: Originall$, this is strateg$ is adopted b$ "etfli#. *n order
to remain competenc$, Blockbuster did it as well. But this decision soon
turned out causing +., billion -% dollars loss, we conclude this ma$ lead to a
decline of Blockbuster stock price.

.or "etfli# part, we would prefer bu$ing its stock.
A. !/b$/mail ser&ice as a pilot: Be$ond the traditional ! rentals, "etfli#
pro&ided a more rapid and con&eniet wa$ to deli&er goods and can respond
instantl$ both in ordering and unsubscribing. ue to being the first compan$
pro&iding such ser&ice, "etfli# has alread$ hold the most marketshare.
B. 0All $ou can eat 1 model: *f customers want to see more mo&ies, the$ would
return the pre&ious !s soon and "etfli# could keep more !s in hand.
Or if a customer possesses one ! a long time , then the cost of sending
another ! is reduced. This model also beat "etfli#)s competitors and
force them to follow such rules since most subscribers prefer no e#piration
date of a rental .
C. 2ong/tail strateg$: The recommendation s$stem will recommend a
customi'ed mo&ie list and won)t recommend the ! "etfli# doesn)t ha&e in
hand. This satifies customers with films in stock and let the 0old1 ones be
rented again and again. Compared to traditional &ideo rental spots where
new releases make up o&er 3+4 of total rentals, new released represented
less than 5+4 of "etfli#)s.
The abo&e are the reasons we belie&e in resulting in the increase of "etfli#)s stock.
')(id Netflix offe! sa#e )alues fo! co*su#e!s t"at Blocbuste! did$
%o& did t"is e)ol)e o)e! ti#e$
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When "etfli# decided to enter the &ideo rental market in 8993, it was dominated so
far b$ big companies such as Blockbuster. Before 8993 a customer who wanted rent
a &ideo had to go into a retail store and paid from : to ,; for a couple of da$s rental.
One of the particularities of this t$pe of rental s$stem was the 0late fees1 one had to
pa$ if the !(%<! was not brought back on time.
At the beginning "etfli# offered e#actl$ the same &alues for customers that
Blockbuster did, but this model was not successful. The added &alue =con&enience
offered b$ internet and larger selection> was not enough to o&ercome the deli&er$
waiting time.
Then the$ decided to mo&e to a monthl$ prepaid subscription ser&ice which enabled
customers to ha&e unlimited rentals. This new pricing s$stem appealed fre?uent
&iewers and was a real competiti&e ad&antage for "etfli#.
Whereas it was difficult for a customer to get accurate ad&ice in a retail store, "etfli#
made ratings and re&iews of millions of similar customers a&ailable. The$ could enjo$
personal recommendations of mo&ies that were more likel$ to appeal to them.
This wa$, people could disco&er less famous and recent mo&ies, which would not
ha&e been a&ailable in a classical store like Blockbuster.
@oreo&er, the centrali'ed storage s$stem allowed "etfli# to keep a greater selection
of mo&ies with a limited number of copies. Aet, some geographical areas took a
longer time to reach &ia postal ser&ices, especiall$ on the Bast Coast. "etfli#
therefore decided to open new distribution centers =,, total in :++3> in man$ different
places to be able to deli&er almost an$ place in America o&ernight and impro&e
customer satisfaction.
+)Co#,a!e Blocbuste!-s a*d Netflix-s ,!ofit #odels. %o& #i/"t t"e
diffe!e*ces affect t"e !es,ecti)e co#,a*y-s st!ate/ies$
Blockbuster)s strateg$ relies on touching the greatest number of persons possible, b$
opening 0high &isible stores in high/traffic areas1. As a matter of fact, in :++C, 3+4 of
the population li&ed within a 8+/minute dri&e of one of the D89, Blockbuster stores.
Ee&enue is generated through rentals, with a pa$ as $ou rent pricing model, and
therefore largel$ depends on customer impulse. Another source of income used to be
late fees =which represented up to 8+4 of the income> but the$ were abandoned
because of their unpopularit$ among customers.
The$ own most of the stores, therefore occupanc$ and pa$roll represent a big part of
their e#pense =8+ part/time workers and one manager per store>. .i#ed costs are
much greater than with "etfli#)s profit model.
"etfli#)s strateg$ of centrali'ing storage in a few places =about one per state> reduces
fi#ed costs, since fewer copies of a film need to be bought to satisf$ customers. And
the fact that almost e&er$thing is done online of course reduces occupanc$ and
pa$roll e#penditure. Agreements with postal ser&ices allow "etfli# to manage e#press
deli&er$ at a reduced cost. The pricing s$stem of monthl$ subscriptions makes the
income easier to appraise, more constant. The absence of late fees, the fact that it is
&er$ eas$ to subscribe or unsubscribe embod$ the firm)s strateg$ of fle#ibilit$ and
tight customer care.
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/ shift from a mo&ie/enthusiast focus to a ! rental focus : "etfli# had no choice
due to the lack of rentabilit$ of its earl$ model : it was a cash/induced strategic
focusing
/ shift from a 0pa$ as $ou rent1 to an 0all $ou can eat1 model with no late fees : "etfli#
needed to find a competiti&e ad&antage to o&ercome the deli&er$ waiting time. B$
doing so the$ targeted fre?uent &iewers rather than one/time &iewers.
/ shift from a ! b$ mail compan$ to a much broader ser&ice of !
recommendation : "etfli# thought that people would appreciate a tighter customer
care and pa$ to ha&e a broader selection of mo&ies
/shift from a centrali'ed storage s$stem with just 8 distribution center to a s$stem with
multiple distribution center =,, as of now>: "etfli# wanted to address the deli&er$
waiting time issue to impro&e customer satisfaction all o&er the -%
With the rate of technical impro&ements, it appears that &ideo on demand =!O> will
become big in the future $ears thanks to the impro&ed compatibilit$ between
tele&isions and computers. Aet, the reluctance of majors to cooperate to get their
films ?uickl$ a&ailable on !O might dela$ such a re&olution. *t therefore seems that
the democrati'ation of !O will take much longer than it did for !s.