ISOM2310 Fundamentals of E-Commerce, Session 12

Netflix

Instructor: Jing Wang

Department of ISOM
Fall 2021
Netflix Profile

Netflix began as a DVD by mail rental service and has grown into
the largest online provider of on-demand streaming media
Provide access to > 100,000 DVD titles (2009)
An Internet pure play without a physical store
As of July 2021, Netflix reached 209 million subscribers worldwide
Revenue in 2020: $25 billion
Netflix users watch over 1 billion hours of streaming video every
month
Current stock price $628.29 (>500 times of the initial price in 2002)

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Netflix: Time Line (Constant Innovations)
Netflix subscribers 1999 – 2014 in thousands

Start monthly
subscription
model
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The Start of Netflix
1997: Founded by Marc Randolph and Reed Hastings

“We were targeting people who just

bought DVD players. At the time our goal
was just to get our coupon in the box. We
didn’t have too much competition. The
market was underserved, and stores didn’t
VHS cassette DVD carry a wide selection of DVDs at the time.”

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Shift in Pricing Model

Initial pricing model

❖ $4 per DVD rented + $2 shipping and handling
❖ Return by a specific due date or pay extended rental fees

Prepaid subscription model (no-late-fee)

❖ Allowed a customer to keep several movies at once and
exchange them as frequently as they liked (“all you can
eat pricing”)

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How Netflix Works

Videos arrive in envelopes with:

❖ Prepaid postage
❖ Return address

No late fees

After watching the video, consumers:

❖ Slip the DVD back into the envelope
❖ Drop the envelope in the mail box

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How Netflix Works: Request Queue
Users make their video choices in their “request queue”
at Netflix.com

Consumers can:
❖ Browse and search
❖ Specify preferences
❖ Get recommendations
❖ Check out DVD details
❖ Rate and review

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Value Proposition

Building a great brand online starts with offering

exceptional value

Subscribers expectations from Netflix:

❖ Huge selection of offerings
❖ Ability to find what they want
❖ Timely arrival
❖ Ease of use and convenience
❖ Fair price
Technology drives many of these capabilities!

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Netflix: Long Tail in Action

Long tail --- items that are in low demand or have low
sales volume can collectively make up a market share
that rivals or exceeds the collective demand of the most
popular items.

Traditional retailers can determine their breakeven point

by considering:
❖ Number of customers that can reach a location, store size, store
inventory, payback from inventory, cost to own and operate

But Internet firms can have just a few highly automated

warehouses; no shelf space constraints

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Long Tail Explained
Fewer limits of geography and shelf space
-> able to offer less-popular products
-> more revenue because of the long tail!

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Know What the Audience Wants
Cinematch: a proprietary recommendation system used by Netflix
❖ Collaborative filtering: a method of making automatic predictions
(filtering) about the interests of a user by collecting preferences or
taste information from many users (collaborating).
Users trust and value Cinematch

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The Netflix Prize
Oct 2nd, 2006 --- an open competition for the best
collaborative filtering algorithm to predict user ratings for
films

Grand prize of US$1,000,000 for improving the accuracy

by 10%

Crowdsourcing

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Operational Efficiency
https://www.youtube.com/watch?v=CHU_F9hHkf8

A network of over 50 distribution

centers, which are purposely located
within driving distance of 119 USPS
processing & distribution facilities

Pre-sort all outgoing mails for fast-

delivery
Netflix gets the lowest possible postal
rates for first-class mail delivery

Ability to know customer demand in

the future using their request queues –
“near-perfect inventory”
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Competitive Environment

Physical Stores
❖ Movie Rental Stores: Blockbuster,
Hollywood Video, Movie Gallery
❖ Movie Rental Kiosks: Redbox
❖ Movie theaters: AMC, Showcase

DVD by mail
❖ Blockbuster, Wal-Mart, Amazon

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Competitive Advantage

Timing of entry - DVD adopters on Usenet groups

First Mover – Brand loyalty, scale advantage, technological

leadership

Strategic Partners (upstream and downstream) –

Netflix partner’s with the movie industry (share revenue
with them) & the consumer-electronics industry (DVD
player manufacturers and sellers)

Switching Cost

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Competitive Advantage – Switching Cost

Ratings:
Netflix has more than 2 billion movie ratings from
members. The average member has rated about
200 movies.

Recommendations:
Approximately 60% of Netflix members select their
movies based on movie recommendations tailored
to their individual tastes. Referrals are a better
choice than advertisements

“It probably looks easy to imitate Netflix, but it’s quite difficult to get all the
details right that matter to a consumer. We’ve put four year’s effort into building
our service.” – Reed Hastings, co-founder in 2001

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Video on Demand (VoD) — Streaming

Video on Demand --- allows users to select and watch

video content in real time or download and view them
later, using whatever device you find most convenient
(e.g., computer, television)

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Be Brave and Self-Disrupt
❶ DVD/Blue-ray Plan

❷ Streaming Plan

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Be Brave and Self-Disrupt

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User Interface: Compatible Devices

(e.g., Panasonic, SONY, SAMSUNG)

(e.g., Apple TV, Chromecast)

(e.g., XBOX, PS3/4) (e.g., Panasonic, LG)

https://en.wikipedia.org/wiki/List_of_Netflix_compatible_devices
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Original Programming
Netflix is no longer just a site at which you can watch series
and films made by others. It is now an original media content
producer, including dramas, comedies, films, documentaries,
etc.

https://en.wikipedia.org/wiki/List_of_original_programs_distributed_by_Netflix

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Most Watched Show Ever - Squid Game

111 million viewers

in its first month

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Video-on-Demand Competitors Map
Ad-supported Video: Cable and Satellite TV:

Broad
Target

Stand-alone online VOD: Set-top Box bypass VOD/IPTV:

Narrow
Target

PC Based TV Based

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Success in Video Streaming
***Netflix is in nearly 3X as many households in the U.S. as its
nearest competitor – Amazon Prime), and more than 5X the number
of the 3rd place subscription video on demand service, Hulu.

Why can Netflix excel in VoD competition?

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Netflix: The Great Disruptor

1997: DVD by mail rental service

2007: Internet video-streaming

services

2011: Original programming

A disruptive innovation is an innovation that

creates a new market and value network and
eventually disrupts an existing market and
value network, displacing established market
leaders and alliances.
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Disruptive Innov: Mobile Phone vs. Old Phone

Old Phone Mobile Phone

Mobile Phone (compared to Old

Phone)
Traditional Performance
New Performance

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Keep Innovating

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Review Questions
What is Netflix’s value proposition?
Explain the concept of long tail. Describe how Netflix uses this idea
to generate revenue.
What strategy does Netflix use to predict the preferences of its
customers?
What is Netflix prize?
Describe the competitive advantages of Netflix over other
companies who also offer DVD by mail service.
Talk about the strategies that Netflix has used to excel in VoD
competition.
What is disruptive innovation? What did Netflix do to become a
disruptor in content provider industry?

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