NETFLIX
By Group Z2
NETLFIX, A BRIEF
INTRODUCTION
Started as an online home video rental service
Founded by Reed Hastings & Marc Randolph in 1997
Located at Los Gatos, California, USA
Website launched in 1998
Concentrated on early technology adopters, DVD player buyers
DVD by mail only in USA
Currently present in 40 countries
Netflix has been one of the most successful dot-com ventures
Not available in Asia
NETFLIX BUSINESS MODEL CANVAS
STRUCTURE-CONDUCT-PERFORMANCE
An emerging industry in 1998
Gained first movers advantage
Technological leadership
- Online platform to preview and share preferences
- Proprietary recommendation system
Strategically Valuable Assets
-Revenue sharing agreements with major studios by 2000
Creating customer switching costs
- Competitors didnt offer lesser known movie titles
STRATEGIC MOVES MADE
In 1998, traditional pay per rental model
US postal service deliver
Gained competitive advantage as it targeted a niche market of those
owning DVD players
Online prepaid Subscription model to counter longer delivery times
More no. of DVDs could be rented at a time
Promotion of independent and older movies helped in reduction of Avg.
price of the catalogue
Video-recommendation algorithm was very successful
Partnerships with studios
NETFLIXS PERFORMANCE
The demand for more movies helped Netflix make profits
The revolution in internet made their business model successful
PRODUCT ANALYSIS - NETFLIX
High price
Low price
PREMIUM STRATEGY
High popularity
Streaming and discs
for rent, both Bluray and DVDs
OVER CHARGING
STRATEGY
DVD Boxed sets
Low popularity
GOOD VALUE STRATEGY
Older films
ECONOMYSTRATEGY
History
Uncertainty
Social Complexity
Low Cost Duplication
Internet/Web portal
Maybe Costly
The Recommendation
model
Costly to duplicate
Alliance with USPS
Partnership wih Studios
One Day delivery
Movie catalog
Q1: Analyze external and internal
environment by performing SWOT analysis
for Netflix
SWOT ANALYSIS
Q2. DID NETFLIX DO THE SAME JOBS FOR
CONSUMERS THAT BLOCKBUSTER DID?
HOW DID THIS EVOLVE OVER TIME?
Started off as an online alternative.
Focused on early technology adopting households.
Used the U.S. postal service for shipping.
Business model was similar to Blockbuster initially.
How it evolved?
Realization of faults in business model.
Introduction of new algorithm and software.
Focus on consumer preferences rather than latest releases.
Shift to a new pricing model of pre-paid subscription.
Shift in the content acquisition strategy.
Q3. COMPARE BLOCKBUSTERS &
NETFLIXS PROFIT MODELS. HOW DOES
THIS AFFECT THE STRATEGIES?
BLOCKBUSTERS PROFIT MODEL
Retail Outlets - 5194 Locations
70% of American population lives within a 10 minutes drive of a
Blockbuster
Maximizing the days that any movie was out on rent
10% of the revenue was from the late fees
Sales staff recommended new movies
Preview copies of new releases were sold at discount
Shelf was dedicated to hit movies
Stores were reluctant for storing older/less demanded movies
NETFLIXS PROFIT MODEL
Online retailing
DVDs delivered through USPS
Search Engine for customers
No late fee
Having a movie at home all the time
Unlimited Plan
Personalized experience through the algorithm
One day delivery for 90% of the customers Netflix Distribution Centre
Tie up with studios: 1.2x = 2x
Q4. WHAT MIGHT HAVE BEEN AN ASSUMPTIONS
CHECKLIST MADE BY NETFLIX AT EACH STAGE OF
STRATEGY? WHAT ASSUMPTIONS CHECKLIST MIGHT
YOU USE FOR VOD?
The entry strategy:
A niche market targeted, only DVD player buyers (Early technology adopters )
Lack of competition in DVD rental would give a competitive advantage
The latent demand for online subscription, previewing, reviews
Customer service offered by online platform would be better than telephonic
mode
Wider choices offered in movie titles, instead of just hits and new releases would
be a sustainable advantage
The Early Strategy:
Offering recommendation to all users without subscription would create a
web portal
Refocus only on cash induced strategy could gain cash inflow
No other retailers would sell DVDs
Cost of building DVD library was realized later
Monthly prepaid subscription fee would never be a lucrative value offered
The Pricing Strategy changes:
Unlimited rentals were offered without any research, assumed dot com
boom will boost there growth
The inventory of older movies would become a burden was never thought
of
The recommendation model:
Repetitiveness of recommendations due to a common homepage
Promotional value of editorials would be sufficient for movie fans
The distribution channel:
Shorter delivery times would enhance customer satisfaction
Partnering with Studios would reduce costs
The unsubscribing strategy:
Offer easy to exit options to users would make them return later
ASSUMPTION CHECKLIST FOR VOD
Customers would download & watch videos/movies
Technology would lead to better offering than the substitutes
Subscriber volume would increase
Instant gratification could be satisfied by VODs as compared to DVDs
The youth would prefer VOD over DVDs
Studios would continue giving license to distribute movies in the VOD
format
Q5. WHERE WILL THE MONEY BE IN THE VOD WORLD?
HASTING BELIEVES THAT SINCE THE FIRST SALE OF
DOCTRINE DOESNT APPLY, THE WINNING BUSINESS
MODEL WILL BE VERY DIFFERENT.
Product differentiation is under 3 heads Product attributes, Firm- customer interaction and Firm linkages
How can VOD come into play with the current economics of scale ?
VOD can be used by customers to find movies for future viewing
Logistics Vs. Bandwidth sharing is a problem
PRODUCT DIFFERENTIATION
VONGO allows users to download and watch movies for a month but in a limited catalogue
Choice of films limited to the ones being aired on Starz network
NETFLIX streams the videos in a format similar to YouTube
This marks the entry of monthly payment based service provider into the online market
Instant streaming and hence gratitude
Solves all the logistics problems such as turn around time of DVDs
Factors
Value
Rarity
Inimitability
Organization
National
Inventory
Pricing
VOD
Sustained
competitive
advantage
Streaming
Sustained
competitive
advantage
Movie collection
Sustained
competitive
advantage
Digital file
ownership
Sustained
competitive
advantage
Temporary
competitive
advantage
Temporary
competitive
advantage
VOD PORTERS FIVE FORCES
Threat of New Entrants
High level capital needed and sunk costs high
Too expensive for a firm to test out
High level of technological advantages
needed
Product differentiation very hard
Brand name a huge factor
Rivalry
Price war with Blockbuster
Variety of choices like Amazon Unbox
(internet)
Low rivalry as differentiation will emerge
Supplier power
Buys from studios
Forward integration of buyers possible
Buyer concentration is really high
Hard copy sales of DVD is affected
Limited power to influence the evolution of the market
Substitutes
Rental stores, pay per view, television
Rental stores dont provide the instant gratitude
User switching is very difficult as such
Threat of substitutes limited
Buyer power
Power is low as one persons decision wont effect market
Buyers an substitute but substitutes are weak
Prices can be regulated
Not much bargaining power
Compliments
Technology main compliment
High bandwidth needed 3Mbps (internet)
Products like Apple TV
CD, DVD loosing value
Q6. SHOULD NETFLIX SELL/LICENSE/RENT ITS RECOMMENDATION
SYSTEM TO OTHER PLAYERS IN THE INDUSTRY OR WILL ITS
SYSTEM QUICKLY BECOME A PROFITLESS COMMODITY? WHAT
MIGHT THE TERMS OF A LICENSE LOOK LIKE?
Netflix could license its recommendation system to other players like local
cable operators
The technology would soon be imitated by the competitors
Licensing the system would help gain revenues for a longer period
Customer base would also increase
A revenue sharing model can be developed and a license term be laid
down wherein per subscription or per video viewed could be charged
Value chain model
