Company Overview
The idea behind Netflix, the most popular provider of online and by-mail rental services, came from an unsatisfied, embarrassed customer. Reed Hastings, founder and current CEO of Netflix, was charged 40$ as a late fee because he returned the movie Appolo13 six weeks late (Zarafshar, 2013).
This made him think creatively about an idea to transform the movie rental model into a more innovative business. In 1997, Hastings and Randolph started Netflix which was a DVD rental-by-mail business with no subscriptions. Later in 1999, and as a step further towards developing the business, Hastings launched the subscription-based business model which was based only on renting DVDs by mail with multiple plans dependent on the number of titles at a time. Netflix offered its subscribers to choose from its extensive DVD library with more than 120,000 titles for unlimited monthly DVD rental with free shipping as well as zero late and per title rental fees. It was very attractive for customers to make subscriptions on the spot as they were tempted with the incredible Netflix service. For example, Blockbuster subscribers found Netflix’s offers more appealing and it was easy for them to make the switch. (Wikipedia, 2014) Netflix has been always open to new opportunities that Hastings believes it will sustain the company’s competitive advantage.
A new opportunity was captured when the streaming service was introduced in January 2007 where it enabled Netflix’s subscribers to instantly watch movies, TV-episodes, documentaries, series and much more on internet-connected devices such as smart TVs, PCs, DVRs, Blu-Ray players and special Netflix players. During that time, Netflix was leading the industry as it was the first company to offer paid streaming services to its subscribers in US, Canada and Latin America. Today, Netflix is known as the largest provider of online streaming service with almost 44 million subscribers in more than 40 countries offered access to an ever-growing library of thousands of titles. (Netflix PR, 2014) Netflix executives were keen to devise flexible strategies accompanied by a profitable business model that gave them sustainable competitive advantages over their rivals. They constantly monitor their external environment and do the required amendments quickly and swiftly to leverage the emerging opportunities and tackle the upcoming threats. Strategies ranging from growing its library content, service differentiation, very competitive DVD-by-Mail service, unique marketing plan and ambitious international expansion all made Netflix a leader in its industry.
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However, Netflix isn’t the only player in the DVD-rental and streaming services market. Blockbuster and Redbox are one of the many competitors in the DVD-rental market that use different competitive models to outcompete Netflix’s. Hulu Plus, Amazon and HBO GO have fueled the competition in the streaming service market. They all compete on acquiring more titles to expand their libraries and try to offer the best subscription plans in order to get more market share. Having this in mind, what should Netflix do next in order to outperform its competitors and sustain its competitive advantage.
External Environment Analysis
Macro Environment
We will start our assessment of the external environment by examining the PESTEL factors in the Macro (General) Environment of the movie renting industry.
Political Factors
Network Neutrality is the principle that preserves the internet to remain free and open for all users. It defends against discrimination of the internet use based on the content or website services (Ala, 2014).
Major internet service Providers (ISPs) would like to charge a company like Netflix more money because it’s website of online movie streaming is eating a lot of their internet bandwidth. According to the broadband internet service tracking firm Sandvine, Netflix alone is consuming 32.3% of the downstream traffic in North America, much more than any other site or service. (Protalinski, 2013) Major ISPs may well contemplate the idea of blocking Netflix from their service to release all that traffic or they might demand increased internet subscription fees from Netflix to continue hosting their website; this would be a disaster for Netflix who is facing increasing content obligation costs and if ISPs opted for that step, they will have no other choice other than increasing the monthly fees of their streaming service which will definitely not come to the delight of their customers.
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All of this is against the Net Neutrality rule, which states that all internet users will be under the same conditions to get space on the net whatever their website or content, is. “The possibility of regulations designed to mandate the neutrality of the Internet has been subject to fierce debate, especially in the United States” (Internet Cleaner, 2013) In an interview (Netflix Investor Relations, 2014), Reed Hastings says he is not concerned with the threat that ISPs might block Netflix since “it will fuel the fire for more regulation and no one is interested in this”.
Environmental Factors
Historically, the video rental industry was built on the idea of reusing the same stuff by different people over and over again and this concept is environment-friendly. Moreover, switching to the soft copies of media and streaming it through the internet reduces energy consumption and pollution levels due to a decrease in delivering DVDs by mail and also less manufacturing of DVDs.
Socio-Cultural Factors
People are expected to watch movies or play video games when they have more leisure time. However nowadays, many people are having 2 jobs to support their families which basically means less leisure time and less watching movies. In addition to that, people are now becoming more convenient watching movies at their homes instead of going out to the theaters since it is cheaper, less time consuming and is ideal after having a long tiring day; this emerging trend will boost the volume of the streaming media subscriptions. Moreover, the rapid acceptance of the society for technological advancements greatly benefits the online movie rental industry, this is particularly correct due to the new educational and pedagogical systems that stress more on computer learning making people more convenient when dealing with technology.
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Technological Factors
The rapid technological advancements and production of electronic products such as Blu-ray DVD players, Video game consoles, smart phones, smart TVs and many other devices that can connect to the internet, made the concept of online rental and video streaming easier and more adaptable. As the internet services are becoming more popular and an important ingredient in people’s daily life, companies like Netflix will be able to increase its operations especially in the video streaming service. Therefore, the advancement in technology is an opportunity and enabler for the industry as a whole. 4K streaming is a new high-quality video technology that reduces compression rate and produces output in 4K/Ultra HD format. (Burns, 2014) Netflix started offering some of its content in this format, which signals their aim to go side by side with technological advancement. Of course, to be able to stream at this high resolution, you need to have a super speed internet (40-50 Mbps) so people now have a reason to upgrade and it means more profits to the ISPs. (Netflix Investor Relations, 2014)
Economic Factors
The industry depends on the consumers’ spending power and real income, which is affected by employment rate, interest rate, tax rate and inflation rate. When consumers have more money, spending on entertainment facilities rises and this is an opportunity for the industry. On the other hand, the spending power of households usually decrease in recession periods, so they will probably tend to sacrifice the theater ticket and may well reward themselves with some older movies available on streaming services such as Netflix’s.
Legal Factors
There is a considerable potential for legal actions to be taken against companies operating in this industry, actions related to the use of licensed material and customers’ privacy issues. Moreover, any company that operates in the international market should study well the rules and regulations specific to that market or else it will shortly fall in trouble or lose valuable opportunities. Some legal actions might have a positive impact on companies in this industry such as the amendment of the VPPA law discussed earlier. On the other hand, Netflix had some hard times in 2010 with lawsuits pertaining to privacy issues when an academic research suggested it exposed the movie preferences of its customers for the programmers who participated in the Netflix prize to produce a better recommendation algorithm. (Buley, 2010) The issue was later resolved and Netflix cancelled the sequel “Netflix Prize II” competition.
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Competitive Environment
In order to determine nature and strength of the competitor pressures in the movie rental industry Netflix is operating in, we use Porter’s five forces model of competition.
Bargaining Power of Customers
In the streaming market, customers have a high bargaining power; the reason behind this is that people are very well informed about other companies which are in the same line of business as Netflix. Customers are always in search for a better deal because buyers are very price sensitive when it comes to the video rental industry and they are always looking for the best quality, so they will leave Netflix as soon as a better offer is available since there is no switching cost. Customers always expect product differentiation, and if Netflix does not give it customers this variety, they will simply leave.
Bargaining Power of Suppliers
Bargaining power of suppliers is very high; Netflix relies on getting exclusive rights to certain television shows and movies so suppliers play a very big role in bargaining over what content is exclusively reserved for Netflix users. Also, there are only a number of studios who supply the movies and shows. Another reason bargaining power of suppliers is high is that Netflix can only get its content from those studios and there is no substitute for that content, also contracts with those studios are usually for a short period of time (1-3 years) and expensive; a good example of this is when Netflix was unable to renew its contract with Starz because they were demanding a much larger amount of money – $300 million instead of the $30 million paid in 2008. (Kafka, 2011)
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Threat of New Entrants
Although entering the online movie rental industry needs a huge initial investment to get content and secure exclusive copyrights, we can say that the threat of new entrants is moderately high since it remains a growing market with a growing demand, and huge rich companies like Apple and Google may be tempted by its growth potential and might well enter the play stage with generous budgets; and also the low exit costs in this market make this threat high. But in order to be profitable in this industry, companies need to achieve economies of scale and try it best to have a large volume of subscribers, which in Netflix’s case is how they achieve profitability, and also to have a large number of viewers if it is a VOD company.
Threat of Substitutes
The threat of substitutes is relatively high since substitutes are available, such as Blockbuster On demand, Amazon Prime Instant Video and many other VOD streaming media. Rather than having a subscription of unlimited views, customers can switch to a pay per view option. Another reason is that there is no switching cost. In addition to that, the prices of substitutes are convenient and low which makes it relatively easy to switch. Customers might also choose to switch because companies working on a VOD bases have better features such as making certain television shows and movies available within a few hours of airing them on T.V, unlike Netflix where customers need to wait a few months.
Intensity of Competitive Rivalry
Competition is very high in the video rental industry; Netflix has many current competitors which include Blockbuster on demand, Amazon, Apple, Hulu Plus and many others. Also Netflix has to keep scanning the environment for new competitors since it is easy for new rivals to enter the market for there are low barriers to market entry and exit. Netflix must fear its competitors because they can easily lose customers to them since switching cost is very low and they have no loyalty programs to make it harder for customers to leave.
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VRIO Analysis
Netflix’s top resources can be listed as follows:
1. The variety and big selection of titles (comprehensive library of movies and TV-episodes)
2. The unique software for streaming and recommendation
3. Nationwide distribution network
4. CEO Reed Hastings
Resources must have enough competitive potential for the organization to outcompete its rivals. By applying the VRIO framework (see table 1), one of the best strategic tools to evaluate the firm’s resources, Netflix is shown to be at a moderate sustainable position. Providing its subscribers a wide selection of titles has been always Netflix’s primary strategy. During the year 2012, its library has reached over 120,000 DVD-titles and more than 30,000 titles ready for streaming (Wikipedia, 2014).
This extensive library is definitely valuable for Netflix to attract more subscribers to watch from a wide variety of titles. Moreover, this resource is rare as not all competitors are able to offer its customers a huge number of titles for both DVD-rental and streaming services. However, such a comprehensive library is not very difficult to imitate. Apple and Amazon, for example, are constantly working hard to gain license agreements to acquire new content and grow their library of titles.
An obvious example on this is when Amazon won over Netflix and secured the streaming rights of the whole 8 seasons of Fox’s award winning series ‘24’ (Cantisano, 2014).
Netflix has shown to be organized to capture the value of its library by making it available for its subscribers when using both services. Thus, having a big selection of titles places Netflix at a sustainable competitive advantage as long as no competitor grows a more extensive library. Otherwise, it will become easy for Netflix subscribers to switch to another company that offers wider selection. Netflix had well developed and easy-to-use software that provides titles recommendations for each subscriber based on personalized ratings. This resource is an added value to Netflix’s business because it became convenient for subscribers to quickly view movies they like or place them on “instant queue” for watching them later. (Netflix, 2014) Netflix announced a 1 million-dollar competition to challenge programmers to create an algorithm that can beat its Cinematch system by at least 10% of enhanced accuracy (Netflixprize, 2009).
In 2009, three teams of talented programmers combined forces and developed that algorithm and Netflix’s system was given a major boost. Since the software is customized only for Netflix and consists of complicated algorithms, such a resource is considered rare.
Although Netflix had set the bars high for its rivals, another company can call for a competition or hire top programmers to develop their own software that may beat that of Netflix’s. There is always room for improvement, and for that reason, this software can be imitated. Nevertheless, Netflix is continuously prepared to capture the value out of its smart software and make the best use of it. As a result, the recommendation software positions Netflix on a sustainable competitive advantage as long as no competitor develops similar or improved software. For its DVD-by mail service, Netflix had largely invested in developing its nationwide distribution network by establishing as much distribution centers as possible. Their strategy is to provide customers with the fastest shipping service by delivering ordered DVDs within one business day. This is of a big value for customers who used to wait several days to obtain a DVD. To make it more effective and efficient, Netflix utilizes a distribution network system (logistics system) that saves a lot of time looking for the closest center that has the ordered DVD in stock.
The combination of wide-spread distribution centers and effective logistics software makes it a rare resource. It’s still almost impossible for competitors, such as Blockbusters, to deliver any of its DVDs within 1 business day. Furthermore, it’s difficult to have a large number of shipping points close to every home. Therefore, this resource is considerably inimitable. Obviously, Netflix is doing a great job in regards to quick delivery. It has promised its customer to ship DVDs anywhere within 1 business day. Today, by effectively employing the distribution network system, the company leveraged its capability to reach 98% of its subscribers. Hence, Netflix is organized properly to capture the value of their distribution centers. It is worth noting that although this resource gives them an sustainable competitive advantage, the demand on this type of service (DVDs sent by mail) is on a continuous decline, and the service might completely vanish in the next few years. Last but not least, Netflix’s CEO, President and co-founder Reed Hastings is considered one of the firm’s most valuable resources. In the most difficult times, this innovative and visionary man knew what he was doing and didn’t lose the focus. His vision was very clear since the very beginning back in 1997 when he named the company Net-flix and not DVD-by-Mail (Fortune, 2009); he saw what the industry will be like in the future and believed in the powers of the internet. an intangible asset, as we are interested in his vision, education, expertise, know-how’s, innovation and skills, is considered a valuable one.
If you take a quick glance on what has happened in the past few years, you’ll find it clear how such influential people affect their organizations in every aspect. For example, when Steve Jobs died, Apple’s stock price went down by 5% immediately (Kollewe,2011) which shows you how people believed that the tremendous success Apple had in the past few years was directly linked to the innovative out-of-the-box thinking of their ex-CEO, and future manifestations showed that that was extremely true. So these brilliant executives are so valuable to their firms and they are also rare. Blockbuster’s ex-CEO Jim Keyes had the chance to buy Netflix in year 2000 for as little as 50 million dollars (now it’s worth more than 20 billion dollars!), but he was so arrogant and refused to give any recognition for Netflix’s success claiming his firm can easily do anything Netflix does. (Zarafshar, 2013) Failing to see the opportunities, combined with many wrong assessments of the external environment led to the bankruptcy of Blockbuster in 2011. Many analysts were actually quite sure that Netflix will be sold after the 2011 missteps that caused the stock price to fall by about 80% ; however, at that same exact time Reed Hastings was confident and quite sure that Netflix “will not only survive but flourish” (Morrissey, 2013).
Those same analysts didn’t see, at that time, anything of a value in Netflix other than its CEO, who previously one the “CEO of the year 2010” award (Hartung, 2013) and whom they had great respect for (Morrissey, 2013); and indeed he was able to turn on his company and return it back to the list of the most successful companies in the world and the stock prices went up by more than 700% between 2011 and 2014! (Google Finance, 2014) In an interview, Hastings clarified that he doesn’t see his firm just competing with the other companies in the media-entertainment industry, but he believes to be competing with all companies that offer any kind of product or service that a person can enjoy during his leisure time, whether it is a soccer match, a newspaper, a video game or even hiking with friends or family (Netflix Investor Relations, 2014).
This gives you an idea of the high mindset of this man which explains the success his company is now enjoying. Such a resource is hard to imitate as they usually come through the hierarchy of the same company; that’s what explains their full understanding of the industry they’re working in and the core competences of their firms. Just moving one brilliant CEO from one company to your company doesn’t guarantee you any success at all since many complex factors take action in the whole mix-up. Proceeding from here, it is obvious that this resource is organized to capture value for the firm.
By setting the strategies and adjusting them whenever and wherever needed depending on the ever-changing environment, Mr. Hastings is the captain who controls the helm to take Netflix to the island of success. Therefore, this resource gives Netflix a sustainable competitive advantage as long as he’s on the helm. In the future, will Netflix face the same difficulties Apple faced after their CEO was deceased?
RESOURCE
Valuable
Rare
Inimitable
Is the company organized to capture the value of the resource? Competitive Potential
Big Selection of Titles
YES
YES
NO
YES
Sustainable/Temporary CA
Title Recommendation Software
YES
YES
NO
YES
Sustainable/Temporary CA
Nationwide Distribution Network
YES
YES
YES
YES
Sustainable Competitive Advantage
CEO Reed Hastings
YES
YES
YES
YES
Sustainable Competitive Advantage
Table : Conducting VRIO analysis on Netflix top resources
Netflix’s Competitive Strength
The Netflix Strategy
Netflix’s strategy so far hasn’t been to just focus on one or two aspects of their customer base, but to focus themselves in a number of directions in order to build upon and capitalize on a growing subscriber base. Their main strategy has been to build and maintain the most comprehensive selection of DVD titles in the industry, and they have done so by creating mutually beneficial relationships with a number of entertainment video providers. Their second main strategy has been focused on service differentiation- not only how customers receive content and consume it, but also how customers choose what to watch. Netflix’s number one competitive advantage over Amazon and Blockbuster is their unique software that takes what a customer has seen or rated, and based upon that information builds a list of suggested titles similar to ones they have just watched. While other companies had begun to leak into the rent-by-mail niche category that Netflix had started, no other company had customer profiling software quite like Netflix. Between 2006 and 2009, the film rental market underwent a major shift. The in-store rental market declined, while vending machine rentals increased and by-mail rentals nearly doubled. However, VOD (Video on Demand) services through cable, digital, and subscription also saw major increases.
All of these changes meant companies like Blockbuster had to either restructure and make a complete business model shift – or face bankruptcy. Meanwhile, the increases in by-mail rentals and online subscriptions, two services that Netflix offered, meant that the number of Netflix subscribers more than doubled in that same time frame. Purchase decisions from customers were focused on convenient access, price, variety of DVD offerings, and ease of return/return fees. Customers like variety; a video rental store that only stocks the newest releases will not appeal to all markets. Increasingly, customers are becoming more nostalgic in their movie preferences, searching for titles long past premiere. Customers have also become increasingly busy, often not having the time to go to a store to pick out a movie or remembering to return their rentals on time. We live in a world of instant gratification, where being able to click a few buttons and watch the latest movie or an old classic is extremely important. Customers also do not like fees. More and more companies today are offering free shipping/return shipping, and the same is true in the DVD rental industry. Netflix’s third main strategy was to attract more subscribers using multiple marketing channels including online advertising, radio stations, regional and national television, direct mail, and print ads. One of these marketing strategies included participating in a variety of cooperative advertising programs with studios through which Netflix received cash for featuring a studio’s movies in its advertising.
Moreover, Netflix worked closely with the makers of Netflix-ready electronics devices to expand the number of devices on which Netflix subscribers could view Netflix-streamed content (Thompson, 2012).
This is considered Netflix’s second competitive advantage because it got ahead competitors by being the first to market with next-generation products. By 2012, with the aid of new technology, Netflix added another core strategy which was to grow its streaming subscription business domestically and globally. By doing so, executives expected that the number of members with DVD-by mail subscription would decline, as subscribers migrated from renting DVDs to streaming online and as subscribers with both DVD-by mail and streaming subscriptions opted to only streaming online. The company continuously improved its streaming experience by expanding the size of its content library, increasing the number of Internet-connected devices, and improving the ease of navigating Netflix’s website of locating and selecting content to watch. The result was a rapid growing customer acceptance and interest in the delivery of TV shows and movies directly over the Internet.
Finally, a central element of Netflix’s long-term strategy was making Netflix’s streaming service available outside the US, in countries like Canada, Latin America, the UK and Ireland. (Thompson, 2012) Although this international expansion was expected to temporarily depress the company’s overall profitability and incur huge expenses of obtaining licenses from movie studios and owners of TV shows, Netflix’s entry into such markets would launch a preemptive strike to secure an advantageous position of being market leaders with high-quality suppliers via exclusive partnerships or long-term contracts (Thompson, Peteraf, Gamble, Strickland, 2014).
“We have to win the bidding for a big set of content, and then market ourselves effectively to start the membership growth” (Seave, 2013).
How long it takes for such a bold move to yield good results was not a major issue because Reed Hastings indicated that Netflix would take longer than eight quarters after initial entry to reach sustained profitability.
How Does Its Competitive Strength Compare Against That of Blockbuster and Amazon Compared with Blockbuster and Amazon, Netflix operates within the highly competitive media streaming market that has been forecasted to increase to $12.5 billion in 2017 (Bauman, Deal, Ishak, & Johnson, 2013).
Netflix by far has the most comprehensive number of products and distribution channels, given that consumers can either rent DVDs by mail or stream them on their PC or TV. Its identity is valued greatly among consumers as a quick, easy, and available destination for streaming media. Additionally, the value of their brand has risen recently after the strong media attention for the success of its first original series, House of Cards. When it comes to competitors, Netflix’s main competitors were Amazon and Blockbuster. Operating as Amazon Prime Instant Video, it has three main advantages over Netflix; it offers subscription as a prime member for $79 a year which is $6.59/month, less than Netflix’s streaming price of $7.99/month, subscribers get free 2-day shipping on millions of items and its users can buy or rent a movie/show just after a few hours of it being broadcasted on TV, while Netflix subscribers needed to wait a few months in order to view the same movie or show (McGrath,2014).
However, Netflix’s competitive advantage over Amazon is its library which has more variety and includes original content, thus making their library comprehensive in the streaming market.
They also offer all their content to their subscribers for streaming through a very user friendly personalized interface and effective recommendation system that boosts the watching experience; in comparison, Amazon’s Prime Instant Video library have less categories and less straightforward search results, plus a significant portion of their online content cannot be streamed for free, you have to pay additional money to watch certain shows or movies. (Honorof, 2014) Blockbuster’s strategy was to keep expanding geographically by opening new stores in different locations, rather than switching to online streaming, thinking it would increase their market share. But due to the rise in competition from Netflix and Amazon, the company filed for bankruptcy in 2010 and in January of 2014 they permanently closed all their stores and only operated through “Blockbuster On Demand” on a pay per rental bases and operated only in the US (Netflix Alternative, 2013).
The competitive advantage Netflix had over Blockbuster is the number of titles they offered.
Because Netflix did not operate from a physical store, it made it possible to store thousands of titles, both old movies and movies which were on high demand, and thus satisfying the preferences of much more customers than Blockbuster. Blockbuster was restricted in the amount and titles they had to offer in their stores because of its limited storage space. Another advantage was convenience. Netflix made it very convenient for customers to get their DVDs without having to leave the house and having unlimited videos on a subscription basis without late fees, all of which are things Blockbuster lacked. With all this said, it is obvious that Netflix used offensive strategies that helped it build its reputation as a market leader and created a strong brand loyalty by binding customers to its service. As a first mover, Netflix was able to move down the learning curve ahead of rivals, so it now knows exactly what customers are expecting and learned a hard lesson not to do sudden strategic changes as it did in 2011 missteps of price changes and split of service. As a first mover also, Netflix was able to set the technical standard for the industry by adopting the advanced streaming player and recommendation program that customers now can’t imagine accessing huge movie libraries without it, and Netflix is ahead of its rivals in this and it’s building it over time.
Back in its early stage of existence, Netflix had no chance to compete traditionally with the giant Blockbuster, so it chose a special kind of offensive strategy called “The Blue-Ocean Strategy” which dictates that a firm can “gain a dramatic and durable competitive advantage by abandoning efforts to beat out competitors in existing markets and instead inventing a new industry or distinctive market segment that renders existing competitors largely irrelevant and allows a company to create and capture altogether new demand” (Thompson, Peteraf, Gamble, Strickland, 2014) This is exactly what Netflix did as it didn’t go into the block and mortar business but focused from the very beginning on growing its online library and achieving its most important strategy back then which is to deliver DVDs by mail within one business day. This created a new segment of customers for its service and factors in the external environment started changing to its advantage which shows that Hastings and his team where correct in reading their external environment. Then in 2007 they started their streaming service which is also an offensive strategy that positioned Netflix far ahead of its competitors.
Recommendations
The past few years have shown how volatile the stock price of Netflix was as it fluctuated between as low as 53 dollars in 2012 to as high as 448 dollars in March 2014 (Google Finance, 2014).
This is an indication that Netflix is operating in a very fast moving industry where innovation and continuous improvement are the keys for survival. Consequently, as professional consultants, we advise Netflix executives to learn from what has happened in the past and put new strategies or amend existing ones to tackle the future probable recurrence of the problems they have faced in the past few years. One of the major competitive advantages of Netflix over its rivals in the industry is having this huge and varied collection of title selections in its offering. First we advise them to convert all their DVD-version content, which is not available for streaming, to soft stream-able versions as statistics showed more customers are leaving the DVD-by-mail plan and registering for the more convenient trendy streaming service (Roettgers, 2013).
Maintaining an increasing selection of title offering is vital in this respect, as in such an entertainment industry, we don’t see loyalty in customers as decreed by Marketing gurus; what we mean by this is, if another rival had a similar service with a richer content, many customers will switch with the blink of an eye. That’s why we are stressing on this point as it is a key for survival.
Accordingly, Netflix should opt to create strategic alliances and cooperative partnerships with many movie studios to maintain its database of titles – retaining existing ones and adding new collections, and negotiating to reduce the wait time for streaming movies after they are out in the theaters. This will definitely create value to the customers, but Netflix’s harder job is how to create value for those suppliers, that is, how to convince them to add their productions in the Netflix service. This can be done by creating a win-win model that will persuade those studios to choose Netflix over other rivals, and hence can be achieved by highlighting a set of advantages they’ll get from the deal. An example of such an advantage, is to have the studio’s work available not only in US, but in all the 41 countries Netflix currently operates in, and maybe make it available in local languages; this will increase the popularity of the studio’s work internationally and will basically mean more profits for future project releases. Catching up from this last point, it is vital for Netflix to find new smart ways to continuously increase their subscription base. By the end of Q1 2014, the number of subscribers went up to 33 million US subscribers and 11 million international subscribers (Welch, 2014).
More subscribers simply mean more annual income which will lead to the ability to get richer content to their offering, which will in return link more customers in. This recursive cycle is so prominent and can be triggered by some smart tactics, to initially get more customers. Lowering the subscription price might lure many potential customers to register, but is not advisable to do that since the profit margin of the streaming service is already narrow (Roettgers, 2013).
On the other hand, increasing the price of subscriptions is also risky and the crazy chaos that happened in 2011 will remain unforgettable. Hence, Netflix executives should devise new innovative ways to increase the value proposition of their service that will increase their customer base and enhance their reputation as a market leader. This can be achieved, for example, by doing the exact opposite of what they did in their 2011 missteps. What happened back then was to increase the price of their service for the same quality they offered; so let’s now try to increase the service quality holding the price fixed. One way of doing that, is to diversify their content; for example to start providing Live programs such as Sports events and News. This addition will get-in new customer segments – not only those who love to watch movies and TV series. So, if Netflix was able to secure the online broadcasting rights for a major soccer league matches, for example, and broadcasting Live CNN news, their customer base will be more fragmented and they will be moving in the direction of being an Internet TV provider with a variety of shows that suites all the different categories of viewers.
Another technique to increase the quality of their service is to enhance their GUI (graphical user interface) by creating a new advanced online player for streaming media that can detect voice commands sent from the embedded microphone of the client’s personal gadget (laptop, Smartphone, tablet, etc…), analyze those commands and perform actions accordingly. For instance, “Volume Up” to increase player’s sound volume instead of using your laptop’s mouse or going to “Settings” on your Smartphone/iPad; or the voice command “Action Category” to go to the list of movies in the Action category. Adding such a high-tech innovative feature in their player will amaze their happy customers and will leave their competitors contemplating in the shadows. Netflix can also enhance its online service by continuously challenging and rewarding bright programmers to come up with new algorithms that increase the effectiveness of their rating application. What they did with their one-million-dollar contest, which was won in 2009 by a team called BellKor’s Pragmatic Chao who were able to come up with an algorithm that overcame Netflix’s recommendation system by more than 10% (Netflix Prize, 2009), was very tidy and it really paid off; so they need to continue upgrading their systems – as it goes side-by-side with the ever increasing size of their database.
Speaking about the content, it was very clear that the bargaining power of the suppliers, which are the TV shows producers and movie studios, are becoming increasingly high; and what happened with the Starz Entertainment deal is one example to mention here, when it announced it would remove it movies from Netflix streaming starting February 2012 (Young,2011).
This leads us to what we believe is the most important recommendation for Netflix to consider, that is, invest more in original content. Going backward to the recursive cycle we previously explained, it is clear that getting new content goes in parallel with increasing the number of subscribers. For example, when Netflix secured the deal with Disney for exclusive rights to stream its movies starting 2016, many analysts assumed that the firm needs to get 4 million new subscribers to just breakeven with the cost of that deal (Morrissey,2013).
One here might contemplate, that sooner or later, Netflix will reach a stage where it will cease to be able to increase its customer base, so its revenues will reach a kind of a slow moving ceiling, but their content obligations will continue to rise: to maintain the licenses for the current collection and to get new content in. Many movie studios are closely monitoring Netflix’s performance and stock prices, and they are demanding higher money for renewing their contracts, and this is a major threat for Netflix to consider.
Unable to reach a renewal agreement with a major movie studio, will result in the disappearance of hundreds or thousands of titles from their online library in a fortnight. This will really embarrass the customers. That’s why we recommend that Netflix needs to heavily invest in original programming before they reach the saturation stage, or a deadlock situation whereby they cannot enhance their content because it’s too costly and they need more money by growing membership, and they cannot grow membership because they aren’t able to enhance their content because it’s too costly! Reaching this stage means the firm is approaching its last days. The solution for this misery, and to avoid this tragic end, is to invest in original content right away. Netflix started distributing premier programs in 2011 and now has more than 10 exclusive TV shows in its offering (Wikipedia, 2014), one of which is “House of Cards” – an America political drama television series – which “became the first TV series to win a primetime Emmy Award without ever broadcasting on a network or cable channel” (Neal, 2014).
The success of the series encouraged Netflix to produce a second season of it in Feb 2014, and a third season is scheduled in early 2015 (Wikipedia, 2014).
According to a study (Popper, 2014), one episode of such original content costs Netflix four million dollars; but although this is very expensive, allocating an important portion of the budget every year to produce such exclusive series will have its mark in the future. People can enjoy watching such series any time, as it is a permanent title in the online library, and Netflix doesn’t have to pay licensing or any other kind of expenses on originals once it is broadcasted. They can also make it available for their international customers by adding local language features (subbing or dubbing) to it. Growing internationally is still one of the main strategies that Netflix is counting on and although international expansion proved to be very costly, as Canada for example broke even after 2 years (Netflix Investor Relations, 2014); they are recommended to continue with it. It will give them more international recognition that will enhance their reputation and will pay off in their competition with rivals, and this is exactly what CEO Reed Hastings said in Netflix Q4 2013 Earnings Interview “ we are treating international as a segment – for competitive reasons” (Netflix Investor Relations, 2014).
As first movers in the streaming movie industry, it is advisable for Netflix to leverage their position as pioneers of the market by offering several loyalty programs that will increase the switching cost of the customers to their existing and future rivals. One thing they can do is to create a points-based reward system which works as follows: every month you renew your subscription you’ll add 10 points to your balance, and if you’re a new customer you get 50 “free welcome points”.
Then through time your balance will keep adding up points and you’ll have the choice to buy several valuable things with it. For example, one-month free subscription for 100 points, an original DVD movie (from a predefined list of titles) sent directly to your mail and that will cost you 200 points, and the chance to meet with the actors of your favorite TV-series (Netflix Original) for 300 points. Such a loyalty program will keep delight the customers and keep them hooked to the service. While many consumers have cut the cord and made the switch to Internet-only TV offerings, undoubtedly they’ve experienced frustrations as well. Netflix’s mobile app, while good, can be upgraded to present a much better and more seamless experience for those on tablets. We suggest added-value features like friendship connections, including the ability to see what friends on both Facebook and Twitter have watched, their recommendations, and share content with others. Another impressive change could be a ‘tagging feature’ when watching shows which we believe to be instrumental in expanding the social aspects of Netflix’s content. Viewers can tap the button at any time during a show to tag moments on the timeline relevant with quotes from the scene or make a comment regarding what they saw. Subsequent friends watching the content can see these tags, opening up dialogue between the partners and encouraging more social conversation through Netflix’s app. (The lab Blog, 2013).
Compared to the current app’s design, this new proposal feels fresh and clean. Of course, those added features are optional and can be switched off whenever privacy is needed. By adding this feature, Netflix will be leveraging the benefits of the latest VPPA (Video Privacy Protection Act) law amendments President Obama signed which “facilitate social media sharing of video viewing preferences when users consent to disclosure of information via the Internet”.(McClellan, 2013) Moreover, integrating social media with customers’ viewing experience will give Netflix an important marketing tool that will help them detect which content is more appealing to their customers and will also give their customers a window to speak out what they like to see in the future. Finally we can say that the next step for Netflix is to produce a Hollywood 100-million dollar movie that can be streamed same day it goes into the theater. This massive step of producing one movie every year, of such a caliber, will be a major boost for Netflix in the coming years especially if they were lucky enough and those movies turn out to be a major hit. But here one has to say, is it wise for a company like Netflix, that reported 112 million dollars in net income by the end of 2013 (Google Finance,2014), to handle a project of this size? Isn’t it a crazy adventure? Or should Netflix go through a joint venture with other Pay-TV firms to reduce the risks of such a gigantic project?
References
Bauman, L., Deal, N., Ishak, P., & Johnson, S. (2013, February 3).
Netflix Environmental Scan / SWOT Analysis. Retrieved April 22, 2013, from Memoirs of a Student: http://lisabauman.blogspot.com/2013/02/netflix–?environmental–?scan–?swot–?analysis.html Thompson, A. A., Peteraf, M. A., Gamble, J. E., & Strickland III, A. J. (2014).
Crafting and Executing Strategy – The Quest for Competitive Advantage – Concepts and Cases (19th Ed.).
New York, NY: McGraw-Hill/Irwin – Ch:6, pgs. 151-152 Thompson (2012) – Netflix in 2012: Can It Recover from Its strategy Missteps? Thompson, A. A. (2012).
Netflix Alternative (July,2013) Blockbuster on Demand – Retrieved from: http://www.netflixalternative.com/blockbuster-on-demand/ McGrath (Jan, 2014) Amazon and Hulu Could Slow Netflix Growth in 2014 – Retrieved From: http://www.forbes.com/sites/maggiemcgrath/2014/01/07/amazon-and-hulu-could-slow-netflix-growth-in-2014-morgan-stanley-says/ (Seave, 2013) Netflix to Competitors: Be Afraid, Be Very Afraid – Retrieved from: http://www.forbes.com/sites/avaseave/2013/06/06/netflix-to-competitors-be-afraid-be-very-afraid/ NetflixPR – Netflix Media Center – Company overview – Retrieved April 19,2014 from https://pr.netflix.com/WebClient/loginPageSalesNetWorksAction.do?contentGroupId=10476&contentGroup=Company+Facts Kollewe (October,2011) Apple Stock Price Falls on News of Steve Job’s Death – Retrieved from http://www.theguardian.com/technology/2011/oct/06/apple-stock-steve-jobs Zarafshar (Nov,2013) Remembering Blockbuster Retrieved from http://deweydigest.com/tech/2547 Cantisano (April,2014) Netflix loses Fox
