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Running Head: NETFLIX CASE STUDY ANALYSIS
Reyte On Publishing
Introduction a. Company history Netflix, Inc. is at the top of the market in DVD rentals online. The DVDs are sent directly to the customer by mail for a moderately priced monthly fee. The company has over 15,000+ DVD movie titles to choose from and has several distribution centers throughout the country. This allows them to ship DVD discs to customers very quickly often with turnaround shipment of a single day. Netflix has over a million customers that subscribe to their online service. The company offers more than 15,000+ titles and maintains an inventory of more than 5 million discs. The fee for services has multiple pricing points from under $5 a month to rent a single DVD at a time to $19.95 for more DVDs to be sent during a single order. The movies can be kept for as long as desired but must be returned to receive additional DVD rentals. The customers order directly from the website. There is also video streaming right from the computer for thousands of selections to see a movie immediately. Jay Hoag, has 33% of the company ownership. He is the owner of Jay Hoag's Technology Crossover Ventures (FundingUniverse.com, 2009). b.Biographical information on any prominent managers, etc. The company began in Scotts Valley, California with two experienced IT businessmen Reed Hastings and Marc Randolph in 1997. These Netpreneurs had already been successful in ecommerce with Randolph starting up a computer by catalog company. He was also a vice president with Borland International. Hastings had previously taught math students. He had just sold his company Pure Software. The sale earned him $700 million. The idea for renting DVD movies online originally came from Hastings after having to pay $40 fee for a late movie rental. c. Industry information (History, Growth)
2002 Netflix decided to go public where it sold over five million shares allowing them to rise $82 million dollars. The new name now Netflix Inc. used some of their new funds to pay off debts of $14 million that related to advertising and marketing expenses (Taylor, 2002). The firm also opened new distribution sites in more U.S. cities such as Boston and Los Angeles I order to meet customer demands. This resulted in instant growth in those areas. Soon after several more distribution sites were added in major U.S. cities. (i.e. Atlanta, Denver, Detroit, Houston, Minneapolis, New York, Seattle, and Washington, D.C.) (FundingUniverse.com, 2009). Netflix was able to sign on several film distributors that would receive a 20% revenue sharing profit from Netflix rentals in exchange for DVD distribution rights. This was immediately picked up by the media, drawing more attention to the company causing sales to skyrocket. It also drew the attention of competitors which begin to develop marketing tactics to compete with the company. For example, the retail giant Wal-Mart lowered its pricing for their online rental services below Netflix price. Columbia House also was looking into doing a similar deal. Blockbuster changed their fee structure and offered unlimited and no late fee subscription services. These competitors all targeted Netflix near the same time. This forced Netflix stock to drop in price by 50% as subscribers begin to cancel their memberships. II. SWOT analysis a. Strengths • Customized ordering based on movie genre preferences. Also allows queue of movies to be selected based on a wish list. These are automatically sent based on availability and price tier.
The overhead for staff, property, and administrative expenses are very low because the company is online. Therefore the competition with a brick and mortar offline expense such as Blockbuster and neighborhood rental shops pay more in this area. Netflix overhead costs are virtually fixed.
The selection of DVD movies is the largest in the entire world There are over 30 distribution centers in the U.S. which allows for fast delivery of DVDs to homes.
b. Weaknesses • New movies require large investments of cash for licensing fees and manufacturing DVD copies to add to service offerings
Need more licensing to stream Video on Demand Movies only 10% available to day of 15,000+ titles
Conversion to HD DVDs a major effort to reformat current titles for over a million DVD library (with duplicates for distribution)
c. Opportunities • Increase number of Video on Demand options to compete with Comcast or other Cable and Satellite entertainment services • • Increase the number of contracts with movie distributors to expand content licensing Add a Video Game on demand option
Cable companies such as Comcast that offer movies on demand. This allows instant access to movies at no additional costs.
• • • •
Retailers such as Wal-Mart offering competitive pricing, Columbia House, Amazon.com Other rental movie companies such as Blockbuster, Wal-Mart offering rental services Local stores carry video kiosks at very competitive pricing People choosing streaming movies on their computers, YouTube, Apple iPod, and Iphone options versus ordering DVDs to watch movies.
Rising costs of shipping and postage
III. External environment (Porter's Five Forces) a. Competitiveness of existing firms and b. Threat of New entrants. Blockbuster cannot compete. Once the biggest threat to Netflix, Blockbuster has had to concede its attempt at online rental as they move to 2nd place. Wal-Mart, Best Buy, and Cable and satellite companies, remain the major competitors for Netflix. Also new to the market is Apple, which may, in time, cut into Netflix’ competitive advantage the most. The number of iTunes and iPhone subscribers is also continuing to increase. The advantage of downloading movies with current phone contracts for the long term (1-2 years at a time) may eventually outshine Netflix strategies (Beal, 2008). However, to compete with the threats Netflix opened even more distributing centers that now could offer overnight service to subscribers. This allowed members to get their movies at home instead of having to drive out to retailers. This was a major competitive advantage of Netflix. c.Strength of suppliers
Netflix has partnered with over 50 movie distribution companies in a deal that promises access to DVD of new releases as well as older movies that are being re-released such as Star Wars, Transformers, and others. d.Strength of buyers Surveys show that customers love Netflix. They remain loyal even when not taking advantage of subscriptions they pay each month. According to ComputerWorld (2008) Netflix is at the top of customer satisfaction index over QVC and Amazon.com. The survey reports that subscribers are pleased with Netflix online support and services and they most often decide to buy services. In addition they tell others about their shopping experience which provides referrals that make the same decision (Rosencrance, 2009). e. Threat of substitute products or services Threats of substitute products are mainly through Apple at present. The threat of iPhones and iTunes will be a force to be reckoned with in the very near future. Another upcoming challenge will be free movie distributors that are highly popular online. For instance YouTube offers many movies free. This would be a major threat to Netflix and all other rental companies. There is a limit to how much of a movie can be watched however it is over 1 hour if you are willing to watch a few ads during the viewing (Beal, 2008). IV. Evaluation a.Evaluate Netflix's value chain. Which elements in Netflix's value chain create value for them? Which ones do they need to improve upon? The service offering that needs the most improvement to date is the video on demand inventory. Streaming movies to the desktop, laptop, Iphone, Ipod and other electronic devices for multiple
users requires licensing. This is costly to a company as each individual copy of the movie that is downloaded has a price tag. In addition the use of streaming technology requires a member to watch the entire movie at one sitting. This has proved a drawback versus downloading the movie and watching it at the convenience of the viewer (Beal, 2008). b.Of those elements that create value for Netflix, do any meet the four criteria for a sustainable competitive advantage? Explain in detail which ones and why they can be considered a sustainable competitive advantage? Most of Netflix success can be summed up in the ability to deliver movies to the door of subscribers overnight. This very robust distribution system allows them to outshine all competitors. Another plus is people simply love Netflix. They remain loyal customers even if they rarely use the service. I have a membership at an entry level that I automatically pay each month and I haven’t used the service for several months. This feature meets all four of the marketing 4 ps of product, price, place, and promotion. Why a sustainable advantage? Price- Netflix offers several pricing options from $4 a month to under $20. This meets nearly every budget requirement for an excellent service. Promotion- Netflix has advertising all over the Internet. Through Google and other search engines the company has partnered with the entertainment industry to promote its pop-up ad any time the word movie or even certain actors are mentioned. Referral marketing has also contributed to an influx of new subscribers as perks are given to current members who refer friends and family. Place- Again as discussed Netflix has distribution centers in over 20 major metropolitan areas that can distribute requested rentals in a single day.
Product – Everyone loves movies and Netflix has a library of the most titles in the world over 14,000. They have over one million copies in inventory to distribute. In addition stream video access is also available free based on individual monthly subscription rates (Sandoval, 2009). Patents. Netflix has several patents on software programs that give them the ability to meet customer demands quickly and accurately. Logging the return of DVDs in less than a day through bar code check in once the item is mailed back to the distribution center. Automated postage handling services that tie directly into the U.S. postal delivery system. Online the patents for tracking individual customer taste and favorite types of movies. The email delivery service that sends the latest movie selections that match individual customer’s favorites. The reminder that lets customers know their monthly subscription fee is being billed. All these add up to great customer satisfaction overall with the company. Translating into customer loyalty and ongoing sales (FundingUniverse.com, 2009). V.Summary and recommendations a.What do you see as the greatest challenge facing Netflix? The greatest challenge at present is improving its VOD and streaming technology. This will become even more important now that HD requirements have limited the viewing quality of DVDs that are not HD quality. Though for now this is still a new trend. Soon the only DVDs that people will want are those with HD quality as this is the latest technological advancement. There is a short window that is open to Netflix to get this right. Once people get more comfortable with digital movie viewing, this can be a major drawback to a DVD rental business. For example, another major force to deal with, Apple is now targeting Netflix with iPhone and iTunes movie downloads. In January 2008 Apple has also grabbed up licensing rights with
several top film studios directly. They will get the right to offer on iTunes the latest movie releases only a month after they are released to DVD (Sandoval, 2008). B.What is the firm's strategic options? Strategic options are to gain more cooperation with movie distributors as they already have a relationship with over 50. Though Netflix offers revenue sharing in order to gain favor, this is most likely one of the wisest moves made. This is one way to guarantee the latest releases and discounts on licensing. It is a very strategic move that can be used to keep competitors at bay. Another move that has been a target for Netflix is to gain one million subscribers. In 2002 they were over 670,000. c.How is Netflix doing financially now? Netflix hit the one million subscriber target in the spring of 2003. The price of their stock is was beginning to upswing and by summer they were making a profit for the first time. In addition they decided to offer stock options to employees. This has added more trust to their reputation as a sound corporation that cares about employees. This is especially important as this was the era of corporate ethical scandal. Financially, Netflix has 10 million subscribers in 2009. They have experienced profits for a full year and the first quarter of 2009. The revenue share is up from what was forecasted on $359 million they are earning over $38 cents on each share. Investors like Netflix and claim that they will beat the recession (Kafka, 2009). Recommendations
Netflix still has options to expand its growth. Since the change to all digital television in 2009, a new opportunity for Netflix has arisen. The current economy has caused many homes to discontinue cable, satellite, entertainment in the home due to expense. This opens the door for Netflix to offer economically priced options. Once you become a Netflix subscriber, generally the surveys show you remain one for years. Netflix should continue to take advantage of the economic downturn to gain more customers. This is a peak season to go after this niche market of former cable and satellite customers.
References Beal, A. (2008). Watchout Netflix itunes aned youtube might offer movies for free. Retrieved July 15, 2009 from http://www.marketingpilgrim.com/2008/06/watchout-netflix-itunesyoutube-might-offer-movies-for-free.html FundingUniverse.com, 2009). Netflix inc. company history. Retrieved July 13, 2009 from http://www.fundinguniverse.com/company-histories/Netflix-Inc-Company-History.html MotleyFool.com (2009) Netflix. Retrieved July 13, 2009 from http://wiki.fool.com/Netflix Sandoval, G. (2008), Move over Netflix, here comes apple. Retrieved July 14, 2009 from http://news.cnet.com/8301-10784_3-9850701-7.html Kafka, P. (2009). Netflix what recession Q4 beats estimates and 2009 looking strong. Retrieved July 15, 2009 from http://mediamemo.allthingsd.com/20090126/netflix-what-recessionq4-beats-estimates-2009-looks-strong/ Rosencrance, L. (2008). Netflix tops customer satisfaction survey. Retrieved July 16, 2009 from http://www.computerworld.com/s/article/9085779/Netflix_tops_customer_satisfaction_survey
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