Netflixs Business Model and Strategy in Renting Movies and TV Episodes Jeff Johnston, Quez King, Coti Sanders,

and Mallory Sullivan BUS499.01 Dexal April 5, 2013

Introduction The following paper intends to thoroughly answer the questions from the case study Netflixs Business Model and Strategy in Renting Movies and TV Episodes. Netflix has, for the majority of its existence, been both an innovative and a prosperous company. At its inception in early the early 2000s, Netflix provided customers with DVDs via the mail. The selling point to consumers was that there were no late fees associated with subscribing to a Netflix membership. In 2007, Netflix gained huge profits when they began streaming their movie content online. Netflix steadily grew its consumer base and expanded the breadth of the content they provided quite successfully through 2010. However, Netflix committed an egregious error in 2011. The company decided to charge consumers with two subscription fees, one for streaming movie content online and another for DVD through the mail. Their stock prices fell precipitously as a result of instituting these policies. After the analysis in the following pages, our team will show that Netflix can return to being successful, or they have caused irreparable damage. Competitive Forces in the Movie Rental Marketplace Overall, the competitive forces in the movie rental market are very high. The following five-forces analysis will demonstrate this assertion. The competitive force of buyer bargaining power is quite strong. A consumer has a plethora of choices when deciding on where to rent his/her movie. Buyers can procure movies from DVD rental hubs like Redbox or Blockbuster (which now offers a DVD rental box). Also, public libraries have accumulated large amounts of DVDs and Blu-ray discs that rival the now outdated movie stores (Blockbuster and Movie Gallery). Another option is for consumers to simply stream movies from online sources. Consumers can legally obtain movies from Netflix for as little as $7.99 per month and Crackle.com or illegally by way of torrents. Also, premium TV channels like HBO, Cinemax and Starz offer customers a variety of movies to select from. In contrast, supplier power is relatively weak. Because of the availability of many movie rental establishments, a company like Netflix must sustain competitive advantages to stay relevant. If they fail to keep a competitive advantage they risk becoming obsolete much like the outdated video stores. As alluded to earlier, the threat of substitute products and services is quite high for this market. Essentially, any alternate form of entertainment is a substitute to movie rentals. For the scope of this question, we will focus on substitutes within this market. Free, online streaming websites are taking market share away from Netflix. Hulu.com and Crackle.com are examples of such websites that offer users free streaming of movies online. Netflix customers can stream movies in their queue to their televisions through certain gaming station. If a Netflix user makes the decision to switch over to streaming free movies online, there are pros and cons to the change. The $7.99 monthly fee is gone, but the quality of the free movies is significantly less than what Netflix offers. Also, the movie selection is more limited and often includes older and more obscure movies. Another inconvenience of free online movies is the buffer/loading time for some users and the users accessibility to an Internet device. Another competitive force to discuss is the threat of new entrants into the movie rental market. It is not an arduous process to overcome the barriers to entrance in this particular market. However, the most prominent competitors have been established, and this will deter many prospective new entrants due to the economies of scale needed to compete. The first

barrier to overcome is procuring the legal rights to distribute copyrighted materials to consumers. This is perhaps the most difficult step to surmount. An additional barrier to entry is the ability to utilize online services. If a company wants to compete successfully in this market, it must productively operate within the online realm. The threat of new entrants into the market is slightly mitigated by the first mover advantages Netflix has. Netflix offers a wider variety and higher quality of movies than their competitors who offer free movies. The final force, competitive rivalry within the industry is also quite strong. Even though Netflix enjoys the biggest market share they are on constant watch to stay ahead of the competition. In this industry, companies must be innovative with their services and make sure their video content is always up to date. If one company makes a mistake, other companies will exploit that opportunity without hesitation. Consumer-Oriented Forces That Drive Change in the Movie Rental Industry There are several forces that drive change in the movie rental industry. These forces include technology, convenience, costs, variety of options, and the economy. Technology is continuously changing, and the advancements with the Internet make it easy for movie rental companies to move toward and online format. This factor gave Netflix the ability to out-compete and take away market share from other movie rental companies like Blockbuster and Movie Gallery. The advancements in technology have made it easier for people to watch online streaming movies on their smartphones, Internet-connected televisions, and personal computers. Consumers in the movie rental industry are always looking for a more convenient way to watch movies and TV episodes. Netflix and other companies like Blockbuster offer online streaming of movies and TV episodes. With online streaming, movie rental companies can carry less inventory and not risk running out of copies of movies, which would make it inconvenient to consumers. Ultimately, its more convenient for consumers to log on to the Internet with their personal devices and watch movies without having to visit a movie rental store. This has driven companies to use web-based interfaces to allow consumers to conveniently stream movies and TV episodes. The cost of online streaming of a movie or TV episode is cheaper than going to a movie rental store to rent a copy of the movie or TV episode. The consumer saves money by avoiding late fees as well as the cost of traveling to the movie rental store. There are now a variety of rental options to choose from online companies that offer streaming movies and TV episodes. Consumers consistently seek the best subscription offer, meaning they want the cheapest package that offers the widest selection of movies and TV episodesmovie rental stores and Redbox are able to offer only a limited selection of movies. In todays economy, the price of admission tickets to patronize a movie in theaters has gone up significantly. Cost-conscious consumers that want to see a good movie are forced to look elsewhere. Online streaming has given these consumers an alternative and cheaper way to watch movies If new companies do not enter the industry, the combined impacts of these driving forces would be favorable in the terms of their effect on competitive intensity and future industry profitability. If substantial number of new companies does enter the industry, the combined impacts of these driving forces would be unfavorable in the terms of their effect on competitive intensity and future industry profitability. The market share between the industry leaders will be divided with the new companies, which decreases the industry leaders market share and

profitability. Also the industry would become more competitive and making it harder for companies to compete against each other. Strategic group map of this industry A strategic group map of this industry would contain: Netflix, Hulu, iTunes, Blockbuster, Redbox, and VOD providers. The y-axis would be titled Value-Added. The x-axis would be titled Market Coverage. Netflix would be at the top right corner of the map. Netflix gives its subscribers high value for their money, while covering a large amount of the market. Hulu and iTunes would be at the bottom left corner of the map. Hulu and iTunes are new to the market and have a very small amount of market share. Both do not offer an extensive selection of movies or TV episodes as Netflix or Blockbuster. The two offer fairly low prices for its service but fails to give value for the consumers money. Blockbuster would be at the top right with Netflix but will be slightly lower on the y-axis and x-axis. Blockbuster has implemented some changes by having more kiosk locations and offering a wider selection of movies. These changes have not helped Blockbuster enough to pass Netflix on the value-added or market coverage axis. Redbox would be in the middle of the map. Redbox is constantly adding locations and will move up in the map in the near future. VOD providers would be in the middle of the lower left corner and center of the map. VOD providers cover some of the market but not enough to be a top industry leader. VOD providers do not offer a wide enough selection of movies to be high of the value-added axis. Netflix is very attractive on the map. Netflix gives its subscribers high value for their money. It is the only company on the map that offers both mail-delivery of DVDs and online streaming of movies. The main reason Netflix is so attractive on the map directly relates to its ability to offer a wide selection of movies and TV episodes that can be accessed with easy to multiple devices. Key Success Factors There are some key factors that can determine the success of companies in the movie rental industry in the next three to five years. 1. A large and updated selection of movies and TV episodes will help a company in the movie rental industry grow and be successful. 2. Since there are a growing number of online, movie-streaming companies, strong advertising could allow a company to gain substantial market coverage. 3. Customer convenience is very important for companies to retain and gain customers. Easy-to-use and fast software will allow a company to gain customers. Some consumers find it hard and time-consuming to download and install on their computers the necessary software to stream the movies. User-friendly software will, for the most part, reduce that problem for most customers. 4. A company needs to have overall low cost-to-income ratio to ensure a good return on its services offered. 5. An efficient and widely accessible method of delivery and distribution is needed to help a company gain more customers and retain their current customers. 6. Up-to-date technology is also a key factor because as technology advances, it makes it easier for a new company to stream movies and TV episodes to different devices, making it easier to reach more customers.

7. Making a newly released movie available as soon as possible for customers will also increase a companys potential for success. Netflixs Strategy The current strategy of Netflix has multiple components. Netflix strives to achieve a consistent growth rate of subscribers through generating positive word of mouth, while investing in effective marketing strategies. Its also strives to have a constant growth rate with its revenues. Netflix offers a wide range of movie selection and constantly updates its movie selection. It strives to achieve a high level of satisfaction from its customers. It offers its subscribers the choice of streaming a movie or receiving the movie through the mail. Netflix also makes their service convenient for its subscribers by using advanced software that is easy to use. Of the five generic competitive strategies, Best-Cost Provider closely fits the competitive approach that Netflix is taking. Netflix offer a range of subscription packages to its consumers ranging from $8.99 a month to $47.99 a month. It also delivers a quality service that contains a large base of movie and TV episode selection, while also offering its services on a variety of devices. Netflix is trying to achieve a Best-Cost Provider competitive advantage. Based on the information given, Netflix has achieved the competitive advantage it was trying to achieve. SWOT Analysis of Netflix A SWOT analysis of Netflix shows that they have more strengths and opportunities than weaknesses and threats. Netflix has been able to remain a top contender in the market of DVD rentals and online movie streaming. Though they still remain supreme against opposing competitors in the movie rental market, Netflix will have to tackle their weaknesses and threats with a sound business plan in order to be able to continue to be attractive to consumers transitioning to a more technical lifestyle. Netflix is a category leader. It is the top player and the first mover in the online video streaming space, with more than 30 million subscribers (estimate to date). Netflix's subscriber base is substantially higher than its arch rivals in the space: Hulu Plus, partially owned by Walt Disney, boasts of more than 3 million subscribers (estimate to date), and Amazon Prime which doesn't disclose the number of subscribers, but is estimated to have between 3 million to 7 million subscribers (estimate to date). By building a successful brand, Netflix has been able to keep a large customer base with the potential of growing even larger. One of Netflixs most significant weaknesses is connected to the decline in the DVD business. The migration of customers from Netflix's DVD segment has been pretty strong and is very likely caused by a change in media consumption by customers. Netflix has lost much of its DVD consumers to the Redbox Company due to their fast, anytime disk availability whereas Netflix has a two-to-three day wait on their DVD selections. There are several opportunities available for Netflix to venture into and be become an even better service for their customers, but the main evident venture would have to be the expansion of Netflix. The company must be willing to expanding to more countries and provide more content across the world. With the new improved Internet connections and steadily improving online payment applications would provide additional publicity to gain more subscribers for Netflix especially in Latin America and Europe. Netflixs ability to become flexible with the needs and expectation of their customers will allow them to remain ahead of the

intense competition of the many alternative choices from competitors with respect to streaming, DVDs and Video on Demand such as Redbox, Hulu, Amazon, and Walmarts VUDU. Appraisal of Netflixs Operating and Financial Performance Netflix has experienced a lot of growth and few declines. Netflix is a profitable company that is very liquid. Netflix has seen a steady subscriber growth from 2000-2009. In 2000, Netflix suffered an operating loss of $58.5 million. By 2005, Netflix was finally operating at a profit. From 2005-2009, Netflix has enjoyed a steady increase with its net income. In 2009, Netflix recorded a net income of $115.9 million. Netflixs gross profit margin has also had a steady increase from 2005-2009. In 2006, Netflixs return on assets dropped 8 percent from its previous year. From 2007-2009, Netflixs return on total assets had a steady growth rate between 3 and 4 percent each year. In 2009, Netflixs return on equity increased 35 percent from its previous year. After calculating Netflixs current ratio from 2005-2009, Netflix liquidity has shown to be very high. In 2005, Netflixs current ratio was 1.7 and grew to 2.2 the following year. Netflixs basic EPS has had a tremendous growth of $1.27 from 2006 to 2009. This could have resulted from its implementation of repurchasing its shares to offer a stock-based compensation program for executives and employees. The positive performance of Netflix was its ability to have a steady growth with its net income and total number of subscribers from 2005-2009. Another positive performance of Netflix is return on equity growth of 35 percent from 2008 to 2009. Also, Netflix has proven to be very liquid. The negative performance of Netflix was its loss on disposal of DVDs from 20052009. Another negative performance of Netflix is its decline 8 percent decline with return on assets in 2006. Netflixs Competitive Strength Netflix has a competitive strength out-weighs both Blockbuster and rival VOD providers. Netflixs price is less than both. Netflix offer both mail delivery and online streaming of movies and TV episodes. Blockbuster does not offer online streaming of movies and TV episodes. VOD providers only offer online streaming of movies and TV episodes. Netflix also offers a wider selection of movies and TV episodes than both Blockbuster and VOD providers. Competitive Strength Assessment Importance Netflix Blockbuster Weight Strength Strength Rating/Score Rating/Score .20 8/ 1.6 6/1.2 .10 9/0.9 5/0.5 .20 10/2.0 7/1.4 .10 .05 .10 .15 .10 1.00 8/0.8 5/0.25 9/0.9 9/1.35 10/1.0 6/0.6 7/0.35 6/0.6 6/0.9 1/0.1 -

Key Success Factor/Strength Measure Price Distribution capabilities Movie and TV episode selection Image Service Technology Short time delivery capability Streaming capability Sum of importance

VOD Providers Strength Rating/Score 7/1.4 2/0.2 5/1.0 5/0.5 9/0.45 9/0.9 10/1.5 10/1.0 -

Weighted overall strength rating

8.8

5.65

6.95

Netflix has a sustainable competitive advantage over Blockbuster. Netflix has the ability to delivery DVDs by mail and stream movies online to its customers. Blockbuster does not offer online streaming but has implemented the mail-in return of movies. Netflixs movie and TV episode library has more to offer consumers than Blockbuster. Its technology is more advanced than Blockbuster. Netflix provides its subscribers with a one-day delivery time by locating the movie and sending it out the same day it has requested. Blockbuster does not have the capability of offering a one-day delivery time. If its store does not have the movie, the consumer will have to until the movie is returned and available at the store. If its kiosk does not have the movie, the consumer will have to wait until the kiosk has been restocked with the movie. Top Priority Issues Management Needs to Address There are three top priority issues Netflixs management needs to address. First, Netflixs management needs to focus less on the mailing of DVDs and more on the online streaming of movies. Second, its management needs to update the new releases more often. By the time movies get to Netflix, they have already been out for some time. Third, its management needs to address the variety of subscription packages. Two or three of its most popular subscription packages would be sufficient. There are three top priority issues Blockbusters management needs to address. First, its management needs to address its need to expand more of the kiosks. Second, its management needs to address its need to try an online streaming option or online store. Third, its management needs to address its need to expand its selection of movies. Conclusion and Recommendations There are some recommendations that CEO Reed Hastings needs to consider and implement into Netflixs strategy and business model. First recommendation is to focus less on its mail-delivery of DVDs segment and focus more on its online streaming segment. Technology is constantly changing and making it easier for competitors to offer online streaming of movies. Focusing less on its mail-delivery of DVDs segment will allow Netflix to gain more market share in its online streaming segment. By doing this recommendation, Netflix will be harder to compete against and its subscription revenues will increase. Second recommendation is to update the new releases of movies more often. Consumers are constantly waiting on the next new movie to be available for rental. Updating the new releases of movies and TV episodes will allow Netflix to retained more subscribers instead of losing them at the end of the year. The third recommendation is to limit its variety of its subscription packages. Offering consumers the best three popular subscription packages would allow Netflix to reduce its overall costs. The subscription packages should be low cost and give the most value for the cost. Last recommendation is to create a viewable mission statement for investors and consumers to view on its website. The mission statement should allow the investor or consumer to know the companys purpose and be specific enough to give the company its own identity. There are some recommendations that CEO Jane Keyes needs to consider and implement into Blockbusters strategy and business model. First recommendation is to expand on more of its kiosk systems. Consumers are becoming more attractive to renting movies from kiosk systems. By expanding more kiosk systems, Blockbuster will be able to compete with up-

coming rival Redbox and attractive more consumers. Second recommendation is to implement a plan of action to attain online streaming technology to be able to offer its consumers subscription packages for online streaming of movies. Third recommendation is to offer an online store that allows consumers to rent DVDs to be since to their homes like Netflix. The third recommendation is to expand more on its selection of movies and TV episodes. Although, Blockbuster has already expanded more on its selections of movies, its selection is still less then Netflix. Last recommendation is to advertise its services more to consumers. Many consumers do not even know it has kiosk systems. By advertising its services more to consumers, Blockbuster will be able to gain new consumers and increase its market share. Reference