Netflix Case - Harvard Business School

Service prices:

2011 Changes about Which business are Netflix in

Before: Netflix
*Dvd=$7.99 Dvd+Streaming=$9.99 2$ add-on for Streaming service

After: They separate their services, so, its one price only for DvD and other only for Streaming
And has changed their name to Qwikster (DvD Service) and Netflix Streaming service)
*DvD=$7.99 Streaming=$7.99 DvD+Streaming=$15.98

They want to move from their initial business (DvD delivers) to a new business (Streaming)

1990s Blockbuster was the leader in the DvD rent market

Late fees represent the 10% of revenues.
But the retarded return of the DvDs cause a stockout (falta de inventario) by the stores, so that
reduces customers satisfaction.

2002 At this year Blockbuster was the King of this market and it was their best year. But (yes
its always a but) in this year Netflix get into the market as a new entrant.

We can see Porters five forces in this example, specifically, the Threat of a New entrant to the
market.

NETFLIX History

1997 Reed Hastings*, an entrepreneur, found a forget VHS movie hidden in his house. And
because of that, he had to pay a late fee (multa) for about $40. Then he had an idea.

Relating deliver movies and the new technology (at the time) of DVDs, he thought about send
them by mail, because the DvDs were small and light (ligeros).

He starts to auto-send the movies to himself and analyze how much time of time-delivering
(tiempo de entrega) it`ll take.

Then Hastings founded Netflix and create a website in 1998.

The idea is was to target the buyers of DVD players and attach a coupon within the box. This
coupon includes de website and contact details.
* Reed Hastings (Founder and CEO of Netflix)
They marketing 2000 (es un ao, no una cantidad) IPO (oferta inicial de acciones)

Our 2000 prospectus was spun towards things that were hot it reflected a tension in our
strategy. We would offer price comparisons, theater tickets. That strategic tension didnt resolve
itself until the bubble crashed. That summer we realized we werent going to make it unless we
did on rentals...It was a cash-induced strategic focusing.

Note: Ask to the English teacher David about what the previous paragraph means.

The people were using more and more DvD players, 5% by 1999, 13% by 2000, 37% by 2002
and 65% by 2004.

Rather than growing, Netflix was in a declive, because they have to spend too much money to
satisfy the demand and the cost per delivery were too high, and also the feedback of the people
was about a slower delivery system.

Moving to a prepaid service

In order to offset (compensar) slower delivering time, now, Netflix offer Unlimited movies, up to 3
movies at once (al mismo tiempo) and exchange them as frequently as they liked.

So, this service of all you can eat were very attractive to those people who were daily viewers
of movies.

Demand of the Top new releases (lanzamientos, movies) is already stimulated because of the
external marketing (Ej: TV Trailers, among other things). So Netflix doesnt have to do a
marketing with those movies, but (sino) in Independent films, and other movies with low
demand.

Proprietary Recommendation System

Netflix used to employ a traditional way to recommend movies to their subscribers, they offer in
their home page the same movies to all their users. But now Netflix want to show to each
subscriber what he/she wants to see (to appeal the users) and not to show movies which they
are not interested in (To repeal them). This system was developed via algorithms using the
information collected by the preferences of each user and the preferences of similar users
around the world.

So when they implement that system, the movies which were recommended, were instantly
rented out. Then they realized that the previous system value was zero.
The inventory manage (Gestin del inventario) was directly related with the recommendation
system. The site do not recommend a movie which were not in stock. New releases were not
frequently recommend because of its demand, these usually be in short supply (escaso).

2006 Results of recommendation system

Before: New releases represents 70% of total rentals

After: New releases just represent 30% of total rentals. The other 70% were rented because of
recommendation system.

Building the movie Library

2000 The entry of a Chief Content Officer, Ted Sarandos

The company still have problems with stock, specially with new releases. Their providers were
small distributors, and those didnt have the enough experience and potential to supply this
growing company called Netflix. So they call an experienced man, Ted Sarantos, who has the
contacts and good relationships with the major (principales) studios

Throughout one year of negotiations, Netflix (and, of course, Ted Sarantos) was establishing
relations and revenue-sharing (distribucion de ganancias) with this new major studies.
So netflix reduce costs, and can offer a better satisfaction to their users in terms of enough
stock. And a big coverage of the national territory.

With the information collected in the Personalized recommendations, AND the ability to have
Enough Stock, now Netflix can predict the near demand and then have a model of Just In Time
stocks. This means that the storage costs are significantly lower than a retail store like
Blockbuster, like one-third() to one-fifth(). This costs are more important with the
non-new-releases movies which now represent almost the 70% of total rentals.

Distribution and Delivery

2001 Netflix had a next-day delivery in Sunnyvale, California. But in the rest of the country,
delivers were very slowers. So they get in a Strategic alliance with the U.S. Postal Service
(USPS) to intercept the repaid packages (empaques devueltos) which have the movies, and
then, deliver it faster to the nearest Netflix center. Then Netflix starts to invest in warehouses
(centros de almacenamiento) around the country (US) to get the mail faster, 58 centers by 2009
and 10.6 millions of subscribers..

So, the combination between the Strategic Alliance with the USPS and the new Netflixs
ore
Warehouses, made possible the next-day delivery in all the country. (That is now a C
competence)
Now, Netflix among its movie retail competitors aimed for- Convenience, Value and Selection.

Customer retention The key behind Netflix subscription model is the queue (cola). In average
queue length (longitud) de la cola are 50 movies. Its our biggest switching cost

*Porters five forces: As a supplier of movies, they had a huge bargaining power because of its
high switching costs by change of supplier.

Blockbuster responds

In 2004 they recognize the lose of their customers, so Blockbuster creates Blockbuster Online.
They promoted their website by given discount coupons in their retail stores for online users.
And a lot of advertising. At the end of the year, they reach 2.2 million subscribers. Reed
Hastings refers to this behaviour We are thankful they didnt entry to the market 4 years ago