A Porter’s Five Forces Analysis of Netflix By: Shannon Szabo-Pickering ‘Throughit innovative distribution methods for delivering moviesand television shows and intuition regarding changing consumer preferences for viewing these media forms, Netflixhas grown intoa dominantforce in the entertainment industry. Started in 1997 as a viamail DVD rental service, Netflix capitalizedon the emergence of DVDsasa replacement to videotapes. Fora monthly subscriptionfee, consumers could rent DVDs, have delivered totheirhome,andreturn them anytime without late fees. In 2008, it became first-tomarket in offering digital on-demand services, offering anyone withinternet access the opportunity towatch movies and television shows fromthe Netflix catalogue at their convenienceand without commercial interruptions, Digital streaming gave Netflixa competitive advantage over traditional entertainment distributors, allowing itto simultaneously implementa cost leadership and differentiation strategy. Itproved to be an efficient distribution method, allowing Netflixto offerits services ata considerabl y lowerprice than able and satellite, while simultaneously providingits audience withan improved and unique viewing experience comparedto traditional television and movie viewing. Viewers couldtowatch TV and movies at their convenience, and Netflixadditionally provided personalized viewing recommendations though the use of data mining techniques. Netflixis widely seen asrevolutionizingtelevision and movie viewing, andis widely considered amajor threat to traditional viewingplatforms. InJuly 2014, Netflix surpassed SOmillion global subscribers, with 36 million of them beingin the United States (Netflix, 2015) and during peak hours, it accounts for more than thirty percent of all Internet down-streamingtrafficin North America (Auletta, 2013). Recently, Netflix has focused on aggressive international growth, andis now available in over 40 countries (Netflix, 2015). Despite being highly popular with customers, the Netflix business model does have some areas of concern. It is entirely dependenton outside suppliers for content, and faces high expectations for both price and quality, as well asa multitude of new entrantsin the marketplace. Furthermore, ithas come underscrutiny forprice increases, its potentially unsustainable business modeland over regulatory concerns such as the amount of Canadian contentit offers. The following discussion assesses Netflix using Porter's Five Forces Model todeterminehow market forces may affect Netflixnowandinthe future Threat of new entrants (Moderate) Asa well-recognized growth sectorin the movie and television industry, competitionin online streaming islikely to intensify inthe future. Many new onlinestreamingentrantsare likely to be currentindirect competitors entering the on-demand streaming market tomaintain market share and remain relevant and competitive ina changing media environment. Traditional providers of movie and television imitating Netflix business model have become, and are likely to remain, widespread entrantsinto the digital streamingservices. In late 2014, Rogers and Bell Media respectively introduced Shomi and Crave ‘TVto the Canadianmarketplace; arecognition of markettrends favouring digital on demand. Both of these services have built areputation for soundtelevision content, while Netflixis still widely seen asthe top providerof movie content. Both services also offer personalized recommendations, similarto the Netflixmodel. Additionally, Crave TVisavailable to customers for $4.00 per month, compared to $8.99 for Netflix and Shomi. However, Shomi and Crave TV are both only available tocustomers of, certain television providers, while Netflixis available to anyone withinternetaccess. Due toits vast amount of content, ease-of-access and predominant market share, Netflixstill currently enjoysa competitive advantage over thesenewly introduced digital on-demand services. Netflix salso facing the threat of new entrantsin the United States. In October 2014, HBO and CBS both announced the launching of digital steaming services in 2015. These new entrants todigital streaming bothhave a competitive advantage in the amount of content they already own. However, asfirst to market Netflix has an established reputation, brand equity and market domination in the digital streamingrealm. Additionally, aconsensus among streaming competitors exists that, although offering similar services, the content offered by various streaming services creates a large enough point of difference where numerous providers can compete effectively in the marketplace. WhileNetflix may face many new entrants within its sector, it remains unclear whether these new entrants truly represent athreat Bargaining Power of Buyers (High) The current business model implemented by Netflix gives its customers alarge amount of bargaining. power. Consumers face minimal consequences for cancelling Netflix subscriptions. Customers may cancel at any time without termination fees, and have their profile information saved by Netflixfor one ‘year (How do | cancel Nettlix?, 2015). The price sensitivity of Netflix consumers further increases their bargaining power. At$8.99 per month, Netflixis relatively inexpensivecomparedtotraditional media outlets. The low price and high amount of content available through Netflixcreates competitive advantage compared to traditional media outlets. However, italso creates high consumer expectations regardingboth price and content, and may have inadvertently increased the bargaining power of consumers. Because of these expectations, consumers are extremely price sensitive andat risk of abandoning Netflix over relatively incremental price increases. In 2011, when Netflix divided its DVD by ‘mail and streaming services, charging $7.99 per month for each service instead of $10 access to both distribution methods (Shankland, 2011), resultingin aloss of 800 000 subscribers within threemonths of the announcement. in 2014, it again raised its prices from $7.99 per month to $8.99 per month. It mitigatedthe risk of losing viewership by giving existing customers. two-year reprieve from price increases. Although this strategy appears successful inpreventing the loss of customers, the amount of media coverage regarding the announcement illustrates the price sensitivity of Netflix customers, and its needtomaintaina cost leadership strategy. Bargaining power of buyersis augmented through the large number of alternatives available, with piracy sites providing free streaming services being especially concerning for Netflix. Although these sites violate copyright laws, Netflixhas indicated it believes these sites represent the most pervasive threat to the organization. In 2012, Netflix iled with the Federal Election Commission to form a political action committee (PAC) called FLIXPAC (Netflix, 2015), a U.S. political action committee, with an anti-privacy agenda (Savitz, 2012). Recently, Netflix CEO Reed Hastings expressed concern over the increasing popularity piracy site Popcom Time, citingitas a top competitor (O'Rourke, 2015). Netflix mitigates the bargaining power of buyers by offering customers original content only available ‘through Netflix .In March 2011, Netflix began acquiring original content for its popular subscriptionstreamingservice, beginningwith the hour-long political drama House of Cards, which debuted onthe streamingservice in February 2013 (Netflix, 2015). Since thenit has added more original content, which has popularwith customers, induding Orange and new episodes of Arrested Development. For fans of these programs, loss of access to these programs creates @ consequence for cancelling their subscription and increases the difficulty and likelihood of switching providers. Access to this original contentthereby decreases the bargaining power of these customers. However, the availability of alternativesand the price sensitivity of customers ultimately give bargaining power to buyers. Threat of substitute products or services (moderate) Although often perceivedasindustries in dedine, numerous substitutes for digital streaming remain in ‘the marketplace, Substitute products my includesatelliteand cable television, DVDs and DVD rentals, and movie theatres. In Canada, according to regulatory figures, total cable and satelite subscribers dedined forthe first time in the year ending Aug. 31, 2013 (Bradshaw, 2014). Asthelatest technological advance in television and movie viewing, growth of on-demand video streaming has become a popularmeans foraccessing content anda pervasive treat to traditional ways of viewing television and movies. The simultaneous rise in popularity for digital streaming and dediine in popularity of traditional media outlets lowers the threat of substitute products. However, some viewers may be reluctant to adoptnew technologies. Although traditional substitutes for digital streaming services are higherin price and less user-friendly, they are deeply engrainedin the consumer psyche, andthose uncomfortablewith new technologies may elect to utilize traditional methods of movie and television viewing. This consideration is espedally important with regard to the aging populationin many of Netflix’s key markets, including Canadaandthe UnitedStates;a demographicwhich has spent most of their lives viewingtelevision and movies through traditional means. Additionally, many of these substitute products offer benefits notyet offered through Netflix. Cable and satellite both offer appointment viewing, where viewers will watch liveevents, only shownon certain television and satellitenetworks. Movie theatres provide viewers withthe opportunity to view movies immediately upon release, and provide amore immersive viewing experience. Although many substitute products foron-demand video streamingare in dedine, they remain ubiquitousin the entertainment industry and remaina threatto Netflix. However, as on-demand streaming continues to growin popularity, the threat of substitute products may be diminished. With the rapidrate of change in technology, Netflix wil likely face the threat of newandinnovative substitutes inthe future. Bargaining power of suppliers (high) As Netflix obtains the majority ofits content through licensing agreements with content proprietors, its suppliers have considerable bargaining power. When licensingagreements expire, content suppliers may electto terminate their relationship with Netflix, thereby diminishing the amount of conten tNettflix an offerits consumers. In 2013, for example, aNetflixagreement with Viacom lapsed, causing Netflixto lose the rightto air any Viacom programs, includirg its library Nickelodeon children’s programing. The prevalence of digitalstreaming services further enhances the bargaining power of suppliers. Once theNetflix agreementlapsed, Viacom contracted with Amazon, illustrating that suppliers havea variety of digital streaming competitors with whomto formlicensing agreements Potential suppliersare also of feringtheirown digital download streaming services, atrendlikely to continue in the future. Hulu, for example, isadigital on-demand service owned by 21stCentury Fox NBC Universal and The Walt Disney Company. Itoffers hundreds of TY shows fromABC, BET, CBS, Comedy Central, CW, FOX, NBC, and other networks through its streaming intemet video service (Fontinelle, 2014), Althoughcommercials are included inits programing, this business model could be perceived as mitigating the risk of consumer price sensitivity by creating an additional revenue stream and making Hululess reliant on subscription volume to remain profitable. Furthermore, Netflix does not own the rights tots original content. It owns the right to stream. programssuch as Breaking Bad firstand exclusively fora limited time, but the licensing rights may be sold to a competitor once the contract has expired (Auletta, 2013). With Netflix being highly reliant on suppliers to provide the contentit requires to acquire andmaintain viewership, the bargaining power of the suppliers Netflix contracts with is extremely high, and ultimately posesathreat to the long-term viability ofits current business model. Rivalry amongst existing competitors (moderate) With the increasingnumberof new entrants to the digital-ondemand market segment, acasualindustry observer may expect the rivalry amongst competitors in this market segmenttobe high. Numerous digital streaming services, including Hulu, Google Play, YouTube and Amazon Instant, aswell as Shomi and Crave TV in Canada have emerged, andthe prevalence of digital streaming providers may be seenas increasing rivalry within the industry. However, perhaps counterintuitively, acollaborative competitive environmentappears to be emergingamong digital on-demand competitors. In 2014, Amazon introducedthe Amazon Fire TVStick, a USB port that provides custamers with access to its Instant Video streamingservice, aswell as other digital streaming services including Netflix. Although the user interface strongly favors Amazon Instantcontent over other services, and the search feature doesn't, comb through Netflixor most othernon-Amazon apps (Amazon Fire TV Stickreview: A streaminghot bargain, 2014). Google Chromecastisa similar product that offers the same aggregation of streaming services. The inclusion of third-party applications for these products indicates arecognition of the value added by offering easy access to competing products, as welll asthe ability of consumers toselect multiple on-demand services. Rival organizations have indicated that they believe the digital on-demand marketis evolvinginina direction where consumers will subscribe to multiple digital on-demand services. In a2014 Globe and Mail interview, Rogers Media president Keith Paley expressed that theirmarket research asindicated that “consumers can supporttwo, three, even four [subscription video-on-demand] services’, allowing for multiple organizations to achieve market share despitethe increasingnumber of directcompetitors. inthe digital streamingarena. Credence to this arguments providedin the points of differenceamong competing organizations who offera variety of content, which may act as an incentive for consumers to subscribe to multiple services. Due tothe low cost of these services, consumers could purchase multiple subscriptions, andsstill pay lesser amountthen the cost of a traditional cable or satellite package. Additionally, Netflixis perceived as a means of increasing revenuestreams while simultaneously increasing viewership for traditional content providers. Licensing agreements with Netflix createadditional revenue for these organizations, and permitting Netflixto air prior seasons of popular television shows increases viewership of new episodes, whichremain unavailablethrough Netflix and. are available only through the original content provider. The AMC series Breaking Bad saw ratings double upon the availability of priorseasons through Netflix. AMC CEO Josh Sapan credited this risein viewership tothe program’ s availability on Netflix, through which consumers “became engaged” (Auletta, 2013). Although Netflixfaces many direct competitors, these competitors only pose a moderate threat based on the current competitive environment. However, rivalry mayintensifyas more competitors enter the market or consumers elect notto subscribe to multiple streamingservices. Netflix has established itself as an industry leader in digital streaming services. However, certain aspects of its current business model, includingreliance on suppliersanda cost structure which makes Netflix highly dependent on volume toremain profitable and consumers sensitive to price increase, have createda situation where Nettlix is highly vulnerable to competitive forces. Inin aconstantly changing technological environment, currentmarket dominance does not guarantee continued or future dominance, and organizationsneed to remain flexible enough to adapt to changing consumertaste and to integrate new technological advances into their business models. The followingis list of recommendations for Netflix to remaincompetitive and profitablein the future: In orderto continue to provide original content, as well as to maintain a profitable business model, future price increases are an inevitability. In orderto maintaina large customer base, Netflix will needtofind waysto mitigate the effects of these price increases, by providing added value customers, being transparent regardingincreases and by providing ample notice of price increases to allow customers time to adjusttheir expectations. * Create a product similar to Amazon Instant Google Chromecast. Future market dominance may go to the provider who most effectively aggregates various digital download services. These products providea means of doingso, while stillfavouring producer content. Netflixmay want to consider developing away to include third party services online, instead of through aUSB port. * Continue to concentrate on global expansion. Sales volumeis important to the economic viability of the Netflix business model. Additionally, being first to market new regions provides Netflix with a competitiveadvantage + Finda means of creating anadditional revenue stream, througheitheradvertising oranother source, to provide high-quality contentand for decreased reliance onsales volume toremain profitable. ‘Maintain good relationships with suppliers. Netflix may want to consider providing added value incentives toits suppliers, such as increased brand awareness by including supplier logosin its television andmovielistings. * Buildand maintain positiverelationships with competitors. Seek strategicalliances, andremain opento collaboration. ‘Ina constantly changingtechnological environment, innovation iskey. Netflix needs toremain in touch with changing consumerpreferences and offer innovative products tomeet theirneeds in order to maintain market dominanceNetflix has obtained market dominance through its innovationin deliveringtelevision and movie content, intuitive abilities to predict changing consumer tastesin content viewing; however, whetherit has builta sustainable business model through these competitive advantages remains to be seen.Works Cited Amazon Fire TV Stick review: A streaming hot bargain. (2014, November 19). Retrieved from Cnet: http://www.cnet.com/praducts/amazon-fire-tv-stick/ Auletta, K.(2013, February 3). Netflix and the future of television. Retrieved from The New Yorker: http://www.newyorker.com/magazine/2014/02/03/outside-the-box-2 Bradshaw, 1.2, (2014, August 24). The Globe and Mail. 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