Case Analysis: Netflix

Case Analysis: Netflix

Read the Netflix Case Study in Case Study section of the text. Write a summary of the case study. Be sure to define entrepreneurs and the entrepreneurial mind-set and define strategic entrepreneurship and corporate entrepreneurship as it relates to the Netflix case study. Your summary should be a minimum of 2-3 double-spaced pages and must be in your own words. Use APA style. You must include 3-5 references. Only one reference may be from the internet (not Wikipedia).

INTRODUCTION

 

This case describes an e-commerce success story, set in an ever-changing business climate. In spite of the company’s remarkable performance, Netflix faces a turbulent industry environment and anticipates enormous structural shifts that could impact its very survival in the long run. After introducing the company and reviewing Reed Hastings’ launch of the now-infamous DVD rental business, the case discusses the external environmental trends and competitive forces already gathering to threaten the new industry leader. The company’s strategies, operations, financial results, and leaders are also examined to build a foundation for understanding the critical challenges facing Netflix.

 

Netflix is uniquely positioned to manage the obsolescence of its subscriber rental consumption model as it transitions from a DVD platform to an Internet delivery platform. However, entry barriers for the video streaming mode are extremely low, a new breed of competitors is poised to enter the scene, and content providers are lining up to protect their most valuable revenue stream—DVD sales. The challenge for Hastings is to maintain the relevance of the Netflix brand in the minds of consumers and to lead the emerging media industry in streaming technology to stake a significant claim on projected revenues estimated to reach $6 billion by 2014.

 

A review and evaluation of the company’s strengths, external threats, competitor capabilities, and strategic alliances will aid in the discussion and weighing of strategic options available to Hastings as he confronts these challenges. The results of the analysis can then be used to establish and support a strong set of recommendations seeking to ensure a continuation of Netflix’s strong performance and top market position in both the DVD rental and video streaming businesses.

 

• Review Netflix’s organizational strengths. What core competencies have led to the company’s remarkable success? Under new industry conditions, will they qualify as sustainable competitive advantages? Can anything be done to lengthen or strengthen the advantage(s)?
• What are the greatest external risks facing the company? What measures can or should Netflix take to protect itself from these environmental threats?
• Evaluate the strengths, weaknesses, and strategies of the company’s primary competitors. Based on a thorough competitor analysis, what is the expected strategic intent of Netflix’s key rivals? Is the company prepared to respond to their potential competitive moves?
• Review cooperative strategies that have been used successfully by Netflix and its competitors in the past, then identify a set of goals that future partnership agreements should achieve to maintain the company’s position of market leadership.

 

 

 

 

The company’s rapid and overwhelming success can be attributed to its innovative business model, strong organizational leaders, internally developed information technologies, customer service and satisfaction levels, analytically designed processes, groundbreaking marketing and promotional techniques, strong financial management and control, valuable strategic alliances, and brand equity. They have enabled the company’s remarkable growth and solid positioning in the industry.

 

With its revolutionary business model, Netflix changed the way US viewers rent and watch movies. 14 million subscribers strong, it is now one of most recognizable online movie rental services in the world. The company is the leading provider in the subscription segment of the industry. Visionary and charismatic leadership is supported by a keen, professional management team that is well-equipped to steer the company through uncharted waters.

 

            Information technology skills at Netflix are not only one of the company’s strengths, but serve as a strategic weapon. Proprietary software system capabilities contribute to the company’s overall competitiveness by yielding lean operations, low costs, automated distribution networks, customized interactions with subscribers, and continually improved levels of service (that are unmatched in the industry). Critical to future positioning, the company’s video streaming platform is strong, reliable, and widely embedded in popular consumer electronic devices for ease of use. Streaming now represents 55% of the company’s delivery of video content. As consumer demand for digital content delivery grows, the company will continue to rely on its distinct IT capabilities as a source of competitive advantage.

 

The company’s interface systems and proprietary recommendation software provide the highest level of service for subscribers, maximize customer satisfaction, and continually enhance the Netflix brand experience to distinguish the company from competitors. The company’s positive organizational culture inspires high service levels and its human resource practices attract and reward the best talent. In addition, strong intellectual resources translate into higher satisfaction levels for customers.

 

Netflix competes on a strong foundation of analytic processes. Metrics are used to maximize effectiveness in all areas of the business and to create value for the customer. Innovative, algorithmically driven logistical software balances and prioritizes distribution decisions and supports an obsessive focus on customer needs and continuous improvement. Along these lines, Saturday shipping and delivery is an important component of satisfying subscriber expectations.

 

Netflix pioneered the use of database marketing to develop personalized relationships with online video rental consumers. As a result, the company understands individual customers, can aggregate and predict behaviors, and is able to quickly adapt to meet changing consumer preferences. Its marketing and promotional practices have expanded Netflix’s name recognition and brand acceptance, enabling cost-efficient acquisition of new subscribers. Because scaling benefits are crucial to the company’s cost position, efforts to grow the subscriber base continue to be an essential element of the company’s strategy.

 

Economies of scale contribute to the company’s operational efficiencies, cost position, and financial bottom line. Netflix outperforms other industry participants in several measurements of fiscal health. Profitability, returns, cash flow, and operations ratios exceed the industry median by a substantial margin. Financial strength suggests that adequate funds will be available to invest in the innovation, development, continuous improvement, and significant advertising budget necessary to secure market share and to support continued growth. The company’s excellent return on equity means it will also be able to attract investors and lenders to support costly strategic initiatives if necessary. Although long-term debt financing associated with high-value streaming content has affected the company’s debt ratios and pressures on margins are increasing, Netflix judiciously allocates moneys from its high cash flow growth rates for strategic investments and to strengthen the company’s funding position relative to competitors.

 

Another key to the success of Netflix is based on the company’s early and continued strategic relationships with leading DVD hardware and home theater equipment manufacturers and the strategic alliances forged with film and television sources. Critical partnership arrangements have resulted in the timely development of Netflix-ready devices and an extensive and unique network of original content. In addition, revenue sharing programs developed jointly with content providers yield a cost advantage that contributes directly to the company’s bottom line. To win the digital fight, being first-to-market with the best content is essential. Therefore, the company’s ability to sustain these critical partner relationships is key to remaining a viable and strong competitor in the DVD rental and video streaming business segments.

 

Powerful brand equity plays, and will continue to play, an important role in securing strategic partnerships. Again, these relationships are crucial to providing a distinctive service and product offering. Therefore, ongoing efforts to manage and enhance the Netflix brand are essential to strengthening the company’s exceptional value proposition.

 

Netflix’s competitive advantage is fueled by the company’s core competency in information technology. Valuable and rare IT capabilities and resources provide the company with innovation capabilities, enhanced customer service, and a prominent advantage in the marketplace. Though imitation may be costly for new entrants, new technological developments are always emerging and threatening to introduce improved ways of delivering service to the market. As industry player relationships evolve and technological advancements are discovered, the power of Netflix’s advantage may diminish. Its competitive advantage will only remain sustainable if the company stays at the forefront of critical industry developments, anticipating and making insightful strategic adjustments to changing conditions. The ability to remain first-to-market is crucial for attaining any sustainable competitive advantage.

 

 

Netflix faces multiple environmental conditions that pose a threat to the company’s ability to remain competitive in the marketplace. Rapid and ongoing shifts in technology, ever-changing consumer trends, economic conditions, shifting patterns of distribution, fluid alliances, and new forms of competition all present challenges to Netflix’s leadership position in the industry and will influence strategic decisions being made by the company. Each of these conditions is expected to contribute to changing competitive dynamics and to the increased intensity of competition in the market. Many of them also threaten to inflict downward pressure on Netflix margins.

 

The complexity of advanced technologies and continuous evolution of new products lead to a constantly expanding variety of devices, short product life cycles, and lower costs in the technological sector. Even though Netflix is the primary provider in the subscription segment of the market, customer response to new product offerings, venues, or viewing options could quickly change market dynamics and render the company’s value proposition obsolete. Additional technological threats for the industry include illegal downloading and Internet hacking.

 

Consumer trends and expectations are also a threat to Netflix’s dominance in the industry. Though content, convenience, immediacy, and value are the primary driving forces of customer behavior, consumers are becoming increasingly demanding and selective. An industry-wide lack of brand loyalty and the proliferation of video content availability through Internet-connected consumer electronics devices create a constant threat of new delivery methods emerging that better meet the needs of consumers and eliminate Netflix’s role in the distribution chain. The continued ability to quickly identify trends and adapt to changing conditions is fundamental to retaining a leadership position in the industry.

 

Netflix needs to be most alert to new entertainment developments and to consumer preferences or needs that could shift favor away from the company. For instance, the uncertainty over USPS rates, Saturday delivery, and broadband pricing structures have the potential to quickly alter the company’s competitive position. If the economy continues to struggle, consumer sensitivity to prices will benefit low cost providers like Redbox. And the inability to gain the rights of first run content immediately upon release would be devastating.

 

Industry content providers have significant power to deliver, withhold, or establish exclusive distribution of entertainment content. They determine the timing of availability (distribution window), which can hurt or help different channels. All of the key online rental industry players are seeking relationships with Video on Demand providers to secure a position in the emerging market, and all threaten to undermine Netflix’s advantage of early access to movie releases. Perhaps the most unsettling development is the recent one-month delay of new releases in exchange for cost concessions.

 

Digital streaming substantially shifts the upper hand further in the direction of content suppliers. Countless distribution options are available to them, and they are beginning to demand hefty licensing fees in exchange for immediate streaming rights through any distribution channel. Continued strong demand for their content will provide a strong bargaining position for content providers well into the future, threatening to impact Netflix’s profitability over the long haul.

 

Perhaps the greatest risk to Netflix is for content providers to discover a successful method of gaining full control of digital distribution. The line between alliance partners and competitors is often blurred. As studios continue to seek forward integration ventures to expand and control content distribution, Netflix remains at risk to actions that can have an adverse effect on its business.

 

Despite new developments, the movie rental industry is maturing, and direct competition is increasing. Progress in technology and the absence of entry barriers in streaming invite new entrants to compete against Netflix. In addition to traditional video rental rivals and entertainment stores, Internet, cable, telecommunication,VOD, ad-supported, indirect, and video package providers are dissecting and vying for a share of the market. Emerging competitors can potentially differentiate their service and product offerings in ways that challenge the industry leader along entirely new dimensions and that attract a pliable consumer audience. With switching costs virtually non-existent, customers can shift between providers painlessly, which further reinforces the fluidity of the marketplace.  The life of the DVD format is expected to extend only another 20 to 30 years, peaking in just 5 to 10 years. In addition to sharing the market with more competitors, the changing subscriber consumption model will introduce complications for Netflix’s core strategy to maintain its lucrative subscription business.

 

Competitive intensity is expected to increase as technology changes the dynamics of the movie rental industry and as new competitive forces impact the market. With greater certainty of the direction that technological developments are taking toward video streaming, the speed of competitive response is also likely to accelerate. To remain at the forefront of industry developments, Netflix will need to depend on vision, innovation, and an expansive network of supplier and equipment stakeholder relationships. To protect its position and maintain an advantage, Netflix must ensure that its streaming quality is high, accessibility is effortless, and experiences for consumers are unmatched.

 

Early brand identity associated with streamed video delivery needs to be followed with a compelling value proposition to sustain an edge over new and existing competitors. Value-added services can also create an advantage in the effort to retain subscribers and increase revenue per subscriber. Netflix might try to design in systematic ways to introduce switching costs (through sign-up or set-up costs), but should do so cautiously so as not to discourage new subscribers. Again, the ultimate key to the company’s success will be its ability to secure first-to-market content over its rivals. Netflix needs to determine if lower procurement costs justify delayed access to new release content. It will need to strike the right balance of cost/timing to maximize market gain.

 

 

The table below is a structured competitor analysis of the industry’s primary participants. It outlines their capabilities and highlights their strategic intents.

 

	Strengths	Weaknesses	Strategies
Blockbuster	–   Relationships with film producers–   Community presence –   Marketing power –   Physical distribution – store and kiosks –   Revenues double Netflix’s	–   Strengths not matched to needs of maturing industry – late transition to multi-channel approach–   Outpaced by technological changes –   Financial resources (large debt)	–   Acquisition–   Alliance –   Restructuring –   Industry follower Plans to expand presence in digital distribution (including portable devices) and aims to be the world’s largest video rental chain.
Redbox	–   Expansive network of conveniently located kiosks–   Low overhead – cost advantage –   Low prices –   Retail partnerships –   Real-time transaction systems –   25% market share – fast growth rate –   Management team – former Netflix executive –   Simplicity appeals to customer	–   Low margin business–   Studio support in doubt –   Legally challenging studios over distribution timing policies	–   Cost leadership–   Alliance     Considering a move into online subscription services, which would put it into more direct competition with Netflix.  Be cautious of the power of Redbox’s cost position.
Amazon	–   Massive online storefront–   Extensive, mutually beneficial supplier relationships –   Owns Internet Movie Database –   Customer-oriented interactive technology	–   Agreements not yet established with content providers	–   Alliance–   Cost leadership –   VOD Working on establishing agreements with content providers.
Apple	–   Expertise in digital media distribution–   Cutting-edge technology developer –   Content partnerships –   Prolific handheld/mobile devices	–   Market acceptance of Apple TV–   Loss of creativity and vision of leader Steve Jobs	–   Differentiation–   VOD rental Wants to replicate its success in the music industry to dominate entertainment media. Expect aggressive moves.

 

cont.	Strengths	Weaknesses	Strategies
YouTube	–   Backed by Google–   User-generated content –   Massive Internet presence (6th largest audience on the Web) –   Content filters –   User loyalty	–   Fewer professional content partnerships	–   Ad-supported    Focused on growing its professional premium content
Hulu	–   Backed by strong content providers (Disney, NBC Universal, and NewsCorp/Fox)–   Extensive pool of content providers (200) –   Revenue-sharing agreements that expand distribution network to unique venues and provide a cost advantage	–   Brand awareness	–   Ad-supported–   Alliance   Has already initiated a subscriber service and adopting a similar pricing strategy/value proposition to compete directly with Netflix.
Cable, Internet, Telecom, & Satellite Providers	–   Strong presence in home entertainment environment–   Convenience –   History of exclusive and first out Pay TV agreements	–   Device interactivity–   Mobility –   Rental prices	–   Alliance–   VOD/PPV Packaging Expect a fight to retain encumbering Pay TV agreements.

 

Although Netflix succeeded at redefining the video rental market (rapidly dominating the rent-by-mail DVD industry when demand for DVD rentals was growing), new technological forces are now responsible for changing the definition of the marketplace. And it is uncertain if the company can emulate its successes during the accession of industry streaming.

 

Netflix needs to be able to anticipate competitor moves and to be responsive to the competitive dynamics playing out in the industry. All of its likely competitors have alliance strategies and are seeking to strengthen relationships with content providers and other industry stakeholders. In order to meet demand for immediate, hassle-free access to content of interest, Netflix must beat its competitors in the race for critical alliances, especially with content providers. Securing successful cooperative relationships will be one of the critical factors determining if Netflix can remain the industry leader.

 

The company’s rapid growth and advantageous market position can be attributed to early strategic partnerships with leading DVD hardware and home theater equipment manufacturers. Relationships with film, TV, and other entertainment providers have produced an extensive network of content and enabled Netflix to differentiate itself from competitors. Netflix enjoys an unprecedented number of agreements with film distributors. Mutually beneficial arrangements, such as revenue sharing programs, provide Netflix with tremendous cost savings, while securing additional distribution outlets for content providers. Joint development initiatives with Microsoft have enriched the technology available for Netflix-ready devices and linked Netflix to the computer as a portal for entertainment viewing. Interestingly, the company even successfully negotiated preemptive competition-reducing deals with retail giants Amazon and Walmart. And using Amazon’s cloud computing infrastructure provides mission-critical customer interface, with a pay-as-you-go cost advantage.

 

Developments with makers of consumer electronic devices have produced new forms of connectivity for customers that are convenient and easy to use. Also, the inventive use of gaming consoles has opened up effective new channels of delivery. Such efforts serve strategic purposes and are specifically designed to gain market share in the streaming of video content. Internet-enabled television will be the next point of connection, and the earlier Netflix engages in joint development efforts with console producers, the greater will be its opportunity to lock in an industry lead.

 

Netflix competitors have also benefited from cooperative relationships. Blockbuster and Redbox have strong alliances with movie producers. Amazon has fostered the capability to form unique partnerships with hardware manufacturers for mutual advantage. The success of Apple’s miniature and portable devices gives the company power to negotiate for access to all forms of entertainment content. (However, its drive for full control of media content is not necessarily compatible with the objectives of its content partners.) And Hulu has also made inroads in building valuable relationships with content providers.

 

In this industry, content providers have a significant amount of power, and partnership relationships with sources are vital to market success. But, Netflix is currently in a great position to leverage its relationships, successes, and brand equity to develop entirely new levels of meaningful partnerships, to seek exclusivity, and to obtain the earliest delivery of content to the market. Content providers are motivated to achieve broad distribution of their product and to maximize their revenue streams. Therefore, it is important for Netflix to ensure that its source partners are meeting their financial and distribution objectives. Netflix performance should be intricately linked to achieving supplier objectives. Partnership agreements that are mutually beneficial eliminate the studio’s desire to support Netflix competitors or to enter avenues that otherwise harm the company. Perhaps the most valuable benefit to content providers would be for Netflix to devise a system to reduce illegal downloading and hacker threats to protect the property rights and earnings potential of supplier material. This added value service could secure a more permanent lead for Netflix in the streaming distribution chain.

 

Some additional ways that industry stakeholder relationships can be established to advance Netflix’s interests include:

• Joint-marketing programs to strengthen ties to major content producers
• Equipment development to create advanced features for ease of use, convenience, and simplicity (particularly for remote control and mobile devices)
• Preemptive agreements with emerging competitors whose strategies are fragmented and synergies are limited (like YouTube) for mutual advantage
• New types of relationships with social networking forums (like Facebook) to enhance customer service, experience, and satisfaction
• International marketing channels and Netflix-ready devices on foreign equipment to promote global expansion

 

Through pervasive Netflix-ready devices and embedded streaming software, the company is aggressively seeking universal availability. Full compatibility (that meets the needs of mobile and network operators, service providers, and device manufacturers) will enable Netflix digital entertainment services to reach all devices and to interface with all applications. Netflix’s cooperative strategy is a critical component of achieving universality and safeguarding the company’s lead in the industry.

 

 

The preceding analysis and discussion can be used as the basis to propose and support a business strategy that addresses the growing technological and competitive pressures facing Netflix at this time. The main challenge for Netflix is to determine how to adjust its business model to maximize the life and value of DVD rental consumption, while at the same time distinguishing itself as the industry leader in the evolving streamed delivery format. Meeting growth objectives depends on staying ahead of industry trends and changes, while staying true to the company’s strengths, providing value to its subscribers, and avoiding environmental risks.

 

Important Factors That Weigh into the Strategic Decision(s)

 

• Recognize emerging competitors with strategies that put them into direct competition with Netflix (such as Hulu), and use preemptive moves to disarm them.
• Highlight the significance of maximizing Netflix’s brand equity and the potential it creates for strong positioning with content providers.
• Specify opportunities to extend the product life or grow the market by expanding internationally. Indicate that the successful marketing tactics and promotional techniques used by Netflix to build brand name recognition and acceptance can be applied in new foreign markets. (Taking into consideration the costs, Netflix’s limited knowledge of diverse market conditions, entry barriers, and nuanced studio requirements in foreign markets, the best entry mode for international expansion is for Netflix to form strategic alliances in specific regions.)
• Identify the importance of maintaining current strategy effectiveness and nurturing core competencies. This includes keeping fulfillment costs low and enabling profitability at lower prices in case it becomes necessary to use competitive pricing to expand the appeal of the Netflix value offering.
• Acknowledge the value of the vision and leadership of Netflix’s senior management team and the need for succession planning to secure IT and relationship cultivation capabilities.
• Discern ways to differentiate and continuously upgrade features that customers value while maintaining a cost leadership position.
• Promote the satisfaction of two of the most important product market stakeholders, customers (providing convenience, value, and immediate access to an extensive and unique viewing selection) and content providers (through strategically aligned partnership agreements that benefit both parties). Immediate feedback mechanisms play a role in ensuring that successful relationships are maintained.
• Place focus on the role that universal compatibility and interface with all viewing platforms and delivery devices will play in establishing Netflix as “the place where everyone goes for video entertainment.”
• Diagnose the need for content expansion into areas such as sports, gaming, news, etc. to broaden original entertainment material for the current subscriber base and new customers.
• Indicate how Netflix’s competitive advantage in information technology facilitates innovation and can be used to improve the ease of use on home and mobile devices, to simplify controller interface, and to streamline access for greater viewing immediacy

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