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Running Head: NETFLIX CASE STUDY ANALYSIS

Reyte On Publishing
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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 e-

commerce 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)

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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.
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• 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

d. Threats
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• 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
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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
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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.

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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
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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
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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.

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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-itunes-

youtube-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-recession-

q4-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