Netflix

CASE ASSIGNMENT

Reed Hastings has asked your consulting firm to participate in a meeting of his key
strategic leaders to discuss the salient strategic challenges facing Netflix domestically.
The meeting agenda includes the following items:

I. Competitive Rivalry and Dynamics

A. Key Competition
B. Likelihood of Competitive Response
II. Strategic Management and Competitive Issues
A. Statement of Key Strategic Issues
B. Strategic Goals
C. Stakeholders
D. Measuring Success
III. Discussion and Recommendations for Action

To familiarize yourself with Netflix's situation and prepare for the discussion, you need to
review the background information that Netflix has provided and put it into a strategic
management framework. This assessment should include a look at the company's
External Environment (Opportunities, Threats, and Industry Analysis)
Internal Organization (Strengths, Weaknesses, Value Chain, and Sustainability)
Strategic Management Team
Business Strategy
Strategic Relationships and Alliance

Although you are not an industry specialist, you will need to be prepared to recommend
an integrated and coordinated set of commitments and actions which will exploit the
company's core competencies, strengthen its competitive advantage, and maximize value.

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STRATEGIC MANAGEMENT INPUTS

External Environmental Analysis

Trends

Due to short product life cycles in the technological sector, continual improvements in
products, and lower costs in technology, it has become more common for consumers
around the globe to own their own movie viewing devices and access the Internet from
home. Thus, continued growth in the online movie rental market base is expected.
However, storefront video rental sales are dropping in response to mail-order rental
operations and video on demand services. Convenience, immediacy, and value are the
order of the day.

Opportunities

Video on demand (VOD) is gaining more attention and popularity. Early adopters are
experimenting with downloadable movie services for real-time viewing. Most of the key
online rental industry players are seeking relationships with Video on Demand providers
to maintain a competitive advantage.

Threats

Progress in technology is changing competitive dynamics, inviting new entrants to

compete against Netflix. Emerging competitors include:
Developers of technology devices specifically designed to support new
technologies, such as Apple and Smartphones, offering movies and television
shows on their portable viewing devices.
Large online and storefront retailers, like Amazon and Wal-Mart, offering
downloadable DVD-quality movies for rent or purchase.
VOD service providers, especially among cable/satellite companies, television
networks, and dot-com companies.
Content providers (movie studios) looking for new distribution opportunities and
arrangements that will broaden their markets and increase their revenues.
While Blockbuster has been Netflixs strongest direct competitor, other companies are
strengthening their competitive position to challenge these two giants and gain market
share. These competitors believe they can differentiate their service and product
offerings in order to challenge the industry leaders in entirely new dimensions.
Also, studios are considering a change in distribution timing policies. The possible
elimination or change in distribution windows would adversely affect Netflix, who takes
advantage of early access to movie releases to attract and satisfy its subscribers.

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Five Competitive Forces Analysis of the Movie Rental Industry

Competitive
Forces Strength Comments
New Low to moderate barriers to entry (*see below) and
Entrants High technological developments are inviting new entrants into
the industry, which will increase competitiveness.
Supplier Content providers have the power to deliver, withhold, or
Power High establish exclusive distribution of the movie content being
sold in this industry. They also determine the timing of
distribution availability which can hurt or help different
channels.
Buyer Consumers demand high quality service and affordable
Power Moderate pricing, but do not have cumulative bargaining power and
demands do not result in significant price changes.
Product Include not only different venues or viewing options (such
Substitutes High as VOD), but alternative forms of entertainment.
Intensity of Despite new developments, the movie rental industry is
Rivalry High mature, and direct competition amongst the two or three
biggest rental services is heavy. New forms of
competition will only increase this rivalry.

*Barriers to Entry
Economies of From technological systems, distribution network,
Scale Moderate and content library.
Product Some opportunities to differentiate are emerging
Differentiation Moderate with new technologies.
Capital Building a name in the industry, a library, and
Requirements Moderate distribution network.
Switching Costs Low Low cost and easy for customer to change services.
Distribution Content provider relationships with existing
Channels/Sources Moderate competitors may pose difficulties for new entrants.
Cost Advantages Low to Netflix has a good cost position that would be
Moderate difficult to match - other competitors, not so much.

Based on this analysis, it's easy to conclude that competitive intensity will increase as
technology changes the dynamics of the movie rental industry and new competitors enter
the growing market.

Internal Organization Analysis

Strengths

With its revolutionary business model, Netflix changed the way U.S. viewers rent and
watch movies and is now one of most recognizable online movie rental services in the

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world. Visionary and charismatic leadership is matched with a strong supporting cast of
information technology, marketing, and entertainment industry experts to support a solid
business with a growing subscriber base of 6.7 million and a video library of over 70,000
DVDs. In its primary niche market, Netflix serves nearly four times the number of online
subscribers than its nearest competitor, Blockbuster.
Information technology skills at Netflix are not only one of the company's strengths, but
serve as a strategic weapon. Customized from scratch, its systems capabilities provide
the company with competitiveness, a lower cost position, and continually improved
levels of service that are not matched in the industry. Netflix will continue to rely on its
information technology capabilities and resources as a source of competitive advantage.
The platform is strong, reliable, and compatible with diverse portals and browsers. It can
sustain a large number of users and maintain a positive "brand experience."
Netflix competes on a strong foundation of mathematical, statistical, and data
management expertise. Analytic processes (such as customized interactions and
prioritized distribution) are used to further distinguish the company from competitors and
to provide a higher level of service for its subscribers.
For online video rental, Netflix pioneered the use of database marketing to develop a
personalized relationship with consumers. The database, possible because of Netflixs
strengths in IT, allows Netflix to understand individual customers, aggregate and predict
behaviors, and then send customized emails informing customers of what new movies are
available.
The company also successfully uses cobranding and online advertising to grow its
subscriber base. Due to its financial strength, Netflix has been able to support a healthy
advertising budget and secure a greater share of a growing market.

Weaknesses

Some of the companys key competitors have more brand name recognition, experience,
and financial resources in providing value to the customer. These competitors might
spend more time, money, and resources on marketing and system developments, making
it hard for Netflix to compete at its existing price level or at lower price level structures in
the future.
Netflix does not have storefront locations for consumers to visit for immediate service.
Some delay times can exist between returning a rental movie and receiving a replacement
movie.

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Value Chain

Margin Margin

Marketing

Content Provider Relationship Management

Website Product
Development

Content Acquisition
Information Technology

Financial and Legal

Human Resources

Distribution and
Shipping

Customer Service

Support Activities Primary Activities

This value chain analysis presents a look at the parts of Netflix's business that create
value. As an Internet service provider, the company has lower overhead than its brick-
and-mortar competitors.
Fulfillment costs are about half of its major competitors', which enables profitability at a
lower price. Every penny counts in a high-volume business. As it keeps lowering its
costs, Netflix is able to lower prices. This results in greater demand due to the elasticity
of the market.
Payroll expenses are kept to a minimum through the use of a self-service website and
homegrown support software, which enables customer service representatives to handle
higher volumes.
Netflix's strong culture of analytics and its "test and learn" approach to business
encourage the use of metrics to understand Web site users, advertising impact, valuable
data, subscriber satisfaction, segment research, and marketing material effectiveness.
The company focuses on continuous improvement to continually add value to the
business and to the customers experience.

Sustainability

Netflix's core competency in information technology is both valuable and rare, providing
the company with a distinct advantage in the marketplace. It might be costly for a
competitor to build a similar system, but it is not completely cost-prohibitive (particularly
for a new emerging competitor starting from scratch to accommodate new technological
developments) and it is not inimitable. With the changes in industry player relationships
and new ways of delivering service to the market, strategic equivalents to Netflix's IT
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capabilities are likely to develop and could substitute for its competitive advantage.
Although the company holds a competitive advantage, it is not be sustainable without
making insightful strategic adjustments as the industry evolves.

Senior Management Team

Reed Hastings - Founder, CEO, and Chairman

Provides vision and leadership.
Neil Hunt - Chief Product Officer
Creates and manages the Netflix site, the personalized customer portal.
Ted Sarandos - Chief Content Officer
Manages and cultivates relationships with studios, networks, film makers and
producers to gain access to films and distribution channels.
Satisfies customer expectations video selection and stays abreast of new
trends within the entertainment industry.
Leslie Kilgore - Chief Marketing Officer
Seeks effective and cost-efficient methods to acquire new subscribers.
Success is measured by percent of trial members who convert to paying
subscribers and then share their experience with family and friends.
Barry McCarthy - Chief Financial Officer
Oversees financial and legal affairs.
Patty McCord - Chief Talent Officer
Attracts and retains high talent employees.
Establishes a culture of devotion to superior customer service and lean
operations, where openness, approachability and honesty are highly valued.

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STRATEGIC ACTIONS: STRATEGY FORMULATION

Business Level Strategy

Netflix is an online video rental store, operating essentially as an Internet subscription

service. Its entire business model is focused on providing a unique online rental
experience for the customer. By offering free delivery to households, eliminating due
dates and late fees, and making movie recommendations to all its subscribers, Netflix
appears to have found a niche market by attacking the industry leader's weaknesses (as
well as one of its sources of income).
Netflix was able to achieve rapid growth by establishing early strategic relationships with
leading DVD hardware and home theater equipment manufacturers. It also forged
strategic alliances with sources in the film and television sectors, freeing up funds to
invest in the continued development of its proprietary software for inventory
management, logistics, and shipping.
Brand recognition and acceptance among a growing DVD-rental consumer base was built
through marketing tactics and promotional techniques.
Netflix offers its customers service packages tailored to meet their specific requirements
based on a desired number of rentals. Its services provide value for its large customer
base. The company believes that its business is all about offering quality and value for
the customer.
The strategic leaders have directed Netflix to target and concurrently satisfy three distinct
customer segments based on their video viewing needs, including:
convenience - free home delivery,
access to the widest selection - movie buffs, and
bargains - volume viewers.
Netflix has established strategic competitiveness by using its core competency in
Information Technology as the basis for competing in the online video rental business.
The company's technology systems allow the company to successfully manage its
customer relationships, providing access and connection to customers (reach), supporting
a comprehensive two-way flow of information with subscribers (richness), and
facilitating valuable interactions with the customer base (affiliation).
To distinguish itself from other competitors and to provide a higher level of service for its
subscribers, Netflix uses Cinematch (an internally-created algorithmically-driven
software system providing a customized interaction with each individual customer) and
throttling (a process which balances and prioritizes the distribution shipping requests of
customers based on usage frequency).
Netflix's business-level strategy creates differences between the company's position and
that of its competition while maintaining a cost leadership position. The company uses
an Integrated Cost Leadership/Differentiation strategy to grow its account base and gain
market share.
The Value Chain representation in the section above shows the foundation for the
company's differentiation and identifies where cost-reduction opportunities exist. As was

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stated above, Netflix focuses on continuous improvement and strategic metrics to

continually add value to the business and the customers experience.
In reaction to emerging demand for real-time viewing, Netflix is in the early stages of
introducing streaming videos and television shows to its customers. The new service is
built upon the Microsoft infrastructure, and the company hopes to make it available on
other software combinations, portable devices, and televisions screens over time. Movies
available for instant viewing are contracted with studios and other content providers,
To maintain its market position, Netflix continually reinvests earnings into marketing and
promotional efforts. Co-branding programs and joint-marketing programs with large
retail stores (such as Best Buy) are some of the innovative and successful marketing
techniques used by Netflix. It also reaches more broadly into a diverse demographic
audience by running ads on mainstream networks.
Netflix is one of the largest online advertisers. While other online retailers face budget
restrictions on advertising expenditures, Netflix has grown its advertising budget and
expenditures.

Cooperative Strategy

In its short history, Netflix has used cooperative relationships to rapidly gain an
advantageous position in the marketplace. Netflix has strategically combined resources
and capabilities with DVD hardware, home theater equipment, and video recorder
manufactures, has exercised great effort in establishing strong and mutually-beneficial
relationships with film entertainment providers, has co-branded its rental service with
retail outlets (such as Best Buy and Wal-Mart) in joint-marketing programs, and contracts
movies offered through its instant-viewing feature with major studios and other content
providers.
Establishing strategic alliances with sources in the film and television sectors has
provided a significant cost savings for Netflix, freeing up funds to use for other projects
and investments (such as systems development and marketing).
In light of emerging technological trends, content providers are looking for greater
distribution opportunities and arrangements that will increase their revenues. Netflix's
skill at partnering with other market stakeholders puts the company in a good position to
take advantage of new content provider relationships.

Competitive Rivalry and Competitive Dynamics

Where Netflix has been successful at redefining the video rental market, new
technological forces are now responsible for changing the definition of the marketplace,
and Netflix needs to be responsive to the competitive dynamics playing out in the
industry.
Balance in the movie rental industry had been established for years. Blockbuster was the
first successful mover in superstore video rental chains, dominating the marketplace until
Netflix entered the business and introduced a new way of renting videos.
Netflix was the first strategic mover into the new market of online movie rental, which
emerged with the development of new technologies and the widespread adoption and
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usage of the Internet. Its subscription service appealed to consumers, many who were
frustrated with Blockbusters excessive late fees. As a result, Netflix received
overwhelming acceptance in the market.
Firms operating in the same market, offering similar products, and targeting similar
customers are competitors. Competitive rivalry is the ongoing set of competitive actions
and responses between competitors as they maneuver for an advantageous market
position. What transpired in this new market clearly illustrates the dynamics of
competitive rivalry.
As demand grew in the niche market, other competitors tried to capitalize on it.
Tactically pulling back on late fees, Blockbuster's first major strategic response was to
position itself in direct competition with Netflix by offering the same services. It then
developed the "Total Access" program, adding features that Netflix would be unable to
match because it has no storefront or immediate accessibility.
Attacking one of the weaknesses in Netflix's service (the waiting period between return
and arrival of replacement videos), Blockbuster began offering a reward voucher for a
free in-store rental, with the caveat that normal due dates and late fees for store rental
would be enforced. In addition, Blockbuster's Movie Pass subscription service permits
two to three rental movies out at a time without late fees, but the subscriber is limited to a
maximum number of rentals per month.
It is worth noting that while trying to compete in a new way, Blockbuster's caveats and
service limitations illustrate that the company continues to rely on a "per view" business
model. Netflix, on the other hand, has adopted a "per-subscriber" approach to servicing
the market. It's straight-forward and consistent service packages keep things simple for
the customer and maximizes convenience and value.
Without physical storefronts to provide customers with immediate access, Netflix faces
the challenge of finding a legitimate and value-adding way to compete with Blockbuster's
latest strategic and tactical moves and to adjust its current business model to grow and
stay atop of the online rental market.
Its first step has been to launch a new generation of online video services. Offering the
PC option to view over 1000 "Watch Now" movies and TV shows, Netflix plans to
ultimately bring this type of technology to any Internet-accessible device.
It has also established a new division (Red Envelope Entertainment) to leverage
proprietary technology and offer original content which is otherwise not available to
subscribers, such as independent films.
Netflix should anticipate competitor responses to its latest moves and to the strategic
actions it decides to take in the future. The company needs to be prepared for the onset of
increased rivalry that evolves from an observable pattern of action-response.
In addition to considering current industry conditions, a study of competitors' previous
behaviors is necessary to predict future responsive behavior.

Key Competition

Blockbuster is the largest video and video disk retail chain today, with 9040 stores in
twenty-five countries and over a billion rentals annually. The company became a video
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giant through its foresight, expansion strategy, and prime store locations. Its strengths
include a vast selection, flashy stores, and an innovative computing system to manage the
video catalog and rental process, while minimizing labor costs and theft.
To exploit the superstore video rental chain concept before others entered the market,
Blockbuster initiated a rapid growth strategy of franchising its Blockbuster name and
proprietary computer system and by making horizontal acquisitions.
When the market began to mature, the business grew by offering video games and
continuing expansion globally. It also diversified by acquiring a music retail chain and
establishing agreements with movie production companies, communication companies,
and other entertainment companies. Some of the relationships proved beneficial, but
some had to be severed, such as Blockbuster Music (1998), so as to not drain Blockbuster
of all its financial resources. In 1997, the company scaled back on expansion and
eliminated the non-rental operations (such as retail merchandise) to improve store
operations. It also implemented a revenue sharing program with major Hollywood movie
studios to manage on-time delivery of new releases and lower stocking costs.
Blockbuster's recent strategic moves include:
Exclusive revenue-sharing agreement with an independent American film studio.
Acquisition of Movielink LLC (an online movie downloading company owned by
the major film studios, such as MGM, Paramount Pictures, Sony Pictures
Entertainment, Universal Studios, and Warner Brothers). This agreement
establishes long-term deals for content with the major film studios, which
significantly enlarges its current video library for retail rental and online
subscriptions.
These actions provide Blockbuster customers three ways to attain movies: in-store, mail
order, or download. After waiting five years to move into online DVD rental, it does not
plan to follow its competitors into the VOD market.
The year 2007 brings a new CEO, James Keyes, to confront the challenge of holding
market share in a volatile industry. With over twenty years at 7-Eleven Inc. (the largest
convenience store chain in the world,) and five years as its president and CEO, Keyes
brings with him the experience of achieving record sales and profits. He also has been
involved with implementing current retail systems technology to improve product mix
decisions and introducing electronic services at the store level. Other positions held at 7-
Eleven include CFO, Executive VP, and COO.
Movie Gallery, Inc. is the second largest North American video rental retail chain. This
competitor has pursued internal and selective complementary acquisition strategies for
growth, focusing on rural and secondary markets to compete effectively against
independently-owned stores and small regional chains. Its 2005 purchase of Hollywood
Entertainment strengthened its position and put Movie Gallery in direct competition with
Blockbuster in prime locations.
Through automated movie vending machine kiosks, the company is diligently pursuing
alternative delivery platforms to enhance its base business. With minimal overhead, these
"ATM-like" machines provide around-the-clock availability of movies for rent.
To enter the VOD market, Movie Gallery purchased MovieBeam (a movies-on-demand
service which was created and funded by Walt Disney Co., Cisco Systems, and Intel
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Capital). The service uses a patented over-the-air data-casting technology to reach a

television set-top box. Plans are to expand this service into Internet movie downloading.

Hastings Entertainment is a multimedia retailer. It combines the sale of new and used
CDs, books, videos and video games, as well as boutique merchandise, with the rental of
videos and video games in a superstore format. Located in twenty midwestern and
western states, the company focuses on small to medium sized towns with underserved
markets. While its primary revenue stream (35 percent) comes from the sale and rental of
videos and games, music sales account for 25 percent of its business.
As is the case throughout most of the rental industry, Hastings video rental sales continue
to drop in the face of mail-order rental houses like Netflix and video-on-demand services
from cable companies.
Other movie delivery methods in the market capture some market share, but rentals are
the most common method for viewing newly released films or older pictures. Other
channels include:
movie retail stores (i.e. Best Buy, Wal-Mart, Amazon.com),
subscription entertainment services (Showtime and HBO),
Internet movie providers (iTunes, Amazon.com, Movielink, CinemaNow.com,
and Vongo),
Internet companies (i.e. Yahoo and Google), and
cable and direct broadcast satellite providers.
In addition, actions taken by movie content providers to directly participate in the VOD
market have an impact on video rental competitors.
For Netflix to remain a key player in the industry, it needs to take all of the competitive
dynamics into consideration as it decides on its strategic direction.

Likelihood of Strategic Response

Because strategic moves require greater commitment and more time to react, they are
often less likely to elicit meaningful responses from competitors than tactical moves.
However, the current industry conditions dictate that the likelihood of response to
Netflix's strategic activity is high.
The presence of the following conditions in the video rental industry contributes to this
higher level of responsiveness.
Awareness - competitors recognize the degree of their mutual interdependence,
market commonality, and resource similarity.
Motivation - competitors perceive the potential for gain and loss, giving them the
incentive to react to competitive moves.
Ability - competitors have the resources and flexibility to respond.
In addition, industry competitors have a history (reputation) of responding to market
leader moves. Their dependence on the market for revenues and profits is considerable,
indicating that they will have a greater propensity to react to Netflix's strategic actions.
Characteristically a fast cycle market, strategic and tactical moves have not been shielded
from imitation in the past. However, the present uncertainty of the direction that
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technological developments will take may slow the speed of response and require
competitors to choose between investment-worthy technologies.
Even though competitors are faced with uncertainty, technological advancements are
progressing rapidly. Competitors must stay abreast of new developments and have plans
to quickly take advantage of opportunities that fit with their strategies. In line with this, it
has been noted that most of the key online rental industry players have already sought
relationships with Video on Demand providers to maintain a competitive advantage as the
market for this new type of service materializes.
Blockbuster is the largest video rental company in the industry, and for the purposes of
this discussion, its potential moves will be considered representative of its class of retail
chains.
What can be inferred from Blockbuster's past behavior to predict future actions?
Despite its size and industry leadership position, the company has not always behaved
aggressively when faced with industry changes. Its growth strategies have been
incremental, rather than radical.
However, having watched Blockbuster's lack of responsiveness to Netflix's entry into the
industry, it is unlikely that any video rental retailers (including Blockbuster) will be
complacent with this new wave of industry change. Blockbuster has even stated that it
will not be a bystander as movie downloading hits the market. Nonetheless, recent
moves by Blockbuster do indicate a reluctance to let go of its former ways of doing
business. The company's ability to develop a business model that is suited to the
emerging marketplace can be reasonably questioned. The company's legacy systems are
still designed around its retail operations. Also, its new CEO has a retailing background,
and his perspective will be inclined toward retail. Until the company shifts its focus from
its transaction-oriented storefront business, Blockbuster will struggle to match its
capabilities to market needs.
Other factors that reduce the expected effectiveness of a Blockbuster response include the
fact that some of its alliances and ventures have not always been successful. It has had to
retreat from some strategic relationships and redirect its focus in the past. Additionally,
entering into exclusive agreements with content providers illustrates that the company
does not seem to anticipate retaliatory acts by competitors or to consider the harmful
impact its decisions can have on the industry as a whole. The negative impact that
exclusivity agreements could have on the industry are discussed more fully in the
recommendation section below.

Statement of Key Strategic Issues and Goals

Netflix faces a rapidly developing competitive environment with new technological

innovations affecting product and service offerings among the various movie rental
businesses. The development of video streaming and downloads on PC's and mobile
devices will have a definite impact on the expectations of a new generation of movie
viewers. The main challenge for Netflix is to determine how to adjust its business model
to new technological and competitive pressures while staying true to its strengths,
providing value to its subscribers, and staying atop of the online rental market.

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The company has established brand equity with the Netflix name and delivered a
distinctive solution during its short history. Now it must have the ability and foresight to
manage extensive growth while maintaining its current service level - to enhance its
current customer base's experience while attracting new customers.
Netflix has a long-term objective of being the movie rental leader. The company hopes to
remain a key player in this rapidly developing and competitive industry. All of its
operational goals culminate into one overlying company strategic goal to maintain a
low-cost structure.

Stakeholders

The parties that are affected by the outcomes of Netflix's performance are outlined below,
along with their expectations and the measures of success that Netflix should use to
maximize stakeholder satisfaction.
Capital Market Stakeholders. Shareholders and lenders expect financial returns that
exceed industry performance and potential returns from alternative investment
opportunities. Measures that are used to determine the success of Netflix's strategy and
performance for these stakeholders include:
Stock price - stabilizing
Earnings per share - rising
Price/Earning Ratio - trending toward industry line, but still suggests higher
potential for future earning compared to others in the video rental industry
Current Ratios - high, suggesting liquidity
Profitability - increasing
Despite these positive signs, Netflix has seen some setbacks in 2007's first quarter results,
which are attributable to the key strategic challenges the company faces.
Product Market Stakeholders. Satisfying the needs of two major groups in this
stakeholder market can have a significant impact on Netflix's strategic success.
Netflix's customers will ultimately determine if the company succeeds. Satisfaction
measures for services generally include timeliness, courtesy, consistency, convenience,
completeness, and accuracy. In Netflix's case, its customers are primarily seeking a
service which offers convenience, value, and access to an extensive selection. Netflix
caters to the needs and desires of its different customers simultaneously and monitors
churn (or cancelled subscriptions). This provides immediate feedback on poor customer
performance, which can be triggered by low usage, delayed delivery, poor service, or less
value relative to competitor services. These factors are of critical importance to any
online movie rental business, but especially for Netflix because its entire business model
is based on attracting and maintaining subscribers.
Netflix's suppliers also heavily influence the company's success. In this industry, content
providers have a significant amount of power, and the company's relationships with its
sources are vital. Content providers are motivated by a broad distribution of their product
and maximizing their revenue streams. To satisfy its suppliers and maintain an
advantageous market position, it is crucial for Netflix to demonstrate that their
partnerships are an intricate link in achieving these supplier objectives. Therefore, it is

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important for Netflix to ensure that its source partners are meeting their financial and
distribution objectives to ensure market success.

DISCUSSION AND RECOMMENDATIONS

Based on the analysis of external and internal environments, Netflix is operating in an

industry with continued prospects for growth and new emerging opportunities,
particularly in the area of video downloading.
Although other channels are available, video rentals are the most common method for
viewing newly released films or older pictures. Rental sales continue to drop in the face
of mail-order rental services. With the advent of video on demand services, all rental
businesses will see a decline in rentals as consumers embrace immediate viewing options.
Netflix has taken some early steps to get into the Video on Demand market. Where its
competitors are using alliances with movie downloading companies and VOD service
providers, Netflix is internally developing integrated technologies capable of providing
video streaming to its customer base, and it will contract its source content.
Netflix has a competitive advantage in Information Technology which will support its
attempt to interface with all viewing platforms.
By introducing compatibility with all equipment formats, Netflix will ultimately be able
to interface with all customer viewing devices (including television, home theater
equipment, computers, and mobile units). Not only does this effort position Netflix
broadly in the market, but it can serve to preempt moves by emerging competitors (such
as developers of new portable viewing device, VOD service providers, and movie studios
looking for new distribution opportunities) to establish a foothold in VOD.
The following recommendations should be considered by Netflix to maximize the effect
of its strategy.

Broad Business Definition - The Whole Package

Netflix has been actively growing its niche position since the company entered the
market. As the industry evolves, Netflix needs to identify additional ways to serve its
current subscriber base, deepen it market position, and attract new customers.
As consumers are offered new products and technologies, they will be making decisions
about available viewing equipment, the medium of delivery (Internet, cable, satellite,
television networks, and other VOD sources), convenience, access, and value.
Netflix can best serve these consumers by simplifying viewer choices. Offering simple
packages and pricing, an expansive entertainment selection, excellent and personalized
service, accessible and smooth interface, with no disputes, hassles, or hidden fees, the
company can be the "whole package" for the consumer.
By properly and broadly defining itself in the market, Netflix's target position should be
"where everyone goes for video entertainment".
Defining the customer - Netflix's primary customers are video viewers seeking
access to original content (for entertainment purposes) that is not available to them
elsewhere.
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Defining the product - Netflix's product is a subscriber service providing access to

an extensive library of copyrighted content for viewers.
Expanding viewer and video definitions from "movies" to all original entertainment adds
new material (and value) for the current subscriber base and attracts new customers.
Already seeking additional independent material through its "Red Envelope
Entertainment" division, Netflix should evaluate possibilities in other areas of content,
(such as sports, gaming, news, etc.) and move decisively to quickly grow in this
direction. It has the proprietary technology to implement this strategy, and the actions are
strategically in line with the company's goals.
To take advantage of VOD opportunities and offer immediate viewing options, the new
"Watch Now" feature should be dramatically and quickly expanded to add instant
viewing materials for the subscriber.
In addition to providing more value for its customers and attracting new subscribers,
increasing its scope (by enlarging its library selection) will also improve Netflix's
performance against competitors. Expanding instant viewing materials while developing
universal device compatibility will set a new standard for the industry. First mover
advantages will be available to the company who leads the industry into an uncharted and
uncertain direction. Netflix should attempt to mold industry protocol to match its
business model.
Online and storefront retailers, like Amazon and Wal-Mart, are offering downloadable
DVD-quality movies for rent or purchase and have attracted the attention of major
studios looking for strong distribution outlets. However, the number of titles being
offered by retailers (approximately 3,000) is significantly smaller than Netflix's rental
broad library (of 17,000). Also, providing complete access may eliminate the need for
viewers to own (or purchase) videos. Coupled with instant online movie access,
customers can view the material whenever they want by subscribing to Netflix.
Existing storefront competitors have been able to offer immediate rental and convenience
that Netflix could not with its online business model. However, with VOD on the
horizon, the advantage of video rental retailers is diminished, leaving these competitors
with costly overhead and expense structures. Automated movie vending machine kiosks,
while a unique distribution idea, are essentially an extension of the storefront, which is
becoming an outmoded method of delivery.
Also, companies who are attempting to move into Internet downloading (like Movie
Gallery) are disadvantaged by fragmented strategies with limited synergy.

Relationship Management/Exclusivity

Netflix's experience and skills at building mutually-beneficial relationships with film

entertainment providers can now be applied to partnerships with makers of new devices,
providers of new delivery channels, and new content sources. Its existing relationships
and relationship-building capabilities will prove to be of value as Netflix turns its
attention to offering VOD services.
Netflix should seek alliances with internet providers, expand its supplier and equipment
stakeholders, especially as studios are beginning to forward integrate into ventures (such
as Movielink, now owned by Blockbuster) to secure a position in the VOD market.
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 Netflix

Its cooperative relationships will be one of the keys to competing with movie retail
stores, subscription entertainment services, Internet movie providers, Internet companies,
and cable and direct broadcast satellite providers who are all jockeying for a position in
the emerging market.
Netflix needs to demonstrate to content providers that universal access to material is a
critical condition for broadening their distribution, keeping their distribution costs low,
and increasing their profits.
The recent Blockbuster/Weinstein agreement illustrates the types of moves that some
industry players are engaging in. This type of strategic action can prohibit Netflix's
access to some independent titles, inducing Netflix to pursue its own exclusive
arrangements. This type of rivalry will ultimately fragment content availability in the
market and discourage customers from establishing relationships with any one service. It
will interfere with the distribution reach of content providers and have a negative impact
on the industry as a whole.
Netflix needs to use its credibility in partner relationships to lobby for the elimination of
exclusivity agreements and to keep distribution channels open.
Netflix also needs to negotiate for the most advantageous distribution window that it can
arrange. Being first to access movies after theaters is beneficial for companies like
Netflix. Competition will definitely increase if this advantage disappears. Looking at the
trends in the industry, Netflix is likely to lose its timing advantage over VOD services
and needs to at least keep in even footing with VOD services by participating in the
instant viewing market itself. A distribution lead over satellite, cable, and networks is
likely to remain in place.
Again, building strong partnership relationships with industry stakeholders must be a key
component of Netflix's business strategy.

Summary
These recommendations match the strengths of Netflix to available opportunities in a
rapidly developing and competitive industry. The company will be able to rely on the
strength of its business model, recognizable name, managerial leadership, expansive
library, customer base, IT, cost position, service levels, ability to meet customer demands
and expectations, compatibility with diverse portals/equipment, personalized customer
relationships, supplier relationships, value-adding capabilities, marketing skills, and
financial strength to achieve its goals and strategic moves. The company is strategically
poised to capture a share of the emerging Video on Demand market as well as protect
itself against the actions of new and existing competitors.
By broadening its equipment compatibility and strengthening protective supplier
relationships, its competitive advantage can become more sustainable.
Both catering to the non-standard needs and desires of its different customers segments
and producing its services at competitive costs will help Netflix remain an industry
leader. For continued success of its integrated differentiation/cost leadership strategy,
Netflix must consistently upgrade and differentiate with features that customers value
without incurring significant cost increases.

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