Netflix Case Study Essay

This essay has a total of 8763 words and 39 pages.

Netflix Case Study

Table of Contents
Company Overview 4
Issues 5
Analysis
External Analysis
Dominant Economic Feature 8
Competitive Forces - Five Forces Model 10
Driving Forces 12
Key Success Factors 14
Competitor Analysis 15
Industry Attractiveness 21
Internal (Company) Analysis
Company Strategies 21
SWOT Analysis 23
Value Chain Analysis 29
Competitive Strength Assessment 30
Strategic Issues and Obstacles 31
Alternative Courses of Action for Success 31
Recommendations 31
Implementation 32
Works Cited 36
Appendices
Corporate Officers A
Online Movie Industry Market Share B
Renting Process Flow Chart C
Growth Rate Chart D
Rental Price Comparison E
Ratio Comparisons F
S.W.O.T. Analysis G
Weighted Competitive Strength Assessment H
Unweighted Competitive Strength Assessment I
Financial Analysis J
Return on Assets / Return on Equity K

COMPANY OVERVIEW
Reed Hastings founded Netflix in 1997. He noticed that there was a demand for the ability
to rent movies. With a large customer base he figured there was no question that his
company could fail. This began the online movie rental industry to a large scale. With one
company becoming successful, it wouldn't be but a matter of time before others began to
catch on and begin to reap the benefits of someone else's idea.

Reed Hastings has already been a success for beginning new companies. He first made a name
for himself by going public with Pure Software in 1995 (netflix.com/PressRoom). After the
development of this company he began to acquire several other companies and made Pure
Software one of the 50 largest public software companies in the world by 1997; this until
they sold to Rational Software in 1997. From there Hastings moved on to other projects.

The other project in mind was Netflix. Hastings and a few colleagues formed Netflix in
1997, as formerly stated. Which by 1999, they had over one million subscribers in only
three and a half years. Since the beginning of Netflix in 1997, they have battled many
different forms of DVD entertainment competition. The competition ranges from simply going
to the local video store, or actually going out to purchase a movie. It ranges too many
other levels as well as many other mediums. Through the beginning and even until today
Netflix has been able to stay ahead of their competition; this mainly due to the seemingly
flawless method of getting the product to the end user, and back. "No one is going to
out-hare Netflix," Hasting said. (Netflix-Maddox) With this bold statement, Hastings has
been able to keep his word on it. He is able to keep his word mainly because of the
intricate rental system involved, also because they have until recently been what seemed
to be the best deal for renting movies.

Netflix seems to have a simple statement. "Our vision is to change the way people access
and view the movies they love. To accomplish that, on a large scale, we have to set a
long-term goal to acquire 5 millions subscribers in the U.S., or 5 percent of the U.S. TV
households over the next four to seven years." (Maddox, c-14) This statement appears to be
plausible as long as they figure a way to keep the Blockbusters and the Wal-Marts of the
world at bay.

"Netflix launched its movie rental service in 1999 with the goal of using the DVD format
and the Internet to make it easier for people to find and get movies they will enjoy. As a
result, our members can reliably discover and enjoy lesser-known titles. As we succeed,
more people are watching more films, and filmmakers are reaching a larger audience. In
turn, we believe they will produce more new films. Netflix strives to be the world's
largest and most influential movie supplier. (netflix.com/pressroom)"

ISSUES
Primary
· The first strategic issue that Netflix will need to cover is how to gain a larger
consumer base. Without more members they will have a hard time keeping up with the
competition. Many of their competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing and other
resources than Netflix does. Some of their competitors have adopted, and may continue to
adopt, aggressive pricing policies and devote substantially more resources to marketing
and Web site and systems development than Netflix does. The rapid growth of their online
entertainment subscription business since their beginning may attract direct competition
from larger companies with significantly greater financial resources and national brand
recognition. For instance in 2003 the extremely wealthy Wal-Mart used their online site to
launch an online DVD subscription service, Wal-Mart DVD Rentals. With increased
competition reduced operating margins may result as well as a loss of market share and
reduced revenues. In addition, our competitors may form or extend strategic alliances with
studios and distributors that could adversely affect our ability to obtain titles on
favorable terms.

Secondary
· There are new opportunities for the industry. With the advancement of technology
many companies can take advantage of the Internet. Currently Netflix expects to spend $7
million-$14 million this year on its Internet Video-On-Demand offering, which it will
launch during 2005. Along with opening more distribution centers, this will cut down on
delivery costs and time. They expect Internet VOD to have little impact on its performance
for several years. This will help compete against other members that are allowing the
downloading of movies online. Because of this Netflix will begin a frontal attack as of
2005 with Video on Demand (www.biz-architect.com/netflix_vs_vod.htm).

· New Entrants are becoming a threat to the existing members of the industry. More
companies are deciding that they can take action in online renting. After Netflix
pioneered the online rental service. Since then other major companies like Blockbuster
began offering a lower monthly rate in addition to in-store renting. Netflix will not be
able compete with in-store renting for the fact that they do not have brick and mortar
establishments. With the new entrants in the industry the price of renting movies will
become better for the consumers. In order to attract the biggest customer base the
companies will need to battle over the best offer. As the competition occurs a few things
can happen. First, the price of the membership will decline. Second, more movies will be
offered.

· Netflix must also consider globalization as a potential area to gain market share.
Currently Netflix is serving members throughout the United States and in the United
Kingdom. There is already competition globally outside these two countries. Many of the
companies in this industry already have locations around the world. For example,
Blockbuster has sites in 25 countries, which are 2600 stores outside the United States
alone (blockbuster.com). This would mean that they would have to set a distribution
centers in a foreign country and hire people to run the actual site. Once the centers are
set up though, it would be feasible to promote the online service. Netflix would have to
look the different tax rates, currency exchanges, and government regulations, along with
different copyrights associated with the studios that supply the movies, before physically
setting up this venture. If the rates of these foreign restraints were greater than that
of its sales then Netflix would be operating in a loss.

· Something that the industry will begin to see is a change in the increase of
technology over time. DVD's have replaced VHS, which replaced Beta, which replaced 8
millimeter; eventually something will replace the DVD. With that said, all companies
should be aware that eventually DVD's will be outdated by some future technological
advancement. They might be going in a better direction with Internet Video on Demand. It
should be noted that the DVD would take a while to be replaced. Currently this technology
is still fairly new and extremely reliable to the users.

EXTERNAL ANALYSIS
DOMINANT ECONOMIC FEATURE
Market Size/Growth Rate: The DVD market is one of the fastest growing markets,
experiencing unprecedented growth since its debut in 1997. The growth was largely
attributed to dramatically falling component prices. DVD recorders were forecast to
surpass sales of DVD players by 2007, with an expected compound annual growth rate of 126
percent. DVD sales for 2003 were $11.4 billion.

Stages of the Life Cycle: The e-commerce movie rental industry is now in the rapid growth
and takeoff position, in the business life cycle.

Scope of Competitive Rivalry: Rivalry is fierce between the top e-commerce movie rental
agencies, which are Blockbuster Video, Wal-Mart, Movie Gallery, Walt Disney's Movies on
Demand, and Movielink's Downloadable Movies. These rivalries all compete in global
marketplace. The Geographic area of operations for the e-commerce movie rental industry is
worldwide. With the advantage of not having a brick and mortar operation, subscribers can
literally be anywhere in the world.

Number of companies in the industry: The online DVD rental agencies are fairly large and
still new. There are two major companies that dominate the industry. (Netflix and
Blockbuster) The four other companies listed in the previous section are rivalries of
Netflix as well.

Buyer Needs: Buyer needs have changed since the opportunity of the e-commerce industry. In
the online movie rental industry buyers are looking for the added convenience of not
having to drive to the traditional brick-and-mortar outlet. Buyers are also looking for
certain attributes such as, no due dates, and free shipping. We can predict that in the
future buyers will require a new form of deliver such as downloading.

Pace of Technological Change: Advancing technology plays a vital role in the online movie
rental industry. Industry members need strong technological capabilities to keep up with
buyer needs.

Ease of Entry/Exit Barriers: Barriers to enter in the online DVD rental market were very
low, but the barriers to profitability were extremely high. (Netflix-Maddox)

Degree of Vertical Integration: Members of this industry can gain competitive advantage by
being partially integrated through their distribution channel.

Product Innovation: The online movie rental industry should focus on research and
development to gain competitive advantage over rivals by being first to market with a new
product. A new product for this industry will soon be VOD.

Degree of Product Differentiation: Rivals within the industry are causing price
competition. Blockbuster Video recently just lowered there monthly rate under what Netflix
charges for there cheapest subscription. The degree of product differentiation has not
occurred with the physical product, but it is the service that is causing price
competition.

Economies of Scale: In this industry, member can enjoy economies of scale in shipping
activities and partnership agreements with studios

PORTERS 5 FORCES
The five forces model is a tool used to diagnose the competitive pressure of the industry.
The model assesses the strength and importance of each pressure from five different areas
of the market. The five areas of competitive pressure are threat of rival sellers,
potential new entrants, and firms offering substitute products, supplier bargaining power,
and buyer bargaining power. To use the five forces model one must first identify the
specific competitive pressures in each of the five areas, second one must evaluate the
strength of each pressure, and last one must determine whether the collective strength of
the five forces is conducive to earning profits.

Rivalry
The strongest of the five forces comes from rivalry among competing sellers. Firms will
use any resource or weapon available to gain a better position in the market. The rivalry
in the online DVD rental industry is high. In this industry rivals carry a weakly
differentiated product, which makes the threat from rivals more intense. There are low
costs to switch, which make it easier for consumers to shop around and have less brand
loyalty. The only area in the online movie rental industry that has weak rivalry is in
buyer demand. The industry enjoys an expanding buyer demand. In this fast growing market,
rivalry is weak due to enough business being available to all members of the industry.



New Entrants
The threat of new entrants in the online DVD rental industry is strong. Industry members
should be concerned with several factors that lead to strong threats of entry. Some
factors include a large pool of potential candidates with available resources, low entry
barriers, and high buyer demand. The industry is attractive to potential entrants because
it is one of the fastest growing markets (Netflix, Maddox). There is significant pressure
in the online rental business due to large market growth and profit prospects. The most
formidable force comes from the incumbent members entering new areas of the industry.
Blockbuster is an incumbent industry member who began expanding into other product
segments. Some attributes that Netflix have lead to a weak threat of new entrants. These
attributes are; better distribution channels, strong lead of customer base, revenue and
brand recognition, and patents that can stifle competition through licensing fees for
service (Netflix, Maddox). New comers to the industry also face high barriers to
profitability. Netflix may also enjoy a cost advantage from longer experience and
technological know-how in the industry.

Substitute Products
The threat of substitute products in the online DVD rental industry is moderate to high. A
major threat for the industry is the idea that the DVD will no longer be the medium of
choice for home entertainment and that consumers would soon be downloading movies and
using On Demand (Netflix, Maddox). The substitutes for the industry are movie theaters,
downloads, and movies On Demand. The threat of substitutes is strong when the substitutes
are available and attractively priced.


Supplier Power
There are certain competitive pressures that come from supplier bargaining power. If the
supplier exercises bargaining power to influence terms or collaborate with sellers there
can be a strong pressure. The suppliers of the industry are all of the studios that make
movies. Suppliers have sufficient bargaining power when they know what the companies need
to keep in inventory because of consumer demand. Each studio makes movies that are only
available through them and that is a differentiated product, which gives the supplier more
power because the companies can't get the movie from any other studio. One area where
suppliers have less bargaining power is if Netflix, or Blockbuster or any other competitor
accounts for a big fraction of the supplier's total sales.

Buyer Power
Large retailers usually have more bargaining power than individual buyers. Buyers can
demand concessions when purchasing large quantities. There are also not many buyers for
the studios so each buyer is important to the supplier. Information is also readily
available to each of the competitors to compare prices the studios are charging other
buyers.

DRIVING FORCES
Netflix has become a dot-com success story. Netflix had to build software to help manage
its complicated rental system. Using the Internet has extended the geographical area to
where it is accessible anywhere in the United States. You can search and rent movies no
matter what time it is, you don't have to worry about the store closing. It doesn't matter
if there is a store near you or not. They had to have to newest technology available to
outwit their competition. How Netflix did this was buy making a wish list for viewers to
see and eventually rent. Netflix will ship the movies free of charge with no due dates or
late fees. One service that Netflix has is called CineMatch, which is a database for all
the movies they carry.

CineMatch runs on two Sun 420 systems which generated thousands of predictions each
second. CineMatch also collects information on the users' preferences. Netflix built 15
distribution centers to accommodate the customers so they can receive their movie rentals
in one business day of shipping. Netflix would ship from the closest distribution center.
With customers having more access to the Internet, they will be more likely to order
movies online rather than driving to the store and worrying about the late fees.

Changes in Buyers/Changes in Usage
With more users having access to the Internet, more people will be online renting. The
home computer will become the next movie store. As the Internet is accessible people may
start burning and copying movies from the Internet rather than renting and paying any fee
at all. Netflix has mentioned adding and adult entertainment category to its website. Even
though Netflix doesn't want to attract that kind of clientele they have talked about it.
This may mean that women will no longer be making up more than half of the subscribers to
Netflix. Seeing as how Netflix has come into the rental market people of different
socioeconomic range have decided to enter as well. DVD's are much more accessible to every
class of citizens, not just the upper class. Netflix appeals to everyone's taste. It
appeals to movie fans because you are getting a deal if you watch a lot of movies. Like
some people who only watch one movie a month, will lack interest in this deal. So they
need to develop a deal for people who only watch 2 movies a month for an even lower price.

Changes in Cost and Efficiency
Netflix was first offering $20.95 a month for unlimited rental and three titles out at a
time. The flexibility that Netflix offers now is great, the highest price is $39.95 which
is for the avid movie goers, then it goes down to $13.95 for the most limited subscriber.
Netflix has the highest efficiency out of all of its competitors because it has more than
one distribution center. Netflix also lists your preferences and allows family members to
use the account as well. Which means mom and dad can access movies that the kids can't.
Netflix started turning profit in 1999 and has had continued success with its growth rate
from year to year. Netflix has now lowered the subscriber cost to the amount each person
may want to purchase. You can now decide what plan you want to subscribe to making it more
efficient and cost worthy to rent movies. With Blockbuster treading on Netflix's heels
there is going to be strong competition for a long time. This means that each company that
is in the Internet movie rental business needs to continuously be improving their systems
to compete against each other.

KEY SUCCESS FACTORS
Technology-related
In-the brick-and mortar-buying context, we can use all five senses when distinguishing
between items and exercising our preferences. Online businesses do not have that luxury.
One factor that contributes to the successfulness of an e-commerce business is the
persuasiveness of its web site. The industry must provide easy access to all of their
movie selections, with search engines and other navigational links to help search for any
movie. With the new technology of the Internet online retailers, such as Netflix and
Amazon, are capable of monitoring consumer behavior. Unlike brick and mortar retailers
they can relate every consumer response on their web site with a marketing-related outcome

Distribution-Related
To gain success in e-commerce there must be a strong network of distributors or shipping
centers. With shipping centers strategically located throughout the United States members
of the industry can promise that movies will be received within one to three days.

Marketing Related
Marketing related key success factors can be an important way to develop a company's
strategy. These strategies can include providing better customer service, customer
guarantees, user friendly website, and clever advertising. Without the conventional brick-
and -mortar opportunities for marketing, members of the online movie rental industry need
to think of new ways to implement these strategies.

COMPETITOR ANALYSIS
Since 2001, the movie-rental industry has shrunk 19 percent, according to Carmel,
Calif.-based Adams Media Research. That has left companies such as Blockbuster, Hollywood
Video, Movie Gallery and independent operations fighting over ever-smaller pieces of the
entertainment pie. In the early 1990s, there were about 70,000 stores around the country
that rented movies and today, there are about 18,000 (Monroe, 2005). The companies that
have felt the pressures sumers are willing to change their behavior to online purchasing
of movies instead of purchasing them at a store. This competes with video stores because
the consumer can receive movies without standing in lines or worrying about the movie you
wish to view not being on the shelf. Price is also a factor in the competition of
e-commerce distribution of movie rentals, such as offering free shipping of the movie
rentals and the elimination of the infamous late fees. Competition is heating up on the
company that can offer the best service for the lowest price. Appeal of this online
process becomes apparent in the promotion aspects of the industry. Customer service is
limited and not face-to-face, therefore friendlier interactions occur more than the usual
services held by rental stores. The online entertainment industry also gives the customer
a larger variety of products to choose from, almost like a movie library. With the
advantage of price, product, promotion and distribution all favoring online transactions
of movie rentals, competition can become pretty stiff.

(click.linksynergy.com)
Netflix
Netflix, the Los Gatos, California based company, had a four year head start in front of
competition which helps them control the majority of the online DVD rental market share.
The world's largest online DVD rental service's idea is pretty simple. You get online and
create a rental list of your top movie choices. You rank movies so Netflix knows which
titles to send first. They send out 3 movies at a time in a rental slip with a return slip
included. You never pay any shipping charges. As a safeguard, if any DVDs become broken or
damaged, the consumer will not be charged since anything can happen with mailing DVDs you
simply return the broken or scratched DVD with no charges. The company decided on the
strategy of $13.95 a month for 4 DVD rentals a month (two titles out at one time) or
$19.95(three out at a time), $29.95 (five out at one time), $39.95 (eight out at one time)
unlimited DVD rental at any given time with absolutely no late fees! This plus the easy
and usable online rental system, along with the 15,000 plus DVD library allows Netflix to
boast a 2.6 million-user base. (ad.linksynergy.com)

To maintain the market share, Netflix had to step up and strategize against incoming
competitors. Netflix has developed a nation-wide distribution process, operating 30
distribution centers located throughout the United States and reaching more than 85
percent of their subscribers with generally one-day delivery (netflix.com). Netflix
members who rate movies will receive unique and personal movie recommendations every time
they visit the Netflix website. These personalized recommendations are based on a member's
individual likes and dislikes (determined by their movie ratings and rental history). The
recommendations allow members to discover great new films they may not have otherwise
considered watching. Netflix has also built alliances with Best Buy owned stores to
increase advertising and their consumer base.

Blockbuster Video
Blockbuster Video is one of Netflix's top competitors. Blockbuster, being the world's
largest video rental chain with about 9,000 company-owned or franchised stores in
twenty-seven countries, is well-known name in the movie rental industry. Blockbuster has
kept loyal customers for online rental as a sizeable opportunity and feel that teaming up
with MSN to reach its large audience of unique monthly users is one key way Blockbuster
Online can quickly establish itself in this business," said Shane Evangelist, general
manager of Blockbuster Online. Other alliances that Blockbuster Video has teamed up with
to enhance marketing are Time Warner and DIRECTV. These partnerships put pressure on
Netflix by promoting and advertising to a wide variety of areas.

Blockbuster Online using the campaign, "Your favorite neighborhood movie store has come up
with an offer that will compete with Netflix" (funways.com), competes by pricing unlimited
DVD rentals for $9.99 the first month, and $14.99 a month after that. Blockbuster online
renting works the same as Netflix: no late fees, no due dates, and no shipping and
handling. In 2003, the Company continued laying the groundwork for its participation in
new opportunities like rental subscriptions, movie and game trading and store-in-store
concepts. Blockbuster currently offers an in-store movie rental subscription program, the
Blockbuster Freedom Pass, in approximately 25% of its stores and a no late fee policy. For
a flat monthly fee, the Freedom Pass allows members to rent an unlimited supply of movies
without due dates or extended viewing fees for as long as they subscribe to the pass. The
Freedom Pass is scheduled to be rolled-out to all U.S. company-operated stores. The
company also intends to launch an on-line rental subscription service this year. Now,
Blockbuster plans to integrate the in-store and on-line subscription program providing
members with increased flexibility, choice and convenience.

Wal-Mart
Wal-Mart Inc. is a large new entrant that Netflix is contending with in the online movie
rental industry. Wal-Mart is the world's largest retailer, with sales toppling over $200
billion, which builds strong brand/name recognition. Wal-Mart Stores, Inc. builds an image
in the mind of consumers of always having the "lowest prices" on their products. From this
advertising tactic, online movie rentals will benefit by customers feeling as if Wal-Mart
will also offer the lowest monthly fees. Wal-Mart offers a free 30-day trial period, free
shipping and $12.97 unlimited rentals per month with no late fees. Wal-Mart's movie
library is almost identical to Netflix, the only difference for now is that Wal-Mart
operates seven distribution centers compared to Netflix's fifteen plus. Wal-Mart has
enough profit flowing through the corporation to make anything possible, including running
over the competition in online movie rentals, the only problem standing in the way is the
lack of potency or knowledge Wal-Mart has or is known for in the movie distribution
industry.

Movie Gallery
Movie Gallery is the nation's third video rental company, whom bought out a rival
Hollywood Entertainment (nation's second video rental company), owns franchises of 2,200
stores and still expanding in all 50 states and Canada. The agreement between Movie
Gallery and Hollywood Entertainment stems from the traditional video-rental companies
being locked in a price war with Netflix and Wal-Mart Stores Inc. From the background of
this rental company along with the buy out, Netflix has another competitor to watch out
for. Movie Gallery's principal activity is to provide retail home video in rural and
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