Netflix: a Competitive Landscape 100% 50% 10% Prepared by: Denton Bayles For: Sean Campbell CI Spring 2012
Executive Summary• Netflix, a leader in the video streaming and rental industry, in the third quarter of 2011 lost 800k subscribers and their stock price dropped nearly 500%. How was the company going to respond to this radical stock drop, lost of customers, and the poor PR?• The following competitive landscape uses the McKinsey 7S framework to identify Netflix’s strengths and weaknesses in the following areas: structure, strategy, skills, staff, style, systems, and shared values.• The results of the McKinsey 7S framework are that Netflix has set up an ideal corporate structure for flexibility. Their long term strategy has always been to dominate the video rental market (changing over time from DVD’s to streaming). However, they have struggled to fit their short term strategy seamlessly into their long term strategy with mistakes such as Qwikster. They have competencies in their library size, recommendation algorithm, original content, partnerships, and IT infrastructure. Their weaknesses lie in marketing/PR, short term strategy, customer service, original content, and partnerships. Original content and partnerships are included in both strengths and weaknesses due to the fact that the original content will be liked and hated on both sides and partnership with one firm means that you did not partner with another. The staff is strong in computer science, computer engineering, and economics; but, lacking in marketing and PR. They are talented and come from schools such as Stanford and Wharton and the staff in general are well compensated. The Netflix style is to find the very best employees and weed out those employees who are merely adequate. They give their employees freedom to be creative and work as they need. Netflix relies on operations, product development, human resources, and recommendation algorithm systems for their day-to-day success. Finally, Netflix has a shared set of values that form their company culture. They divide them into seven sets: values are what we value, high performance, freedom and responsibility, context – not control, highly aligned – loosely coupled, pay top of market, promotions and development. Their most important values are judgment, communication, impact, curiosity, innovation, courage, passion, honesty, selflessness. These are the values that on the corporate level keep the organization on path.• In the future I expect to see Netflix hire a permanent CMO, eradicate their DVD delivery service, form new partnerships, bring in a new CEO with Hastings reverting to Chairman only, a new CCO or additional communications/PR talent, another Qwikster-like experiment or the wholesale fire sale of their DVD equipment.• Additional research would involve their competitors. They need to understand what Blockbuster, Redbox, and Verizon are going to do in the future.
Overview• Netflix – Delivers streaming video content and DVD delivery services. – Instantly watch as many TV episodes & movies as you want for only $7.99 a month. – Established in Los Gatos, CA in 1997 – IPO May 2002 – 2011, 26 million worldwide subscribers and $3.2B in revenue • A $1B increase over 2010 despite the 3rd quarter loss of 800k subscribers and which still resulted in 6.2 million new subscriptions
Financial Overview • The plummet of their stock price in July 2011 with the announcement of changes to subscription fees, the cancellation of Starz, and the announcement of Qwikster resulted in a stock price drop of nearly 500% over the course of 4 months. • Hasting’s announces he will not resign, “this is the first time there have been material missteps. If you look at the cumulative track record, its extremely positive."
KIQ• What actions will Netflix take to address the issues surrounding reputation, pricing, and service offerings?
Sources• Netflix.com• Wikipedia.org• Business and Competitive Analysis: Effective Application of New and Classic Methods• Sean Campbell’s course on Competitive Intelligence and associated materials• Netflix annual reports• Paidcontent.org• Techcrunch.com• Slideshare.com• Linkedin.com• Facebook.com• Netflix blog• Twitter.com• Glassdoor.com• Compete.com• Quora.com• My Google Reader• My Google Alerts
Methodology1. Choose competitor a. Chose Netflix because I was intrigued by how they were going to try to fix their business.2. Choose KIQ(s)3. Choose framework a) McKinsey 7S chosen because it allows for hard and soft data.4. Collect data5. Synthesize the data6. Make predictions7. Future monitoring
McKinsey 7S• “It is a management tool designed to facilitate the process of strategy implementation within the context of organizational change.” -Fleisher
Structure Cont.• Netflix is divided into six major functions and legal with the CEO retaining centralized decision making authority over the six major function areas.• The structure is a flat structure that is designed to help Netflix meet its desire for flexibility
Strategy• Current main strategic goal is to become a streaming only service – The Qwikster experiment was a failure; It showed Netflix that the switch to online only would be difficult to do without sacrificing their customer base – The online only strategy of the company has been “on again, off again.” After their move to originally bring the services together they are proving difficult to separate. – Develop original content in the mold of a “Mad Men” like show to market as an exclusive and draw more people to the service – PAC – Netflix is showing their need for a free internet by forming their own PAC in response to SOPA/PIPA
Skills Strengths GapsSignificant library (100,000+ movies & TV) Marketing / Public RelationsRecommendation Algorithm (75% of Making their short term strategy consistentviewing done based on recommendations) with their long term strategyOriginal Content Customer ServicePartnerships (most major studios) Original content*IT infrastructure Partnerships*Is it true that Netflix divides subscribers into 10 groups and assigns each group to an internal team that competes toboost loyalty metrics of that group?“There arent 10 groups, however every subscriber might be allocated to a differential experience in a particular area - forexample, a variant of a recommendation algorithm, a different search results presentation, a different web UI, astreaming experience that starts a second faster with lower bitrate prior to upshifting to the highest quality theirconnection will support, etc. The terminology is that each customer is assigned to one test cell in each test, usually thedefault or "control" test cell. There are typically a few hundred tests running concurrently, and a customer picked atrandom would likely have a differential experience in more than 1 but less than 10 of the different tests, all assignedrandomly.” – Neil Hunt, CPO via Quora
Staff• Reed Hastings – CEO – MSCS from Stanford – Has a trend as a long term CEO. 14 years with Netflix and 7 years with his only previous CEO post at Pure Atria Software.• Jesse Becker – Interim CMO – BS in Economics from Wharton – MBA from Stanford – Previously worked for Amazon and Oracle – Expertise primarily in acquisition channels – With Netflix since 2000
Staff Cont.• Jonathan Friedland - CCO – MS Economics from London School of Economics – Worked previously for Walt Disney Company and the Wall Street Journal – Experience as a SVP with WDC and a foreign correspondent/editor• Neil Hunt – CPO – PhDCS from University of Aberdeen, UK – Worked previously as Director of Engineering for Rational Software and at Netflix as VP of Engineering – In his current post at Netflix since 2002.
Staff Cont.• David Wells – CFO – MBA/MPP University of Chicago – BS Accounting University of Virginia – Previously worked for Deloitte Consulting – Has been with Netflix since 2004 as Director of Operations Planning & Analysis and VP of Financial Planning & Analysis
Staff Review• Many of the Chief Executives share history – Reed Hastings was CEO of Pure Atria Software which was acquired by Rational Software. – Most of the Chief Executives worked at one of these two companies• Most of the Chief Executives have been with Netflix over 10 years• Compensation – strong focus on paying high enough salaries to keep top performers at the company, focused primarily on salary as opposed to stock options or bonuses• Talent – the resumes of Netflix’s employees boast of Stanford, Wharton, Harvard, etc.• Strengths in computer science, computer engineering, and economics• Weak in Marketing and PR – Recently released their CMO who had been at the company for 12 years – CCO is a journalist with experience in a different industry
Style Review• Despite the performance driven, competitive culture; Netflix insists that “cutthroat” or “sink or swim” behaviors are not tolerated• There is a stress on the importance of creative performance, but how do you define creative performance?• Walk the talk – Most of the Chief Executives have been with the company for over ten years, but they did recently “I have worked for Reed for twelve years at Netflix, and I believe the remove their CMO and CFO culture deck is as accurate a document as we can create in describing our culture” – John Ciancutti, VP of Engineering via Quora
Systems• Operations – For their DVD service the warehouse holds over 26 million DVD’s. 100,000 DVD’s are returned every day and most of those never reach the shelves, but are immediately returned to circulation.• Product Development – Although Netflix has a significant movie and television library they focus on quality over quantity as a method to differentiate themselves from Amazon• Human Resources – between hiring and firing the HR system keeps itself busy through a series of performance reviews that are integral in their efforts to meet the corporate goals for finding the best human capital• Recommendation Algorithm – Like Google or Amazon, Netflix relies on their recommendation algorithm and are constantly working to improve the system
Shared Values• Corporate Culture – Values are what we value – High performance – Freedom & responsibility – Context, not control – Highly aligned, loosely coupled – Pay top of market – Promotions & development• Values – Judgment, Communication, Impact, Curiosity, Innovation, Courage, Passion, Honesty, Selflessness
Predictions• New CMO• Eradication of DVD delivery• New partnerships (because of the loss of Starz)• New CEO, Hastings will become chairman only• New CCO or additional communications/PR talent• They will attempt “Qwikster-esque” business again or have a wholesale sell off of their DVD operations
Moving Forward• Competition is catching up, as streaming video becomes the norm, more and more people will look outside of Netflix, How will they react? – Blockbuster focuses primarily on DVD’s, but could expand – Redbox – Redbox/Verizon partnership
KIQ Answers• What actions will Netflix take to address the issues surrounding reputation, pricing, and service offerings? – New CMO – Additional communications/PR talent – Online only service with the consistent $7.99 price – The addition of Original content and new partnerships
Sources• www.netflix.com• http://en.wikipedia.org/wiki/Reed_Hastings• http://en.wikipedia.org/wiki/Netflix• Fleisher, Craig S.; Bensoussan, Babette E. (2007-02-27). Business and Competitive Analysis: Effective Application of New and Classic Methods (Kindle Locations 5367-5369). Pearson Education (USA). Kindle Edition.• Sean Campbell’s course on Competitive Intelligence at Willamette University and associated materials• Netflix annual reports. http://ir.netflix.com/secfiling.cfm?filingID=1193125-12-53009&CIK=1065280• Netflix Investor Relations. http://ir.netflix.com/stockquote.cfm• http://paidcontent.org/2011/09/24/how-blockbuster-netflix-hulu-and-amazon-stack-up/• http://techcrunch.com/2009/08/05/other-companies-should-have-to-read-this-internal-netflix-presentation/• http://static.slidesharecdn.com/swf/ssplayer2.swf?doc=culture9-090801103430-phpapp02&rel=0&stripped_title=culture- 1798664• www.linkedin.com/company/netflix• www.facebook.com/netflix• http://blog.netflix.com/• http://blog.netflix.com/• www.twitter.com/netflix• http://www.youtube.com/watch?v=K3GzO2_NFfQ• Glassdoor.com• http://siteanalytics.compete.com/netflix.com/• http://www.quora.com/Netflix• My Google Reader• My Google Alerts