An AnalysisJoel Goodman, Teichka Rodriguez, & Michael Strasser
ABOUTNetﬂix is the world’s largest subscription based service streaming movies andtelevision episodes over the Internet and DVDs by mail with 16.9 million subscribersat the end of September 2010. They offer a variety of attractive subscription plansthat have no due dates, no late fees, no shipping fees and no pay-per-view fees. Approximately 2 million DVDs are shipped daily and during the last trimester of2010 more than 66% of subscribers instantly watched more than 15 minutes ofstreaming content. There were 30% more streaming options in 2009 than theprevious year. In order to offer a unique selection of programming at a low price, Netﬂix dependson their growing number of subscriptions. These are composed of both streamingand disc-by-mail.This past September, Netﬂix launched an option to instantly and unlimitedly streammovies and TV episodes in Canada for a monthly subscription of $7.99. This marksthe ﬁrst availability of the Netﬂix service outside the US.
ABOUTNetﬂix maintains strong ties with various entertainment video providers. Theiroffices in Beverly Hills forge effective business relations with the major studios. The growing number of subscriptions is beneﬁcial to Netﬂix as it provides studioswith a powerful new distribution channel to rely upon. In November 2010, Netﬂix signed a multi-year contract with independent distributorFilmDistrict. Under this deal major motion pictures that would have been licensed topremium channels will now ﬂow directly from FilmDistrict to Netﬂix starting in 2011.Deals such as this one continue to enlarge Netﬂix’s control and growing dominancein the online market.Netﬂix is one of the top ranked websites for consumers. In February 2010 Netﬂixwas named the number one e-commerce company by the American CustomerSatisfaction Index.
ACQUISITIONNetﬂix’s Business Model Netﬂix obtains their content from several agreements: direct purchases from studios and distributors, revenue sharing programs and license agreements. DVDs are typically obtained by direct purchase or revenue sharing while streaming titles are generally licensed for a ﬁxed term. Netﬂix obtains physical titles for a low initial cost in exchange for a commitment for a deﬁned period of time to either share a percentage of subscription revenues or pay a fee based on content utilization. After these agreements expire Netﬂix has the option to either returning the disc, destroying the disc, or purchase it. Netﬂix also purchases DVDs from studios, distributors and other suppliers on a purchase order basis. Under this arrangement typically a fee per disk purchased is paid. The content of movies available for streaming is licensed directly from studios and distributors for a speciﬁc amount of time. After this period expires the license is extended or renewed, or the content is removed.
PACKAGINGNetﬂix’s Business Model The Netﬂix website (www.netﬂix.com) features the base actions of the company and for subscribers such as: Subscription account sign up and management; personalized merchandizing; inventory optimization; streaming content and payment. Netﬂix’s merchandizing technology creates a powerful method for catalog browsing and is believed to be directly tied to the company’s success. Proprietary and other technology manage processing and distribution of DVDs from shipping centers and streaming content. Proprietary recommendation technology offers a quick and personalized way of ﬁnding content for subscribers based on their viewing preferences. The technology also provides information about each title such as, factual data, trailers and editorial information, recommendations and information gathered by the service for each subscriber.
EXHIBITIONNetﬂix’s Business Model Netﬂix utilizes various models to promote their service. Online advertising, TV and Radio Advertising, Direct mail and third party promotions are some of their many marketing strategies to gain subscribers. Electronic partners also help promote the service. The company also acknowledges word-of-mouth advertising as a marketing enhancer. Online advertising is an important channel that consists of: search listing, banner adds, text links, permission based emails and an affiliate program whereby web- banner ads are available on a self-assisted basis. There are also cooperative advertising programs with studios under the terms in with Netﬂix receives economic consideration in exchange for featuring the studio’s movies in the promotional advertisement.
DISTRIBUTIONNetﬂix’s Business Model Netﬂix distributes content through mail delivery of DVDs or instant streaming of available titles to personal computers, mobile devices, and internet-connected home theater devices The company maintains a nationwide network of shipping centers, which ensures the efficiency of the mailing system and a fast delivery. Discs are shipped First Class mail and subscribers return them in pre-paid mailers. After a disc is returned, the next available title in the subscriber’s queue is shipped. Third party delivery networks help the efficiency of streaming movies and TV episodes in high volume. Third party content delivery networks make streaming content through many different devices possible. Among them: Xbox, PlayStation 3, Internet Connected TVs, Boxee, Roku, and Blu-ray players.
SALESNetﬂix’s Business Model All revenues are generated from monthly subscriptions in the United States and recently Canada. Plans start at a monthly cost of $4.99 and continue to the most expensive of $55.99. Subscription prices vary based on the number of discs out at the same time. Every plan from $7.99 and up includes unlimited streaming services. Subscribers pay the monthly fee in advance via the Netﬂix website. A third party authorizes and processes payments.
SALESNetﬂix’s Business Model Performance highlights from the past three years are positive and show an increasing net income.
STRENGTHSPresence in the MarketplaceInnovationNetﬂix’s idea of starting an Internet based DVD rental system was and still is arevolutionary idea. Removing the need for an individual to travel to a typical brick andmortar rental retailer, consumers were now able to select and create lists of DVDs theywished to watch that would be delivered to their door without the need for additionalshipping costs. Using this same shipping system for DVD returns and not requiring anyadditional cost all while eliminating late fees made Netﬂix an innovator in what hasbecome a new era of home entertainment consumption.
STRENGTHSPresence in the MarketplaceDiverse Physical LibraryThe number of physical discs offered by Netﬂix puts it in a strong position overcompetitors. Unlike traditional brick and mortar retailers Netﬂix is able to harness LongTail economics to provide a complete library of content offerings. While offering the latestreleases in DVD content, a major boon to Netﬂix is its expanded library, which is as muchof a draw to subscribers as are new releases.
STRENGTHSPresence in the MarketplaceDiverse Delivery OptionsIn expanding its services beyond DVD rentals, Netﬂix has set up a powerful streamingservice. Netﬂix is dedicated to being available on as many 3rd party devices as possible,making it versatile as well as giving legitimate competition to cable on-demand offerings.
STRENGTHSPresence in the MarketplacePowerful Brand / Market LeaderBeing the ﬁrst company of it kind in the marketplace, Netﬂix has been able to build apowerful brand. In the past where Blockbuster was the leader in movie rentals, Netﬂixhas been able to take over that space, making its brand synonymous with DVD andmovie rentals. This shift has positioned Netﬂix as the market leader in the physical videorental space.
STRENGTHSPresence in the MarketplaceEase of UseNetﬂix operates on a simple model. Sign up is an easy, streamlined, quick process. Userscan easily search for ﬁlms and manage which movie they will receive next via theNetﬂix.com website. Their website and streaming services also are a simple intuitivesystem. Select you movie or TV show, hit play and Netﬂix begins to stream the requestedcontent.Additionally Netﬂix’s website has been awarded for its ease of use and movie suggestionengine that serves customized recommendations based on a user’s preferences, viewingactivities, and past ﬁlm ratings.
STRENGTHSPricing and DistributionPricingNetﬂix’s tiered pricing model offers a choice and price that matches anyone’s viewinghabits. Users are able to choose a price they feel provides sufﬁcient value for their moneyspent. In addition, all but the lowest tier includes unlimited online video streaming.DistributionMost locations in the continental US receive discs by mail in one day. Video-on-demandallows users to stream content to a number of devices include iPhones, HDTVs, Blu-rayplayers and video game consoles.
WEAKNESSESDVD Release GatingNetﬂix has arranged lower prices on its physical disc purchaseby entering into agreements with ﬁlm studios. As a result, mostnew releases are unavailable for 28 days after they are availablefor sale at retail outlets.
WEAKNESSESStreaming LibraryWhile the Netﬂix streaming service is available on many devices,the company has been unable to keep up with expanding itslibrary. While the service and delivery of streaming content isgood, content selection is severely lacking.
WEAKNESSESUSPS DistributionNetﬂix has always included return shipping in the subscriptionprice. However, with the constant increases in postage, Netﬂix isunable to control the costs of a key function of its business,which is the distribution of DVD rentals. Additionally, by usingthe USPS Netﬂix is unable to guarantee delivery times of DVDrentals.
WEAKNESSESInternational DistributionCurrently Netﬂix’s disc-by-mail rental service is available only inthe continental United States while its streaming service isavailable in both the US and Canada. A major hurdle toexpanding their business is the cost of distributioninternationally. The company’s distribution network is not robustenough to offer that sort of ﬂexibility.
OPPORTUNITIESInternational LicensingInternally, Netﬂix has already positioned itself as a streamingcontent company ﬁrst, and a rental service second. The successof its ﬁrst foray into a country outside of the US suggests thereis a large untapped market for streaming ﬁlm and televisionservices worldwide.Obtaining licensing internationally could rocket Netﬂix to the topof earnings lists.
OPPORTUNITIESDomestic LicensingAs Netﬂix becomes the premier outlet for consumingcommercial video content outside of the theatre and broadcasttelevision, it wields enormous power in negotiating pricing andgaining content exclusivity. Acting on this advantage will giveNetﬂix and edge over its competition.
THREATSCompetitionIn the physical rental sphere, Netﬂix has competition fromtraditional rental stores like Blockbuster as well as Redbox.However, the real competition is in streaming. Netﬂix is in directcompetition with Amazon-on-Demand, Hulu, YouTube, Apple’siTunes Store, and several others.
THREATSDelivery CostsPostage continues to rise in the United States as demand forphysical mailing declines. Netﬂix could soon ﬁnd its disc-by-mail services in a ﬁnancially unviable situation and be forced toraise subscription prices to offset these costs.
RECOMMENDATIONSExpand Beyond Subscription-onlySome strengths of Netﬂix today are its high level of consumer satisfaction, personalizedmerchandising, and the fast delivery service. Though the company envisions strongcompetitors to arise in the future, they should start taking advantage of their currentplace as leaders in the market and of their services to maintain and generate morefaithful audiences.They claim that word-of-mouth has a great impact on their advertising strategies. Bymaintaining customer satisfaction they can take the lead over competitors in aneconomic battle. Also by expanding their catalogue and keeping prices low (offeringmore for less), they can continue to attract more consumers. We would also suggestpricing for individual streams. In a bad economy someone may pay cheap to see a movieonce without the monthly commitment.
RECOMMENDATIONSPrepare for ISP ThreatsAlthough they are ﬁghting to protect net neutrality rules and prevent broadbanddistributors from blocking their services, Netﬂix must prepare their budget for furtherexpenses. By marketing and continuing to grow their online streaming service instead ofDVDs the ﬁnancial pressure of shipping could be transferred to what would become“online shipping.”They should take advantage of their leading role in the market today to continue toeducate their subscribers and possible future subscribers about online streaming, thegrowth of this area mixed with less disc-by-mail shipping can fend off rising distributioncosts.
RECOMMENDATIONSBranch Into International MarketsNetﬂix should begin offering its streaming video services internationally, and quickly. Thelonger Netﬂix remains a North America-only service, the greater the chance of themlosing the international playing ﬁeld to another company.In the long-run, the costs of licensing content internationally are diminished in light of thepotential number of new subscribers gained.
CONCLUSIONNetﬂix is the the US leader in online video streaming. It’s focus on customer satisfaction,device ubiquity, and dedication to excellent service has cemented the company as being onthe consumer’s side.As online streaming matures, Netﬂix will have to ﬁnd ways to reach broader audiences withbetter and more content while continually being more innovative than its competitors. In this,Netﬂix has a robust an streamlined distribution process and is making great headway in itscontent acquisition and licensing.
SOURCESNetﬂix SEC Filinghttp://ir.netﬂix.com/sec.cfm“Netﬂix and FilmDistrict Announce Agreement to Stream First-Run Theatrical Films to NetﬂixMembers”. http://netﬂix.mediaroom.com/index.php?s=43&item=377“Netﬂix Signs Distribution Agreements With Universal Studios, Twentieth Century Fox -Update”. http://www.rttnews.com/Content/BreakingNews.aspx?Node=B1&Id=1265166%20&Category=Breaking%20News“Netﬂix Signs Pact With Epix for Studio Films on Web”. http://www.bloomberg.com/news/2010-08-10/netﬂix-signs-deal-with-epix-to-put-studio-movies-available-on-internet.html“Netﬂix, Warner Bros. End Dispute, Reach Deal on DVDs”. http://www.businessweek.com/news/2010-01-06/netﬂix-warner-bros-end-dispute-reach-deal-on-dvds-update3-.html
SOURCES“Netﬂix Signs Distribution Agreement With NBC”. http://seekingalpha.com/article/227209-netﬂix-signs-distribution-agreement-with-nbc“Netﬂix Is on a Roll!” http://www.fool.com/investing/general/2010/09/08/netﬂix-is-on-a-roll.aspx“Netﬂix looks to add newest TV episodes”. http://articles.cnn.com/2010-12-03/tech/netﬂix.tv_1_netﬂix-relativity-media-content?_s=PM:TECH
An AnalysisJoel Goodman, Teichka Rodriguez, & Michael Strasser
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