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Netflix Case Study

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How an 18-year-old company created a new market through the Internet

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Netflix Case Study

  1. 1. BY JULIEN GUITTON E-COMMERCE & WEB DESIGN MET MG448 HOW AN 18-YEAR-OLD COMPANY CREATED A NEW MARKET THROUGH THE INTERNET
  2. 2. 2Julien Guitton | Netflix Case Study TABLE OF CONTENTS TABLE OF CONTENTS...................................................................................................................... 2 INTRODUCTION................................................................................................................................. 3 BUSINESS / CLIENT DESCRIPTION.................................................................................................. 4 NETFLIX’S HISTORY & BUSINESS ....................................................................................................4 NETFLIX’S CUSTOMERS ..................................................................................................................5 SWOT ANALYSIS............................................................................................................................ 7 STRENGTHS ...................................................................................................................................7 WEAKNESSES ................................................................................................................................8 OPPORTUNITIES .............................................................................................................................8 THREATS........................................................................................................................................9 STRATEGY & MANAGEMENT FACTORS........................................................................................10 ECOMMERCE BUSINESS MODEL...................................................................................................12 CONCLUSION.................................................................................................................................14 REFERENCES.................................................................................................................................15
  3. 3. 3Julien Guitton | Netflix Case Study INTRODUCTION In many ways, Netflix is an amazing company to analyze. By being disruptive, the company has changed drastically the disc rental business and the streaming industry. In addition, the ecommerce business model Netflix has developed was one of a kind, focusing mainly on the consumer’s needs and experience. Now, it might seem obvious that ecommerce marketers should focus on those aspects but at the time it was a first. If one is not convince that Netflix is an online retailer like no other, I could always argue with the 2013 online sales made by the top 10 U.S. retailers (figure below). Most of the companies listed below are either click-and-mortar companies, or pure players. They sell or rent office furniture, hardware & software, clothes, food. Only Netflix stands out, by providing a subscription-based model where people can access thousands of movies either by disc rental or by streaming. This essay will provide insights and sufficient background to understand Netflix’s success and struggles the company had to face. Top 10 U.S. online retailers ranked by online sales (in billions) in 2013 Amazon $67.9 Apple $18.3 Staples $10.4 Wal-Mart $10 Sears $4.9 Liberty Interactive $4.8 Netflix $4.4 Macy’s $4.2 Office Depot $4.1 Dell $3.6 Figure 1 - Source: based on data from Internet Retailer, 2014b
  4. 4. 4Julien Guitton | Netflix Case Study BUSINESS / CLIENT DESCRIPTION NETFLIX’S HISTORY & BUSINESS Marc Randolph and Reed Hastings founded Netflix in 1997 in California. It is said that the idea came to Hastings after having to pay $40 in overdue fines for returning Apollo 13 too late. Netflix was originally a website (launched on August 29, 1997) that rented DVDs through mail posting and a traditional pay-per-rental model. In the early 2000, Netflix dropped this model and launched its now well-know subscription model. In 2005, 35,000 different film titles were available, and Netflix shipped 1 million DVDs out every day. In February 2007, the company introduced the video on demand that allowed Internet users to watch content directly from their devices. The company is still renting DVDs in the US and Canada, but has extended its online streaming market all over the world. Netflix is competing in two different markets. The first one, its historical market, is the DVD rental industry, where Netflix is facing Blockbuster and smaller businesses. We will not focus on this market but rather on the other one, the Online Television and Premium Video Industry (or OTPVI). This market, part of the online entertainment industry, is a fast growing and extremely competitive market. To give a precise figure of the market would be difficult if not impossible. There is an inability to count Internet viewing, or time-delayed viewing. Still, experts estimate that the online movie business represents $5.7 billion in 2013 in the US. There is no figure regarding online TV. Also, there are two different industries regarding OTPVI: the Video-On-Demand (VOD), which is a streaming service like Netflix, and the Electronic-Sell-Through (EST), which sells or rents movies and TV shows like iTunes. The next figure will give an overview of the competition.
  5. 5. 5Julien Guitton | Netflix Case Study Figure 2 - Major U.S. Online Movie Distributors, basedon data from industry According to a survey made by Statistica in 2014, the online spending soared thanks to a 45% rise in streaming sales and a 35% rise in movie downloads. NETFLIX’S CUSTOMERS Netflix has always put its customers at the center of its strategy. When it was only a DVD rental service, Netflix saw the inconvenience for renters: they had to move physically to get their DVDs and return them; plus the late-return fees were incredibly high. Now, providing online streaming, Netflix is answering the new needs of most of movies & TV shows fans. According to eMarketer, in 2014, over 140 million Americans watch TV online, which represents 55% of the US Internet population. And over 75% of millennials are watching streamed television shows and movies. Netflix 44% Apple 32% Others 10% Microsoft 8% VUDU 4% Sony 2%
  6. 6. 6Julien Guitton | Netflix Case Study Viewers are now switching from TV network to go to online services (streaming or download). The trend is not going to stop anytime soon because they value too much what this market offers: 1. An access to content anytime, anywhere, on any device. By creating an early platform working 24/7 on any device, Netflix has gained a competitive advantage. 2. An almost infinite library. When confronted to TV programing, or in store rental, viewers have a limited choice. Chris Anderson developed a Long Tail theory for the Internet: “no matter how much content you put online, someone, somewhere will show up to buy it” (Ecommerce 2015). Indeed, the Internet has allowed content provider, like Netflix, to offer a wider library than physical stores. This explains mostly the success of Netflix against Blockbuster. 3. An ad-free environment. As opposed to TV network or advertising revenue model (like YouTube), Netflix opted for a subscription revenue model that made it more attractive and user-friendly. 4. Lower price: to pay between $10 and $15 for a DVD that you might watch only once or twice is expensive. Now, Netflix let you watch all the movies and TV shows you want for only $9 a month. Of course, every one is not going to switch to the OTPVI, but with a population more and more accustomed to using the Internet, online viewers should keep growing and generating revenue for companies like Netflix.
  7. 7. 7Julien Guitton | Netflix Case Study SWOT ANALYSIS STRENGTHS Brand Worldwide Renown: Netflix has developed over the years a strong brand image in the US and Canada. Thanks to its extension in other countries, and its original content, many Internet users now recognize Netflix and use it daily. Today, Netflix is the market leader in streaming movies and TV shows, producing $14.4 billion in revenue in 2013. A Unique Algorithm: by creating a large library, Netflix’s customers might have had difficulties finding the right movie. In order to help them discover content they would like, Netflix has spent millions on improving its recommender system. They were so confident about their algorithm that they offered in 2006 a $1,000,000 prize to the first developer that could beat them at predicting customer ratings by more than 10%. A team finally succeeded in 2009. Original Content: Netflix quickly understood that to attract more customers, it should offer exclusive content and not only already-aired content. They managed to produce award-winning series like House of Cards, Orange is The New Black and Daredevil. This strategy paid off when Netflix started to conquer others countries. An ATAWAD platform: Netflix has developed its platform on any device and offers its customers the experience they need. They adapted their subscription offers so that several devices could play their content at the same time.
  8. 8. 8Julien Guitton | Netflix Case Study WEAKNESSES Internal Costs: Netflix started as a content distributor and had to buy mass licensing packages to distribute movies and TV shows to its audience. Hollywood saw the opportunity to raise prices for movies, lowering the profitability of Netflix. On average, Hollywood receives 50 cents from every streamed movie, $2 for each downloaded movie and $4.5 for DVD sale. Today Netflix is also producing its own content, but the production costs are enormous. To compete against TV shows like Game of Thrones (HBO), you have to produce high-quality content. For example, one episode of House of Cards costs around $4 million to produce. Raising Subscription Prices: price is one of the main factors of Netflix success. Now that they offered a low price access to an almost unlimited library, it would be extremely difficult for Netflix to raise subscription prices. That means to gain profit; their only options would be to gain new customers or to lower costs (cf. previous weakness). DVD Subscribers: one part of Netflix’s business is still to rent DVDs and Blu-rays, or there are less and less subscribers to that service and they do not always switch to the streaming service, thus decreasing Netflix’s revenue. OPPORTUNITIES Growing market: as discussed earlier in pages 4 to 6, the market is expending. Viewers see a clear value in turning to online videos and the trend is not going to stop. Netflix, already leader on the market, has an increasing market to conquer.
  9. 9. 9Julien Guitton | Netflix Case Study International Opportunities: Netflix was a unique company when it launched its streaming service back in 2007. Even now, in a lot of countries there is no similar system. Thanks to its original content, Netflix can continue expending throughout the world. THREATS Net Neutrality: in 2014, in the United-States, all Internet traffic is treated equally in the sense that all activities and files are charged the same flat rate regardless of how much bandwidth is used. Or Netflix accounts for 33% of daily Internet traffic. There are rulings occurring to enforce laws regarding Net Neutrality. One idea, called Highway Toll Pricing, is to charge service providers like Netflix for their use of the Internet based on their bandwidth use. If this would be applied, Netflix would have to assume more costs to provide the same service. Hollywood and Other Content Providers: as mentioned in its weaknesses, Netflix has to buy most of its content to Hollywood and TV shows producers. The company is always facing the risk that the price of licensing will increase in the future. And that is most likely to happen. Netflix will have to create new partnerships to ensure the licensing prices. Competition: larger and wealthier companies are now interested in entering the streaming industry. Amazon (through their service Prime) and Google (YouTube) have announced their own original content productions and aim to be a direct competitor to Netflix. International Regulations: now that Netflix is entering other countries, the company will have to face different regulations than the American one. For example, where Netflix can distribute a
  10. 10. 10Julien Guitton | Netflix Case Study movie or TV show 8 months after theatrical release in the US; in France, Netflix can only distribute after 36 months. If Netflix is not able to provide the same service in every country the company is operating, it could loss customers. STRATEGY & MANAGEMENT FACTORS Even if Netflix has not released its strategy to the public, it could be divided in three distinct phases. 1. 1997-2006: creating a new business model Netflix started as an E-commerce company from the beginning. When facing basic customer problems, the founders realized that current business models were no fit for their needs. Choices were limited, you had to move physically to get your DVD and late-returning fees were enormous. Netflix was indeed the answer to all these problems. Thanks to the introducing of DVDs, mailing costs were almost inexpensive; the Internet gave the possibility for an infinite content and easy access to it. Netflix changed completely the DVD rental industry, creating a subscription-based model, without late-returning fees. In addition to this business model, Netflix focused most of its attention to its algorithm. It was a key element to the company’s success and a value-added to the customer’s experience. 2. 2007- 2010: developing a powerful platform for every needs 2007 marks the apparition of the online streaming platform Netflix created. Many Internet users did not see the point in such a service. Netflix was ahead of its time. Still, they were able at that time to grasp future consumer needs and to develop an adequate solution.
  11. 11. 11Julien Guitton | Netflix Case Study They did not stop there. They kept developing the platform to work on every device. Once again, they anticipated consumer behavior. While nowadays some companies are still developing responsive website or mobile application, Netflix was already prepared in 2011 on Apple, Windows and Android operated smartphones and tablets. At the end of 2010, Netflix had a product that run smoothly, and they reached around 20 million users in the US. As they wanted to gain in profit, they had to expand, thus the third phase that began in 2011 and that is still ongoing. 3. Since 2011: extending its business and acquiring new customers Netflix used two methods to attract new customers. The first one was to acquire original content and produce its own. In February 2013, House of Cards made its debut online. Orange is the New Black was aired on July of the same year. Since then, they launched several series that received positive critics: Marco Polo (2014), Daredevil (2015), Sense8 (2015), Narcos (2015)… This period marks also a geographical expansion. Netflix launched its service in Canada, Latin America, Oceania and Europe. Today, Netflix is present in over 50 countries and plans to continue growing in Asia and Europe. This strategy has paid off. In the second quarter of 2015, Netflix had over 65 million users around the world (half of them being in the US). Finally, Netflix began at the same time to develop partnerships to ensure the accessibility of its service. For example, you can access Netflix through Apple TV and pay for the subscription on iTunes. The next challenge for Netflix will be to agree on licensing costs and the Net Neutrality ruling. Otherwise the company will face financial difficulties.
  12. 12. 12Julien Guitton | Netflix Case Study ECOMMERCE BUSINESS MODEL As Kenneth Laudon & Carol Guercio Traver explain in their Ecommerce book, there are different revenue models: 1. Advertising 2. Subscription 3. Freemium 4. Transaction fee 5. Sales 6. Affiliation Netflix chose the right revenue model. They have no property over most of the content so the models 4 and 5 would not be applicable. As they put the customer at the center of their priorities and models 1, 3 and 6 being not user-friendly, they were left with the subscription model. In the subscription revenue model, a company that offers content or services charges a subscription fee for access to some or all of its offerings. Laudon & Traver added that, to overcome the disinclination of users to pay for content, the content offered must be perceived as a high-value-added, premium offering that is not readily available elsewhere nor easily replicated. The only available service they faced was illegal streaming. Still, with their recommendation algorithm and HD content, they offer a better experience to viewers that platform like MegaUpload. Netflix has decided to offer different subscription price according to its customers’ needs: number of people in the household, the quality you are looking for (figure 3 shows the different offers for the US). Also, Netflix changes its library often for two reasons. First it diminishes the cost of licensing: if Netflix where to keep its content forever, the company would have to pay
  13. 13. 13Julien Guitton | Netflix Case Study enormous amount of money to content producers. Secondly, by creating a changing library, viewers are eager to come back to the website to see the addition made to the library and discover movies or TV shows that had never heard of. Finally, Netflix makes it easy for customers to subscribe but also unsubscribe. A month is offer for free when you sign in, and you can always cancel your subscription for no additional fee. Figure 3 - Netflix Subscription Offers  
  14. 14. 14Julien Guitton | Netflix Case Study CONCLUSION Netflix is the perfect example of a company that uses the Internet to reinvent the market. Netflix came as a disruptive, ahead on its time company. Still, many are now trying to implement a similar business model and to compete against Netflix. In any case, Netflix will certainly keep its competitive advantage: a true understanding of its customers’ needs and their behaviors. Those insights are crucial in e-commerce: they are the basements of any strategy that intends to differentiate the company from the others. The Internet has allowed many possibilities to businesses, like offering an unlimited choice of online videos. Still, it has to make the customers’ life easier. Netflix has perfectly understood this aspect: the Internet and e-commerce businesses are tools that must suit needs and behaviors. The future of Netflix is not certain. While its product is great, the company has given way to other companies like Google or Amazon. Netflix is still one step ahead, but they will have to innovate if they do not want to lose leadership. For example, they could add a social experience to the service where you would be able to see what your friends have watched and recommended.
  15. 15. 15Julien Guitton | Netflix Case Study REFERENCES  Kenneth C. Laudon & Carol Guercio Traver (2014). E-commerce 2015 (11th edition). Pearson Global Edition.  Kris Holt (2014). Netflix, Comcast get better connected. Ecommerce Times. Retrieved September 19, 2015 from http://www.ecommercetimes.com/story/80030.html  David Strom (2001). Netflix’s Great Business Model. IT World. Retrieved September 19, 2015 from http://www.itworld.com/article/2785081/business/netflix-s-great-business- model.html  Netflix (2012). Netflix Case Study. E-commerce Digest. Retrieved September 19, 2015 from http://www.ecommerce-digest.com/netflix-case-study.html  Sam Mallikarjunan (2013). How To Build The World's Most Valuable Ecommerce Business Model. Hubspot Blogs. Retrieved September 19, 2015 from http://blog.hubspot.com/ecommerce/build-worlds-most-valuable-ecommerce-business- model  Eric Noren (2013). Analysis of Netflix Business Model. Digital Business Models. Retrieved September 19, 2015 from http://www.digitalbusinessmodelguru.com/2013/01/analysis-of-netflix-business- model.html  Netflix (n.d.). Retrieved September 19, 2015 from Wikipedia: https://en.wikipedia.org/wiki/Netflix  Netflix (2014). SWOT Analysis. The Netflix Report. Retrieved September 19, 2015 from https://netflixreport.wordpress.com/2014/02/10/swot-analysis/

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