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A Porter's Five Forces Analysis of Netflix

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A Porter's Five Forces Analysis of Netflix

  1. 1. A Porter’s Five Forces Analysis of Netflix By: Shannon Szabo-Pickering Throughit innovative distributionmethodsfordeliveringmoviesandtelevisionshowsandintuition regardingchangingconsumerpreferencesforviewingthese mediaforms, Netflixhas grownintoa dominantforce inthe entertainmentindustry. Startedin1997 as a via mail DVDrental service, Netflix capitalizedonthe emergence of DVDsasa replacementtovideotapes.Fora monthly subscription fee, consumerscouldrentDVDs,have deliveredtotheirhome,andreturnthem anytime withoutlate fees. In 2008, it became first-tomarketin offeringdigital on-demandservices, offeringanyonewithinternet access the opportunitytowatchmovies andtelevisionshowsfromthe Netflixcatalogue attheir convenienceandwithoutcommercial interruptions. Digital streaminggave Netflixacompetitive advantage overtraditionalentertainmentdistributors, allowingittosimultaneouslyimplementacost leadershipanddifferentiationstrategy. Itprovedto be an efficientdistributionmethod,allowingNetflix toofferitsservicesataconsiderablylowerprice than cable and satellite,while simultaneouslyprovidingitsaudiencewithanimproved andunique viewing experience comparedtotraditionaltelevisionand movie viewing.Viewerscould towatchTV and movies at theirconvenience, andNetflixadditionallyprovided personalized viewingrecommendations though the use of data miningtechniques. Netflix iswidelyseenasrevolutionizingtelevisionandmovie viewing,andiswidelyconsideredamajor threatto traditional viewingplatforms. InJuly2014, Netflix surpassed50millionglobal subscribers,with 36 millionof thembeinginthe UnitedStates (Netflix,2015) and duringpeakhours, it accountsfor more than thirtypercent of all Internetdown-streamingtrafficinNorthAmerica (Auletta,2013).Recently, Netflix hasfocusedonaggressive internationalgrowth, andisnow available inover40countries (Netflix, 2015). Despite beinghighlypopularwithcustomers,the Netflixbusinessmodel doeshave some areasof concern. It isentirely dependenton outside suppliersforcontent,and faceshighexpectationsforboth price and quality,aswell asa multitude of new entrantsinthe marketplace.Furthermore,ithascome underscrutinyforprice increases, itspotentiallyunsustainable businessmodelandoverregulatory concernssuch as the amountof Canadiancontentitoffers. The followingdiscussionassessesNetflix usingPorter’sFive ForcesModel todeterminehow marketforcesmayaffectNetflix now andinthe future. Threat of new entrants (Moderate) As a well-recognizedgrowthsectorinthe movie andtelevisionindustry, competition inonline streaming islikelytointensifyinthe future. Manynew onlinestreaming entrantsare likelytobe currentindirect competitorsenteringthe on-demandstreamingmarkettomaintainmarketshare andremain relevant and competitiveinachanging mediaenvironment.Traditionalproviders of movie andtelevision imitatingNetflixbusinessmodel have become,andare likelytoremain, widespread entrantsintothe digital streamingservices. Inlate 2014, Rogersand Bell Media respectively introducedShomi andCrave TV to the Canadianmarketplace;arecognition of markettrendsfavouringdigitalondemand.Bothof these serviceshave builtareputationfor soundtelevision content,while Netflixisstill widelyseenas
  2. 2. the top providerof movie content. Bothservices alsoofferpersonalizedrecommendations,similar to the Netflix model.Additionally,Crave TV isavailable tocustomersfor$4.00 permonth,comparedto $8.99 forNetflix andShomi.However,ShomiandCrave TV are bothonlyavailable tocustomersof certaintelevision providers, while Netflixisavailable toanyone withinternetaccess. Due toits vast amountof content, ease-of-accessandpredominantmarketshare,Netflix still currentlyenjoysa competitiveadvantage overthesenewlyintroduceddigital on-demandservices. Netflix isalsofacingthe threatof newentrantsinthe UnitedStates. InOctober2014, HBO andCBS both announcedthe launchingof digital steamingservices in2015. These new entrantstodigital streaming bothhave a competitiveadvantage inthe amountof contenttheyalready own.However,asfirstto marketNetflix hasanestablishedreputation,brandequityandmarketdomination inthe digital streamingrealm.Additionally,aconsensus amongstreamingcompetitorsexiststhat,althoughoffering similarservices,the contentofferedbyvariousstreamingservicescreatesalarge enoughpointof difference where numerousproviderscancompete effectivelyinthe marketplace.WhileNetflix may face many new entrantswithin itssector,itremainsunclearwhetherthesenew entrantstrulyrepresent a threat. Bargaining Power of Buyers (High) The current businessmodelimplementedbyNetflix gives itscustomersalarge amountof bargaining power. Consumersface minimalconsequencesforcancellingNetflix subscriptions.Customersmay cancel at any time withoutterminationfees,andhave theirprofile informationsavedbyNetflix forone year(How doI cancel Netflix?,2015). The price sensitivityof Netflix consumers furtherincreases their bargainingpower. At$8.99 permonth,Netflix isrelativelyinexpensivecomparedtotraditional media outlets. The lowprice andhighamountof contentavailable throughNetflixcreates competitive advantage comparedtotraditional mediaoutlets.However,italsocreateshighconsumerexpectations regardingbothprice and content,andmay have inadvertentlyincreasedthe bargainingpowerof consumers. Because of these expectations, consumersare extremelyprice sensitive andatriskof abandoningNetflix overrelativelyincremental price increases.In2011, whenNetflix divideditsDVDby mail and streamingservices, charging$7.99 per monthforeach service insteadof $10 access to both distributionmethods (Shankland,2011),resultinginaloss of 800 000 subscriberswithinthreemonths of the announcement. In2014, it againraiseditspricesfrom$7.99 permonthto $8.99 per month.It mitigatedthe riskof losingviewershipby givingexistingcustomersatwo-yearreprieve fromprice increases.Althoughthisstrategy appearssuccessful inpreventingthe lossof customers, the amountof mediacoverage regardingthe announcement illustratesthe price sensitivityof Netflix customers,andits needtomaintaina cost leadershipstrategy. Bargainingpowerof buyersisaugmentedthroughthe large numberof alternativesavailable,withpiracy sitesprovidingfreestreamingservicesbeingespeciallyconcerning forNetflix. Althoughthese sites violate copyrightlaws,Netflixhasindicated itbelievesthese sites representthe mostpervasive threatto the organization. In2012, Netflix filedwiththe Federal ElectionCommission toforma political action committee (PAC) calledFLIXPAC (Netflix,2015),a U.S.political actioncommittee,withananti-privacy agenda(Savitz,2012). Recently, Netflix CEOReedHastingsexpressedconcernoverthe increasing popularitypiracysite PopcornTime,citingitasa top competitor (O'Rourke,2015). Netflix mitigatesthe bargainingpowerof buyersbyofferingcustomersoriginal contentonlyavailable throughNetflix..In March 2011, Netflix beganacquiringoriginal contentforitspopularsubscription
  3. 3. streamingservice,beginningwiththe hour-longpolitical dramaHouse of Cards,whichdebutedonthe streamingservice inFebruary2013 (Netflix,2015). Since thenithas addedmore original content,which has popularwithcustomers,includingOrange andnew episodesof ArrestedDevelopment.Forfansof these programs,lossof access to these programs createsa consequence forcancellingtheirsubscription and increasesthe difficultyandlikelihoodof switching providers.Accesstothisoriginal contentthereby decreasesthe bargainingpowerof these customers. However,the availabilityof alternativesandthe price sensitivityof customersultimately givebargainingpowertobuyers. Threat of substitute products or services (moderate) Althoughoftenperceivedasindustriesindecline,numeroussubstitutesfordigitalstreamingremainin the marketplace.Substitute productsmyincludesatelliteandcable television,DVDsand DVDrentals, and movie theatres. InCanada, according to regulatory figures, total cable and satellite subscribers declined for the first time in the year ending Aug. 31, 2013 (Bradshaw, 2014). Asthe latest technological advance intelevisionandmovie viewing,growthof on-demandvideostreaminghas become a popularmeansforaccessingcontentanda pervasive treattotraditional waysof viewing televisionandmovies.The simultaneousrise inpopularityfordigitalstreamingand decline inpopularity of traditional mediaoutletslowersthe threatof substitute products. However,some viewersmaybe reluctanttoadoptnew technologies.Althoughtraditional substitutes for digital streamingservicesare higherinprice andlessuser-friendly,theyare deeplyengrainedinthe consumerpsyche,andthose uncomfortablewithnew technologies mayelecttoutilize traditional methodsof movie andtelevisionviewing.Thisconsiderationisespeciallyimportant withregardto the agingpopulationinmanyof Netflix’skeymarkets,includingCanadaandthe UnitedStates;a demographicwhichhasspentmostof theirlivesviewingtelevisionandmoviesthroughtraditional means. Additionally,manyof these substitute productsofferbenefitsnotyetofferedthroughNetflix.Cable and satellite bothofferappointmentviewing,where viewerswill watch liveevents,onlyshownoncertain televisionandsatellitenetworks. Movie theatresprovideviewerswiththe opportunitytoview movies immediatelyuponrelease,andprovide amore immersive viewingexperience. Althoughmanysubstitute productsforon-demandvideostreamingare indecline,theyremain ubiquitous inthe entertainmentindustry andremainathreatto Netflix.However,ason-demand streamingcontinuestogrowinpopularity,the threat of substituteproductsmaybe diminished.With the rapidrate of change in technology,Netflix will likelyface the threatof new andinnovative substitutesinthe future. Bargaining power of suppliers (high) As Netflix obtains the majority of itscontentthrough licensingagreements withcontentproprietors, its suppliershave considerable bargainingpower. Whenlicensingagreementsexpire, contentsuppliers may electtoterminate theirrelationshipwithNetflix,therebydiminishingthe amountof contentNetflix can offeritsconsumers. In2013, for example, aNetflix agreementwithViacomlapsed,causingNetflixto lose the rightto air any Viacomprograms,includingitslibraryNickelodeonchildren’sprograming. The prevalence of digitalstreamingservicesfurtherenhancesthe bargainingpowerof suppliers. Once the
  4. 4. Netflix agreementlapsed, Viacomcontractedwith Amazon,illustratingthatsuppliershave avarietyof digital streamingcompetitorswithwhomtoformlicensingagreements. Potential suppliersare alsoofferingtheirowndigital downloadstreamingservices,atrendlikelyto continue inthe future.Hulu,forexample,isadigital on-demandserviceownedby 21stCenturyFox NBC Universal andThe Walt DisneyCompany. Itoffershundredsof TV showsfromABC,BET, CBS,Comedy Central,CW,FOX,NBC,and othernetworksthroughitsstreaminginternetvideoservice (Fontinelle, 2014). Althoughcommercialsare includedinitsprograming,thisbusinessmodel couldbe perceivedas mitigatingthe riskof consumerprice sensitivitybycreatinganadditional revenuestreamandmaking Hululessreliantonsubscriptionvolume toremainprofitable. Furthermore, Netflix doesnotownthe rightstoitsoriginal content. Itowns the right to stream programssuch as BreakingBad firstandexclusivelyforalimitedtime,butthe licensingrightsmaybe soldto a competitoronce the contract has expired (Auletta,2013). WithNetflix beinghighlyreliantonsupplierstoprovide the contentitrequirestoacquire andmaintain viewership,the bargainingpowerof the suppliersNetflix contractswith isextremelyhigh,and ultimatelyposesathreatto the long-termviabilityof itscurrentbusinessmodel. Rivalry amongst existing competitors (moderate) Withthe increasingnumberof newentrants tothe digital-ondemandmarketsegment,acasual industry observermayexpectthe rivalryamongstcompetitorsinthismarketsegmenttobe high. Numerous digital streamingservices,includingHulu,GooglePlay, YouTube andAmazonInstant,aswell asShomi and Crave TV inCanada have emerged,andthe prevalence of digital streamingproviders maybe seenas increasingrivalrywithinthe industry. However,perhapscounterintuitively,acollaborative competitive environmentappearstobe emergingamongdigital on-demandcompetitors.In2014, Amazon introducedthe AmazonFire TV Stick, a USB port that providescustomerswithaccessto itsInstantVideo streamingservice, aswell asotherdigital streamingservicesincludingNetflix. Although the user interface stronglyfavorsAmazonInstantcontentoverotherservices,andthe searchfeature doesn't comb throughNetflixormostothernon-Amazonapps (AmazonFire TV Stickreview:A streaminghot bargain,2014). Google Chromecastisa similarproductthatoffersthe same aggregationof streaming services. The inclusionof third-partyapplications forthese products indicatesarecognitionof the value addedbyofferingeasyaccesstocompetingproducts,aswell asthe abilityof consumerstoselect multiple on-demandservices. Rival organizationshave indicatedthatthey believe the digital on-demandmarketisevolvinginina directionwhere consumerswillsubscribe tomultiple digital on-demandservices.Ina2014 Globe and Mail interview, RogersMediapresidentKeithPelleyexpressedthattheirmarketresearchasindicated that “consumerscan supporttwo,three,evenfour[subscriptionvideo-on-demand] services”,allowing for multipleorganizationsto achieve marketshare despitethe increasingnumberof directcompetitors inthe digital streamingarena.Credence tothisargumentisprovidedinthe pointsof differenceamong competingorganizations whoofferavarietyof content,whichmayact as an incentive forconsumersto subscribe tomultiple services. Due tothe low cost of these services,consumerscouldpurchase multiple subscriptions,andstill payalesseramountthenthe costof a traditional cable orsatellite package. Additionally, Netflix is perceived asa meansof increasingrevenuestreamswhile simultaneously increasingviewershipfortraditional content providers.LicensingagreementswithNetflix create
  5. 5. additional revenue forthese organizations,andpermittingNetflixto airprior seasonsof popular televisionshowsincreasesviewershipof new episodes, whichremainunavailablethroughNetflix and are available onlythroughthe original contentprovider.The AMCseriesBreakingBadsaw ratings double uponthe availabilityof priorseasonsthroughNetflix. AMCCEOJoshSapan creditedthisrise in viewershiptothe program’savailabilityonNetflix,through whichconsumers “became engaged”(Auletta,2013). AlthoughNetflixfacesmanydirectcompetitors,these competitorsonlypose a moderate threatbasedonthe currentcompetitiveenvironment.However,rivalrymayintensifyas more competitorsenterthe marketorconsumerselectnottosubscribe tomultiple streamingservices. Netflix hasestablisheditself asanindustryleaderindigital streamingservices.However,certainaspects of itscurrentbusinessmodel,includingrelianceonsuppliersanda cost structure whichmakesNetflix highly dependentonvolume toremainprofitable andconsumerssensitivetoprice increase,have createda situationwhere Netflix ishighlyvulnerable tocompetitiveforces. Ininaconstantlychanging technological environment,currentmarketdominancedoesnot guarantee continued orfuture dominance,andorganizationsneedtoremainflexibleenoughtoadapttochangingconsumertaste and to integrate newtechnological advancesintotheirbusinessmodels. The followingisalistof recommendationsforNetflix toremaincompetitive andprofitableinthe future:  In orderto continue toprovide original content,aswell astomaintaina profitable businessmodel, future price increasesare aninevitability.Inordertomaintainalarge customerbase,Netflix will needtofindwaysto mitigate the effectsof these price increases, byprovidingaddedvalue customers,beingtransparentregardingincreasesandbyprovidingample noticeof price increases to allow customers time toadjusttheirexpectations.  Create a product similartoAmazonInstant Google Chromecast. Future marketdominancemaygo to the providerwhomosteffectivelyaggregatesvariousdigitaldownloadservices.These products provide ameansof doingso, while stillfavouringproducercontent.Netflixmaywantto consider developingawayto include thirdpartyservicesonline,insteadof throughaUSB port.  Continue to concentrate onglobal expansion.Salesvolumeisimportanttothe economicviabilityof the Netflix businessmodel.Additionally,beingfirsttomarket new regions providesNetflix witha competitiveadvantage.  Finda meansof creatinganadditional revenue stream, througheitheradvertisingoranother source,to provide high-qualitycontentandfordecreasedreliance onsales volume toremain profitable.  Maintaingoodrelationshipswithsuppliers.Netflix maywanttoconsiderprovidingaddedvalue incentivestoitssuppliers,suchasincreasedbrandawarenessbyincludingsupplierlogosinits televisionandmovie listings.  Buildandmaintainpositiverelationshipswithcompetitors.Seekstrategicalliances,andremain opento collaboration.  In a constantlychangingtechnological environment,innovationiskey.Netflix needstoremainin touch withchangingconsumerpreferences andofferinnovativeproductstomeettheirneedsin orderto maintainmarketdominance.
  6. 6. Netflix hasobtainedmarketdominance throughitsinnovationindeliveringtelevisionandmovie content,intuitive abilitiestopredictchangingconsumertastesincontentviewing; however, whetherit has builta sustainablebusinessmodel throughthesecompetitive advantagesremainstobe seen.
  7. 7. Works Cited Amazon FireTV Stick review: A streaming hotbargain.(2014, November19).RetrievedfromCnet: http://www.cnet.com/products/amazon-fire-tv-stick/ Auletta,K.(2013, February3). Netflix and the futureof television. RetrievedfromThe New Yorker: http://www.newyorker.com/magazine/2014/02/03/outside-the-box-2 Bradshaw,J.a. (2014, August24). The Globe and Mail. RetrievedfromShomi givesRogers,Shaw a toeholdonNetflix’sturf:http://www.theglobeandmail.com/report-on-business/new-rogers- shaw-video-streaming-service-to-match-netflix-cost/article20204045/ Fontinelle,A.(2014, Septemeber24). The Economicsof Hulu, Netflix,Redbox and Blockbuster.Retrieved fromInvestopedia:http://www.investopedia.com/articles/investing/092414/economics-hulu- netflix-redbox-and-blockbuster.asp Howdo I cancel Netflix? . (2015, January27). RetrievedfromNetflix: https://help.netflix.com/en/node/407 Netflix.(2015, January27). RetrievedfromWikipedia:http://en.wikipedia.org/wiki/Netflix O'Rourke,P.(2015, January26). Netflix sayspiracy-filled Popcorn Time is a seriouscompetitor.Retrieved fromcanada.com: http://o.canada.com/technology/internet/netflix-says-piracy-filled-popcorn- time-is-a-serious-competitor Savitz,E. (2012, April 9). Forbes.RetrievedfromNetflix GetsPolitical WithFLIXPAC: http://www.forbes.com/sites/ericsavitz/2012/04/09/netflix-gets-political-with-flixpac/ Shankland,S.(2011, September19). Netflix CEO's apology bringsnew backlash.RetrievedfromCnet: http://www.cnet.com/news/netflix-ceos-apology-brings-new-backlash/

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