1
Netflix
Netflix
Assignment 3
Table of Contents
Executive Summary……………………………………………………………………………….3
Section One: Prepare an e-Commerce in Action: The Business Model of the Company…......3-11
The Vision………………………………………………………………………………3-4
Business Model……………………………………………………………………………4
Financial Analysis………………………………………………………………………4-5
Strategic Analysis…………………………………………………………...…………5-11
Business Strategy………………………………………………………………..5-6
Competition……………………………………………………………………..6-8
Technology………………………………………….…………………………8-10
Social & Legal Challenges…………………………………………………...10-11
Section Two: The Positioning of the Company to the Challenges Ahead…………………...11-13
References……………………………………………………………………………………14-16
Appendix………………………………………………...……………………………………….17
Executive Summary
Throughout this paper, we will be moving forward and looking at what the future entails for the entertainment TV company, Netflix. We will start by looking at the company’s vision, their current and possible future business model, their finances, and their strategic business decisions. In order to better analyze their strategic business decisions, we have looked at relevant factors such as their business strategies, competition, technology, and social & legal challenges. Diving into all these external and internal factors will help Netflix better prepare for the challenges we expect them to face, which will be discussed in section two. By the end of this paper we hope the reader has a better grasp on how Netflix operates and plans to continue its successful online marketing to overcome challenges and stay relevant over the course of the next few years.
Section One: Prepare an e-Commerce in Action: The Business Model of the Company
The Vision
Netflix envisions that online streaming services will know what viewers want to watch, even before they themselves do by 2025 (“What Television,” 2014). Through the company’s personalization technology, viewers won’t have to spend so much time browsing through television channels and endless lists of shows on-demand (“What Television,” 2014). Instead, Netflix’s recommendation system will suggest one or two offerings that will fit with the viewers likes and interests of genres (“What Television,” 2014). In terms of variety of shows, Netflix releases niche media content that would be for small audiences. However, when Netflix’s personalization engine is perfected, it will become easier to discover these types of genres for the small audience (“What Television,” 2014). For production, Netflix sees a future for filmmakers to have the freedom to not be restricted to time and not have to tease viewers with a cliffhanger at each episode (“What Television,” 2014). Netflix envision continuous binge-worthy content that can go right into the next episode (“What Television,” 2014). In addition, Netflix believes that commercials will die, and advertisers will have to find new ways to deliver targeted advertisements (“What Television,” 2.
1. 1
Netflix
Netflix
Assignment 3
Table of Contents
Executive
Summary………………………………………………………………
……………….3
Section One: Prepare an e-Commerce in Action: The Business
Model of the Company…......3-11
The
Vision…………………………………………………………………
……………3-4
3. at what the future entails for the entertainment TV company,
Netflix. We will start by looking at the company’s vision, their
current and possible future business model, their finances, and
their strategic business decisions. In order to better analyze
their strategic business decisions, we have looked at relevant
factors such as their business strategies, competition,
technology, and social & legal challenges. Diving into all these
external and internal factors will help Netflix better prepare for
the challenges we expect them to face, which will be discussed
in section two. By the end of this paper we hope the reader has
a better grasp on how Netflix operates and plans to continue its
successful online marketing to overcome challenges and stay
relevant over the course of the next few years.
Section One: Prepare an e-Commerce in Action: The Business
Model of the Company
The Vision
Netflix envisions that online streaming services will know what
viewers want to watch, even before they themselves do by 2025
(“What Television,” 2014). Through the company’s
personalization technology, viewers won’t have to spend so
much time browsing through television channels and endless
lists of shows on-demand (“What Television,” 2014). Instead,
Netflix’s recommendation system will suggest one or two
offerings that will fit with the viewers likes and interests of
genres (“What Television,” 2014). In terms of variety of shows,
Netflix releases niche media content that would be for small
audiences. However, when Netflix’s personalization engine is
perfected, it will become easier to discover these types of
genres for the small audience (“What Television,” 2014). For
production, Netflix sees a future for filmmakers to have the
freedom to not be restricted to time and not have to tease
viewers with a cliffhanger at each episode (“What Television,”
2014). Netflix envision continuous binge-worthy content that
can go right into the next episode (“What Television,” 2014). In
addition, Netflix believes that commercials will die, and
advertisers will have to find new ways to deliver targeted
4. advertisements (“What Television,” 2014). Netflix has
demonstrated that companies can be successful without
advertisers through subscription services and ad-free content
has become popular and important for viewers (“What
Television,” 2014). Another factor that will be competitive
among other online streaming services such as Amazon, Apple,
Hulu, TV providers etc. is being the brand that viewers will
watch on their TVs. Netflix is certain that by 2025, every
household will own a smart TV and that companies will
compete to get viewers’ attention (“What Television,” 2014).
Business Model
Netflix is a membership-based business model. This means is
that Netflix’s main source of income is through the membership
fees that people pay each month in order to receive the content
they provide, or the DVD’s that they rent out. They receive
most of their funding through equity and debt. It’s estimated
that Netflix raised approximately $200 million dollars through
equity financing, and $1.8 million dollars through debt
financing (Bhatt 2018). With that being said, a content provider
such as Netflix has a ton of costs they need to pay before
arriving at their bottom line. These costs include permitting
costs that allow Netflix to provide these shows, creation costs,
for when they developed Netflix Originals in 2013, promoting
costs in order to compete with other content providers such as
Hulu and Amazon, and innovation and improvement costs. Costs
are especially expensive because Netflix partners with ISP’s in
order to make sure that with the number of the viewers they
have, the they want to optimize the Open Connect Appliance
arrangements so that no one’s speed is slowed. These are just a
few of the costs that Netflix has to pay for. We will now dive
deeper into the numbers and their financial statements to get a
more accurate idea of how large these can amount to.
Financial Analysis
Looking at Netflix’s SEC filings with Edgar, one of the first
measurements everyone wants to look at is their bottom line,
their net income. This factor skyrocketed this past fiscal year
5. (12/31/2017). They reported a net income of a $186,678 (in
thousands) in 2016, and then a 200% growth rate to 2017,
reporting $558,929. Knowing this information, we want to take
a look at their revenues, and their operating income/margin to
see where this change is occuring. (Are they just retaining more
of their revenues by decreasing costs, or are they making more
revenues?). Their revenues had a 32% growth rate from 2016 to
2017, ending at $11,692,713, compared to a 30% growth rate
the year prior. After subtracting cost of goods sold, and wages
and other operating expenses we arrive at operating income.
This showed a 128% growth rate from 2016 to 2017, ending at
$838,679. This is a 7% operating margin compared to the years
prior’s 4%. Clearly, 2017 was a good year for Netflix, and after
reading the statement from their management team, we can see
what caused this positive spike. “The increase in consolidated
revenues was primarily driven by the growth in the average
number of paid streaming memberships globally, the majority of
which was growth in our international memberships” (Netflix
2017). This is great news for the company because this means
there is still untouched target markets internally for them, and
they can still reach new consumer bases to continue to grow
financially. Overall, Netflix is a young company and it is great
that it has such high growth rates for using such an innovative
business model in the 2000’s. We would keep an eye on their
licensing and creation costs in the future, as well as their
interest expenses, but overall knowing what they are working
on, we would invest in Netflix if we were a current stock
investor in the NASDAQ.
Strategic Analysis
Business Strategy. Netflix’s business strategies have allowed
the company to dominate the online video streaming market.
This is a major accomplishment considering that Netflix was
first established as a DVD rental company. Hastings, the CEO
of Netflix, took his bad experience of paying fines for overdue
DVD rentals and created a business model where users paid one
flat fee per month . Hastings saw an opportunity where if a
6. business is giving the customer a product or service that
satisfies their wants, they will continue to pay for it (“How
Netflix,” 2017). These past few years, Netflix has slowly
increases their monthly subscription payments but has not seen
many cancellations. Why? This is because Netflix adds high-
valued content that is exclusive to Netflix viewers and makes
recommendations that is very good at predicting the viewers’
queues (“How Netflix,” 2017). Netflix spent about $5 Billion on
content acquisition in 2016 (“Netflix business,” 2016). 10
percent went to original content and is expected to rise in the
coming years (“Netflix business,” 2016). Netflix also has
invested in Real Estate to build its own studios because
currently they are leasing production studios in California
(“Netflix business,” 2016). Also, despite the expensive
licensing contract, Netflix received the rights to release Disney
and Marvel content and are in the works to create a partnership
to product original content (“Netflix business,” 2016). Netflix’s
spot-on recommendations is successful because of their
powerful algorithms and data analytics that follows viewers’
string of media content they watch and track how the viewer got
to watching a certain TV show or movie. In addition, Netflix
pays close attention to the type of genres and content viewers
pay to see and how many hours they spend binge-watching a TV
show or movie (“Netflix business,” 2016). Therefore, the user
data Netflix collects guides the company to create the type of
original content viewers are looking for (“Netflix business,”
2016).
Netflix has also created partnerships with big brand companies
such as Apple where Apple TV has Netflix built into the box (“6
Strategies”). Hence, Netflix can reach Apple’s large customer
base, while Apple can also provide media content conveniently
to their customers (“6 Strategies”). Similarly, cable companies
like Comcast Corporation saw an opportunity to incorporate
Netflix into their cable boxes because still many households pay
for cable and have Netflix as another source of media content
(“How Netflix,” 2017). Instead of resisting Netflix, Comcast
7. Corporation embraced the company and has seen big success
with the partnership.
Competition. Netflix has been in the forefront as a successful
leader in the online video streaming business. When the
company transitioned into online streaming from DVD rentals
through a subscription service, they became a business model
other companies seek to gain steady revenue. Despite their
accomplishments of having over 125 million memberships,
Netflix face its competitors and retain their current subscribers.
One major competitor is Amazon Prime, which is Amazon’s
online video streaming service. Within a Amazon’s Prime
membership, members can stream online videos without any
additional cost. Amazon Prime’s original content alongside with
a media library of thousands of movies and TV shows are only
exclusive to Prime members. Additionally, Prime members can
watch and download their shows and movies anytime and
anywhere through a variety of devices such as Amazon’s app,
tablet, desktop, and smart TVs.
Another major competitor for Netflix is Hulu, an online video
streaming company that offers a subscription service starting at
$7.99 per month for limited commercials and $11.99 per month
for no commercials. Hulu also has plan with live TV starting at
$39.99 per month as well as add-ons for HBO, Showtime, and
Cinemax. Hulu offers Hulu Originals, current episodes, classic
entertainment, and family movies. Hulu’s plans options and
having a similar business model as Netflix displays how
subscription models are easy to replicate. An advantage Netflix
does have is offering no commercials and ad-free content while
Hulu incorporates advertisements that might deter people for
spending money on a subscription with commercials.
HBO is yet another competitor that Netflix has to
contend against. Like Netflix and Hulu, HBO Now is a
subscription service where members pay $14.99 per month and
have access to unlimited HBO TV shows and movies. Also,
HBO offers exclusive original content and award-winning
movies that is updated daily. HBO was the former content king
8. but was taken by Netflix because they deliver over 1000 hours
of original content in 2017 versus HBO where they have around
600 hours of original content (“Who are Netflix’s,” 2018). In
addition, Netflix has over 110 million viewers while HBO Now
has 3.5 million viewers (“Who are Netflix’s,” 2018).
Not only does Netflix have to compete against subscription
services like Amazon, Hulu, and HBO, but they also contend
with major video content providers like YouTube. YouTube
allows viewers to subscribe to different channels such as music,
YouTube movies, TV shows, Live, etc. for a certain price. For
example, if a viewer wants to watch a season of a TV show, he
or she will pay a one-time payment to view the whole season. In
addition, YouTube’s viewership is over 1 billion hours of
videos daily on its network worldwide (“Netflix’s biggest
competition,” 2017). Hastings admires YouTube and their
company envies YouTube (“Netflix’s biggest competition,”
2017). Even though YouTube is essentially “free” and has more
viewership than Netflix, they do not provide all access to their
paid content which may deter certain people to go to a
subscription model. In the end, despite the pros and cons from
Amazon, Hulu, HBO, and YouTube, all of these companies are
trying to capture the same target audience as Netflix. All of
Netflix’s competitors could surpass Netflix at any given
moment which makes it crucial for Netflix to know what their
competitors are doing and how to stay on top.
One competitor that Netflix considers their real
competition is not a company but rather more elemental is sleep
(“Netflix’s Biggest,” 2017). At one of Netflix’s regularly-
scheduled Q1 meetings, CEO Reed Hastings explained why
sleep is their truest competitor, “When you watch a show from
Netflix and you get addicted to it, you stay up late at night. You
really – we’re competing with sleep, on the margin. And so, it’s
a very large pool of time” (“Netflix’s Biggest,” 2017). Hastings
believes that because the market is so vast, they are competing
for people’s eyes and every waking moment they have
throughout the day (“Netflix’s Biggest,”2017). People’s greatest
9. limitation is the need to sleep and Netflix wants people to stay
up late and stream media content. Netflix has already met some
of their goal by creating original content that encourages
subscribers to stay up by releasing a whole season all at once
and increase their original content daily. Subscribers are eager
to binge-watch the whole season despite having to work the next
day or need to do errands. In addition, in 2017 Netflix was
experimenting ways to re-scan already-produced programming
to appear better on smartphones (“Netflix’s biggest
competition,” (2017). Their goal of re-scanning is to have the
faces bigger and more visually appealing (“Netflix’s biggest
competition,” 2017). With Netflix’s app and having the ability
to bring the media content anytime, anywhere, makes it easy for
members to find the time to stream video and eventually
accomplish Netflix’s goal.
Technology. Netflix spends a significant amount of money on
technology and development expenses. The company focuses on
developing the best suggestions and referral algorithms.
Statistics show that 80 percent of the TV shows people watch on
Netflix are from their “top-secret” recommendation system
(“This is how Netflix’s,” 2017). Netflix has built algorithms and
machine learning to recommend viewers shows and movies that
they may not have initially chosen (“This is how Netflix’s,”
2017). Netflix is able to break subscribers preconceived notions
of a TV show by a model they created called the three-legged
stool, “The three legs of this stool would be Netflix members;
taggers who understand everything about the content; and our
machine learning algorithms that take all of the data and put
things together,” (“This is how Netflix’s, 2017). The vice
president of product innovation, Todd Yellin, suggests that
Netflix tracks what members watch, what they watch before and
after, what they watched a year ago, and what time of day
members watch (“This is how Netflix’s, 2017). Netflix hires
freelancers and in-house staff to tag their media library in
which they use algorithms to identify ‘taste communities’ for
the subscribers using tags and user behavior data (“This is how
10. Netflix’s, 2017). Lastly, from Netflix’s elaborate algorithms,
the results come from implicit and explicit data (“This is how
Netflix’s, 2017). Implicit data is behavioral data through binge-
watching while explicit data is through reviews and providing
thumbs up or down after the show or movie is ended (“This is
how Netflix’s, 2017).
In addition to developing intricate algorithms to
provide recommendations to subscribers, Netflix is finding
better quality streaming and unclogging the Internet. By re-
coding their media library, they can save up to 20 percent of
data which is significant because Netflix usage accounts for a
third of all data consumed (“Inside Netflix’s Plan,” 2015).
Through an experiment of placing two TVs side-by-side with
their existing service and a new bandwidth saving technology,
the video algorithms team realized they are looking at this all
wrong (Inside Netflix’s Plan,” 2015). Before, Netflix was
preparing their video files based on bandwidth available to
consumers (Inside Netflix’s Plan,” 2015). Some consumers had
bandwidth, slow DSL connections, or fast fiber speeds (“Inside
Netflix’s Plan,” 2015). But, Netflix’s team realized that each
movie and TV show is different, “You shouldn’t allocate the
same amount of bits for ‘My Little Pony,’ as for ‘The
Avengers,” (“Inside Netflix’s Plan,” 2015). With their
conclusion, Netflix decided that each title should get its own set
of rules by giving each title its own encoding settings (“Inside
Netflix’s Plan,” 2015). This way, subscribers can watch media
content in high-quality resolution and still save on data because
of their encoding settings despite the subscriber’s bandwidth
connection (“Inside Netflix’s Plan,” 2015). Netflix’s investment
to free up internet traffic could be important for phone and
cable companies and the internet overall because of their intent
to be ‘good stewards’ of the internet (“Inside Netflix’s Plan,”
2015). Netflix’s development of re-coding is also a plus because
now that they are expanding globally such as places in India,
Africa, and the Middle East, Netflix has to deal with slower
wired internet speeds and mobile-first approach (“Inside
11. Netflix’s Plan,” 2015).
Netflix devotes their efforts to high-quality
technology to ensure they provide their members receive
recommendations that fit their interests as well as content that
they were not expected to watch and enjoy. Netflix wants to
ensure their consumers that they are always on their minds and
in return receive high customer satisfaction (“The
Significance,” 2016). Netflix is not able to provide algorithms
and high-quality streaming that large investments from the
company. Netflix must make sure that the delivery process,
postage, and packaging process is just as important as investing
in convenient payment systems to make it easy for new
subscribers to sign up (“The Significance,” 2016). As a result,
in Appendix A, displays their continuous efforts to invest in
technology and development. Netflix’s contribution profit
dollars slowly declined from 2014 to 2016 but estimates show
that will increase in 2017 and 2018. In addition, Netflix’s
technology and development expenses increase each year
because of online video streaming optimization and them
pushing to create even more advanced algorithms (“The
Significance,” 2016). Despite the increased expenses, these
actions of improvements could lead to more subscribers
nationally and internationally and increase operational leverage
(“The Significance,” 2016).
Social & Legal Challenges. Netflix is an international online
streaming company. Netflix has recently expanded to Europe
which includes but not limited to Germany, France, Britain,
Scandinavia and the Netherlands to name to a few (“Netflix
faces Hurdles,” 2014). Even though people assume as
companies expand, they expect growth and profits. However,
Netflix faces digital distribution obstacles due to different laws
overseas. For example, in France, Netflix is unable to offer their
most popular in-house production such as “House of Cards”
because France’s Canal Plus television service already has the
rights (“Netflix face Hurdles,” 2014). Another example is in
Germany, their satellite TV operator, Sky Deutschland, offers
12. many of the popular American series such as the “Game of
Thrones” (“Netflix face Hurdles,” 2014). Netflix may have to
consider film production in European countries, but this could
also lead to high operating expenses in hopes that more people
will sign-up for their subscription service.
In addition, obstacles in Europe, Netflix has yet
received approval in China to allow online video streaming
within the country. China has strict laws on foreign movies and
TV shows that have made it difficult to receive support from the
Chinese government, “Chinese administrators require all foreign
movies and shows to be registered and inspected before they can
air online, and Beijing’s censors are known to block the kinds
of sexual, violent or political story lines central to some of
Netflix’s biggest hits” (“The biggest challenge,” 2016). The
Chinese government also requires any online video streaming
service to get an approved license from Beijing which is rare to
receive (“The biggest challenge,” 2016). Similarly, censorship
is important to countries like Israel that certain movies and TV
shows are “walled off” and blocked due to the type of content is
displayed in the show or movie (“The biggest challenge,” 2016).
The obstacles to let countries release Netflix’s
American content is just one challenge they are facing to
expand globally. Another challenge Netflix is facing is
receiving global licensing from studios. Netflix has received
resistance from studios to release media content because
regional sales staff do not want to feel marginalized through
global expansion “Global Licensing,” 2015). Continuously
resentment from studios could cause limited media content
which will make it more difficult for Netflix to have a
substantial media library that viewers are willing to pay the
subscription service. Some other challenges Netflix need to
continue to keep in mind is buffering and broadband challenges.
With Netflix trying to expand globally, they are dealing with
some low-income countries that have lower bandwidths and
slower speeds that may cause the quality of the media content to
lessen (“How Netflix,” 2017). Also, Netflix must consider data
13. caps and using too much data that may disrupt mobile providers
(“How Netflix,” 2017). Netflix is partnering with video
encoders to experiment ways to use half a megabit to receive
high-quality picture content on a smartphone size screen (“How
Netflix,” 2017).
Section Two: The Positioning of the Company to the Challenges
Ahead
Many investors and companies question the future of Netflix.
Will Netflix survive due to increased competition from Amazon,
Hulu, HBO, etc.? Will Netflix succeed in the international
market and at the same time dominate the United States market?
Can Netflix make enough to be a profitable company? Netflix
faces many different challenges in terms of business strategy,
competition, technology and social and legal challenges, which
will shape the future of the company.
Netflix must focus its strategies on retaining its current
customers and appealing to new members in order to stay
successful. Firstly, Netflix must figure out pricing strategies.
However, with the price of Netflix increasing, that will be
difficult. With 100 million members, Netflix must obtain a
variety of different content in order to satisfy the wide range of
tastes. Just in the last year, Netflix has spent $5 billion on new
content (Evans, 2017). Users will want more and more content,
and newer content will cost more. Therefore the trend of rising
prices Of Netflix’s subscription will continue.
While Netflix may sit on the top of the online streaming world,
its competitors are quickly climbing up the ladder. Of these,
Amazon may be Netflix’s biggest competitor. According to
Joseph Philleo from Quora, the long-term competition from
Amazon may hurt Netflix because Amazon has more to offer
through their subscription (“Will Netflix,” 2018). He believes
that if customers had to choose between the two providers, they
would choose Amazon over Netflix. Philleo also discusses that
Netflix is considered a “premium” streaming product and that
Netflix will develop competition from social media platforms
rolling out video and dramatic improvement sin content creation
14. tools (“Will Netflix,” 2018). In addition, Netflix’s continued
domination will be determined by future growth in globalization
(“Will Netflix,” 2018). Due to variation of laws in different
countries, Netflix must overcome cultural challenges that can
either make it or break it for the company.
Netflix must keep up with new technology in order to stay
relevant in the online streaming marketplace. Netflix prides
itself on its personalization and special features that its
competitors cannot provide. In 2015, Netflix upgraded its user
interface to make the website more user friendly. For example,
Netflix changed their rating system from stars to a system that
tells users how likely it is that they would like a certain show or
movie. This falls in place with their theme of personalization.
However, some users still preferred the star rating system. As
suggested by Business Insider, Netflix could benefit from
connecting to internet services like Rotten Tomatoes or IMDB
for rating even though they have their own algorithm (“5 small
changes”, 2017). The current Netflix website also automatically
plays trailers of new and upcoming shows, usually advertising
its Netflix original. This feature could be annoying to many
users who wish to skip the trailers and have more control over
their homepage. Therefore, Netflix should allow users to control
whether or not to play the trailer to improve its user interface.
Netflix has the potential to dominate the world with
online video streaming content and in some ways, it already
has. Yet, what would solidify they are the top company? One
idea is something that recently happened where Netflix released
its first “Choose-Your-Own-Adventure” storytelling format
from their original series “Stretch Armstrong and the Flex
Fighters” (“The Future of Netflix,” 2018). The story is about
three heroes and they have to track down villains that escaped
and are creating chaos in the city. The twist is if you watch the
series on a computer or certain devices, the viewer is able to
choose the direction of the action which will lead to multiple
storylines and endings (“The Future of Netflix,” 2018). Netflix
has created an interactive series where viewers are not just
15. sitting and relaxing but it is actively engaging where the viewer
is essentially making their own content. This interactive
experience would be a big plus with children because they are
more willing to try something new and gaming is hugely
popular with the younger audience. In addition, Netflix has been
known to offer more teen and adult content which will give
Netflix a competitive edge for children. Netflix should continue
to explore options to include interactive media content as part
of their library because as more people engage with the
interactive experience, this would mean more time spent on
Netflix, more online streaming, and more people willing to pay
for the subscription service.
Netflix can reach its full potential by continuing to expand
globally. Netflix needs to create and find family-oriented media
content that could be approved by the Chinese government.
Keeping in mind production and operation expenses, Netflix
would have to create content that is suitable for children in
China and present it to the government displaying how they can
meet the needs of the censorship and still provide interesting
content worth releasing. Currently, Netflix has made a licensing
agreement with iQiyi, Baidu’s video streaming service (“Netflix
Enters China,” 2017). The platform has over 500 million
monthly viewers who uses the free service and 20 million paid
subscribers for its VIP service (“Netflix Enters China,” 2017).
Netflix is trying to grow its viewer fan base through iQiyi while
iQiyi can benefit from Netflix’s original content (“Netflix
Enters China,” 2017). Netflix is using this opportunity to
showcase their original content and to get their brand out there
in China (“Netflix Enters China,” 2017). This could also lead to
other licensing opportunities for actual products of TV shows of
Netflix because they are adding more original content
throughout the year (“Netflix Enters China,” 2017). In the long
term, Netflix needs to be a company that can stand alone and
generate revenue from subscribers to offset the cost of
production.
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Appendix A