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Netflix Case Study


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Netflix’s unique DVD rental service has revolutionized the industry. They successfully took the best of traditional conventions (like physical media, the U.S. Postal Service) and mixed them with new world internet-conventions. They have also effectively managed to discourage competition from both more established businesses and new entrants. The future growth of Netflix as it expands into streaming media, poses challenges in legal, infrastructure/technology, and through additional costs. In order to remain competitive, it is imperative that Netflix partner with companies with global reach to overcome these challenges. This presentation was part of an MBA class assignment to audit and industry in the the technology sector. The presentation has multiple authors listed on the title page. If you would like copies of the executive summary, complete S.W.O.T. analysis, and/or the transcript of the presentation please PRIVATE MESSAGE ME and I will email it to you.

Netflix Case Study

  1. 1. On-line DVD Rental NETFLIX Laurie Bouchard Kikuyu Daniels Stephen MacNeil John McDonnell Christine Palkoski
  2. 2. DVD Rental Overview <ul><li>Primary “after theater” consumer distribution methods: </li></ul><ul><ul><ul><li>DVD rental and purchase </li></ul></ul></ul><ul><ul><ul><li>On-line content service (pay-per view, streaming) </li></ul></ul></ul><ul><li>Growth of DVD rental/purchase in 1990s </li></ul><ul><ul><ul><li>Large movie studios recording in digital format </li></ul></ul></ul><ul><ul><ul><li>DVD players more affordable </li></ul></ul></ul><ul><li>Enter Netflix, DVD rental strong in U.S. </li></ul>
  3. 3. Netflix Profile <ul><li>Founded in 1997 by Marc Randolph and current CEO Reed Hastings </li></ul><ul><li>Originally offered DVDs on a fee per use basis </li></ul><ul><li>Introduced monthly subscription service in 1999 </li></ul><ul><li>9.4 million subscribers as of Q4 2008 </li></ul><ul><li>2009 forecast of 10.6 to 11.3 million subscribers </li></ul>
  4. 4. Netflix Competitive Advantage <ul><li>First-mover advantage in on-line rental </li></ul><ul><li>Patented method of web-based DVD selection </li></ul><ul><li>Customer-centric, monthly subscription-based service </li></ul>“ It probably looks easy to imitate Netflix, but it’s quite difficult to get all the details right that matter to a consumer. We’ve put four year’s effort into building our service.” – Reed Hastings, co-founder in 2001
  5. 5. Netflix Services <ul><li>Service Plan Options: </li></ul><ul><ul><ul><li>Unlimited Plans </li></ul></ul></ul><ul><ul><ul><ul><ul><li>$8.99 1 DVD at a time </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>$13.99 2 DVDs at a time </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>$16.99 3 DVDs at a time </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Less popular plans of 4-8 DVDs at a time available </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>*Unlimited online viewing on all unlimited plans </li></ul></ul></ul></ul></ul><ul><ul><ul><li>1 Limited Plan </li></ul></ul></ul><ul><ul><ul><ul><ul><li>$4.99 1 DVD at a time (2 per month) </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>* 2 hours of online viewing </li></ul></ul></ul></ul></ul>
  6. 6. Subscriber Growth (000’s)
  7. 7. Service Features <ul><li>No Due Dates </li></ul><ul><li>No Late Fees </li></ul><ul><li>No Cancellation Fees </li></ul><ul><li>Free DVD Shipping – Both Ways </li></ul><ul><li>Blu-ray Substitution, for a Fee </li></ul>
  8. 8. Customer Loyalty <ul><li>Consistently maintain 84% - 86% of existing customers quarter over quarter. </li></ul><ul><li>Voted #1 online retailer 8 consecutive periods by Foresee/FGI Research </li></ul><ul><li>Achieved Through: </li></ul><ul><ul><li>Ease of Use </li></ul></ul><ul><ul><li>Fast Delivery (97% in one day) </li></ul></ul><ul><ul><li>Size of Selection (Over 100,000 DVD titles) </li></ul></ul>
  9. 9. Competition <ul><li>Movie Rental Stores </li></ul><ul><ul><li>Blockbuster, Hollywood Video, Movie Gallery </li></ul></ul><ul><li>Movie Rental Kiosks </li></ul><ul><ul><li>Red Box </li></ul></ul><ul><li>Downloadable Movies </li></ul><ul><ul><li>Apple, YouTube, Hulu </li></ul></ul><ul><ul><li>“ On Demand” </li></ul></ul><ul><li>Movie Theaters </li></ul><ul><ul><li>AMC, Showcase </li></ul></ul>
  10. 10. Main Competition Source: 2008 Data from Hoovers, SEC Netflix Blockbuster Redbox Industry Median Annual Sales ($M) 1,364.7 5,542.4 22.4 Employees 1,644 59,643 750 Gross Profit Marin 33.30% 51.90% - 36.00% Net Profit Margin 6.10% 0.50% - -11.50% Return on Invest. Cap. 19.8% 1.8% - 2.9% 12 mo. Revenue Growth 13.2% 0.6% - 8.7% 12 mo. Net Income Growth 24.0% 0.0% - 15.2%
  11. 11. Financial Position
  12. 12. Financial Highlights <ul><li>Predictable Revenue Streams </li></ul><ul><ul><ul><li>Not dependent on rental fees or late fees </li></ul></ul></ul><ul><li>Low Overhead Costs Contribute to Profits </li></ul><ul><ul><ul><li>No store rent, utilities, salaries </li></ul></ul></ul><ul><li>Strong Growth </li></ul><ul><ul><ul><li>Market entry timing, planned barrier to entry for competition, customer centric </li></ul></ul></ul>
  13. 13. Video Streaming
  14. 14. Video Streaming
  15. 15. Video Streaming <ul><li>Opportunities for Netflix </li></ul><ul><li>Lowers shipping costs </li></ul><ul><ul><ul><li>More can be spent on content while achieving same profit margins </li></ul></ul></ul><ul><li>No more planning ahead to watch a movie </li></ul><ul><ul><ul><li>May attract a new segment of movie watchers </li></ul></ul></ul><ul><li>Partnerships for streaming </li></ul><ul><ul><ul><li>LG & Samsung Blu-ray players </li></ul></ul></ul><ul><ul><ul><li>Xbox360 </li></ul></ul></ul><ul><ul><ul><li>Roku digital video players </li></ul></ul></ul><ul><ul><ul><li>Tivo HD boxes </li></ul></ul></ul>
  16. 16. Video Streaming
  17. 17. Video Streaming <ul><li>Threats for Netflix </li></ul><ul><li>Exclusivity agreements with content providers may effect availability of movies for streaming </li></ul><ul><li>More competition from big name companies (Apple, Microsoft, Amazon) and global competition from companies operating locally overseas </li></ul><ul><li>Limits on Bandwidth usage from internet providers </li></ul><ul><li>Price adjustments to cover new expenses </li></ul>
  18. 18. Exclusivity Issues Source: Netflix 2008 Investor Day Presentation
  19. 19. SWOT <ul><li>STRENGTHS </li></ul><ul><li>First Mover Advantage </li></ul><ul><li>Strong Brand Recognition </li></ul><ul><li>High Customer Satisfaction </li></ul><ul><li>Large Movie Selection </li></ul><ul><li>Low Overhead Costs </li></ul><ul><li>Predictable Monthly Revenue Streams </li></ul><ul><li>Affordable Pricing </li></ul><ul><li>WEAKNESSES </li></ul><ul><li>Monthly Fee Discourages Membership From </li></ul><ul><li>Less Frequent Movie Watchers </li></ul><ul><li>Lack of Control Over DVD Return Time </li></ul><ul><li>Comparatively Small Movie Library Available to </li></ul><ul><li>Stream </li></ul><ul><li>DVDs Can Arrive Scratched or Broken Due to </li></ul><ul><li>Mailing Process </li></ul><ul><li>OPPORTUNITIES </li></ul><ul><li>Product Line Expansion – Video Games </li></ul><ul><li>Expand Downloadable Movie Offerings </li></ul><ul><li>Print 3 rd Party Advertisements of Red Envelopes </li></ul><ul><li>Expand on Partnerships With Content Providers </li></ul><ul><li>and Technology Providers. </li></ul><ul><li>THREATS </li></ul><ul><li>Staying power of DVDs </li></ul><ul><li>Contractual restrictions on streaming content </li></ul><ul><li>Bigger competition in the streaming video market </li></ul><ul><li>DVD competition from Red Box, and Blockbuster </li></ul>
  20. 20. References <ul><li>“ Twitter for Netflix” accessed on 23 March 2009. < > </li></ul><ul><li>Luther, Shaila. “Netflix creeps into Facebook with Netflix Updates.” CrunchGear. 24 March 2009. <> </li></ul><ul><li>NetFlix Company Website accessed on 3 March 2009. < > </li></ul><ul><li>Wikipedia accessed on 14 March 2009. < > </li></ul><ul><li>Hoovers Online accessed 23 March 2009. < > (Premium subscription required) </li></ul><ul><li>Cook, Jim and Taylor, Suzanne. “Five Lessons From the Netflix Startup Story.” MarketingProfs. 11 April 2006. < > </li></ul><ul><li>Mullaney, Timothy. “Coming soon to a Netflix near you.” Business Week Online . 9 June 2006.< > </li></ul><ul><li>Helft, Miguel. “Netflix to Deliver Movies to the PC.” New York Times . 16 January 2007. < > </li></ul><ul><li>“ Netflix offers subscribers the option of instantly watching movies on their PCs.” Netflix press release. 16 January 2007. < > </li></ul><ul><li>Blockbuster Movies accessed 23 March 2009. < > </li></ul><ul><li>“ Apple TV.” < > </li></ul><ul><li>Zeidler, Sue. “Netflix, consumer electronics partnerships near.” Reuters . Gary Hill. 2 April 2008. < > </li></ul><ul><li>Jacobs, Ian. “Internet-based businesses are (finally) changing the customer interaction paradigm.” Frost & Sullivan Market Insight. 28 September 2007. < > </li></ul><ul><li>Jacobs, Ian. “Universal agents – not a universally applicable idea.” Frost & Sullivan Market Insight. 30 June 2007. < > </li></ul><ul><li>“ World Video Content Delivery Networks Market.” Frost & Sullivan Subscription Service. 15 December 2008. < > </li></ul><ul><li>“ World Video Encoders and Transcoders Markets.” Frost & Sullivan Subscription Service. 13 December 2007. < > </li></ul><ul><li>“ North American Residential Broadband Access Services Markets.” Frost & Sullivan Subscription Service. 28 March 2008. </li></ul><ul><li>SEC website accessed 7 April 2009 . < > </li></ul>