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Netflix Case Study

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Chris Reimer

on 25 February 2014

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Transcript of Netflix Case Study

Netflix Case Study
By: Christopher Reimer

Industry Analysis
Key Segments & Trends
Key Success & Failures
Specialized Language
Environmental Factors
Role of Innovation & Tech
Risk/Volatility/Cyclical Influences
Financial Characteristics
Competitive Analysis
Jockeying for Position
Threat of Substitutes
Likelihood of New Entrants
Bargaining Power of Suppliers
Bargaining Power of Consumers
Solution #1: Focus on Original Content & Exclusive Partnerships
Expand on successful ventures into original content and form exclusivity partnerships to differentiate its product offerings and drive viewership through exclusivity.
Company Analysis
Current Strategies & Effectiveness
Financial Analysis
SWOT Analysis
Position Relative to Competition
Position Relative to Future Challenges
Key Strategic Challenges
Solution #2: Add Premium Videos Via Pay-Per-View Add-On
Continue to offer services at the same monthly fixed price; however, offer premium viewing options that can be purchased separately on a pay-per-view basis.
Solution #3: Discontinue DVD Mailing Service & Expand Into International Markets
Gradually liquidate its DVD mailing infrastructure (warehouses, employees, mailing) while expanding into potentially successful international markets.
Plan of Action: Synthesize #1 & #3
Netflix should continue its exploration of the original/exclusive content sphere that has had proven success, all while liquidating its DVD-by-mail infrastructure and expanding into new international markets.
Possible Solutions
Immediate Actions
Mid-Range Actions
Long-Run Actions
Video rental industry: 1970's
VCR--> DVD--> Online
Brick/Mortar--> Mail--> Streaming
Recent Trend: Video on Demand (VOD)
Rent-by-mail/Vending/VOD Streaming
Market Trend --> Rapidly expanding online service
Low barriers of entry
Video pirating
Expansive catalog & low price
low customer loyalty
Competitive pricing
Diversity & Quality of portfolio
Relationships with suppliers (film & Internet)
Industry awareness
Timeliness of content offerings
Consumer experience
High quality streaming & DVDs
Partnerships with consumer electronics
Pay-Per-View vs. Monthly Subscription
Video rental industry sees slight growth during economic downfall
Time-intensive consumption - limited consumer hours
Legal measures (i.e. net neutrality)
Mobile usage
Increased demand for convenience
Increased competitive nature within the industry
Increased illegal downloads
Haziness of legal arena
Removal of middlemen
Lawsuits as industry rapidly changes
Loss of revenue due to net neutrality issues
Retention of subscribers
Binge viewership
New material release dates
New consumer electronics released
Video rental industry overview:
GPM: 24.42% (NFX: 36.31%, BB: 58.97%, AMAZ: 22.35%)
NPM: 2.14% (NFX: 7.11%, BB: -12.42%, AMAZ: 3.35%)
Current: 1.38
Quick: 0.9
Debt/Equity: 0.12
Immediate and intense
Competition low in brick-and-mortar & DVD-by-mail
Competition high in online streaming
Pricing strategies vary
Direct competition
Netflix, Redbox, Amazon, Hulu, AppleTV, Blockbuster Online, Video Pirating sites
Indirect competition
Cable/satellite companies, consumer electronics stores, movie theatres
Unlikely to threaten market in excess
Live music, live sports, video games, hiking, Broadway plays
dependent upon circumstances or more costly than video rentals
New entrants
Strong likelihood of suppliers offering content on their own website
Low barriers & net neutrality rulings leave open window for new companies
Bargaining power of suppliers:
Very High
Film studios withhold content
Internet Service Providers withhold quality service
Bargaining power of consumers:
Above average
Sensitivity to price and content
Gravitate to best supplier/no loyalty
Lack of established enforcement on illegal downloads
Monthly subscription strategy
Netflix saw 35% increase in subscribers 2009-2010
Automating distribution centers
Acquisition of 1 million new users in a single quarter
Diversified portfolio
Original content creation
Netflix exclusive releases from suppliers
Revenue sharing agreements with suppliers
Video recommendation software
Rise in revenue by close to $800 million 2008-2010
GPM: 36.31% > 24.42%
NPM: 7.11% > 2.14%
Lower operating costs than competitors
Current: 1.82 > 1.36
Quick: 1.4 > 0.9
Debt/Equity: 1.0
forefront of innovation
ability to provide diverse portfolio at low price
Strong partnerships (electronics, Internet, film)
Strong brand awareness
High profit margins
Easy to use platform online
Domination of video-by-mail market
Supplier and Consumer bargaining power
Hard to establish differentiation
Arguably strongest in the industry
Offers the most content
Offers online and by mail delivery
cheapest price for multiple orders
free trials
no time restrictions on consumption
utilizes largest amount of platforms
positive ratios and profit margins
Outstanding stock market growth
Well positioned moving forward. Why?
Positive brand presence
Proven pricing model
Original content creation
Comcast Deal YESTERDAY!!!
Deal with Walt Disney & Marvel
Significant challenges moving forward:
Removal of middlemen
Lowering barriers of entry
Proving Netflix is a valuable partner
Providing content demanded by viewers
Keep consumers from illegal downloads
Retention of customer base
Market research on DVD-by-mail consumption
Market research on media habits of emerging markets
Initiate conversations with film studios, producers, etc to begin producing original content and securing exclusive releases
Liquidate physical infrastructure for DVD-by-mail in U.S.
10 warehouses per year
Within four years, turn entire focus onto online streaming services
Creation of 2-3 new premium shows & other experimental content per year ($200 mil per year)
Establish contracts with Big 8
Selection of 2-3 new countries to offer online streaming pilot programs (Israel & Japan)
Focus on performance analytics to measure success of content
Revisit performance analytics
Original content & International performance
Withdraw unsuccessful attempts in content
Either withdraw or merge/buy-out in international markets
Continue expansion of exclusive content via long-term contracts with film studios & ISPs
Continue expansion into more and more international markets
$1 billion funding needed in long-term debt
Once well-established, implement U.S. strategies (original content)
IMPORTANT: All requires continued success in the U.S. market
Netflix is currently positioned atop the video rental industry; however...
The main problem facing Netflix is retaining their consumer base and profit margins as the video rental market shifts from DVD rental where Netflix dominates and has competitive economies of scale to drive out competition to online consumption via on-demand streaming, thus decreasing barriers of entry for suppliers and competitors and causing possible disruption in a consumer base highly driven by price-sensitivity and content offerings.
International markets
Expand original content
Premium charges for premium content
Legal ramifications (i.e. net neutrality)
Lack of brand loyalty
Suppliers providing own content on own websites
Full transcript