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Netflix Business Model

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Sophie Girke

on 21 November 2014

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Transcript of Netflix Business Model

By France Couissin, Sophie Girke, Bernhard Orendi, Johanna Otten, Julia Saffari
Facts
"Our core strategy is to grow our streaming subscription business domestically and internationally. We are continuously improving our members' experience - expanding our streaming content, with a focus on programming an overall mix of content that delights our customers, enhancing our user interface and extending our streaming service to even more Internet-connected devices while staying within the parameters of our consolidated net income (loss) and operating segment contribution profit (loss) targets."
Netflix Form 10-K Annual Report
Core Strategy
Broad mix of marketing and public relations (e.g. Facebook and Twitter) to promote service to potential new members
“We are not a generic ‘video‘ company that streams all types of video such as news, user-generated, sports, porn, music video, or reality. We are a movie and TV series network.“
Creation of own content due to initial bargaining difficulties with studios
Member Acquisition
Backwards Integration
Netflix Long Term View
Finances
Organization
Monthly subscription fee (Germany 7,99 €, US 8,99 $) in exchange for unlimited viewing of offered TV shows, movies and Netflix‘s original content
(flat rate)

Total revenues are derived from subscription fees in total streaming (domestic and international) and domestic DVD delivery

In 2015 Netflix is going to absorb the increase in VAT (value-added tax) in European countries and will not pass it on to the members
no increase in fees
Pricing Model
Significant investments to license streaming content both domestically and internationally

Expectations for 2014: to substantially expand investments in original content (though still representing less than 10% of overall global content expense)
Primary use of cash
(1) licensing of content
(2) content delivery
(3) marketing programs and payroll
“We’ll invest in 2014 over $400M on technology development to continue to improve our service and our app on the very broad range of platforms we support.“


“We plan on spending nearly $3B in 2014 on content for our members.“

Financial Planning
Netflix Long Term View
Netflix Long Term View
Financial Data Q3 2014
Stock Performance
Broadband networks
Studio
(content library)
Customers
Device manufacturers
Content licenses
System
Founder & CEO
(Reed Hastings)

Strategy
Scope & Customer Value
Service Scope
A business focusing more and more on streaming on a video-on-demand market:

DVD rental by mail
On-demand Streaming: instant streaming of movies, TV shows, documentaries and animated movies

The DVD rental portion of business is slowly declining replaced by instant streaming:

“(The DVD-by-mail business) will probably be something like AOL dial-up from 2002 through to today, where it’s a steady decline every year a little bit, but there’s a long-term residual market. And there’s very little fixed cost in the business. ”
Netflix’s CEO Discusses, Q3 2011 results

Organizational Chart
Chief Content
Officer
Chief Product
Officer
Chief Marketing
Officer
Chief Talent
Officer
Chief Streaming
and Partnership
Officer
Chief Communication
Officer
General Counsel
Chief Financial
Officer
Netflix reinvented itself

Three operating segments: Domestic streaming, International streaming and Domestic DVD

The substantial majority of revenues are generated in the US, where all of the long-lived tangible assets are held (headquarter: Los Gatos, CA, USA)
Structure
People and Organizational Culture
Highly organic organizational culture

Seven aspects of culture

Values are what we value
High performance
Freedom & responsibility
Context, not control
Highly aligned, loosely coupled
Pay top of market
Promotions & development

According to their culture Netflix will only hire and promote employees
with the following 9 attributes:

Judgement
Communication
Impact
Curiosity
Innovation
Courage
Passion
Honesty
Selflessness

“Internet TV is replacing linear TV.
Apps are replacing channels,
and screens are proliferating.
As Internet TV grows from millions to billions,
Netflix is leading the way around the world.“

Innovation
Netflix Long Term View
Netflix‘s corporate culture landed 30th on Forbes annual list of the World’s Most Innovative Companies
Serve the trend „Binge Watching is the new normal“
Change in consumer habits (no cliffhangers, less dependency on devices or time slots, no ads)
Reduced power of suppliers (third party content creators)
Internal Innovation
Distribution AND production of own content (differentiation)
Deviation from traditional show formats
Technological “innovation“: compatibility with great number of devices and operating systems
“Reinvention of HR“ by appreciation of creativity and own responsibility of employees beyond working regulations
External Effects
BCG Matrix
Customer Scope

Demographic dimension
Males and females between the ages of 17-60
Households with income levels of $30,000 and up
Different racial/ethnic groups (with an assortment of foreign and international films)

Psychographic dimension
People who are too busy to go out and shop for movies
People who are frequent renters and movie buffs
People who want to get the most value for their money


SCOPE
Customer Value
On-demand Streaming
Newness & Quality
: more than one billion hours of TV shows and movies per month, including Netflix original series

Convenience
: commercial-free movies and TV series, with unlimited viewing on any Internet-connected screen, at any time

Customization
: excellent recommendation system allowing customized browsing (full control over the viewing experience)

Price
: affordable no-commitment monthly fee

Differentiation
1. Acquisition of as much exclusive content as possible

2. Creation of their own content
TV shows: House of Cards, Orange is the New Black, Arrested Development...
Documentaries: The Short Game
Animated series: Turbo F.A.S.T

A well-thought differentiation strategy based on…

Partnership with entertainment companies
such as Starz Entertainment, Paramount Pictures, Lions Gate Entertainment or Metro-Goldwyn-Mayer…

Creating top-quality original content
, sometimes in cooperation with famous studios, such as AMC, CBS, DreamWorks Animation or Warner Bros…

Netflix's Brand Reputation
Customer satisfaction
A three year high according to the American Customer Satisfaction Index:

“Netflix‘s score in 2013 was 79, up 5% from a score of 75 in 2012. This compared favorably to an overall decline in the online retailer sector”
Source: money.cnn.com

Subscribers
In nearly 50 countries worldwide
More than 33 million streaming subscribers in the United States
More than 10 million internationally

The Long Tail
Netflix, a long tail business by licensing a huge library of content to target niche demand and build its subscriber base

Capabilities
SWOT-Analysis
Strengths
Threats
Opportunities
Weaknesses
strong member base
no physical stores
customer service
compatibility
original production
partnerships with movie companies
limited title variety
high licensing costs
partnerships with content providers, smart phones and airlines
greater title selection
international growth
dependency on studios, content providers etc.
reliance upon Amazon Web Services and providers of terminal devices
Sustainability
Netflix Member Subscriptions
Netflix Form 10-K Annual Report
Image Sources
:
http://o.aolcdn.com/hss/storage/midas/e8cb29917bfa9fca83791f853753ac45/200840617/revert-old-netflix-app-new-xbox-360-update.w654.jpg
http://cdn.ndtv.com/tech/images/gadgets/netflix_hq_gate_ap.jpg
http://msptelemarketing.com/wp-content/uploads/2011/06/istock_000011435957xsmall1-300x221.jpg
http://s3.amazonaws.com/digitaltrends-uploads-prod/2013/12/netflix-movies-expiring-jan-2014.jpg
http://synovas.com/wp-content/uploads/2012/05/iStock_000020192757_Strategy-puzzle-pieces-404x256.jpg

Text Sources
:
http://investazor.com/.../netflix-saga-part-1.../
http://www.slideshare.net/evelyneringia/netflix-markeitn
http://www.moneycrashers.com/netflix-hulu-amazon.../...
http://www.fool.com/.../how-netflix-acquired-over-2...
http://www.slideshare.net/evelyneringia/netflix-markeitn
http://www.huffingtonpost.co.uk/.../netflixs-long-tail-is...
https://imba2011.wikispaces.com/Brief+Analysis+of+Netflix...
http://www.dslreports.com/.../Netflix-Customer...
http://money.cnn.com/.../19/technology/netflix-satisfaction/
http://michaelwessel.weebly.com/.../1/0/6810798/netflix.pdf
http://mgmtclarity.files.wordpress.com/2010/04/capstone_final_report.pdf
http://www.thewire.com/technology/2013/02/economics-netflixs-100-million-new-show/61692/
http://www.forbes.com/sites/greatspeculations/2014/05/15/the-impact-of-netflixs-price-rise/
http://www.theverge.com/2013/7/22/4545446/netflix-q2-2013-earnings
Annual report 2013 http://ir.netflix.com/secfiling.cfm?filingID=1065280-14-6&CIK=1065280
http://thebusinesscore.com/wp-content/uploads/sites/192/2012/10/Crisis-Management-and-the-Benefits-of-Strong-Organizational-Culture.pdf
http://faculty.tuck.dartmouth.edu/images/uploads/faculty/ron-adner/11EIS_Main_Project_-_Netflix_Paper.pdf
http://hbr.org/2014/01/how-netflix-reinvented-hr/ar/1
Netflix Culture: Freedom&Responsibility: http://de.slideshare.net/reed2001/culture-1798664?redirected_from=save_on_embed
Weltkarte (nur auf Slide) http://en.wikipedia.org/wiki/Netflix#mediaviewer/File:Netflix_area.svg
How Netflix Reinvented Itself: http://www.forbes.com/sites/petercohan/2013/04/23/how-netflix-reinvented-itself/ Netflix Long Term View: http://ir.netflix.com/long-term-view.cfm
Q3 2014 Letter to Shareholders http://files.shareholder.com/downloads/NFLX/3594578127x0x786677/6974d8e9-5cb3-4009-97b1-9d4a5953a6a5/Q3_14_Letter_to_shareholders.pdf
https://pr.netflix.com/WebClient/loginPageSalesNetWorksAction.do?contentGroupId=10477
http://ir.netflix.com/management.cfm
http://seekingalpha.com/article/265310-netflix-q1-earnings-up-88-percent-adds-3-m-subscribers
http://www.nytimes.com/2013/10/22/business/media/netflix-hits-subscriber-milestone-as-shares-soar.html?_r=0
http://seekingalpha.com/article/265310-netflix-q1-earnings-up-88-percent-adds-3-m-subscribers
http://www.forbes.com/sites/samanthasharf/2014/07/21/netflix-eyes-global-streaming-domination-as-it-crosses-50-million-subscriber-mark/

Netflix: Past, Present, and Future Innovation
Source:
Netflix Q2 2013 earnings show solid growth in revenue, a bit light on subscribers
, theverge.com
Source:
The future of real estate is in the Long Tail
, http://cooltownstudios.com
40 countries

The Americas
USA
Canada
Latin America

Europe
Germany
Denmark
Finland
Ireland
The Netherlands
Norway
Sweden
United Kingdom
France
Switzerland
Austria
Belgium

Timeline
Subscribers
Launches
1987
Unlimited rentals for one low monthly subscription
USA
2010
Canada
2011
TV series production, domestic streaming, listed on the stock market
Latin America, Caribbean
26 millions
2012
United Kingdom, Ireland, Scandinavia
2013
International streaming service
Netherlands
2014
more than 50 millions
Austria, Belgium, France, Germany, Luxembourg, Switzerland
Core Strategy
Expand streaming customer base
Provide a good mix of content
Enhance the user interface
Extend accessibility on more devices
“We are not a generic ‘video‘ company that streams all types of video such as news, user-generated, sports, porn, music video, or reality. We are a movie and TV series network.“
Netflix Long Term View
Unique rental strategy
Customer convenience
Strong brand
no physical stores
unique distribution system
flexible subscription models
customer service
large member base
customer insights
delivery speed
own production
Streaming
DVD rental
40.4 millions
Production of Movies
RUN
TEAM UP
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