Netflix was once held up as a major new-economy company with a unique digital business

model. By fully incorporating the internet into its operations, Netflix was able to quickly overtake
its chief rival, Blockbuster, but the company had not developed a new business model. Instead,
Netflix was able to adapt several known business models and incorporate new digital innovations
to quickly gain competitive advantage.

The Video Rental Market

Blockbuster had steadily come to dominate the video rental market, pushing mom-and-pop rental
stores out of business and diminishing the impact of smaller chains like Hollywood Video. The
company built its brand and established operational efficiencies that made it the most successful
contender with an established business model: the physical landlord. Renting VHS customers on a
daily or weekly basis is a perfect example of the landlord business model, allowing Blockbuster to
own a large number of physical assets and profiting by charging customers for the temporary use
of the asset.
This business model continued to be

successful as the market evolved beyond VHS tapes into DVDs, and might have been successful
through the transition to Blu-Ray discs had the industry not experienced disruption from Netflix.
Blockbuster seemed to be in a very good position in the marketplace, and appeared to adapt well
to changes in technology and consumer tastes, even incorporating video game rentals into its
stores. That is, until Netflix began poking holes in the traditional video rental business model and
exposing its weaknesses.
Weaknesses in the Business Model
The rise of Netflix exposed a couple of weaknesses in the traditional video rental business model.
First is customer convenience. While, at its peak, Blockbuster had stores in every major town
across the country, making the video rental process reasonably convenient, the company could not
compete with the convenience of the mailbox. The convenience factor is a fairly common concern
with the landlord business model, for example with car rentals and equipment rentals where the
customer is responsible for picking up and dropping off at designated locations. The sheer number
of stores that Blockbuster had to maintain in order to provide convenience added to the
infrastructure costs associated with the business, something that an upstart like Netflix would not

have to contend with.

A second weakness that Netflix was able to expose is the amount of revenue Blockbuster earned in
late fees. In the view of customers, the late fees that Blockbuster charged were exorbitant (often
higher than the cost of the original rental itself) and arbitrarily enforced (kicking in within
minutes of the deadline with no room for leniency). Once again, this is a common weakness with
the landlord business model, requiring landlords to enforce late fees and, in Blockbuster's case,
spend significant time on collecting overdue fees. The early marketing efforts on the part of
Netflix focused on the fact that the company didn't charge late fees with unlimited rentals.

JAN

21

Analysis of the Netflix Business Model

A Business Model Disrupter Enters the Next Stage of

Video

Netflix was once held up as a major new-economy company with a unique digital business
model. By fully incorporating the internet into its operations, Netflix was able to quickly overtake
its chief rival, Blockbuster, but the company had not developed a new business model. Instead,
Netflix was able to adapt several known business models and incorporate new digital innovations
to quickly gain competitive advantage.

The Video Rental Market

Blockbuster had steadily come to dominate the video rental market, pushing mom-and-pop rental
stores out of business and diminishing the impact of smaller chains like Hollywood Video. The
company built its brand and established operational efficiencies that made it the most successful
contender with an established business model: the physical landlord. Renting VHS customers on a
daily or weekly basis is a perfect example of the landlord business model, allowing Blockbuster to
own a large number of physical assets and profiting by charging customers for the temporary use
of the asset.

This business model continued to be

successful as the market evolved beyond VHS tapes into DVDs, and might have been successful
through the transition to Blu-Ray discs had the industry not experienced disruption from Netflix.
Blockbuster seemed to be in a very good position in the marketplace, and appeared to adapt well
to changes in technology and consumer tastes, even incorporating video game rentals into its
stores. That is, until Netflix began poking holes in the traditional video rental business model and
exposing its weaknesses.
Weaknesses in the Business Model
The rise of Netflix exposed a couple of weaknesses in the traditional video rental business model.
First is customer convenience. While, at its peak, Blockbuster had stores in every major town
across the country, making the video rental process reasonably convenient, the company could not
compete with the convenience of the mailbox. The convenience factor is a fairly common concern
with the landlord business model, for example with car rentals and equipment rentals where the
customer is responsible for picking up and dropping off at designated locations. The sheer number
of stores that Blockbuster had to maintain in order to provide convenience added to the
infrastructure costs associated with the business, something that an upstart like Netflix would not
have to contend with.
A second weakness that Netflix was able to expose is the amount of revenue Blockbuster earned in
late fees. In the view of customers, the late fees that Blockbuster charged were exorbitant (often
higher than the cost of the original rental itself) and arbitrarily enforced (kicking in within
minutes of the deadline with no room for leniency). Once again, this is a common weakness with
the landlord business model, requiring landlords to enforce late fees and, in Blockbuster's case,
spend significant time on collecting overdue fees. The early marketing efforts on the part of
Netflix focused on the fact that the company didn't charge late fees with unlimited rentals.
Hidden Opportunities
Netflix successfully capitalized on the weaknesses of the traditional video rental business model,
but was also able to identify hidden opportunities that were a result of evolving digital
technology. To begin with, in the transition from VHS to DVD videos, there was a new opportunity
to send movies via the postal service at much lower cost. The cost of mailing and returning a large
VHS tape simply wouldn't have made the Netflix business as profitable. Flatter discs that would fit
in with other envelopes made the transition to mail order rentals much simpler.
Netflix was one of the first companies to successfully develop an online recommendations engine
that helped customers find new movies and TV shows based on others that they had rated in the

past. While much more common today, Netflix's recommendation engine was extremely innovative
when it was first developed. Along with this, the company created the concept of the movie
queue, allowing customers to build a wish list of movies that they would like to watch in the
future, and a list that drove the order of movies that were sent out to customers.
This combination of a customer movie queue and a strong recommendations engine allowed
Netflix to add one additional layer to its business model: the long tail. In 2006, Chris Anderson
popularized the notion of the long tail, where an online store drives revenue from a much broader
set of products than can normally be done in a bricks-and-mortar store. Instead of the few
thousand products that can be stocked at a normal retail store (and have to be stocked at
multiple locations), online stores can stock hundreds of thousands of products and sell them to
anyone, anywhere.
While Blockbuster certainly could have developed similar shopping tools for its customers, they
just weren't as suited to a bricks-and-mortar experience as they were to the shop-at-home
experience that Netflix offered.

Combining Business Models for Competitive Advantage

Netflix gained its initial competitive advantage, not through a new business model, but through a
combination of known business models. The company combined the physical landlord model with
the subscription and all you can eat models to allow customers to rent all the DVDs they could in a
month for a flat fee. Customers were allowed to keep the DVDs for an unlimited period of time
and were not subject to late fees. In return, customers agreed to pay a recurring monthly
subscription fee.
Netflix was able to overcome some of the weaknesses of the landlord model discussed earlier by
delivering DVDs through the mail. This lack of physical infrastructure and advanced integration
with the postal service provided a clear advantage over the Blockbuster model. By opening up
rentals to all you can eat, customers were never subject to late fees and could rent as many
videos as they wanted within a single month. Lastly, the monthly subscriptionprovided consistent
cash flow for the company while establishing a single low price that customers could count on
month after month.
Blockbuster tried too late to combat Netflix by eliminating its own late fees and introducing its
own all you can eat DVD subscription. Unfortunately, the Blockbuster response came too late and
the company never was able to overcome the advantage that Netflix had built up in volume and
convenience. Had Blockbuster seen the Netflix threat sooner, the company may have made its own
business model adjustments in a way that leveraged its vast retail infrastructure in a way that
Netflix would not have been able to compete with.

The Netflix Business Model Canvas

Alexander Osterwalder and Yves Pigneur, authors of Business Model Generation, have developed
the popular business model canvas. The canvas is described as a shared language for describing,
visualizing, assessing, and changing business models. It's made up of nine building blocks that help
focus attention on key attributes of a business. I've attempted a business model canvas for Netflix,

incorporating different aspects of its business model that apply to the DVD rental and video
streaming products.

From Disrupter to Just One of Many

Still to come is whether Netflix can maintain its advantage during the transition from physical

discs to video streaming. When Netflix first came on the scene, it disrupted the video rental
market through its series of digital innovations and improvements on the standard business model.
When it came to renting videos on a physical disc,
Netflix proved to be a significant disrupter that imitators couldn't match. But as technology
continues to evolve from discs to online streaming, Netflix finds itself in a crowded marketplace.
Today's video streaming business models follow two basic patterns: 1) the landlord and 2) the all
you can eat subscription. Apple, for example, offers short-term video rentals through its iTunes
store on a per use basis, employing the virtual landlord business model. Netflix, Hulu, and a host
of other video streaming companies offer unlimited streaming for a monthly or yearly subscription
fee. In this kind of environment, Netflix has no operational or distribution advantages over rivals,
and competitors have reached parity with the company's digital innovations.
The future for Netflix is uncertain. Along with its other digital innovations, the company was able
to employ a long tail business model, allowing it to drive customers to its deep catalog of movies
instead of focusing on best sellers as Blockbuster generally did. It can still leverage its movie and
TV show catalog with video streaming, but now it's competing with rivals to expand that catalog in
a cost-effective way. Absent a new disruption, Netflix will have to rely on its role as the
incumbent player in a crowded market. Instead of poaching customers from Blockbuster, Netflix
finds itself in the position of defending itself from other video streaming companies poaching its
customers.

The Netflix Business Model

Introducing a subscription fee to the video on demand service was certainly a risky move. Before
Netflix, this practice was still unheard of. Today, inspired by the success of this company, many
services are adopting this model. You can find everything from opera to BBC classic shows available
online in exchange for a subscription fee. However, the VOD giant is still dominating the market, with
more than 89% of total shows streamed online during the first quarter of 2013 coming from this
service alone.
The DVD rental business is actually one of the least lucrative services which Netflix offers. Although
DVD-mailing system was popular at first, with the development of modern technologies, and
streaming services becoming more popular over the years, today this business segment of Netflix is
actually in decline. On the other hand, the domestic streaming service and international streaming
service are both rapidly growing
Apart from being one of the pioneers of the industry with their subscription model, the value
proposition is yet another element which helped this particular service to become as popular as it is
today. In fact, there are a total of three elements that are making all the difference.
1. Affordable price

2. Accessibility
3. Original content
While Netflix offers more than 20.000 episodes of various shows for an extremely affordable price, it
also delivers its content via multiple and various devices. There isnt a service on the market which
covers more electronic devices than this one. The rating algorithm is certainly a feature which adds
on the value, but the cherry on top is definitely the original content which Netflix produces. In fact,
the Fuller House show managed to get a total of 21 million of viewers in less than a month.
However, being the first VOD service of this sort, Netflix had the unique opportunity to offer this
model to many studios and broadcasting networks. When faced with the possibility of selling their
content through this ingenious model, very few companies made the same mistake which
Blockbuster did, and almost none
of them turned down Hastings offer. So before the actual production of the original content, Netflix
served as a side-channel for distribution to many other companies, paying for licenses and exclusive
deals in order to attract the crowd.
After this initial period, this company made another breakthrough with an ingenious idea. In 2013,
the good people of Netflix started developing their own production and shows, based on the analysis
of their own customers data. So as the people came to watch their favorite shows, the company
monitored rankings, popularity, and interest of their customers and invested in original content
production. A marvelous and yet unseen concept which proved to be extremely lucrative. This truly
changed the world of VOD for good.
In conclusion, you definitely have to be the first that will answer a demand as big as this one is if you
want to build a VOD service this big. Or any other service for that matter. Having that edge over the
competition, or not having any actual competition at all, is definitely a compulsory factor. However,
employing big data analysis in the production of original content is certainly a step forward in this
industry that will redefine it for good.

Netflix Business Model Netflix - BUSINESS MODEL: Netflix represents a classical

service business model in the video-on-demand industry where users of the service
and payers are the same entity. Netflix was the pioneer who used this business
model to offer entertainment content using video streaming technology in exchange
for subscription fee. HISTORY The exemplar firm and others: Netflix video on
demand originated from DVD rental business in 2007. The company still operates it
along with its VoD streaming business. Netflix is the largest online movie and TV
show streaming provider with more than 40 million streaming members as of 2013;
Netflix streaming accounted for 89% of shows streamed in Q1 2013. The company
also produces original content. Video on demand industry is a crowded one, with
multiple players and business models. Players in the industry compete on price,
exclusivity and range of content, user experience in terms of personalization and
compatibility with different devices. Some of the large competitors include Hulu,

which uses a hybrid business model partly based on advertising revenues, and
Amazons Prime offering as a complementary to their retail business. CUSTOMERS who are they: Companies at the core of the industry, like Netflix and LoveFilm grew
out of DVD rental businesses operate a one-sided business model, where user of the
service is the one who pays for it and is the primary customer at the same time.
ENGAGEMENT value creation proposition (including network effects): The main
value propositions to streaming consumers are the legal access to the rich movie
database (20 000+ episodes) and the personalized service expressed in the
personal suggestion of movies for each customer without interruption of
advertising. The customers ratings serve as the basis for the recommendations and
not a films popularity at the box office. The rating algorithm makes better use of
movies available on the website tailored to his/her taste to watch. Netflix also
creates value by having one of the widest supported devices ranges, including
game consoles, tablets, PCs, and internet TVs. Finally, Netflix offers original and
exclusive content to its subscribers. New and exclusive series are being released as
full season, getting Netflix users hooked. Users do not have to wait week by week
for episodes to be released is being released. DELIVERY - the value chain: Netflix
licenses content from broadcast network, cable network providers, but also directly
from movie and film and television studios, as well as develops original content. As
an early entrant Netflix was able to build a huge database of movies benefitting
from the willingness of both TV studios and media companies to license their
content. They hoped that the user would have a chance to catch up on previous
series of TV shows and, as a result, would be more willing to pay for their services.
As time passed, Netflix was viewed as being a substitute rather than a
complementary good to traditional content distributors. It acquires movies
customers want to watch and it uses the recommendation engine to make the
service personalized and appealing. This significantly increases customers
willingness to pay for the service as they have a wider choice and easy use. Netflix
also produces original content based on the customer data. By analysing
behavioural propensities of its paying customers, Netflix determined that a political
drama starring Kevin Spacey and produced by David Fincher would appeal to a large
cross-section of its existing subscriber base, resulting in highly successful (14 Emmy
nominations) political drama House of Cards. A possible next step for Netflix is
licensing its original content to other distribution channels.
Netflix delivers its streamed media through Microsofts SilverLight platform, which is
a platform that permits programmers to develop complex web applications. The
Silver Light player that Netflix uses allows streaming service to PCs only. In 2010
Netflix switched to Amazons cloud services and started using some features of the
HTML5 technology to extend the range of devices that couldstream video through
Netflix to numerous web browsers, consoles, and other devices including tablets
and iOS systems since they do not work with Flash. Due to the fact that HTML5
platform is not yet implemented officially Netflix engineers had to work to integrate
and innovate the way they deliver video in order to use the technology. The way
Netflix integrates HTML5 enables a wider range of devices able to stream media,
uses less battery than other platforms. The supreme rating algorithm CineMatch,

which recommends customers movies matched to their tastes, makes for a distinct
personalized service. MONETIZATION value capture Netflixs major source of
revenue are the subscription fees of 7.99$ per month for an unlimited TV shows and
movies streamed over the internet to their TVs computers and mobile devices.
Currently Netflix does not use price discrimination for its customers. A popular
critique of video streaming service Netflix is that the company cannot bring in
enough revenue from customers alone to keep up with the need to continue
purchasing new content for their service: "Netflix needs advertisements to bring in
more money." Netflix's response has always been a solid "No." Instead, the
company is planning to increase their fees, while still protecting the original addfree value proposition.

Strengths

High quality, fast and easy access from many different devices anytime, anywhere.
Netflix provides a much more comfortable way to watch movies without leaving
home and still doing it legally.

Price. Available subscriptions are at an affordable price for Netflix's customers

(from $7,99 up to $20 per month).

Customers avoid legal risks which are associated with downloading movies
through torrent networks.

Personalized recommendations that suggest to users what to watch next

according to their preferences .

Allowing users to avoid moral issues connected with stealing content and
intellectual property.

Original content. Netflix streaming gives access to Netflix produced TV shows (eg.
House of Cards, Orange is a New Black or Marvel productions) and movies, and
also older movies and niche content (that many have stopped seeding); and to an
independent and documentary films (that nobody bothers to torrent) and to
foreign films.

Great User Experience, simple user interfaces and cross-platform compatibility on

a variety of platforms and devices.

Network effect keeps users loyal to Netflix. Friends discuss their favorite Netflix's
series and impatiently wait for the release of the next seasons' episodes.

Long and successful history. Netflix was in operation long before streaming
services were even possible, and they effectively killed Blockbuster and other retail
video stores.

No ads. Netflix is the only company that streams movies without ads.

As a streaming service, it doesnt have to worry about competing for the top
ratings spot in primetime. People decide when they watch and what they watch.

Strong and well-recognized brand.

Weaknesses

Low profit margins due to the cost of international expansion and currency
fluctuations.

Dependence on content licensing costs and relationships with distributors. The

company is vulnerable in renegotiations of their content deals.

Potential dependence on regulations and laws in different countries (e.g.

censorship regulations of the Chinese government).

Limited local content encourages users to use IP re-routing software through a

DNS proxies. Netflix needs to prevent customers from watching videos that aren't
licensed for viewing in their country.

Netflix needs to compete with free access through torrents and cable television
which is still very popular, easily accessible and offers live news and unique
content.

Users need to wait a couple of months for newer series or films to be available on
Netflix.

Domestic providers can produce series that are designed for and dedicated to
viewers from their country this gives a better match to the customers' needs.

Netflix is starting to lose a little bit of the competitive edge that it built.

Netflix doesn't have revenue from ads (lower income than competitors like Hulu
Plus and Amazon which all have ads).

Netflix is under pressure to produce more high-quality original content, the

production of which is very expensive.

Netflix highly depends on the availability of internet connection (still large parts of
Africa are mostly an 'internet desert', and Asia has much less internet connectivity
than Europe or U.S.).

Opportunities

Be the first to embrace the changing habits of consumers (Netflix has already
successfully switched once from DVDs to online streaming).

Network upgrade and expansion. The quality and speed of broadband needs to be
good enough to satisfy the needs of multi-screen, multi-use homes; and there is
still room for network creation in Africa and Asia.

Attracting new users through increasing the amount of available original content,
new channels and video library with bonus features, TED conference videos, and
addition of new TV shows just after their original broadcast.

Multi-play options, mobile access (the more services you offer, the less likely the
household is to churn).

Increasing demand on video services. Cisco predicts that 80% of all Internet traffic
will be video by 2019.

International expansion. Netflix still is not available in China and has a small
presence in other Asian and European countries.

Finding local partners to further international expansion.

Lack of ads will attract new users who are tired of time-consuming ads.

Growing number of users who are opting not to sign up for cable tv (due to higher
cost: $60-$100/month and less flexibility).

Netflix still has not fully capitalized on its existing user base.

Scale and popularity will help potentially lower their content licensing fees, and can
potentially increase their average revenue per user per month.

Extending the portfolio to products associated with content like clothing, toys and
accessories (Netflix have experience in mail-ordered DVDs).

Threats

Rising content costs, limited access to content due to stiff competition with the
cable tv's and conflicts with content owners (such as Sony) who lean on Netflix for

not cracking down hard enough on customers who evade geographic licensing
restrictions.

Radical changes in consumption habits (as previously with DVDs).

Increasing churn rate among customers.

Competition and price war between streaming services (Amazon Prime, Hulu and
HBO with original content).

Problems with effectively delivering non-English content due to high local

competition.

Netflix become too successful too quickly forcing the cable companies to evolve
and compete directly with them before they are ready.

Apple and Google may join the war for the video market.

Internet service providers may find a way to charge Netflix for all the bandwidth
they use.

Content generated by users is becoming more popular on many services such as

Youtube, Twitch, Vimeo, Facebook Video or Vine.

Unpredictability of stock price. Dependence on investors' expectations.

When company saturates the domestic streaming market, growth could

suddenly slow at any time.

Legal issues with local authorities, and content providers because of licensing and
violation of regulations.

SWOT Analysis

Strengths:
International rollout is on track with launches in Spain, Italy, & Portugal
through the end of the year, and Korea, HK, Taiwan, & Singapore in early
2016, along with ROW skimming. NFLX continues to expect contribution
losses will peak in 2016 with material global profits starting in 2017.
We believe the company has a strong track record of prudently investing in
successful original content, high-value licensed content, and marketing. We
note that assuming no impact to churn, the recent $1 increase should give
NFLX an additional $200-$300M in domestic streaming revenue next year, and
$600M+ in 2017
Originals continue to perform with strong slate ahead, including the companys
first original feature film, Beasts of No Nation, which earned $90M at the box
office on a mere $6M budget. Marvels Jessica Jones was also a hit, the first of
four films from Adam Sandler, and The Ridiculous Six, which just came out.
NFLX also reiterated on the call that it has been positively surprised by the
global strength of Narcos, with much of the language in Spanish.
Weaknesses:
Netflixs International Business is not yet profitable. Although thanks to their
international expansion they have seen increased revenues, internationally they
operate at a loss, in 2013 alone they lost $274M internationally. In the first 3
quarters of 2015, they a recorded a contribution loss of $81M added to an
expect loss of $95M at the end of Q4. The companys recent expansions added
various expenses to the business, including a new value-added tax that will
begin in January 2016 under European law. We believe internationally Netflix
will keep on losing money for some time. Their strategy seems to be
prioritizing long-term performance over short-term profits, which in our
opinion is the way to go.

 Although Netflix has started creating original content, we believe another

weakness is their dependency on striking deals with content owners. They need
to do so in order to constantly upgrade their streaming catalog.
Opportunities:
We believe the main opportunity here for Netflix is to expand. Netflix first
internationally rolled out to Canada in September 2010, eventually launching in
many European countries and South American countries. Now they are present
in about 50 countries, and as mentioned above, they plan on expanding to at
least 200 countries by this time next year.
Netflix has started to produce Movies as well recently, we believe that if they
were to continue expanding on the Original Content business they could very
well become a full-on entertainment company producing their own movies and
T.V shows. This combined with the fact of showing it online to their growing
existing customer base could make a killing.
Threats:
The main threat Netflix faces is competition. The online market for streaming
service is constantly subject to change and technological updates. We believe
that in such a market, subject to constant changes, with low barriers to entry the
possibility of increasing competition is high. As of now Netflix has 2 main
competitors in the form of Amazon Prime, a yearly subscription service which
on top of providing the user with free shipping all year long, allows them to
access its instant streaming platform that boasts a lot of content. Secondly,
HBO recently released HBOGO, another online movie subscription service to
which customers can sign up, without necessarily needing an existing, or new
membership with HBO cable T.V. CBS also recently announced the possible
introduction of a new online streaming service.
We believe the black market around the world in the form of downloading is
also a potential threat for Netflix. Increasingly high numbers of young people
between the ages of 20 and 30 download content for free. These customers
dont need a subscription service at all, and most content is available to them
for free.

Forecast:

I Know First supplies financial services, mainly through stock forecasts via
their predictive algorithm. The algorithm incorporates a 15-year database and utilizes
it to predict the flow of money across 2000 markets. The self-learning algorithm
uses artificial intelligence, predictive models based on artificial neural networks, and
genetic algorithms to predict money movements within various markets.
I Know First released a bullish forecast on Netflix. The one-year forecast for Netflix is
shown below. We notice that on the 1 Year period, Netflix has a signal of 160.65 and
high predictability of 0.46.

I Know First wrote a Seeking Alpha Article which argued that the investors had
concerns at the time about the international expansion and content costs and how this
eventually has impacted Netflix Inc. future in regards of new and exciting content as
well as the international expansion. Since this algorithmic forecast article Netflix, the
stock price has risen by 145%. In the hitmap below you can see the signals provided
on January 7th, 2015 and we can see that the algorithm correctly predicted the behavior
of the stock price in the 3 months and 1 year periods.

Conclusion:
We believe Netflix is on track toward significantly disrupting the linear TV market
through strong subscriber growth, content differentiation, and a better consumer
proposition. We think the company is benefiting from key secular trends, including the
proliferation of Internet-connected devices and increasing consumer preference for
on-demand video consumption over the Internet rather than linear TV. Higher
subscribers have a disproportionately larger impact on profitability as relatively fixed
content costs account for the majority of Netflixs costs. As mentioned earlier in the
SWOT analysis Netflix is prioritizing long-term performance over short-term gains,
this reinforces our fundamental, and algorithmic view that Netflix is a long-term buy.

SWOT ANALYSIS
Strengths:

Brand Recognition: The Netflix brand is very well known and has become a verb among many
internet users.

Accessibility: The Netflix App has enabled their subscribers the ability to stream media on
nearly all internet enabled devices.

Original Content: Award winning original content for series House of Cards and Hemlock Grove
and other critically acclaimed titles.

Strengths:

Brand Recognition: The Netflix brand is very well known and has become a verb among many
internet users.

Accessibility: The Netflix App has enabled their subscribers the ability to stream media on
nearly all internet enabled devices.

Original Content: Award winning original content for series House of Cards and Hemlock Grove
and other critically acclaimed titles.

Cost of Content: The cost of mass licensing packages and the in-house original content
production has the company undertaking a large amount of debt.

DVD Subscribers: DVD and Blu-ray subscribers have dramatically declined in 2013.

Raising Subscription Prices: Netflix has a difficult time raising subscription prices. The last
attempt to raise monthly subscription prices left currently subscribers upset and Netflix stock
tumbling.

International Expansion: The ability to create original content will enhance international growth.

Original In-House Programming: With many house-hold entertainment devices connected to the
internet, there is an opening for internet tv and Netflixs exclusive in-house content poises the
company for that demand.

Word-of-Mouth Campaigns: Marketing expenses have steadily decreased due to word-of-mouth

campaigns based on original content.

ISPs: Netflix accounts for about 30% of daily internet traffic. With net neutrality laws struck
down, Netflix may have to assume more debt or cut content.

Competition (Amazon Prime, YouTube): Both, Amazon Prime and YouTube has announced
their own original content productions and aim to be a direct competitor to Netflix.

Content Price: The price of licensing and renewing those license agreements remain to be the
largest threat to the companys ability to operate at a profit.

Weakness:

Cost of Content: The cost of mass licensing packages and the in-house original content
production has the company undertaking a large amount of debt.

DVD Subscribers: DVD and Blu-ray subscribers have dramatically declined in 2013.

Raising Subscription Prices: Netflix has a difficult time raising subscription prices. The last
attempt to raise monthly subscription prices left currently subscribers upset and Netflix stock
tumbling.

OPPORTUNITIES:

International Expansion: The ability to create original content will enhance international growth.

Original In-House Programming: With many house-hold entertainment devices connected to the
internet, there is an opening for internet tv and Netflixs exclusive in-house content poises the
company for that demand.

Word-of-Mouth Campaigns: Marketing expenses have steadily decreased due to word-of-mouth

campaigns based on original content.

THREATS:

ISPs: Netflix accounts for about 30% of daily internet traffic. With net neutrality laws struck
down, Netflix may have to assume more debt or cut content.

Competition (Amazon Prime, YouTube): Both, Amazon Prime and YouTube has announced
their own original content productions and aim to be a direct competitor to Netflix.

Content Price: The price of licensing and renewing those license agreements remain to be the
largest threat to the companys ability to operate at a profit.

Recommendations:
Financing and licensing is the immediate threat to the companys ability to operate on the short-term.
Management may consider introducing a conditional price increase that would supplement some of these
costs by implementing limited advertising between programming. The in-house original content is a
noteworthy investment that has benefited the company by generating a word-of-mouth campaign and
proving that the company can be an award winning content producer.
Reviews:
Yelp or Google reviews would not benefit the company or service. Netflix has few competitors due to the
complexity and extreme cost of content licensing that essential prices out the competition to only a few.

Netflix SWOT analysis

Posted on 20/03/2016

The article is based on Netflix SWOT analysis, which can be found in the Library, in CayenneApps
SWOTapplication.

In February 2007, ten years after its founding date, Netflix delivered its billionth DVD. The company was
extremely successful at that time, but decided to pivot, and moved away from its original core business model
of mail-ordered DVDs, and introduced a new one video on demand via the Internet.
This decision was the beginning of a new technological age that offered customers a comfortable way to watch
movies legally without leaving home. High quality, fast and easily accessible content available from many
different devices anytime, anywhere, and at low prices has already attracted more than 75 million
subscribers around the world.
Even though the number mentioned above looks impressive, it appears that this is just the beginning. Cisco
predicts that by 2019, 80% of all IP traffic will be video streaming an increase of 16% compared to 64% in
2014. This years prediction for mobile-only video traffic is 20% growth for the next few years (from 55% in
2015 to 75% in 2020).
These numbers were truly astonishing, so we decided to identify (with a little help from the SWOT analysis)
what kind of strengths and weaknesses Netflix has developed, which opportunities and threats it may face
during the next few years, and, finally, how all four types of features relate to each other.

Prices
Netflix SWOT analysis from CayenneApps

Netflix is in a tight spot. On one hand, the company needs to compete not only with other streaming services
such as Amazon Prime or Hulu Plus, but also with cable television which is still very popular, easily
accessible, and filled with live news and unique content. On the other hand, the company has another major
rival the vast and open Internet where anyone can find illegal but free content available to download.
Netflix has found the remedy for both types of competition in an affordable price. Netflixs subscription costs
vary from $7.99 up to $20 per month which, compared to $60-$100/month for cable is relatively
cheap. These prices are also attractive enough to convince the average Internet user to switch from torrent
networks and sites such as the Pirate Bay to Netflix. The American company claims not only to free its users
from the legal risks associated with downloading illegal content,but also from moral issues connected with
stealing content and intellectual property.
However, to keep prices competitively low, Netflix needs to find a balance between maintaining good
relationships with the distributors and aggressively negotiating content licensing costs with them. This
dependence on the primary asset of any video company its content, results in a serious vulnerability.

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This vulnerability can lead to rising costs, wars with the cable providers regarding content accessibility or
even conflicts with content owners (such as Sony) who lean on Netflix for not cracking down hard enough on
customers who circumvent geographic licensing restrictions.
Netflix has already discovered that being so dependent on external sources is a weakness and risk so great,
that it needs a proper response its own original proprietary content.

Original Content
Netflixs first big original series was the House of Cards, which debuted in 2013. The producer of the series
was the famous director David Fincher (Seven, The Social Network), and the cast included Kevin Spacey (KPax) and Robin Wright.
The House of Cards was a game changer for Netflix. All episodes of the first season of the show were
released at the same time, and the response of the critics was more than positive. The House of Cards not
only attracted many new users but also proved that the key to their customers loyalty is a unique and abundant
content library. In 2016, the show has already had four successful seasons behind it, and the contract has
already been renewed for the next one in 2017.

Netflix House of Cards

But the House of Cards was only the beginning; later on, the company produced many other shows including
high ranked productions such as Orange is the New Black, Marco Polo, Bloodline, Daredevil or The
Narcos. Netflix has recently announced that it plans to have a total of 31 scripted shows by the end of 2016,
which is almost two times more than it aired in 2015. Additionally, the company is also working on 30 kids
shows, ten new feature films, 12 documentaries, and ten stand-up comedy specials.
In the long run, Netflix should strengthen its position by increasing the amount of available original
content, new channels and video libraries with bonus features, TED conference videos, and new TV shows
aired just after their initial broadcasts.
However, the competition does not sleep and is keeping up with the race. Therefore, it seems that the content
and the size of the library will continue to be the subject of a fierce fight between streaming

services.

User-centric approach
Netflix has gained its popularity not only by increasing the amount of content but also by improving the
development process of its product. Their applications stand out from the crowd by having intuitive user
interfaces and cross-platform compatibility. These features make them widely appreciated by its users,
considering that Netflix apps are frequently used as a synonym for a great User Experience.

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Moreover, Netflix, in order to keep their users satisfied and facilitate navigation through thousands of movies
and TV shows created the personalized recommendation system which suggests users what to watch next.
Netflix gives its customers the possibility to create several profiles per account so that the recommendations
can be used by all members of the household separately. Therefore, each and every family member can
customize Netflix and receive its own tailored suggestions without paying extra, consequently making the
family less likely to churn.

International challenges and expansion

In 2015, Netflix was available in 60 countries, but this was not enough. At the beginning of 2016, the
company confirmed that it is broadening its range and would be now available in 130 new countries,
including India, Russia, Poland, Saudi Arabia, Vietnam, Nigeria, Singapore, Turkey and South Korea. The
announcement was great news for many users but didnt solve all their problems.
On the one hand, Netflix is available globally, but still does not cover all of the Chinese market, and its
popularity in some of the Asian, African and European countries is still insignificant.
Firstly, its low popularity may be connected directly with Netflixs high dependence on the availability of fast
internet connection. The US and Europe have very high levels of internet connectivity, but large parts of
Africa are still mostly an internet desert, and Asia has much less internet connectivity than Europe or

the US despite having very dense population centers in some areas. The future network upgrade and
expansion may open the doors for new opportunities in Africa and Asia, but it wont help in
the case of strict regulations in China.

Internet connection in the World map

The companys CEO, Reed Hastings, discussed Netflixs ambitions to launch in China. China is an excellent
market it includes roughly 20 percent of the worlds population. However, any streaming company in
the Middle Kingdom needs an explicit permission from the government to operate. This includes obeying strict
rules that dictate what kind of content can be distributed and being subject to censorship before streaming of
foreign TV shows. Entering the Chinese market also means facing fierce competition from domestic
streaming services many of which have close ties with, or even funded by the government.
Operating on local markets is difficult, and this not only applies to China. On the one hand, Netflix collects
and makes the use of data from across the world and countries of all sizes. Therefore, it can create
valuable suggestions for new or small markets, experiment with mixing in content recommendations
from foreign markets and eventually satisfy the most demanding customers with unique content of
highly specific or niche tastes.
On the other hand, domestic providers can produce series that are designed for and dedicated to viewers from
their own countries, which results in giving a better match to the customers needs. This is true not only in
China but also in countries where the content library is limited to videos that are licensed for viewing in that
specific country.
Another issue is that even though Netflix is not available in China, it does not mean that Chinese are not using
Netflix. For the time being, about 20 million users from China and millions from other countries access
Netflix by using IP re-routing software through DNS proxies.

DNS proxies help to circumvent Netflixs geographic limitations by pretending that the user is in another
country. Such a practice is not welcomed warmly by content owners (such as Sony). This is a top priority issue,
and Netflix, in order to avoid legal issues with local authorities and content providers will need to work harder
to solve this problem, and eventually, find the right way to achieve the companys goals in China.

Summary

Netflix already has a history of being the first to embrace the changing habits of consumers by successfully
switching from DVDs to online streaming. However, the company is not resting on its laurels. Netflix was the
first company to resigned from
making money off streaming ads between its movies and proved that the satisfaction and convenience of
its users, who were tired of watching time-consuming ads, is once again more important than higher income.
And even though some say that Netflix has become too successful too quickly and is not ready to fight with the
competition, I believe they have created enough strengths to win not only the battle but the entire war.
But who knows what the future will bring whether the American company will flourish or fall apart like
a house of cards? I guess we will find out in the subsequent seasons

We have compiled a lot of information about Netflix and presented you with our vision of the American
company, but now, it is your turn! Please, visit our website and feel free to modify the Netflix SWOT
analysis we have prepared.

ExternalFactorEvaluationMatrix(EFE)

1.
2.
3.
4.
5.

Opportunities
Potentialforcreatingmoreoriginalcontent
BidforcontractsforpopularTVseries
PotentialforincreasingstreamingandDVDlibrary
Marketingpotentialamongstyoungerviewers
Possibleinternationalexpansion

Weigh
t
0.06
0.06
0.05
0.05
0.03

Ratin
g
4
3
2
4
2

Weighted
Score
0.24
0.18
0.10
0.20
0.06

6.
7.
8.
9.
10
.

1.
2.
3.
4.

Potentialpartnershipswithotherplatforms(i.e.tablets,gameconsoles,
etc.)
Potentialforrevenuefrom3rdpartyadvertismentsonredreturn
envelopes
Potentialproductexpansion(i.e.livesports,gaming,etc.)
PotentialforexpansionofBlueRaylibrary
AppleTVPartnership

Threats
PotentialforDVD'stobecomeobsolete
Restrictionsincontractsforstreamingcontent
CompetitioninthevideoandTVsteamingmarket(i.e.Hulu,Amazon,
etc.)
CompetitionintheDVDrentalmarket(i.e.Redbox,etc.)

0.05

0.10

0.05

0.05

0.04
0.05
0.05

1
3
3

0.04
0.15
0.15

Weigh
t
0.05
0.06

Ratin
g
3
3

Weighted
Score
0.15
0.18

0.05

0.15

0.05

0.10

5.
6.

Partnershipsformingbetweencompetitors(i.e.Amazon&Epix,etc.)

0.05

0.10

Bandwidthrestrictions

0.06

0.12

7.
8.
9.
10
.

Increasingoverheadcosts(i.e.licensing,etc.)
Priceadjustmentscanresultincustomerdissatisfaction
PotentialchangesmadebytheMotionPictureAssociationofAmerica
Potentiallossofstreamingavalabilityfromexclusivecontractswith
competitors
TOTALS

0.06
0.03
0.03

3
2
2

0.18
0.06
0.06

0.07

0.21

1.00

2.58

1.
2.
3.
4.
5.
6.
7.
8.
9.
10
.

InternalFactorEvaluationMatrix(IFE)

Weigh
t
0.03
0.05
0.05
0.10
0.03
0.05
0.08
0.03
0.05

Ratin
g
3
3
3
4
3
3
4
3
4

0.05

0.20

Weigh
t
0.03
0.10
0.03
0.03
0.03

Ratin
g
2
1
2
2
2

Weighted
Score
0.05
0.10
0.06
0.06
0.06

0.03

0.06

0.05
0.05
0.05

1
2
2

0.05
0.10
0.10

Videoprovidersenteringexclusivecontractswithcompetitors

0.10

0.10

TOTALS

1.00

Strengths
FirstMoverAdvantage
Brandrecognition
Highrepeatcustomersatisfaction
Extensivecustomerdatabase
LargemovieandTVseriesselections
Origianlviewingcontent
Lowoverheadcosts
Predictablerevenuestreams
Affordablecustomerpricing
Availableonmultipleplatforms

1.
2.
3.
4.
5.
6.
7.
8.
9.
10
.

Weaknesses
Ageoftitlesavailableforstreaming
Expiredandlossofcontracts(Sony,Stars,etc.)
ProcessingtimeforshippingDVDs
PotentialfordamageofDVDs
UnabletocontroltimetablecustomerkeepsDVDs
Decreaseincustomersatisfactionoverchangedinmembershippricing
plans
Competitorshavegreaterfinancialresources(i.e.Amazon,etc.)
Growthisbeginningtoseeaslowdown
Unabletoofferstreamingofnewreleasesfor28days

Weighted
Score
0.08
0.15
0.15
0.40
0.08
0.15
0.30
0.08
0.20

2.52