Muth 1

Ryan Muth

MKTG 341

18 April 2016

Research Paper: Netflix

Netflix was founded in California in 1997, and was started as a mail-order video rental

and sales service1. Netflixs original subscription model allowed subscribers to pay a monthly

fee, and in return they were able to rent any movie from Netflixs collection and return it when

they wanted to, all through the mail, without any late fees. In 2007, Netflix introduced their

online video streaming service, which was included with the mail-order subscription fee2. Today,

Netflix has over 75 million subscribers world-wide, and produces their own original series and

movies3.

The main reason that Netflix has been able to grow to the level they have is they have

been able to identify important consumer trends and develop their strategy to address these

trends. When the company was originally started during the dot-com bubble, the internet was

quickly becoming more accessible to consumers in the US4, and like many others, the founders

of Netflix recognized this trend and looked for a way to capitalize on it. As the two original

founders attempted to form an idea for their new website, they originally decided that it would be

too expensive for the Netflix model to work with the existing VHS technology1. However, about

a year before the company officially formed, DVDs were first introduced into test markets, and

the founders began to re-develop their strategy incorporating this new medium, which they

believed would have widespread use1. By recognizing this trend before it became widespread,

they were able to develop and implement their initial concept as the market initially began
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expanding, which gave them a huge advantage over their future competition. Initially, the

majority of Netflixs revenue came from people buying DVDs, not renting them. However, the

founders realized that as more people gained access to the internet in their homes, digital media

would begin to replace its physical counterpart as the preferred viewing method. They decided to

transition to a rental-only model, and walk away from what was at the time, the majority of their

business1. Although the decision was shocking and widely questioned at the time, the founders

were able to recognize a trend before their competition, even though it would be almost 10 years

before the conditions were right to implement their online streaming service.

When they first introduced their streaming service, online video access as a whole was

not nearly as widespread as it is today. YouTube had just been founded the year before, but its

rapid growth5 was a clear indicator that internet based media, especially music and videos6,

would continue to replace physical media as the preferred method of media consumption. When

Netflixs streaming service was first offered to their customers, they did not have many

competitors who offered the ability to legally watch a movie online, and the ones that did usually

required the customer to first download the entire film before watching it, and pay on a per-

movie basis. Netflix recognized the desire of consumers for an improvement to this model, and

streamed their movies as they were watched instead of forcing the customer to download the

entire file before they could begin watching it. They also used a similar system as their mail-

service, where different price tiers were allowed to rent more or less movies at a time. For the

streaming service, each tier had a different amount of time available to stream per month, which

allowed the user to watch as much or as little of the title as they wanted, and switch to another at

any time2. By offering this improved viewing experience at a time when watching movies online

was a relatively new but welcome concept to most people, Netflix not only improved the
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experience of their existing customer base which gives them incentive to continue subscribing to

Netflix, but they also made their service more appealing to those considering a subscription.

In order to retain their position, Netflix continues to search for and analyze trends to gain

insights their competition hasnt recognized yet. When Netflix launched the Dutch version of

their streaming service, the Vice President of Content Acquisition mentioned how Netflix will

monitor various BitTorrent sites and analyze the data to see what television shows and movies

are being illegally downloaded the most in each market, and attempt to include those shows in

their offerings7. As millennials grow older and move out of their childhood homes, they are

increasingly opting for services like Netflix instead of a traditional cable setup, and they are

watching it on something besides their actual TV approximately 50% of the time8. In order to

address this growing segment of the market, Netflix offers versions of their software for almost

any device that people watch videos on9, and their monthly rates are significantly less expensive

than cable, and they do not require you to enter into a long contract10. As this generation grows

older and their buying power increases, this trend will most likely continue, and Netflix has

positioned themselves to take full advantage of it.

In my opinion, Netflix must continue to recognize consumer trends before their

competition, and adjust their strategy to best take advantage of those trends. As more and more

people cut the cord and opt for alternatives like Netflix, Netflix will continue to see increased

competition, including services that already exist such as Amazon Prime and Hulu Plus. If

Netflix is not able to innovate and offer a better experience than their competition in the eyes of

their customers, then they face the risk of losing their spot at the top of the market.
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Sources

1. Xavier, John. Netflixs first CEO on Reed Hastings and how the company really got

started. Silicon Valley Business Journal, 8 January 2014. Web. 17 April 2016.

2. Pogue, David. A Stream of Movies, Sort of Free. The New York Times, 25 January

2007. Web. 17 April 2016.

3. IR Overview Netflix. Web. 17 April 2016. <http://ir.netflix.com/>

4. Computer and Internet Use in the United States. United States Census Bureau, May

2013. Web. 17 April 2016. <https://www.census.gov/prod/2013pubs/p20-569.pdf>

5. YouTube serves up 100 million videos a day online. USA Today, 16 July 2006. Web.

17 April 2016. <http://usatoday30.usatoday.com/tech/news/2006-07-16-youtube-

views_x.htm>

6. Sreedhar, Susan. The Future of Music. Institute of Electrical and Electronics Engineers,

1 August 2007. Web. 17 April 2016.

7. Worstall, Tim. How Clever, Netflix Monitors BitTorrent To Purchase Shows. Forbes,

16 September 2013. Web. 17 April 2016.

8. Hughes, Mark. The Millennial Trends That Are Killing Cable. Forbes, 21 March 2015.

Web. 17 April 2016.

9. Devices. Netflix. Web. 17 April 2016. <https://devices.netflix.com/en/>

10. Risen, Tom. Comcast, Netflix and the Death of Cable. US News and World Report, 16

July 2015. Web. 17 April 2016.