Beruflich Dokumente
Kultur Dokumente
Kevin Andrews
Ebube Anizor
Nasir Gondal
John Selvakumar
Appendices 2
CONTENTS
Netflix
Appendices 3
COMPANY OVERVIEW
Netflix was founded in Scotts Valley, California, in August of 1997 by Reed
Hastings and Marc Randolph. The idea for the “DVD-by-Mail” business was
born out of Hastings’ own personal frustration from paying $40 in late fees for
figure out a better way for consumers to experience what was then the new
video format – DVDs - and began his quest to disrupt the traditional movie
In just over a decade Netflix has developed into the world's leading DVD rent-
by-mail and video streaming company. With over 14 million subscribers in the
Netflix’s mail or streaming services. Netflix employs 1,700 staff and reported
cycle (traditional DVD rental service) and the beginning of another (on-line
Streaming below) were met with failure their foresight and “big bet” into this
technology has led to their dominant status in the movie streaming market, and
Netflix
Appendices 4
has provided them with significant power in the industry. Figure 1 depicts how
While plans for geographical expansion are underway Netflix currently only
TECHNOLOGY
a two hour movie – needless to say the project the scrapped. Noticeable
cost of $300 it took two hours to download a two hour film.1 However, the
viable offering. Progress in both regards will continue to affect growth in the
Adoption
Netflix’s service offerings reside in distinct stages in the technology life cycle
DVD-by-Mail
(Figure 2).
Streaming
DVD-by-Mail
DVD-by-Mail lies somewhere between the “Early Majority” and “Late Majority”
stages. The service is still growing; however the entire model as a means of
of the delivery chain peaks and the cost of shipping DVDs becomes too high
Streaming
“Early Adopters” stage, however that is being driven full steam ahead into the
tablets, PCs, and just about any device that can connect you to the internet are
all becoming “Netflix enabled” devices that will likely catapult the Netflix
Evolution
foretell the gradual dominance online delivery. That being said, Netflix
anticipates the continued growth of the DVD-by-Mail business into 2013 (see
Figure 3) driven by the growing closures of video stores and Netflix’s delivery
Netflix
Appendices 7
technology Netflix employs in delivering a movie via mail or via streaming can
be classified as key; providing Netflix with short term advantage, they are
imitable in the longer term. See Appendix D for details on Netflix’s technology
CURRENT STRATEGY
BUSINESS STRATEGY
intimacy strategy heavily rooted in innovation to make it simple, fast and easy
devices. Subscribers are offered a choice of delivery method and platform that
Netflix
Appendices 8
is most convenient to them, all at one low price. This strategy has proven to be
a highly effective strategy as it helps grow and entrench the company’s greatest
resource: its loyal subscriber base. Through its focus on customer service and
user experience, Netflix has built itself into one of the leading brands in home
entertainment.
TECHNOLOGY STRATEGY
At the genesis of Netflix in 1997, its founder Reed Hastings was said to have
envisioned a future for online streaming content – thus the name “Netflix” - but
knew the timing was not right. It was obviously too early in the technology
cycle (or “S-curve”) for online streaming content and the technology had not yet
reached its breakthrough point2. When the company sensed that the
beginning to catch up and that streaming had become more pervasive, the
Technology strategy and innovation are at the heart of Netflix’s ability to deliver
2Wolf, Michael (2010, July 1, 2010). How Netflix Shaped Skype’s Platform Strategy. Message posted to Gigaom
archived at http://www.gigaom.com
3 Bulik, Beth Snyder (2010). How Netflix Stays Ahead of Shifting Consumer Behaviour. Advertising Age, 81(8), 28
Netflix
Appendices 9
“operate efficiently”4.
way to enjoy and experience content and through its pricing strategy
which entails charging one price for quick delivery of DVDs through mail
• Netflix then captures value through fees charged to its large installed
billion in revenue.
Platform Strategy
5 Bulik, Beth Snyder (2010). How Netflix Stays Ahead of Shifting Consumer Behaviour. Advertising Age, 81(8), 28
guided by the company’s goal “to be ubiquitous on whatever device gets the
devices, Netflix has positioned itself to benefit from network effects and
capture more value in the form of subscription fees and loyal customers. This
strategy also helps the company defend its position against other competing
INNOVATION STRATEGY
Disruptive innovation has been the hallmark of Netflix since its inception in
1997. It was one of the first companies to offer DVD by mail ordered over the
internet. This service provided a cheaper, more convenient way for customers
to enjoy DVD movies and television shows compared to the traditional brick
and mortar video rental store, with the added convenience of no late fees.
Netflix perfected the fulfillment of its DVD rental by mail business by investing
customers to receive and easily return DVDs by mail. 8 Faced with competition
from kiosks and other mail based rental companies, improving broadband
gradually shifting its innovation focus from DVD by mail to growing its library
7Anonymous. (2010, Jan 23). Netflix Announces Multiple Partners to Instantly Stream Movies and TV Episodes from
Netflix to the TV [Electronic version]. Leisure & Travel Week, p. 34
8 http://www.inc.com/magazine/20071001/netflix-vs-blockbuster-what-would-you-do.html (July 4)
Netflix
Appendices 11
platforms.
Open Innovation
across multiple platforms. In one of its most well known initiatives, Netflix
engaged the general public and open source community by offering $1 million
hundreds of new apps built when it opened up its API including apps to queue
article, the $1 million competition illustrated how Moore’s law may not be
which states that hardware power will double within approximately two years,
the author contends that the ‘Netflix law’ illustrated by this competition
suggests that you will only realize a 2-3% improvement rate and only for a
short period of time.10 In addition to cost and time savings, this example
9Klaassen, Abbey. (2009) Brands get boost by opening up APIs to outside developers. [digital version] Advertising Age.
80 (40), 17
10 Gomes, Lee. (2009) Netflix’s Law: The Future of Software. [electronic version] Forbes Magazine
Netflix
Appendices 12
INVESTMENT PRIORITIES
SUMMARY
Overall Netflix has made well timed adjustments in strategy according to both
12 IBID
Netflix
Appendices 13
and effective recommendation engine. This “intimacy” is likely how Netflix will
differentiate itself in the broader and to-be-hotly contested IDV industry. See
Netflix
Appendices 14
ENVIRONMENTAL ANALYSIS
segment of the IDV industry exhibits growing rivalry, the existence of many
substitutes and the threat of powerful entrants. Table 1 summarizes the Five
FORCES ANALYSIS
Force Strength
Competitors Medium/High
• Market rapidly growing. Estimated at US$13B by 2011
• Online based services lowers entrance costs
Suppliers High
• Several distribution avenues
• Threat of forward integration (i.e. providing Internet
delivery services)
• Flexibility in licensing content
Buyers High
• Demand < Supply
• No switching costs
Substitutes Medium/High
• IPTV, Download Services (e.g. iTunes)
• Traditional Cable and Satellite TV
New Entrants Medium
• Potential for M&A among Major Players
• Strength could be high if content providers forward
integrate
The environmental analysis provided below examines the opportunities that can
be exploited by Netflix to grow and strengthen its market position, and the
Netflix
Appendices 15
OPPORTUNITIES
Game Consoles
With a high speed connection, Netflix content can be streamed via a game
console. There are over 60 million game consoles in the US13 ; representing a
potential asset that Netflix can exploit to expand its customer base. In April
2010, the firm signed a contract with Nintendo whereby Netflix subscribers can
stream video on the Wii at no additional cost. At the end of first quarter of
video; but this still accounts for only 30 percent of Netflix-enabled devices14.
Mobile Devices
As of June 2010, or 80 days after product launch, Apple has already sold 3
million iPads15 . Netflix has launched an iPad app that allows existing
smartphones and tablet devices will enhance the complementary asset base for
Netflix and provide further incentive for the new customers to sign up and
International Expansion
14 http://www.zdnet.com/blog/btl/netflix-55-percent-of-subscribers-now-streaming-movies/33415
15 http://www.apple.com/pr/library/2010/06/22ipad.html
Netflix
Appendices 16
Currently, Netflix streaming is available only in the United States. However, the
beyond the US. According to research by Morgan Stanley16 there are 124 million
households in the top 10 countries that meet key criteria for Netflix such as
broadband usage rate, GDP, and affinity for Western culture. By gradually
expanding its services into these countries Netflix can further leverage its
digital content library and build on its brand recognition in the US to become a
firm with international scope and reach. Naturally obtaining the content
Content Licensing
New films are released by studios in a process called windowing whereby film is
Netflix
Appendices 17
For Netflix, only 25% of the content represents new releases17. However, with
the focus of the company shifting to digital streaming, the company might have
allow for better access to new content. Content access will be a key challenge
going forward in light of a recent agreement Netflix has signed. Realizing that
the firm needed to improve its relationship with movie studios to gain access to
wider variety of new content, Netflix signed an agreement with Warner Brothers
Home Entertainment whereby Netflix will not sell new releases until 28 days
after they go on sale. In return, Netflix will be “able to extend the range of
rule changes whereby certain “managed services” will be exempt from net
neutrality rule. Managed services are those services for which network carriers
transferred more quickly. Since many of the US network carriers are affiliated
managed services rules to reserve high bandwidth for their affiliated content
providers. For example, Comcast (who recently acquired NBC) might provide
18 CNET (2010). “netflix, warner bros. Rejigger movie renting”. Accessed form http://news.cnet.com/
8301-31001_3-10426792-261.html
Netflix
Appendices 18
priority access to bandwidth for its own content. Thus if subscription video
which don’t have an affiliation with any network carrier may be at a competitive
disadvantage.
Netflix
Appendices 19
COMPETITIVE ANALYSIS
When Netflix launched in 1998 it effectively disrupted the video store industry.
heading to the store Netflix offered quick turnaround and no late fees. By 2007
fought back toying with no-late-fee schemes and launching its own cheaper
DVD mailing service (with the option of pick ups at one of its 5000 retail
stock value has dropped 79% in 2010 to under 20 cents and is no longer listed
victory. Netflix’s move into the IDV business has multiplied its challenges and
COMPETITORS
Currently the market for Internet delivered video consists of three segments:
19 http://www.inc.com/magazine/20071001/netflix-vs-blockbuster-what-would-you-do.html
Netflix
Appendices 20
The key competitive factor is access to content or the film release windows (See
Figure A1 in Appendix A). This is the mechanism that rights holders use to lock
Netflix
Appendices 21
in early profits from DVD releases (the most lucrative) and through other
distribution channels over time. This factor alone may be enough to keep
congregate to buy DVDs; and while rentals remain 75% of its business, sales of
DVDs are far more profitable for studios. Studios earn up to $18 on each DVD
sold compared to around $4 for a rental. In March 2010, Warner Bros. signed a
deal permitting Blockbuster to rent DVDs online and through mail order the
same day they are released for sale; Netflix and Redbox are held to 28 day wait
period.
“all you can eat” in a month model has brought it early success and has been
acceptable by studios for the DVD-based product because Netflix purchases the
DVD’s in cash up front. With the streaming model lucrative DVD sales are lost
Netflix
Appendices 22
the emerging IDV industry. The existing customer base gives the companies
services. However these businesses also have existing revenue streams and
investments to protect. In the long term, IP based television and delivery may
threaten margins and protected revenue made on its traditional business (e.g.
NEW ENTRANTS
high margin DVD business that studio the biggest threat from new entrants to
Netflix are the studios themselves; should they choose to forward integrate –
the Industry Outlook section, the future success of the company will rely heavily
upon its agreements with movie studios and what part the studios themselves
want to play in the IDV value chain. As a whole the comparatively low margins
NETFLIX POSITIONING
package that consumers use. Its success is based on clearly defining where and
how it competes:
adult & instructional) is not in scope. Pay-per-View and DVD will likely
revenue streams.
COMPETITIVE ADVANTAGE
Netflix’s disruption of the traditional movie rental industry has not only
garnered the company financial success but several assets that can be
INTELLECTUAL PROPERTY
protect its intellectual property both in the U.S. and abroad. The company uses
In 20006 Netflix was granted a patent describing its mailing DVD rental
business model20. Just hours after receiving the patent, Netflix filed a patent
20http://patft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&p=1&u=/netahtml/search-
bool.html&r=1&f=G&l=50&co1=AND&d=ptxt&s1=netflix&OS=netflix&RS=netflix
Netflix
Appendices 24
their online rental operation. The suit was settled in 2007 – with terms
undisclosed. Blockbuster did indicate that the settlement materially affected its
patents21 .
COMPLEMENTARY ASSETS
Installed Base
under than 6 million at the end 2006, to 14 million by the spring of 2010 22. The
company’s large install base and high level of customer satisfaction is arguably
Distribution
When Netflix first launched the business didn't seem to require cutting-edge
and get those mailers to customers”23 . But keeping customer high did in fact
has always been building enough centers so that most Netflix subscribers
22 http://ir.netflix.com/
receive their movies within a day of shipping. The centers also give Netflix a
competitive advantage over Wal-Mart and Blockbuster, each of which sends out
Customer Service
Now that Netflix has settled into the leader in DVD rentals, they have decided to
focus on another aspect of business, customer service. One might find this odd
due to the fact they do not have a physical store and are online only business,
but they have eliminated e-mail based customer service inquiries, thus forcing
all complaints, questions, and suggestions to their call center. Unlike other
to contact customer service, they have made it very simple and easy to find on
their main page. And unlike the increasing trend of many other companies, they
have chosen not to outsource their call center. Their call center is located in
License Agreements
The company has license agreement with large content providers such as
Warner Bros. and various studios and distributors granting Netflix the right to
provide its subscribers with movies and TV shows on DVDs and Blue-ray discs.
On the other hand, streaming content over the Internet involves the licensing of
rights which are separate from and independent of the rights that the company
acquires when obtaining DVD content26 . Unlike DVD, streaming content is not
subject to the First Sale Doctrine (Netflix’s right to do whatever it desires with a
with those studios and content providers, Netflix is in a very strong position in
to acquire the most popular movies and TV shows available for streaming over
the net27.
Roughly 50 percent of Netflix members are now instantly watching movies and
via game consoles, Blu-ray disc players and other devices that have been on the
market since 2008 28. The viewing experience is enabled by Netflix controlled
Ready Devices”). These Netflix Ready Devices currently include Blu-ray disc
players manufactured by LG, Panasonic, Philips, Samsung, Sony and may more.
Also customers can stream the content via Internet-connected TVs, digital
video players and game consoles such as Xbox 360, Nintendo Wii, PlayStation
3. Even Home Theatre systems that are “Netflix Ready” enable users to have
28 http://blog.netflix.com/2010/03/friends-update.html
Netflix
Appendices 27
access to the streaming content only if they have internet feed available 29 .
Thus, users do not need to acquire any hardware as long as they have one the
mentioned devices. Netflix elegantly offers convenient and practicality for any
type of customer who may be comfortable using only one of those devices.
29 http://www.netflix.com/NetflixReadyDevices
Netflix
Appendices 28
INDUSTRY OUTLOOK
The now infamous failure of the music industry to adapt to the digitization and
many in the movie business contemplating their future in light of the success of
Netflix. The aforementioned “28 day agreement” that studios have negotiated
revenues. While the measures that studios put in place to not commoditize its
business is key to industry outlook, activity in other areas will also shape the
outcome.
STUDIO REVENUE
Historically, studio revenue comes from the distribution of their movies through
a chain of different channels and the importance and value of second rights
(see Figure A2 in Appendix A) has grown over time to produce the kind of
revenues and splits seen in Figure 4 below. Consequently studios will tread
lightly in addressing IDV given the revenues other competing channels provide
to the industry.
Netflix
Appendices 29
The movie industry has been wrestling with where online fits into the
even after TV. With all traditional providers of services for each of these
windows capable of offering online, many models are possible and have been
tried. Placement is key to not only maximizing revenues from the new format
but to minimizing losses from existing ones.30 For example VOD, with its pay-
per-view model and revenue share for studios, makes a far more appealing
proposition for studios than Netflix subscription model and therefore VOD
once they release a film for rental, any purchaser of a licensed rental copy can
rent it out for whatever price they choose and the same goes for online. Studios
have no control over pricing, just license conditions, such as time, geography
So what can studios do? Should they try and starve Netflix and the likes of
content, compete directly with them by setting up their own online distribution
channels? Needless to say the answers to these questions are of keen interest
to Netflix.
31 Ibid
Netflix
Appendices 31
RECOMMENDATIONS
The biggest strategic challenge facing Netflix will be the content agreements
put in place. They key for Netflix will be to reduce the “blackout period” from
when they can release new titles. This is currently difficult given the desire for
the studios to generate revenue from DVD and Blu-Ray disc media sales for
laptops, netbooks, tablets, etc), the pressure for the studios to fairly negotiate
will mount. Due to Netflix’s first mover advantage, library, user experience,
maintain transition from gorilla status in DVDs to the same in the streaming.
the content providers could start their own offerings and have several
Netflix
Appendices 32
• Large install base (e.g. Windows) can be an effective barrier to entry and
spur retention
deliver the Netflix experience. This can be a challenge and have brand
Geographic Expansion
proprietary file formats for its iPod, iPhone and iPad. Netflix can
delivery times) may be necessary as more users get access to films via
Key to long term growth when subscription growth flattens will be leveraging
enter other business. This strategy may provide attractive growth prospects for
the path for extension into other physical / digital mediums that may work on a
subscription basis; the most notable being video games, books and even music.
THE BET
In the 5 years heading into 2010 Netflix has experienced great growth with
23% and a market cap of US$6.2 billion32 . Even those that invested in the
company as recent as January 2010 would have doubled their money by July
2010. So what room is left future investors? Netflix’s prospects for growth are
India, China)
• Mobile network speeds improving for mobile devices (4G networks, etc)
device manufacturers
Investment
firms and potential content challenges in the IDV industry a “large” investment
cannot be recommended.
Netflix
Appendices 35
Netflix
Appendices 36
APPENDICES
41141)
Netflix
Appendices 37
APPENDIX B: INDUSTRY
Figure B1: US Subscription Home Entertainment Market Size (Source: PWC 2009)
Buyer Power – In this case, the buyer would be the end-user utilizing the
Netflix service (either the “DVD by Mail” model or “Streaming model”). The
buyer does have a significant amount of power in this relationship, as there are
many other digital alternatives for them to consume the same media that
Netflix provides, meaning there are very low switching costs for the end
more and more people are realizing the future of broadband media. While the
Netflix
Appendices 38
“DVD by mail” business model that served as the foundation of Netflix in the
early years slowly fades, Netflix has successfully transitioned into the streaming
media streaming, many companies in the US are also offering streaming media
Netflix.
Supplier Power – In this case, the suppliers for Netflix would be the movie
studios granting them the rights to stream their content via their service. Of
course, there is the imminent fear from these studios that by providing their
content to Netflix, they are cannibalizing their own DVD/Blu-Ray title sales
through regular distribution channels. This would lead one to believe that the
Hollywood studios do carry much of the power in this relationship, which is true
to some extent. Don’t forget that the “DVD by Mail” business is profitable for
the studios as well, so even while the model is transitioning, there are still
studios. Overall, this “upper hand” that the movie studios perceive to have is
slowly eroding and shifting into the hands of Netflix for the following two
reasons:
Netflix
Appendices 39
1. Lessons learned from the “Apple iTunes model” – whether the studios like
it or not, movie and television content is being consumed online in a big
way, growing more and more as each day passes. Some could say that
they days of fixed disc content like DVD, and even Blu-Ray are numbered.
After seeing the challenges that their big music label neighbours fell
victim to in the music industry, many Hollywood movie houses like
Warner Brothers are much more willing to get ahead of this inevitable
trend and work with Netflix on this streaming service. Just as iTunes
proved to the world that there was a market for legally downloadable
music for a fair price, Netflix seems to feel the same way for streaming
TV & movie content, and so far their business growth is proving them
right.
2. The Gorilla That is Netflix – At some point, even those movie studios that
first resisted the “streaming” model cannot ignore the impact and power
that Netflix has in the video streaming market. By the nature of sheer
“industry peer pressure” combined with not wanting to be the few that
have not joined Netflix’s streaming vision, the transition of “Buyer Power”
is slowly but surely transitioning for the big movie studios and into the
hands of Netflix as a pure result of their “Gorilla” status in the “DVD by
mail” and “Streaming” markets.
Threat of New Entrants – As the streaming video market heats up, it will
streaming business have been Blockbuster, Vudu (which is now owned by Wal-
Mart), Cinema Now, Hulu and Hulu+, and Amazon.com. While this list of
(12.3 million) that Netflix currently has on record. (Netflix, 2010). Netflix’s first
Netflix
Appendices 40
They currently offer over 15,000 titles for the rent-by-mail side of the
business, and over 30,000 titles available for their streaming business.
APPENDIX C: COMPETITION
Netflix
Appendices 41
Netflix
Appendices 42
Figure C4: Product Portfolio / BCG Matrix (Source: Netflix 2.0, Slideshare)
Netflix
Appendices 43
APPENDIX D: TECHNOLOGIES
Stage Notes
Emerging/Pacing N/A
Key • Streaming technology (e.g. codecs)
• Recommendation and merchandising
algorithms
Base • High Speed Internet
Table D1: Technology Life Cycle
Netflix