Netflix: Strategic Analysis Strategy I – Winter 2012 Basic Information & Assessment of Strategy Netflix is a U. S provider of on-demand Internet streaming media. Launched in1997, it originally offered DVD rental on a pay-per-use basis. In 1999, the company moved to a subscriptionbased model. In January 2008, Netflix began offering unlimited steaming content.
Initial approach aimed to position the company as a low-cost video rental service competing with the brick and mortar stores and movie theaters.Since the product they were offering was not easy to differentiate, Netflix began focusing more on the services provided with the DVD rental rather than the price alone. Netflix introduced a No-Due-Dates-No-Late-Fees model and offered an excellent customer service. It provided a quality customer experience with their user-friendly website, recommendation software, queue function, vast content library and free overnight straight-to-home delivery. A differentiated strategy has enabled Netflix to provide distinct value to their customers.Netflix’s first mover advantage allowed them to garner a large subscriber base and helped them transform the video rental business model.
Netflix in entering into multi-year licenses with studios and distributors to continually provide newer content, attracting more subscribers and allowing for organic growth. Due to the technological advances as well as changing trends in movie viewing and consumer preferences, Netflix’s focus has shifted towards wireless video-on-demand services.The rise of complementary products, such as smart mobile devices and TV’s as well as the proliferation of broadband internet access allowed a fundamental shift in content distribution. Overall, Netflix’s strategy is to retain and attract new subscribers by continually providing a larger selection of content and incorporating new technology to enhance the user experience. The company started its expansion into international markets to leverage their gains from the US market.
It launched its services in Canada, Latin America, the Caribbean, UK and Ireland. 2 Netflix – Strategic Analysis 011 – Strategic Group Map Netflix Subscriber Value Paid TV (content catalog) Amazon/Hulu Kiosk OO Theater Access to Content (online, stores, etc) BB 3 Netflix – Strategic Analysis Strategically Important Activities/Resources Largest subscriber base and social communication data ~ 24M subscribers as of Q3 2011 Obtained through first-mover advantage, low-cost offering, as well as providing customers with distinct value for the service On-line community connected through recommendations, sharing movie lists and reviews Unrivaled portfolio of digital content rightsEarly established relationships and licenses with studios and content providers offer largest movie library Recent deals done with DreamWorks Animation, Open Road Films, Epix, Relativity Media, Nu Image/Millennium Films, BBC Patented method of web-based DVD selection Cloud computing services improve business agility and increase movie streaming capacity Continuously gaining new distribution channels (mobile devices, gaming devices, Internet T V’s, etc. ) increases product penetration High investment in technology architecture and innovation Access to most distribution channels 4Netflix – Strategic Analysis Sustainable Competitive Advantage Netflix’s Large Subscriber Base Is Their Most Sustainable Competitive Advantage Valuable because it allows Netflix to funnel more money into their acquisitions, increasing people’s willingness to pay. In addition, more customers create a more comprehensive experience on their website with their expansive movie reviews and recommendations no competitor can match.
Rare because no other competitor has been able to come close to its 24+ million subscriber base. One of its main competitors Hulu just celebrated reaching 1. million subscribers. 1 Imperfectly Imitable because Netflix acquired such a vast network of consumers through its unique history, utilizing its first mover advantage and accepting losses for its first six years of existence. To replicate its size today would require a competitor to offer more content at lower prices, and be willing to accept hefty losses for an even longer period of time. Non-substitutable because a large number of subscribers cannot be replaced by anything else.
A large subscriber base creates a cyclical competitive advantage that feeds on itself.More subscribers creates more available capital that allows Netflix to pay the large amounts of money necessary to acquire the vast content library that they possess. In turn, this large library brings in more customers and helps them retain current customers since Netflix offers more content in one place than any competitor by far. In addition, Netflix’s large subscriber base acts as a form of free marketing, with more satisfied users recommending the service to friends, growing upon itself even further. 5 Netflix – Strategic Analysis Porters Five Force Analysis High: Most television and movie content is owned by very few corporations.
Netflix currently produces no content on their own (although they have some coming), leaving them extremely vulnerable to price hikes when their licensing deals come up for renewal. One analyst believes that its licensing costs will rise from $180 million in 2010 to $1. 98 billion in 2012. Low: With major players like Netflix, Apple, Amazon, and Hulu already in the industry, along with the owned and operated offerings, capital requirements would be high to gain market share. High: Netflix faces competition from many big name companies with lots of money to spend.
If the battle over streaming content comes down to a price war, they do not have the money to win. If companies like Amazon and Apple began to pay extra for exclusive streaming rights, that could seriously hurt Netflix’s ability to retain customers. Companies like HBO and Starz have already, or soon will, remove their content from Netflix streaming. Low: Mainly individuals buying single subscriptions for personal use giving them little power. However, they did show the collective clout that they possess with their backlash to Netflix’s new pricing strategy and forcing the company to quickly squash their Qwikster spin off site.Medium/High: Entertainment options for individuals are extremely fragmented.
Most of Netflix’s current offerings are available elsewhere. Where their uniqueness lies is the comprehensive collection they possess in one place for the consumer. 6 Netflix – Strategic Analysis Takeaways from studying Netflix When competing on economies of scale, as Netflix does, being the first mover and building a very large customer base quickly, is critical to sustained success. The strategy that made the company successful will not necessarily be the strategy that carries the company forward.An awareness of the market drivers and a willingness to change strategy (even from one that has been successful in the past) is key to maintaining an advantage once you have achieved it.
This is evident in how Netflix outcompeted Blockbuster, a much larger and better established firm that was slow to adapt or innovate. Netflix implements strategies that maximize their primary strengths – their low cost, large subscriber base, recommendations/review data and ease of service.Netflix has focused on their core strength and has not diluted those core strengths by branching their product lines into music or gaming. 7 Netflix – Strategic Analysis References Q3 2011 – Financial Data and Letter to Shareholders Netflix. com http://money. cnn.
com/2011/09/01/technology/netflix_ starz/? iid=EL http://money. cnn. com/2011/09/19/technology/netflix_ cash/index. htm http://www. broadcastingcable. com/article/478980CES_Hulu_Plus_Subs_Hit_1_2_Million_in_2011.
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