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Netflix Case Study Essay

Reed Hastings founded Netflix in 1997. He noticed that there was a demand for the ability to rent movies. With a large customer base he figured there was no question that his company could fail. This began the online movie rental industry to a large scale. With one company becoming successful, it wouldn’t be but a matter of time before others began to catch on and begin to reap the benefits of someone else’s idea.

Reed Hastings has already been a success for beginning new companies. He first made a name for himself by going public with Pure Software in 1995 (netflix.com/PressRoom). After the development of this company he began to acquire several other companies and made Pure Software one of the 50 largest public software companies in the world by 1997; this until they sold to Rational Software in 1997. From there Hastings moved on to other projects.

The other project in mind was Netflix. Hastings and a few colleagues formed Netflix in 1997, as formerly stated. Which by 1999, they had over one million subscribers in only three and a half years. Since the beginning of Netflix in 1997, they have battled many different forms of DVD entertainment competition. The competition ranges from simply going to the local video store, or actually going out to purchase a movie. It ranges too many other levels as well as many other mediums.

Through the beginning and even until today Netflix has been able to stay ahead of their competition; this mainly due to the seemingly flawless method of getting the product to the end user, and back. “No one is going to out-hare Netflix,” Hasting said. (Netflix-Maddox) With this bold statement, Hastings has been able to keep his word on it. He is able to keep his word mainly because of the intricate rental system involved, also because they have until recently been what seemed to be the best deal for renting movies.

Netflix seems to have a simple statement. “Our vision is to change the way people access and view the movies they love. To accomplish that, on a large scale, we have to set a long-term goal to acquire 5 millions subscribers in the U.S., or 5 percent of the U.S. TV households over the next four to seven years.” (Maddox, c-14) This statement appears to be plausible as long as they figure a way to keep the Blockbusters and the Wal-Marts of the world at bay.

“Netflix launched its movie rental service in 1999 with the goal of using the DVD format and the Internet to make it easier for people to find and get movies they will enjoy. As a result, our members can reliably discover and enjoy lesser-known titles. As we succeed, more people are watching more films, and filmmakers are reaching a larger audience. In turn, we believe they will produce more new films. Netflix strives to be the world’s largest and most influential movie supplier. (netflix.com/pressroom)”

Primary

* The first strategic issue that Netflix will need to cover is how to gain a larger consumer base. Without more members they will have a hard time keeping up with the competition. Many of their competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than Netflix does. Some of their competitors have adopted, and may continue to adopt, aggressive pricing policies and devote substantially more resources to marketing and Web site and systems development than Netflix does.

The rapid growth of their online entertainment subscription business since their beginning may attract direct competition from larger companies with significantly greater financial resources and national brand recognition. For instance in 2003 the extremely wealthy Wal-Mart used their online site to launch an online DVD subscription service, Wal-Mart DVD Rentals. With increased competition reduced operating margins may result as well as a loss of market share and reduced revenues. In addition, our competitors may form or extend strategic alliances with studios and distributors that could adversely affect our ability to obtain titles on favorable terms.

Secondary

* There are new opportunities for the industry. With the advancement of technology many companies can take advantage of the Internet. Currently Netflix expects to spend $7 million-$14 million this year on its Internet Video-On-Demand offering, which it will launch during 2005. Along with opening more distribution centers, this will cut down on delivery costs and time. They expect Internet VOD to have little impact on its performance for several years. This will help compete against other members that are allowing the downloading of movies online. Because of this Netflix will begin a frontal attack as of 2005 with Video on Demand (www.biz-architect.com/netflix_vs_vod.htm).

* New Entrants are becoming a threat to the existing members of the industry. More companies are deciding that they can take action in online renting. After Netflix pioneered the online rental service. Since then other major companies like Blockbuster began offering a lower monthly rate in addition to in-store renting.

Netflix will not be able compete with in-store renting for the fact that they do not have brick and mortar establishments. With the new entrants in the industry the price of renting movies will become better for the consumers. In order to attract the biggest customer base the companies will need to battle over the best offer. As the competition occurs a few things can happen. First, the price of the membership will decline. Second, more movies will be offered.

* Netflix must also consider globalization as a potential area to gain market share. Currently Netflix is serving members throughout the United States and in the United Kingdom. There is already competition globally outside these two countries. Many of the companies in this industry already have locations around the world. For example, Blockbuster has sites in 25 countries, which are 2600 stores outside the United States alone (blockbuster.com).

This would mean that they would have to set a distribution centers in a foreign country and hire people to run the actual site. Once the centers are set up though, it would be feasible to promote the online service. Netflix would have to look the different tax rates, currency exchanges, and government regulations, along with different copyrights associated with the studios that supply the movies, before physically setting up this venture. If the rates of these foreign restraints were greater than that of its sales then Netflix would be operating in a loss.

* Something that the industry will begin to see is a change in the increase of technology over time. DVD’s have replaced VHS, which replaced Beta, which replaced 8 millimeter; eventually something will replace the DVD. With that said, all companies should be aware that eventually DVD’s will be outdated by some future technological advancement. They might be going in a better direction with Internet Video on Demand. It should be noted that the DVD would take a while to be replaced. Currently this technology is still fairly new and extremely reliable to the users.

Market Size/Growth Rate: The DVD market is one of the fastest growing markets, experiencing unprecedented growth since its debut in 1997. The growth was largely attributed to dramatically falling component prices. DVD recorders were forecast to surpass sales of DVD players by 2007, with an expected compound annual growth rate of 126 percent. DVD sales for 2003 were $11.4 billion.

Stages of the Life Cycle: The e-commerce movie rental industry is now in the rapid growth and takeoff position, in the business life cycle.

Scope of Competitive Rivalry: Rivalry is fierce between the top e-commerce movie rental agencies, which are Blockbuster Video, Wal-Mart, Movie Gallery, Walt Disney’s Movies on Demand, and Movielink’s Downloadable Movies. These rivalries all compete in global marketplace. The Geographic area of operations for the e-commerce movie rental industry is worldwide. With the advantage of not having a brick and mortar operation, subscribers can literally be anywhere in the world.

Number of companies in the industry: The online DVD rental agencies are fairly large and still new. There are two major companies that dominate the industry. (Netflix and Blockbuster) The four other companies listed in the previous section are rivalries of Netflix as well.

Buyer Needs: Buyer needs have changed since the opportunity of the e-commerce industry. In the online movie rental industry buyers are looking for the added convenience of not having to drive to the traditional brick-and-mortar outlet. Buyers are also looking for certain attributes such as, no due dates, and free shipping. We can predict that in the future buyers will require a new form of deliver such as downloading.

Pace of Technological Change: Advancing technology plays a vital role in the online movie rental industry. Industry members need strong technological capabilities to keep up with buyer needs.

Ease of Entry/Exit Barriers: Barriers to enter in the online DVD rental market were very low, but the barriers to profitability were extremely high. (Netflix-Maddox)

Degree of Vertical Integration: Members of this industry can gain competitive advantage by being partially integrated through their distribution channel.

Product Innovation: The online movie rental industry should focus on research and development to gain competitive advantage over rivals by being first to market with a new product. A new product for this industry will soon be VOD.

Degree of Product Differentiation: Rivals within the industry are causing price competition. Blockbuster Video recently just lowered there monthly rate under what Netflix charges for there cheapest subscription. The degree of product differentiation has not occurred with the physical product, but it is the service that is causing price competition.

Economies of Scale: In this industry, member can enjoy economies of scale in shipping activities and partnership agreements with studios

The five forces model is a tool used to diagnose the competitive pressure of the industry. The model assesses the strength and importance of each pressure from five different areas of the market. The five areas of competitive pressure are threat of rival sellers, potential new entrants, and firms offering substitute products, supplier bargaining power, and buyer bargaining power. To use the five forces model one must first identify the specific competitive pressures in each of the five areas, second one must evaluate the strength of each pressure, and last one must determine whether the collective strength of the five forces is conducive to earning profits.

Rivalry

The strongest of the five forces comes from rivalry among competing sellers. Firms will use any resource or weapon available to gain a better position in the market. The rivalry in the online DVD rental industry is high. In this industry rivals carry a weakly differentiated product, which makes the threat from rivals more intense. There are low costs to switch, which make it easier for consumers to shop around and have less brand loyalty. The only area in the online movie rental industry that has weak rivalry is in buyer demand. The industry enjoys an expanding buyer demand. In this fast growing market, rivalry is weak due to enough business being available to all members of the industry.

New Entrants

The threat of new entrants in the online DVD rental industry is strong. Industry members should be concerned with several factors that lead to strong threats of entry. Some factors include a large pool of potential candidates with available resources, low entry barriers, and high buyer demand. The industry is attractive to potential entrants because it is one of the fastest growing markets (Netflix, Maddox). There is significant pressure in the online rental business due to large market growth and profit prospects.

The most formidable force comes from the incumbent members entering new areas of the industry. Blockbuster is an incumbent industry member who began expanding into other product segments. Some attributes that Netflix have lead to a weak threat of new entrants. These attributes are; better distribution channels, strong lead of customer base, revenue and brand recognition, and patents that can stifle competition through licensing fees for service (Netflix, Maddox). New comers to the industry also face high barriers to profitability. Netflix may also enjoy a cost advantage from longer experience and technological know-how in the industry.

Substitute Products

The threat of substitute products in the online DVD rental industry is moderate to high. A major threat for the industry is the idea that the DVD will no longer be the medium of choice for home entertainment and that consumers would soon be downloading movies and using On Demand (Netflix, Maddox). The substitutes for the industry are movie theaters, downloads, and movies On Demand. The threat of substitutes is strong when the substitutes are available and attractively priced.

Supplier Power

There are certain competitive pressures that come from supplier bargaining power. If the supplier exercises bargaining power to influence terms or collaborate with sellers there can be a strong pressure. The suppliers of the industry are all of the studios that make movies. Suppliers have sufficient bargaining power when they know what the companies need to keep in inventory because of consumer demand. Each studio makes movies that are only available through them and that is a differentiated product, which gives the supplier more power because the companies can’t get the movie from any other studio. One area where suppliers have less bargaining power is if Netflix, or Blockbuster or any other competitor accounts for a big fraction of the supplier’s total sales.

Buyer Power

Large retailers usually have more bargaining power than individual buyers. Buyers can demand concessions when purchasing large quantities. There are also not many buyers for the studios so each buyer is important to the supplier. Information is also readily available to each of the competitors to compare prices the studios are charging other buyers.

Netflix has become a dot-com success story. Netflix had to build software to help manage its complicated rental system. Using the Internet has extended the geographical area to where it is accessible anywhere in the United States. You can search and rent movies no matter what time it is, you don’t have to worry about the store closing. It doesn’t matter if there is a store near you or not.

They had to have to newest technology available to outwit their competition. How Netflix did this was buy making a wish list for viewers to see and eventually rent. Netflix will ship the movies free of charge with no due dates or late fees. One service that Netflix has is called CineMatch, which is a database for all the movies they carry.

CineMatch runs on two Sun 420 systems which generated thousands of predictions each second. CineMatch also collects information on the users’ preferences. Netflix built 15 distribution centers to accommodate the customers so they can receive their movie rentals in one business day of shipping. Netflix would ship from the closest distribution center. With customers having more access to the Internet, they will be more likely to order movies online rather than driving to the store and worrying about the late fees.

Changes in Buyers/Changes in Usage

With more users having access to the Internet, more people will be online renting. The home computer will become the next movie store. As the Internet is accessible people may start burning and copying movies from the Internet rather than renting and paying any fee at all. Netflix has mentioned adding and adult entertainment category to its website. Even though Netflix doesn’t want to attract that kind of clientele they have talked about it. This may mean that women will no longer be making up more than half of the subscribers to Netflix.

Seeing as how Netflix has come into the rental market people of different socioeconomic range have decided to enter as well. DVD’s are much more accessible to every class of citizens, not just the upper class. Netflix appeals to everyone’s taste. It appeals to movie fans because you are getting a deal if you watch a lot of movies. Like some people who only watch one movie a month, will lack interest in this deal. So they need to develop a deal for people who only watch 2 movies a month for an even lower price.

Changes in Cost and Efficiency

Netflix was first offering $20.95 a month for unlimited rental and three titles out at a time. The flexibility that Netflix offers now is great, the highest price is $39.95 which is for the avid movie goers, then it goes down to $13.95 for the most limited subscriber. Netflix has the highest efficiency out of all of its competitors because it has more than one distribution center. Netflix also lists your preferences and allows family members to use the account as well. Which means mom and dad can access movies that the kids can’t. Netflix started turning profit in 1999 and has had continued success with its growth rate from year to year.

Netflix has now lowered the subscriber cost to the amount each person may want to purchase. You can now decide what plan you want to subscribe to making it more efficient and cost worthy to rent movies. With Blockbuster treading on Netflix’s heels there is going to be strong competition for a long time. This means that each company that is in the Internet movie rental business needs to continuously be improving their systems to compete against each other.

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