According to Boogren (2013), the video rental industry has changed in the past decade due to the development of IT technology. Customers have more opportunities to choose different ways to catch the TV programs, movies or shows if they want, it could be from a traditional way like brick-and-mortar stores such as Blockbuster, an online service provider such as Netflix, or a modern channel like TV cable companies. Consider of all, this paper will be separate to the following parts: Implementation of Porter’s five forces in U.S video rental industry; Implementation of Porter’s Value Chains in Netflix; IT techniques and applications applied in Netflix; Netflix’s Strengths and Problems; Recommendation and conclusion.
Implementation of Porter’s Five Forces in U.S Video Rental Industry Buyer Power
Buyer power in the video rental industry is high. First, consumers are well informed and demands high quality. They can get and compare all the information from Internet when they are trying to rent a video. Second, due to the multiple choices, buyers acquire the low switching costs. Third, buyers could expect more product differentiation. Since buyer power is high, the industry becomes more competitive. (Boogren, 2013).
Supplier power in the video rental industry is regard as high because the video rental companies have to buy the copyrights of new movies or TV programs directly from the makers, and also there are few studios and content providers are available. This means the supplier are highly differentiated and unique to the companies and there is no substitution. In the meantime, signing contracts with studios will cost the rental companies a lot. High supplier power makes this particular industry unattractive. (Boogren, 2013).
Threats of Substitutes
The threats of substitute products or services are the highest in the video rental industry. This is because there are so many different formats in entertainment and each of them could be interchangeable. Such as pay-per-view, online streaming, and VOD among others. Consumers also can purchase a combination of these services at the same time. Because they only need to pay very low price that even could be ignored to switch the services, small changes in price or quality may cause people to drop the current service and switch to choosing the products or services from competitors. (Boogren, 2013).
Threats of New Entrants
The threat of new entrants in the video rental industry is low at this time. This is because there are several barriers the companies should face whenever they want to enter in or exit. The biggest barrier entering the industry could be the costs of acquiring products rights from studios. In today’s market, there are too many big companies and they monopolize the new films. In the other hand, the costs of exit from the industry could be high. For example, Blockbuster might have extremely higher costs of exits since it has extensive investments in real products like DVDs. (Boogren, 2013).
Competition In the Industry
Rivalry among competitors in the industry could be high, which simply means the businesses in this industry are competitive. First of all, many companies are sharing the market from a limited number of buyers, and buyer demand is growing steeply. Second reason is online streaming has become commodity product. The third one is with the development of IT technology. Many companies from other industry are entering into the industry such as Amazon, YouTube and even Microsoft. Their participation makes the market completely in a mass. (Boogren, 2013).
Implementation of Porter’s Value Chains in Netflix
The inbound logistics for Netflix is that it must store various DVDs for distributing at any time. If the company could not provide the products when consumers need them, it will be hard to keep doing business with the customers.
The main purpose of operations activity is keeping the business in a stable way. Netflix has a whole produce system to keep the products such as DVDs in abundant supply and high quality. They will check and repackage the DVDs and make sure the next consumer will be satisfied when he or she receives the products.
The outbound logistics activity for Netflix means consumers can get the orders in time. So Netflix has established the partnership with USPS that helps take a shorter time to deliver and return DVDs. The company also built the many distribution centers all over the US. Distribution center makes great contribution to reduce time for collecting the return of DVD and ship them out.
Marketing and Sales
Compare with the competitors, Netflix pays more attention on marketing and sales, and get great success from it. For example, Netflix has a recommendation system, it has made the company’s website more smarter to provide a better service for consumers. When consumers order one DVD and they can see the similar DVDs that they may be interested in. This strategy makes the customers feel like the company cares much more than doing business with them.
In order to improve their customers’ satisfaction, Netflix provides quite well customers service. Firstly, new customers can enjoy one-month free trail to experience their rental system. Secondly, consumers can cancel and get the full refund at any time if they do not satisfy the service. Finally, they have created many convenient systems to help customers to search and find the videos they want.
Supporting Activities support the company’s primary activities and they are the fundamental of a company. These activities can’t help the company to
make profit directly but they actually help the company acquire the competitive advantages. (Porter, 1985)
The firm’s infrastructure
It is very important for Netflix keeping the organized infrastructure. In order to run the fifth value chain activity in stable way, Netflix has to maintain a strong management. It could be in a mass due to the company needs to receive and ship out so many DVDs everyday and the tasks require the corporation from all departments. In the other hand, the company focus more on Internet business, so an organized management to combine the advantages from traditional and new business ways will be able to insure the company very profitable.
Human Resource Management
Human resource is very important for any firm, especially for Netflix. The company needs good HR management toward to encourage their employees working in positive moods and to be more creative. The company provides relax surrounding conditions such as using employee’s favorite film to name each office room. Netflix believes that the happy worker does the work more efficiently which means help the company make more profit.
Product and Technology Development
Netflix has done quite well to grow with the development of IT technology so far. Today, The products provided by Netflix not only DVDs this traditional business but also include Internet videos and Home Entertainment System. Netflix allows consumers download the movies if they like and pay. With TV cables or Intelligence TV, consumer can easily assess to Netflix website and watch the videos directly. Even with the video games consoles such as XBOX ONE or PS4, consumers only need the make sure consoles be connected to the Internet and they can store Netflix movies in the hard drives. Obviously, Netflix is working very productive right now. As long as the company can stand in the top position when new development coming up, they will be able keep making profit.
Netflix needs to focus on keeping refreshing the data base when new movies coming out. This means they only have to build strong relationship with studios and TV stations. If they can get the exclusive authority to sell new and hot movie, they will own more customer.
IT Techniques and applications applied in Netflix
IT Techniques implementations in Streaming
According to Hunt (2008), Netflix has upgraded three times in encodes used for streaming in order to deliver the products in high quality to consumers. The first generation encodes are based on WMV3 and WMA in ASF with WMDRM10 (Janus). The company chooses these standards because they are widely adopted by CE partners, which helps the company establish a bigger platform. With the development of players, Netflix moves forward to the second generation. In this generation, Hunt (2008) mentioned VC1 encoders are more efficient than the WMV3 encoders. The more important thing is that, the company also re-wraps the encoders to help switch to the more efficient encodes in future firmware upgrades.
This means second generation is a transition period. In today’s generation, Netflix streams to a lot of different devices, Xboxes, iPads, connected TVs, more than 900 models need to be precise. And many of them have different screen sizes, bitrate requirements and codec support. Netflix is working a bunch of encoders and also doing quite well. They encode each and every movie in 120 different versions. This updating technique help Netflix combine all the resources from supply chains and CE partners, also lots of companies want to corporate with Netflix. The consequence is that Netflix occupied 63% market share in US 2013.
IT Applications in Supply Chain
According to McEntee (2013), Netflix is working hard on Digital Supply Chain. He explains that once complete an order in this system, the products (video, audio, timed text, artwork, meta-data) flow into retailers systems automatically and out to customers in a short and predictable amount of time, 99% of the time. Based on this concept, Netflix is trying use Netflix Delivery Specification supported by many equipment manufacturers to transport materials over global distances. This application system specifies which kind of audio and video file formats the company is accepting. Netflix is certifying production houses that support these specifications. According to McEntee (2013), content owners who can deliver quickly and without error will be able to get more revenue from Netflix than those suffering from the delivery problems. For Netflix, the system helps the company find opportunities to grow its streaming catalogs quickly with budget dollars, which means spend less to get more resources. It cuts the costs and maximize the profits.
Netflix’s Strengths and Problems
Nemcick-Cruz (2103) pointed that Netflix has lots of strengths in the video rental industry. The first strength is the company’s fame. “Netflix” is treated as a verb in today’s society just like “Google”. Everyone knows the company’s name and this could be the most successful advertisement. The second strength is the platform the company created. Compare with all competitors, Netflix provides the best delivery system and this helps to catch the loyalty consumers. The third strength is the content. Netflix not only corporate with studios but also has the original production such as “House of Cards”. According to Nemcick-Cruz (2103), Netflix also has the strengths like lower price, DVD margins and forward-thinking management in company.
Nemcick-Cruz (2103) mentioned that the first problem could be DVD subscriber base. In the second quarter of 2013, Netflix lost 475,000 DVD subscribers and the number is expected to continue falling until zero. This means Netflix will loss one part of business in the future. The second problem should face is the show ownership. Netflix provides the original hot TV shows to their customers. But the company doesn’t have these copyrights. This means Netflix only has the exclusive authority to stream the show but they can’t make profits after playing them.
Unlike Time Warner, they can make money from the shows’ DVDs and other derivatives. The next problem is about the raising content cost. As mentioned keeping lower price to customers is strength. Netflix has achieved quite a lot benefits from it. However studios and media companies will be expected to raise the prices of contents. That will hurt the margins of Netflix. Last but not the least, stronger competitors already enter into this industry. Google, for example, owns YouTube, which achieves a great success. And Google now is focusing on drawing a big picture in this industry, and the deep pockets could easily help Google pull eyes away from Netflix.
Based on the above discussion, there are three things Netflix should do. First, seeking new opportunities in various markets in order to replace DVD subscribers business. AS the traditional rental business would be abandoned in the near future. Netflix has to find a new business to keep making profits. The second thing is that try harder to make their own shows like Time Warner. This could be a new area for Netflix and if they could do well, they may expand margins incredibly. The last but is the most important is that keep adapting to the technological dynamism, which means always upgrade the IT technology. Advanced technology can help lower the cost and fight against the competitors.
So the company should invest in software technologies in user friendly. The software will be able to grab consumers’ eyes in order to help the company maintain the large market share. In addition, the company should incorporate software products that block any illegal files downloading or unauthorized access or copying of its products. This could help block illegal usage of its video products and protect the legitimate profits from going away that could acquire from the sales.
Netflix should continuously focus on the development of information technology, which propels the company to its position now. The every changing trend in the industry can’t be ignored especially in services. The plans should continuously be reviewed, make sure they are current, instant, and relevant to the identified changes.
Boogren, A. (2013, February 18). Porter’s Five Forces Model Applied to the Movie Rental Industry. Retrieved from: http://www.termpaperwarehouse.com/essay-on/Porter-s-Five-Forces-Model-Applied-To/200445
Hunt, N. (2008, November 6). Encoding for streaming.
McEntee, K. (2012, December 17). Complexity In The Digital Supply Chain. Retrieved from: http://techblog.netflix.com/2012/12/complexity-in-digital-supply-chain.html
Nemcick-Cruz, M. (2013, December 17). What Are Netflix’s Strengths and Weaknesses? Retrieved from: http://www.fool.com/investing/general/2013/12/17/what-are-netflixs-strengths-and-weaknesses.aspx#commentsBoxAnchor
Porter, M.E. & Millar, V.E. (1985). How information gives you competitive advantage. Harvard Business Review. Vol. 63 Issue 4, p149-160.
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