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Netflix Business Risks Essay

For a low monthly price Netflix allows their customers not only to streamline videos on their mobile devices and computers but also choose from a wide variety of DVD’s. This allows for the consumer to watch as much which is beneficial for someone that has a busy schedule and would like to go back and catch up where they left off. As with every business there are risks associated with the everyday operations and I will go into detail as to what the risks are that Netflix has encountered.

Business Risk

I was a Netflix customer back in 2010 and I was pleased with the low monthly rate associated with a Netflix membership. This option was wonderful with a houseful of children that had different likes in what they watched everyone was pleased. As I carefully monitored my monthly bank statements the low price was at a constant rate up until the middle of July 2011. My monthly fee of $8.50 went up to $16.00 which nearly doubled. More than doubled. I made the honest mistake of not taking into consideration the economic downturn and what risks were associated with such a good deal. As the saying goes, if it is too good to be true it must be.

With a household of 7 I had to outweigh the pros and cons of paying an additional $8.00 a month. While comparing the previous membership price along with the new membership price there was no return on the company’s part. I was still able to view movies via streaming online as well as DVD’s in the mail. So why did the the price jump? Pogue (2011) states, “This, as you can imagine, is not a popular decision. This isn’t a cost-of-living increase. This isn’t inflation. It’s a 60 percent overnight price increase — that gives you nothing new in return.” Not only was I the only irate customer. Netflix felt this chain of reaction across the globe, the consequence of a 60% price increased caused Netflix to lose 800,000 customers in their third quarter.

Operational Risks

Netflix’s Chief Executive Office Reed Hastings made the decision in splitting Netflix into two separate companies. One of the companies will be specifically for streaming movies on demand and the other company will be called Qwikster specifically for the DVD business. Blodget (2011) states, “And we can also certainly understand why, from the company’s perspective, it makes sense to split the DVD and streaming businesses into two separate companies: They’re different businesses, with different cost structures and different delivery, marketing, licensing, and management challenges, and they will be easier to run better if they’re managed separately.” Split in Two. It only makes sense to create two companies that would help them focus on their main objective. Since Qwikster will be for the dvd section library they have to take into consideration the costs of shipping out a dvd, the quantity of inventory in the warehouse as well as inventory turnover.

Online streaming does not the same costs associated since the consumer is just a click away from watching at their convenience. Consumers are sometimes forced in choosing the DVD’s because as I have experienced myself some of the older and newer versions of movies are not available to stream online. For example, Willow was an all-time favorite of mine during my childhood, while checking the streaming library I came across the movie but once I had clicked on the title it showed it was only available via DVD. I have a very bad habit in returning the Netflix dvd given there are no additional shipping costs associated with the dvd, but the downfall for Netflix is that there is one less dvd out in the world and the inventory won’t be replenished until I return this movie.

Financial Risk

Netflix domestic online streaming has a committed amount of customers while domestic dvd are hit the worst. Netflix membership plans include $8.00 a month for unlimited streaming, for an additional $8.00 more a month customers can add unlimited DVD’s, and if the consumer is interested in Blu-ray disks then they would add an additional $2.00 on top of dvd price bringing it up to $10.00 for Blu-ray’s. Hurley (2012) states, “Nevertheless, gross, operating, and net income margins have been sliding steadily and substantially for several years. Moreover, Netflix continues to rely on subscriptions to its DVD’s-by-mail service to prop up net income. Although management officially altered corporate strategy to place emphasis on streaming services rather than DVD-by-mail services and there are more than twice as many streaming subscriptions as by-mail subscriptions.”

Strong Force. In December 2012 it was announced that both Disney (DIS) and Netflix (NFLX) announced a deal that would allow Disney shows and movies to be available to only Netflix’s subscribers. The result of this announcement resulted in Netflix stock rise to 15%. This is great news for consumers like me who is a Disney fanatic, now I will have a reason to stay with Netflix so that I can watch Disney movies with an unlimited amount of time.

Conclusion

When the price increase occurred back in 2011, I did cancel my membership because I was still feeling the economic downturn in my household. I would rather use that $18.00 towards filling up my gas tank rather than watch TV, in my eyes needs are more important than wants in my household. In mid-2012 I had a career change that resulted in a higher income. I now had a little extra play money to apply to a want that I once had and since Netflix allowed my children to be satisfied and allowed for some quiet time on my end, I went ahead and renewed my subscription. Being on Netflix for a few months I can say that I was extremely stoked when the announcement of Disney and Netflix working together.

References
Blodget, H. (2011). With all respect to Reed Hastings, the Netflix-Qwikster split bad for customers. Retrieved from http://finance.yahoo.com/blogs/daily-ticker/respect-reed-hastings-netflix-qwikster-split-bad-customers-160148340.html Hurley, D. (2012). Could Netflix bounce in 2013? Retrieved from

http://www.wealthlift.com/blog/netflix-bounce-2013/
Pogue, D. (2011). Why Netflix raised its prices. Retrieved from
http://pogue.blogs.nytimes.com/2011/07/14/why-netflix-raised-its-prices/


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