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Netflix provides various services to its customers, such as DVD rental through mail, instant streaming on PCs, and streaming on Netflix-ready devices connected to a TV. The company operates using a subscription-based model where customers pay a monthly fee instead of paying per use. While there are eight different subscription packages available, the primary sources of revenue for Netflix come from the $8.99, $13.99, and $16.99 plans. These plans offer unlimited DVDs per month, the option to have 1-3 titles out at once, and unlimited online content streaming.
This approach is what propels Netflix's success.
Netflix has implemented a strategy to grow and diversify its customer base using various methods. They have prioritized establishing beneficial partnerships with entertainment video providers, resulting in an extensive collection of DVD titles. Moreover, they differentiate themselves by not only transforming the way customers access and consume content but also revolutionizing the process of selecting what to watch. What sets Netflix apart is their unique software that generates personalized lists of recommended titles based on a customer's viewing history and ratings.
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While other companies entered the rent-by-mail sector pioneered by Netflix, none possessed as advanced customer profiling software. U.S. Movie, TV, & Video Game Rental Market (2006-2009)
Between 2006 and 2009, there were significant changes in the film rental market. In-store rentals decreased by almost $2 million, while vending machine rentals increased by ten times and by-mail rentals nearly doubled. VOD services offered via cable, digital platforms, and subscription also experienced substantial growth. These shifts had a major impact on companies like Blockbuster and Movie Gallery, forcing them to restructure or face bankruptcy.
However, Netflix saw a surge in subscribers during this time because they offered both by-mail rentals and VOD subscriptions. Customer decisions were influenced by factors such as convenience, pricing, DVD availability, and ease of returning DVDs or associated fees.
As a result, key success factors within the U.S. DVD rental industry included having diverse distribution channels (mail, online streaming, TV streaming, vending machines), extensive video libraries with new releases and hard-to-find titles, no or minimal charges for renting/returning DVDs,and user-friendly interfaces for easy returns.
5) In order to cater to a wide range of markets, it is essential for video rental stores to establish a strong network of entertainment video providers. Nowadays, customers have a preference for diverse movie options and hold sentimental value in their choices. They desire the ability to locate titles that were released long ago. Moreover, due to busy schedules, customers lack the time to physically visit stores or return rentals promptly. Instant gratification holds great importance in our society where individuals seek convenience through the ability to simply click a few buttons and enjoy the latest Jennifer Aniston romantic comedy or an old cult classic like Rocky Horror. Additionally, customers are not fond of fees; thus, it has become customary for companies within the DVD rental industry to offer complimentary shipping and return services.
Rivalry among competing sellers: High. Buyer costs of switching brands is low and product offerings are weakly differentiated. The number of competitors is growing and rivals have diverse strategies for providing their services.
Competitive pressure from buyer bargaining power: Medium to high. The cost of switching to competing products is low, as well as the level of convenience for switching. Products are for the most part undifferentiated.
Competitive pressure from supplier bargaining power: Low to medium. There are a large number of suppliers within the industry and a variety of ways in with to gain access to the needed material. However, most sellers cannot self-manufacture these movie titles; whereas the suppliers could easily begin offering these services themselves.
Competitive pressure from substitute products: Low. The cost per DVD to buy is greater than that to rent or stream a movie. Buyer demand for purchasing DVDs is decreasing due to the lack of disposable income created by the financial crisis, as well as the practicality of owning a vast collection of physical DVDs.
Potential of new entrants: High. The market is growing at an ever increasing pace and barriers to entry are low.
Buyer demand is increasing, prompting industry members to expand their market reach. There are several factors influencing the movie retail industry. Previously mentioned, a shift in consumer behavior has occurred where consumers expect instant gratification. If obtaining a movie requires more effort than a few button clicks, consumers are less likely to invest their time. This competitiveness drives firms to constantly offer more titles in shorter timeframes. Eventually, this intensity will reach its peak and stabilize. However, it will also lead to increased industry profitability as the process becomes more streamlined, attracting more users. Another factor is the transition from physical DVD purchases to online access for movie collections.
By eliminating the need for consumers to maintain their DVD collection, this development improves convenience and cost savings. In terms of industry profitability, it is expected to have a positive impact by reducing the reliance on distribution plants and lowering operating expenses. Companies will no longer be required to stock numerous copies of DVDs, resulting in significant cost reductions, including the expenses associated with maintaining multiple large plants.
One factor impacting the movie rental industry is the rise of VOD services provided directly by cable networks and providers. These established firms face minimal barriers to entry and, if all networks decided to offer such services, it would significantly reduce profits for competitors like Netflix or Hulu. While this would reduce competitive intensity, it would enhance future profitability for the industry. If major suppliers (cable networks & providers) began offering their own VOD services, smaller independent rental firms would disappear, but profitability would increase due to easy access to complete network libraries. Mapping the Movie Retail Industry
The distinguishing factors that set apart companies within the movie retail sector are as follows:
When examining the strategic positioning of firms in this industry, my attention was directed towards price and distribution channels (See Appendix 2). Netflix and other video-on-demand (VOD) providers hold a favorable position as they provide cost-effective subscription packages for a diverse selection of movies and TV shows via multiple distribution channels. Netflix stands out due to its affordability in relation to the wide range of products it offers. Redbox also has competitive pricing but is limited to one distribution method. Conversely, Blockbuster charges higher prices but has broadened its offerings by incorporating streaming, mail rental options, and in-store rentals.
Netflix has performed well in recent years, including during the financial crisis. They consistently generate profit and their revenue has steadily increased, reflecting the growth of the mail rental and online streaming movie retail market.
In the last four years, Netflix's growth rate has averaged 20%. However, there was a decline in growth from 2007 to 2008, with only a 13.22% growth rate during that year. This fluctuation is due to the financial crisis. Nevertheless, it is expected that Netflix will keep growing along with the mail and digital movie rental industry.
Over the past four years, the cost of products for Netflix has remained fairly consistent, accounting for more than 60% of revenue. These costs have only fluctuated by 4% or less, despite the company's continuous increase in revenue. This indicates a lack of control over manufacturing and operating expenses. As Netflix expands, it also expands its physical DVD inventory and the number of distribution plants. While the company aims to shift subscribers to streaming delivery instead of mail delivery, it is evident that they have not achieved true success in this endeavor.
Netflix achieved a record high Return on Assets (ROA) of 17.05% in 2009, despite predominantly operating in a growing market. This achievement is noteworthy because the mail and digital movie rental industry is still expanding, making such a high ROA impressive. It is evident that the company's investments in new assets are effectively generating returns. (Refer to Appendix 3 for a comprehensive financial analysis of Netflix between 2006 and 2009).
The brand has a wide following across various consumer segments. Its strong relationship with many entertainment video providers is recognized by top management, who understand the importance of the digital environment. They are making efforts to shift subscriber use in this direction. Netflix has developed unique and comprehensive movie selection software that personalizes the consumer experience based on their movie preferences and provides accurate suggestions. The platform offers detailed movie information, including customer and critic reviews. The increasing demand for digital streaming presents a clear opportunity. With the transition from mail rental to digital streaming, Netflix can restructure its subscription packages and make them more competitively priced. The company can also consider partnering with networks that are starting to offer VOD streaming.
Netflix, a market leader in DVD rental by mail, is now witnessing a decline in this category. The company's substantial DVD collection and distribution centers are consuming a significant portion of their revenues. In contrast to other movie rental and streaming services, Netflix does not provide access to recently released movies. The changing preferences of subscribers towards online streaming will impact Netflix's existing portfolio. Moreover, the growing competition from rival companies like Hulu, with their Hulu Plus program, will erode Netflix's consumer base. Additionally, more networks are beginning to offer free streaming of content on their websites.
At present, Netflix is in a favorable position overall. Being the pioneer in introducing a new segment in the market is a significant advantage that cannot be acquired by simply purchasing market dominance for a product or service. With its existing provision of unlimited direct streaming, Netflix is already ahead of certain competitors. Nonetheless, in the near future, Netflix will have to restructure and reassess the profitability of its rental service conducted via mail.
Netflix has the highest level of competitive strength at 46 points, surpassing Blockbuster and VOD Providers. It offers the most comprehensive range of products and distribution channels, allowing customers to either rent DVDs by mail or stream them on their PC or TV. The company's ease of use is determined by the number of distribution channels available and the convenience of prepaid return envelopes with their DVDs. VOD Providers offer a similar level of ease as Netflix, enabling consumers to instantly watch films by simply clicking a few buttons on their TV. On the other hand, Blockbuster ranks lowest in terms of price & fees due to their per DVD cost and price increase in response to declining sales. Additionally, Blockbuster imposes late fees for rentals, while Netflix allows customers to keep DVDs indefinitely without incurring any fees. Moreover, Blockbuster offers a limited number of products due to space constraints in their stores, whereas Netflix and VOD Providers can offer a virtually limitless library spanning the entire history of the movie industry.
Overall, Netflix's performance is satisfactory as it has managed to maintain its market majority despite increasing competition. a) A concern for Netflix is the high product costs, with more than 60% of revenue being consumed by cost of goods sold (COGS). The shift towards direct streaming in the future poses a challenge for Netflix in dealing with millions of DVDs and operating costs of distribution centers needed for storage. If Netflix doesn't phase out this aspect of its product/service portfolio soon enough, it risks losing potential profits and accumulating debt. b) Additionally, the rise of other companies offering free or subscription-based streaming services through specific cable providers presents another issue for Netflix. These new entrants could potentially attract customers away from Netflix due to associated costs.
Netflix needs to quickly remove its mail rental service due to the decrease in demand for it. While there are still businesses willing to handle DVD collections, this may not be the case in about five years, causing Netflix to miss out on preventing a significant loss. To stay competitive, Netflix must reconsider and adjust their current subscription packages in terms of structure and pricing. The number and cost of packages offered by the company no longer align with the current demand as more competitors enter the market, eroding Netflix's pricing advantage. In order to stay ahead, Netflix should restructure both its product offerings and pricing strategy while anticipating the next major trend in movie rental/streaming.
Netflix's Success: Revolutionizing the DVD Rental Industry. (2016, Mar 16). Retrieved from https://studymoose.com/netflix-a-case-analysis-essay
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