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According to Boogren (2013), the video rental industry has been greatly impacted by advancements in IT technology over the past decade. This has led to a variety of options for customers to access TV programs, movies, and shows. These options include traditional brick-and-mortar stores like Blockbuster, online service providers such as Netflix, and modern channels like TV cable companies. Therefore, this paper will discuss several topics related to this industry. These topics include the implementation of Porter’s five forces in the U.S video rental industry; the application of Porter’s Value Chains specifically in Netflix; the IT techniques and applications used by Netflix; strengths and challenges faced by Netflix; and finally recommendations and conclusions.
Boogren (2013) states that the video rental industry experiences significant buyer power.
This is because consumers are knowledgeable and have high expectations for quality. They can easily access information on the Internet to compare various rental options.
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Moreover, with many choices available, buyers face minimal switching costs. Additionally, buyers in this industry can anticipate greater product differentiation. Overall, the substantial buyer power leads to intensified competition within the sector.
The video rental industry faces high supplier power due to the need to purchase copyrights directly from the makers of new movies or TV programs. With limited studios and content providers available, these suppliers are highly differentiated and unique to companies, with no substitutes. Additionally, signing contracts with studios results in significant costs for rental companies.
As a result, the high supplier power makes this industry unattractive (Boogren, 2013).
The video rental industry faces a threat from substitute products and services such as pay-per-view, online streaming, and VOD. Consumers can choose to use these alternatives individually or together. The affordability of these options enables consumers to switch between them easily, even if there are slight differences in price or quality. As a result, customers are more likely to choose competitor products or services rather than the current offering (Boogren, 2013).
Currently, the video rental industry is not highly susceptible to new competitors due to several obstacles that companies must overcome when entering or leaving the industry. The primary obstacle for entry is the expensive acquisition of product rights from studios. Additionally, there is a dominance of major companies in the current market that control new film releases. On the other hand, exiting the industry can also be costly, as Blockbuster's substantial investments in physical products like DVDs demonstrate, resulting in considerably higher costs if they were to exit (Boogren, 2013).
Rivalry among industry competitors is fierce, demonstrating a high level of competitiveness. This can be attributed to various factors. Firstly, the market has a limited number of buyers, and the demand from these buyers is growing rapidly. Secondly, online streaming has become a prevalent and easily accessible product. Lastly, advancements in IT technology have brought in numerous companies from other industries such as Amazon, YouTube, and even Microsoft. Consequently, the market has become highly saturated.
The logistics concerning incoming products for Netflix involves storing different DVDs that can be distributed at any given time. Failing to supply the products when customers require them would make it challenging to maintain customer relationships and sustain business operations.
The primary objective of operations activity is to maintain the business in a stable condition. Netflix has established a complete production system to ensure an ample supply and high quality of products, specifically DVDs. They inspect and repackage the DVDs, guaranteeing customer satisfaction upon product receipt.
Netflix partners with USPS and establishes distribution centers across the US to ensure timely delivery of orders. These distribution centers play a crucial role in expediting the collection of DVD returns and shipping them out.
Netflix has achieved significant success by prioritizing marketing and sales, unlike its competitors. A notable example of this is the company's recommendation system, which boosts the intelligence of their website and enhances services for consumers. When customers order a DVD, they are also presented with similar DVDs that may pique their interest. This approach effectively demonstrates that Netflix values customer loyalty and strives to create meaningful interactions beyond simple transactions.
In order to enhance customer satisfaction, Netflix offers excellent customer service. First, new customers can enjoy a one-month free trial to experience their rental system. Second, consumers can cancel and receive a full refund at any time if they are not satisfied with the service. Finally, they have implemented numerous convenient systems to assist customers in searching for and finding the desired videos.
Porter (1985) states that Supporting Activities are vital for a company as they serve as the basis of its operations. Even though these activities may not directly generate profits, they are pivotal in aiding the company to attain a competitive advantage.
Netflix must maintain a well-organized infrastructure to ensure the stable operation of its fifth value chain activity. The company needs to receive and ship out a large number of DVDs every day, requiring coordination from all departments. Additionally, as Netflix focuses more on Internet business, a strong management system that combines the advantages of traditional and new business methods will contribute to the company's profitability.
Human resource management is crucial for firms, including Netflix, as it promotes positive work environments and enhances employee creativity. Netflix creates a relaxed atmosphere by naming each office room after employees' favorite films. The company firmly believes that happier employees work more efficiently, ultimately leading to increased profitability.
Netflix has successfully adapted to the advancements in IT technology by expanding its offerings. In addition to its traditional DVD business, Netflix now provides internet videos and home entertainment systems. Consumers can download and pay for movies they like, and easily access the Netflix website and watch videos directly through TV cables or Intelligent TVs. Even with video game consoles like XBOX ONE or PS4, consumers only need to ensure that the consoles are connected to the Internet to store Netflix movies in their hard drives. It is evident that Netflix is currently operating very efficiently. As long as the company remains at the forefront of new developments, they will continue to generate profits.
Netflix should prioritize constantly updating their database with new movies. This entails establishing strong partnerships with studios and TV stations. By gaining exclusive rights to sell new and popular movies, Netflix will attract more customers.
According to Hunt (2008), Netflix has undergone three upgrades in the encodes used for streaming in order to provide consumers with high-quality products. The initial encodes, referred to as the first generation, are based on WMV3 and WMA in ASF with WMDRM10 (Janus). These standards were chosen because they are widely adopted by CE partners, thus helping Netflix establish a larger platform. As player technology progressed, Netflix transitioned to the second generation encodes. In this generation, Hunt (2008) notes that the VC1 encoders are more efficient than the WMV3 encoders. Furthermore, the company also rewrote the encodes to facilitate a switch to even more efficient encodes in future firmware upgrades.
The second generation acts as a transitional phase, enabling Netflix to stream its content on various devices such as Xboxes, iPads, and connected TVs. With over 900 supported models, each device with different screen sizes necessitates specific bitrates and codec support. To cater to this diversity, Netflix employs encoders that can convert every movie into 120 versions. This strategy effectively utilizes resources from supply chains and collaborative partners, attracting the interest of numerous companies eager to work with Netflix. Consequently, in 2013 Netflix secured a significant market share of 63% in the US.
According to McEntee (2013), Netflix is focusing on improving its Digital Supply Chain. The goal is to ensure that orders in this system are completed efficiently, with the products (video, audio, timed text, artwork, meta-data) automatically flowing into retailers' systems and reaching customers within a short and predictable timeframe, 99% of the time. To facilitate this process, Netflix is utilizing the Netflix Delivery Specification, which is supported by various equipment manufacturers and enables the transportation of materials across global distances. This specification outlines the acceptable audio and video file formats that the company can accept. Netflix is also certifying production houses that comply with these specifications. According to McEntee (2013), content owners who can deliver their content quickly and without errors stand to earn more revenue from Netflix compared to those experiencing delivery challenges. For Netflix, this system presents an opportunity to rapidly expand its streaming catalogs using a more cost-effective approach, thereby increasing profitability.
According to Nemcick-Cruz (2103), Netflix has several strengths in the video rental industry. One key advantage is its widespread recognition, similar to "Google," making it a commonly used verb and indicating a strong brand presence. Another strength is its efficient delivery system, which helps foster consumer loyalty compared to competitors. Additionally, Nemcick-Cruz (2103) highlights Netflix's content as a major advantage. The company collaborates with studios and produces original content like "House of Cards." Furthermore, Nemcick-Cruz (2103) mentions that Netflix excels in terms of its lower price, DVD margins, and forward-thinking management.
According to Nemcick-Cruz (2103), the main issue is likely the decline in DVD subscribers. Netflix saw a decrease of 475,000 DVD subscribers in the second quarter of 2013 and it is expected that this number will continue to drop until it reaches zero. This suggests that Netflix will lose a significant portion of its business in the future. Another challenge involves show ownership. While Netflix offers original and popular TV shows to its customers, it does not own the copyrights for these shows. As a result, Netflix only has exclusive rights to stream the shows but cannot generate profits from them beyond playback.
Netflix has an advantage over Time Warner in that it can earn money from the sales of DVDs and other derivatives from their shows. However, there is a concern about the increasing cost of content. Despite the benefit of offering lower prices to customers, Netflix may face challenges as studios and media companies are expected to raise their prices. Additionally, stronger competitors such as Google, who owns successful platforms like YouTube, are entering the industry. Google's focus on this industry, combined with their financial resources, could divert attention away from Netflix.
Netflix has three important recommendations to consider. Firstly, they should seek out new markets as a replacement for their DVD subscriber business, which is becoming outdated. Finding an alternative source of income is essential for maintaining profitability. Secondly, Netflix should increase their investment in creating original content, similar to Time Warner's approach. This presents an opportunity for growth and improved profitability. Lastly, it is crucial for Netflix to constantly adapt to changing technology by upgrading their IT infrastructure. Utilizing advanced technology can lower costs and ensure competitiveness against competitors.
The company should invest in user-friendly software technologies that can attract consumers and help them maintain their large market share. Additionally, they should include software products that can prevent illegal downloading or unauthorized access and copying of their products. This measure can effectively block the illegal usage of their video products and safeguard the legitimate profits earned from sales.
Netflix needs to consistently prioritize the development of information technology as it is the main factor behind its current achievements. The company cannot overlook the ever-changing trends in the industry, particularly in terms of services. It is essential for Netflix to regularly assess and adjust its strategies to ensure they align with the latest advancements and stay relevant and important.
Challenges and Competition in Video Rental Industry. (2016, Sep 07). Retrieved from https://studymoose.com/netflix-analysis-essay
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