Netflix’s Business Model and Strategy Essay
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Netflix is the largest subscription service for sending DVD’s by mail and streaming movies and TV episodes over the internet. Netflix’s revenues grew from $500 million in 2004 to $519.8 million in 2010. Company’s net income increased from $21.6 million in 2004 to $141-156 million in 2010. It attracted 1.6 million subscribers in 2004 and had to 15 million subscribers by 2010. Reed Hastings founder and CEO of Netflix have pushed the company to outcompete its movie rental competitors by building the world’s best internet movie service. Netflix is the world largest online entertainment subscription service and revolutionized the way that people rent movies.
Netflix has outcompete its rivals on the basis of differentiation features, with their higher quality, wider product selection, added performance and services, and has superior technology. Netflix has a large selection of DVDs to choose from. It maintains relationships with entertainment providers to expand the title selection. Movies are prescreened for customers based on peer reviews. This allows Netflix to increase their inventory with movies chosen by viewers. There are no late fees. Netflix technology is superior because movies and TV episodes can be streamed directly onto nearly any device in a matter of seconds.
Netflix business model and strategy can be analyzed with the 5 competitive forces in the movie rental marketplace: 1-substitute, 2- buyers, 3- suppliers, 4- potential for new entrants, 5- rivalry Substitute-It does not matter who sells the movie or the TV episode at the end the end user is getting the same product whether he got it from Walmart or Blockbuster. Substitute for Netflix and a potential threat is pirating movie files from the internet and illegal. This is a substitute that is inexpensive or free copy of the file.
Buyers- Have the power to select where they are going to get movies or TV episode. They are going to look provides the best price and best quality. Buyers are not loyal and can get this product from other vendors. Competitors compare industry prices and quality. They will reduce cost in order to attract the buyer.
Suppliers-Such are Hollywood are likely to increase cost if the industry profits increase. Suppliers have the capability to make movies and TV episodes harder to get by limiting license agreements. In order for suppliers to maximize their revenues they sell large number of movies and TV episodes the outcome results in competition and does not allow supplier to have much power on the product. Potential for new entrants- Blockbuster, and Netflix are the dominant retailers in the market it is very difficult for new entrants to succeed.
Rivalry- Consumers have multiple sellers they can buy or rent movies and/or TV episodes. Main competitors are online subscription services internet movies and TV episode provider, kiosk services, and DVD rental outlets.
From SWOT analysis we found the
Strengths as followed, by operation on line is very flexible and very low cost, it has high customer satisfaction levels, and strong knowledge base and brand identity. Weakness are the industry, it is constantly changing at a fast speed, it is supplier dependent, postage is a variable cost (increases), customers need to have internet access and or DVD players. Opportunities are: It can expand globally to international markets because its internet access, new technology.
Threats: If it’s not able to adapt or keep up with technology, rivals such as Walmart.com or Blockbuster have capital to compete against Netflix.
There are some issues Netflix is facing
Netflix needs to watch out for growing competitors with deep pockets and need to keep up with the fast growing changes with technology. It is recommended that Netflix increases its customer base (subscribers). This income will offset the ongoing costs. Netflix should move away from DVD rental, it creates a large percentage of its operating cost. Netflix should find out why people are still ordering DVD’s Netflix should educate customers with their streaming and downloading and focus on encouraging customers to stay with the service.
Blockbuster advantage over Netflix is that they are able to release new released titles. Netflix needs to negotiate with entertainment providers to get new releases earlier than the competitors. Finally it is suggested that if Netflix is able to get new releases earlier they should pass a cost for the newest release (separately from subscription download monthly fee).