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Consultant Report Netflix Case

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Submitted By tonymanero23
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Consultant
report: “Netflix in 2011”

Introduction In 2011 Netflix’s success suffered a sudden slowdown and a change of course. Not many months ago Hasting, founder and CEO of Netflix was nominated as the magazine’s business person in 2010 (Fortune magazine). In last seven years Netflix’s operating income and last year it even grew by about 38.83% (Exhibit 1). The slowdown was due to the fact that Hasting announced that Netflix would split in two companies, one for streaming video service (Netflix) and one for DVD service (Qwikster). The most part of consumers didn’t accept this change demonstrating their attachment to the company. Netflix stock started to decrease, and now Hasting has to face-­‐off the situation, he has to find a way to manage this transition.

Purpose of report (and recommendation)

This reports aims to analyze the situation in 2011. -­‐In first understand the market evolution and competition, (Blockbuster: finding his business model, confronting with Netflix, finding his reaction and analyzing it) -­‐Analyze Netflix’s innovation, what kind of change it made -­‐Future step, how Hastings could manage the situation? He took the right choose to separate the two business? (Recommendation)

Analysis of the issues First step, market and competition: since 90s the U.S. home video market was segmented in a lot of retail outlets. In few years Blockbuster Inc. became the leader of market, his strategy consisted in following the impulse decisions of people to decide at last minute when it’s “the movie night”, so they counted on new releases (70% of rentals) and to improve their geographic coverage opening as more locations as possible. Until 2002 they live a profitable and wellness period , they adapted a lot of little changes in fees and rules to improve their income. One year later and few years after Netflix born 1997, problems started to exist for Blockbuster: Netflix brought a new technology; DVDs were smaller, lighter and easier to ship than VHS. In addition of that Netflix adapted a search engine (to find film with settings), a queue (list of film to be received) and a recommendation system also to nonsubscribers. Few years later, Hastings introduced also a prepaid subscription service and the “unlimited rentals” which permit to Netflix to expand his group of fans and subscribers. They improved also the recommendation system that was able to propose films to clients following strict rules and they built “the movie library” negotiating direct revenue-­‐sharing agreements with the most part of major studios and they adapted a national inventory. This step permitted to Netflix to have the same number of costumers than Blockbusters but without overstocks in one side and understocks in the other sides.

About distribution they opened a lot of new centers to improve the nationwide coverage and reduce delivery time and the relationship with USPS improved. With improving of Netflix importance, It became also the best way to promote a lesser-­‐known movies.

In relation to customer retention Hastings introduced the unsubscription only with a mail, he believed that it was better than previous (an employee called the person who wanted to leave and tried to convince to retain the account).

Blockbuster, the main competitor, responded to Netflix only in 2004. His response consisted in introduce Blockbuster online (closely matched Netflix’s business model) and in 2006 Blockbuster total access (exchange dvds by mail or store). No late fees program was the last move of Blockbuster, they introduced “no late fees” non considering that fees were about 600 million $ of revenue that sentenced the Blockbuster Inc. death.

-­‐The two business models are different, Hastings (Netflix) bases his company on innovation, In first, he introduced DVDs, so a new business model in a existing sector (Disruptive innovation). After that he adapted a lot of little changes to improve the income, a very smart move was to introduce the movie library to improve the customer satisfaction. Instead Blockbuster didn’t invest anything to innovation, they delighted their leader position, not paying attention to the market development, there were clear signals about it. They waited until 2002 to response to Netflix introducing only a copy of Netflix business model (in that moment Netflix was entering in VOD market). For these things Blockbuster’s response was inadequate to the situation. In addition to that they introduced “no late fees” a last big mistake.

-­‐Second step, Netflix’s innovation: how I said before Netflix bases his life on innovation. In 2007 his CEO decided to enter in video over internet market. It was a clear disruptive innovation because he maintained the same technological knowledge but he changed the

business model. He realized that the VOD market will be a profitable potential market, he provides a rent service, a purchase service and a download service to burn directly on DVD. We can clearly say that Netflix is disruptive.

-­‐Third step, separation of business: In 2010 Netflix continued his expansion with signing a deal with Paramount, Lionsgate and MGM but it involved the increasing of licensing costs. Hastings thought about a way to differentiate himself to the other companies, he thought about to develop an original content, in this manner the series “House of Cards” was born. He also improved his device penetration and streaming infrastructure. In 2011, Hasting announced that Netflix would split in two companies, one for streaming video service (Netflix) and one for DVD service (Qwikster). The most part of consumers didn’t accept this change demonstrating their attachment to the company. Netflix stock started to decrease.

-­‐Hasting justified this separation due to different structure cost, different benefits that need to be marketed differently, and growing and operating independently. Probably these factors could justify this change but, for sure, the customer’s opinion has to be heard. Hasting didn’t think about the more difficult that the customers have to face off using two web sites. For example: a customer that use both dvds rental and streaming have to manage two separate queues, it doesn’t work.

Another crucial point is the name, why did he choose “Qwikster”? It’s totally different from Netflix and why removing a company's name on a product that is doing well, and give to a product that you hope will succeed one day doesn’t seem a good strategy.

The best solution could be to maintain Netflix name for all products, in this way we can maintain a good level of customers satisfaction, using the brand to promote a new product in a difficult market. Inside of the company we can divide the two business in order to manage structure cost, logistics etc.

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