Netflix in 2012: Can It Recover from Its Strategy Missteps?

Company Overview:
Netflix Corporation was established in 1997 by the current CEO, Reed Hastings alongside software executive, Mark Randolph. They are the world’s leading internet television network with over 57 million members in nearly 50 countries enjoying more than two billion hours of TV shows and movies per month, including original series, documentaries and feature films. Members can watch as much as they want, anytime, anywhere, on nearly any internet-connected screen. Additionally members can play, pause and resume watching, all without commercials or commitments.

The company was originally only a DVD--by--mail service in which the customer paid for a certain level of membership that determined how many DVD’s could be rented at one time. DVD’s were mailed to the customer and then returned by the customer when they were done watching. After a couple years in business, the company began including streaming services along with this. The goal here was to reduce costs by trying to get the subscribers to switch to streaming, which would reduce the costs incurred for postage and shipping with the mailed DVDs. By 2009, Netflix was offering a collection of 100,000 titles on DVD and had surpassed 10 million subscribers.

Strategic Challenges and Analysis:
Hastings developed a strategy which made Netflix the largest online subscription service for streaming entertainment in the world. Netflix’s strategy includes the following: * Providing customers with a wide selection of DVD titles to view. * Continually acquiring new content by establishing relationships with entertainment provider. * Provide easy to use technology for customers to use to order and identify what they wish to view. * Providing options for subscribers between streaming and mail services. * Aggressive spending on marketing to continue to raise brand awareness. * Promote rapid transition of the US subscribers to streaming. * Expand Internationally.
Netflix chose to outcompete rivals on the basis of differentiation by offering a wider product selection, value--added services and attractive styling. They also utilize technological superiority by continuing to enter each new technology market as they are made available.
Netflix offered unlimited viewing of movies and TV episodes streamed over the internet and also offered unlimited number of DVDs each month, delivered and returned by mail with one title out at a time for $9.99. In home movie viewers found the unlimited streaming for $7.99 by Netflix as an attractive option. The company reached a leadership position in 2012 with over 23 million streaming subscribers. Those who wanted DVD by mail had the option of selecting one or more movie titles from a library of more than 120,000 titles. The streaming option allowed instant watching service with instant watching capabilities for a large number of titles. By 2011, Netflix had a total of 21.7 million streaming subscribers. Netflix grew because its subscribers were drawn to try Netflix's online movie rental service.
Reed Hastings and his team got some important things wrong in changing the Netflix strategy, but they also got a great deal right. Here is scorecard:
The business split. They got this right. The natural boundaries between the physical (mail) and virtual (streaming) markets for pre-recorded movies are increasingly sharp, especially as the streaming market takes off. These two delivery models require distinct assets and capabilities to be successful, and each faces a very different group of competitors. Physical competitors include Blockbuster and Redbox, whereas virtual rivals include Amazon, Hulu, iTunes, LoveFilm, and cable TV companies.
Netflix’s decision to split the businesses was the right one because it created focus and increased the company’s chances of being successful with distinctive business strategies tailored to different natural markets. To thrive, Netflix will have to find a way to execute well with these two bifurcated operating models under one corporate umbrella.
Pricing. They got this right, too. Services that deliver discs by mail have different demand curves from those that stream video content, and they also have very different costs to serve their customers. That’s why different pricing schemes make sense. Netflix’s much-decried 60 percent price increase was assessed only on those who signed up for both mail and streaming. Most observers didn’t recognize this point. The net effective price increase, when applied to Netflix’s entire subscriber base, was closer to 20 percent.
The company had to adjust its pricing model which came with great complaints on the customer based end. Fortunately for Netflix they lost less than 5 percent of their customers (800,000 out of a subscriber base of nearly 24 million). This furthermore reinforce the decision of Adjusting their pricing was the right one.
Brand management. The company really didn’t think this through. Netflix chose to make explicit the distinction between its two business models by giving them separate brands — Qwikster for the original by-mail business and Netflix for the new streaming business — and requiring separate unlinked accounts. This was a tricky and unfortunate decision.
Netflix had built its brand on being an innovative, consumer-centric company that revolutionized the way movies were rented. The decision to change the original business brand name to Qwikster in one fell swoop was apparently based on the premise that the Netflix brand would be more valuable in the newer streaming space. But it was a misstep. The equally swift reversal of the decision might have controlled some of the damage, but there has probably been some permanent dilution of brand equity. In retrospect, it would have been wiser to find a way to brand both services as Netflix, or if a new brand was necessary, to apply it to the new service.
Strategic Alternatives: First, timing is sometimes the hardest part of strategy to get right. Netflix likely judged correctly that its mail business was going to be cannibalized and ultimately replaced by streaming. But no one can really know for sure how fast that might happen. Moving too early can be disastrous, as Netflix learned, but moving too late can be even worse — as companies such as Kodak, Research in Motion, and Nokia have discovered. Another aspect of timing, the speed of change, is also difficult to master. Netflix sprang its new service on its customers too abruptly. People need time to adjust.
Second, strategy should be based on how customers behave, not on what they say. Before Netflix announced its change, customers had posted many online messages about the value of switching to streaming. But talk is cheap. Netflix learned this when it began to implement the change, asking customers to switch to a new account if they wanted their videos by streaming instead of mail — and then customers balked.
Third, when customers have an intense loyalty to a particular product (or service or brand), they become nearly as vested in the product as the company is. Coca-Cola Company learned this lesson the hard way in 1985, when it replaced its original flagship cola with a new cola. Many of Coke’s most loyal consumers were outraged by its unilateral decision to take away “their” product. Likewise, Netflix’s customers were outraged when the company took the Netflix name away from “their” original mail service.
Finally, strategy has to be dynamic and iterative. Customer reaction to any change in a company’s value proposition is difficult to know a priori, even with the best market research. Having the agility to change your choices when new information comes to light is essential to strategy success. This type of agility, no matter what mistakes Netflix made, may save the company in the end.
Implemented Strategy in 2015:
Netflix wants to complete its global expansion within the next two years, the company announced as part of its Q4 2014 earnings release. Here are some other key metrics disclosed as part of the earnings release: * Netflix plans to spend $3 billion on original content in 2015. * The company wants to spend $600 million on marketing this year. * Netflix plans to spend $500 million on technology in 2015. * Netflix grew to five million subscribers across Latin America during Q4 of 2014. * The streaming service intends to release a total of 320 hours of original TV shows, documentaries, comedy specials and movies in 2015, which is three times as much as the company put out in 2014.

Netflix will premiere war thriller “Jadotville” starring Jamie Dornan (“Fifty Shades of Grey”), across all its territories in 2016. Netflix acquired all rights to “Jadotville” and will debut the film on its Internet subscription VOD services. In addition, the company may also release the film theatrically for a qualifying run. Some analysts believe Netflix’s rollout target is achievable. Expanding to 200 countries by 2017 is aggressive but possible, with the rapid proliferation of connected devices.
In late Q1 2015, Netflix plans to launch in Australia and New Zealand, and the company expects to add “additional major countries” later in the year. As for when it might enter the world’s most-populous market — China — Netflix is more circumspect. This year, they are launching 320 hours of original series (new and returning), films, documentaries and stand-up comedy specials, triple the amount of original programming Netflix released in 2014.
Netflix wants to become a global brand as fast as possible for three reasons: to grow revenue faster, which will consequently let it develop and license more content; to be able to source content from around the world; and to gain efficiencies by licensing content on a truly global basis. At the same time, Netflix’s Hastings and CFO David Wells added a note of caution in their message to investors: “As with our initial round of international expansion, we’ll get some things wrong and do our best to fix them quickly.”
Competitors:
The network that is likely to be biggest long-term competitor-for-content is HBO. In the US for example, HBO won long-term exclusive domestic movie output deals with Universal and Fox and Warner Bros. HBO has global reach and was early with their HBO GO app. In addition to HBO, other competitors include Amazon Prime Instant Video, Hulu, Now TV, Viaplay, Clarovideo, and many other cable and broadcast networks in various territories. Netflix and Hulu offer greater video selection than Amazon, though Amazon is spending hundreds of millions of dollars buying more content from Hollywood and TV studios. Blockbuster Video has become a major player again with the launch of Blockbuster Total Access. Redbox, the biggest competitor to the video store model, is also considered a competitor.
Many are commissioning their own original programming, presumably because they see the same exciting big picture for Internet TV that Netflix do. Many consumers will subscribe to multiple services if each has unique compelling content. Success relative to these competitors-for-content would mean for us to have substantially larger revenue and therefore sustainably increasing content, tech and marketing spending, leading to further growth, and a virtuous cycle.
The competition is growing. HBO plans to launch a stand-alone subscription service in 2015 that will not require an existing television subscription to use and has a significant original content roster of its own, including critically acclaimed shows like Game of Thrones, Boardwalk Empire and True Detective. HBO is expected to be a significant competitor to Netflix in the future. Dish and Sony will be launching internet MVPD (multichannel video programming distributor) services. Amazon’s original series Transparent has tasted success as well as critical acclaim. The increased competition will make it difficult for Netflix to raise prices and gain market share. It also witnessed reduced demand for new subscriptions in the months following its May 2014 price hike. Additional price hikes can cause the demand for new streaming subscriptions to taper off.
SWOT Analysis
Strengths: The company’s core strategy is to grow its streaming subscription business domestically and internationally. Since the introduction of this service, Netflix has developed an ecosystem for use on various Internet-connected devices, including televisions, computers, and mobile devices. It has licensed an increasing amount of content for the streaming platform. Netflix looks to further increase the amount of content here, and improve the user experience in other ways, as well. Growth will probably continue at a good pace going forward, as more customers opt for the convenience of consuming entertainment online and Netflix continues to expand internationally.
Weaknesses: Despite dramatic growth in revenue, the company’s international operations remain in the red. For 2013, the contribution loss from the international streaming business totaled $274 million. This line generated a contribution loss of $81 million in the first nine months of 2014, and Netflix expected a loss of $95 million for the December period. The contribution loss had been declining up until the third quarter of 2014, thanks to growth in paid members. However, the company’s recent European expansion has added new expenses for this segment. Netflix is prioritizing long-term performance over short-run profits. This looks to be a sound strategy, but it does create added uncertainty in the near term.
Opportunities: The company originally began its international streaming business in Canada in September of 2010 and has recently expanded its overseas presence considerably. Netflix has made inroads in Latin American, Caribbean, and European markets. In more recent months, the company’s streaming service has launched in France, Germany, Austria, Switzerland, Belgium, and Luxembourg. Growth in international markets will continue going forward. Netflix intends substantial further expansion in 2015. This includes Australia and New Zealand, where the company’s streaming offering will be available starting in March.
Threats: Increasing competition is the most formidable threat the company faces. The market for online entertainment services remains subject to rapid technological change, and fewer barriers to entry in the streaming business means greater competition from rivals. A large number of consumers use multiple entertainment providers, and can easily shift their spending depending on a variety of factors. Amazon is one such competitor. Its service Amazon Prime is an annual membership program that, in addition to offering free shipping on millions of physical items for purchase, also allows customers access to its instant streaming platform, with thousands of movies and television episodes. Cable channel HBO has announced its HBO GO will be made available without a television subscription in 2015.
Financial Analysis:

Year on year Netflix Inc. grew revenues 25.8% from 4.37bn to 5.50bn while net income improved 137.4% from 112.40m to 266.80m.

In 2014, Netflix added a record 13.0 million new members, compared to 11.1 million in 2013, bringing their global total to 57.4 million members. Also added in Q4, 4.33 million member’s vs 4.07 million in the previous year period. They expect to end Q1 2015 with 61.4 million global members. Internet TV is growing globally and Netflix is leading the charge.

It is increasingly clear that virtually all entertainment video will be Internet video in the future. There is a big growth ahead in the US market for Netflix, even if it may not get there in a straight line of 6 million annual net adds. It’ll continue to improve our content, our marketing and our service, to eventually achieve “must have” status in most households.

The international segment is growing very nicely with net adds of 2.43 million members in Q4, compared to 1.74 million a year ago. Their initial set of markets (Canada, Latin America, the UK, Ireland, the Nordic countries and the Netherlands) achieved contribution profitability in Q3 and continue to grow. On launch in Q3 in France, Germany, Austria, Switzerland, Belgium and Luxembourg went well and as well as new original content is particularly popular. With all of the additional new original content set to premiere in 2015, it will be a big year for them in France, Germany and our other recently launched markets.

Q4 Results and Q1 Forecast, Netflix, Inc., on January 20th, 2015 Earnings Interview
Recommendation and Conclusion:
When you make a really big mistake, the best possible outcome is that you learn from it and never make it again. To recover, Netflix must change its strategy. The new strategy must consider the new entrants in the market. The direct competition has become more aggressive. Netflix must consider the money that content providers are charging. This has the potential of reducing the profits of Netflix. To succeed, not only should Netflix increase its sales revenues, it must also control its costs.
The primary forces propelling the growth are their own service, content and marketing improvements, and the improvement of Internet networks and devices. The primary forces impeding the growth are market saturation and the broad set of competitors-for-time all improving their offerings. If we could look into the future at the ways that people access entertainment, we would no doubt see a very different image than we see today - stunning video quality, a proliferation of screens, natural user interface, and an unbelievable range of choice. But if we were to turn instead and look at the person watching that screen, we’d observe a number of similarities across generations. We'd see someone who is taking a moment to escape into a story - to simply relax and enjoy one of life's real pleasures with their friends and family.
By partnering with a multichannel television provider to offer its streaming content alongside well--‐ known premium channels such as HBO and Showtime, Netflix will likely be able to grow its subscriber base and help offset its churn rate. Additionally, such a move could help strengthen and broaden the Netflix band, as it would provide an additional communication channel to customers and also benefit for effects of association with premium names such as HBO.
Given the rising new content acquisition costs, and the likelihood that, given the market conditions, these costs will not depress in the foreseeable future, Netflix should consider imitating premium channel powerhouse HBO – rather than (or, in addition to) acquiring new (and expensive) content from movie studios, HBO creates its own content, such as it hit Game of Thrones series.
It anticipates strong growth in revenues and share earnings for Netflix over the coming years. The company’s streaming offering should remain popular on the domestic front, and it does envision significant expansion overseas. Importantly, it is expected Netflix’s international operation will meaningfully contribute to profitability down the line. Its growing original content portfolio should also continue to attract new customers. Still, increasing competitive pressure will probably remain the biggest concern. Management must find the appropriate balance to manage two distinct operations (declining by--‐mail business and increasing streaming business) under one brand. Focus such branding efforts on the “ease of use” cornerstones of Netflix’s original philosophy.
People love TV shows & movies and they love being the best possible place to enjoy them. It is an amazing opportunity to grow, innovate and lead for several decades and will face strong competition along the way, and embrace the challenge.
References:

Thompson, A., Peteraf, M., Gamble, J., and Strickland III, A. J., Crafting and Executing Strategy: The Quest for Competitive Advantage Concepts and Cases (19th Edition).
Todd Spangler on January 22, 2015. “Netflix Wants the World: Can It Really Expand to 200 Countries in 2 Years?” http://variety.com/2015/digital/news/netflix-wants-the-world-can-it-really-expand-to-200-countries-in-2-years-1201411740/ http://ir.netflix.com/index.cfm: Netflix
Cohan P. Apr 23 2013. “How Netflix Reinvested Itself.” Retrieved from Web Apr 4 2014.
http://www.forbes.com/sites/petercohan/2013/04/23/how--‐netflix--‐reinvented--itself/