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TO: Reed Hastings
FROM:
RE: How to deal with the challenges brought by the emergence of digital distribution of videos?
DATE: Sep 27th, 2013 Considering the changes in the industry of video distribution and inner competiveness of your corporation, I suggest taking some measures to tackle the challenges. Among them, the most important thing is to build Netflix's Eco-System and segment customers to offer them different services. The basic factor contributing to Netflix’s success is highly customized experience based on the strong data collection and analysis system. Thanks to it, Netflix first developed an advanced recommendation engine, making it possible to offer every customer the movies he or she most likely watches. This not only saves customer’s selection cost, making watching movies a more relaxed and convenient experience, but also helps Netflix maintain a good relationship with those movie creators because Netflix can bring some lesser-known movies and even some movies that won’t enter theaters to customers. Besides this, the system could also predict the demand, preference and taste of customers, thus helping managing inventory more effectively with less stocks. The second important factor is the better experience customers can have when they rent movies from Netflix rather than Blockbuster. Monthly subscription without due dates and late fees means more freedom and flexibility, online browse and selection means quantity and variety across genres, and receiving and returning movies via mail means comfort and time-saving. All this satisfy people’s desire for convenience and also love for movies, so it becomes appealing to customers and attract increasingly more subscribers. Of course, these are still some other factors, including less operation cost due to less warehouse and less stock requirement, more stable cash flow due to monthly subscription, less investment to buy movies due to less demand for newer releases. All these factors matter to Netflix’s success, but the core competiveness of Netflix is just the two: highly efficient and effective data accumulation and processing system, and high customer satisfaction and loyalty based on a comfortable consuming experience. Moreover, the two factors are mutual and function towards each other. Then, what digital distribution of videos means to Netflix? Actually, it will affect Netflix’s overall business model. Compared to physical rental of movies, digital distribution allows customers to watch films anywhere at any time. Obviously, it is more convenient and free. So for Netflix, its advantages over Blockbuster have on meaning when competing with those digital companies, such as Apply, Amazon. Moreover, many of these companies are like a complete eco-system, that means, they spreads over the whole value chain, including the content, the distribution and the hardware. So it is justified and reasonable for Netflix to integrate some upstream and downstream companies on the value chain. For Netflix, there are mainly resources that can still be used: the data analysis system and the big customer base it already has. Then, Netflix should take some actions to utilize its advantages: （1）Find its role on the value chain. Netflix needs to turn into a platform both for film-makers and customers. For costumers, it provides various and personalized watching experience; for movie-makes, it offers not only sales but also precious records about customers’ needs, preference and tastes based on data mining. With these information, movie-makers can decide which kind of movie to make and release; （2）Make some strategic adjustments. With the emergence of digital distribution, the video rental cannot be the major business of Netflix anymore. In fact, Netflix should turn to online distribution and establish its own Eco-system, even though it will cost a lot. That means, Netflix needs to maintain and enlarge its customer base, and attract them to its whole eco-system, including its devices. In fact, for Netflix, it should form an eco-system with video-rental service, online screaming and downloading service, social media & discussion board, media-screaming devices, and so on; （3）Segment customers and provide some value-added service accordingly. The movie-watchers can roughly be categorized into three types: people just watch movie in their spare time and randomly, people who really love watching movies but watch all types of movies, people who have preference for specific types or movie-stars. For the first type, Netflix can just retail the movie to them per watch; for the second type, Netflix can offer monthly subscription to them and recommend the latest or most popular movies to them; For the third type, Netflix can offer some kind of value-added service, including selling film collections to them, send latest information about a particular movie star and organize some off-line activities for those who have the same interests. At the same time, Netflix need to found a place for all customers to share their feelings or interests after watching a film.