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Netflix's Case Analysis

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Group 3 13 May, 2010

Netflix -­ Group Case

1. Describe the competitive environment of the video rental industry. During the time that this case was written the Video / DVD rental industry had matured from a Mom and Pop Shop in the local town or down the street to the business model that Blockbuster had implemented. Location, Location, Location was the model. Open more stores and increase your market penetration.

Blockbuster had approximately 7,800 brick and mortar stores, each carrying approximately 1000 titles.1 These DVDs were owned by the store and the volume generated mainly came from recent release rentals and new movie sales.

The market, outside of the Blockbuster market was fragmented, with several copycats of Blockbuster, and continued existence of smaller, possibly regional rental shops. No viable Internet distribution model existed when Netflicks was launched. The only movies being accessed through he Internet at this time were pirated movies, in various formats.

Even in this environment, where for several years, Netflicks did not have a direct competitor, the company soon found themselves in what can only be described as a hypercompetitive competitive environment against Blockbuster. This hypercompetitive environment came after Netflicks survived an earlier attempt by Walmart to enter into the market. 2. The case describes some ways in which Netflix has competitive advantage. Evaluate the sustainability of that advantage (using the sustainability framework from earlier in the course), by the end of the case. Please make sure you mention every advantage listed in the case in your answer and place each into the framework.

1Blockbuster Annual Report 2004 • Proprietary software that managed the logistics associated with the backend of the business In the beginning of the launch of Netflicks there was no direct competitor, the company had achieved the first to market element of Surprise. When analyzing the tenets laid down by Porter, we know that Netflicks excelled

The case mentions two major competitive advantages:

• The company’s network of distribution centers

in each area of competitive advantage over Blockbuster by changing the rules. Cost:

Changing at an early stage to a subscription service, the total cost of rental was significantly reduced from the Blockbuster model. Unlimited rentals for roughly $17.00 a month vs. $4.00 a rental for recent release and $2.00 for an older title, depending on the average usage, this model potentially has significant savings.

Differentiation:

Netflicks was initially completely unique in the marketplace. Focus:

The company was completely designed to exploit the new niche in the market, not to be a convenience store concept. Providing the best DVD postal delivery business was the goal.

Within the Hypercompetitive framework the two major competitive advantages accomplished the following:

Vision for Disruption:

Entering into the DVD rental market and providing a monthly service, as opposed a one-­‐time rental was revolutionary. In order to create this temporary advantage in the marketplace, one has to believe that not everyone rented movies as an impulse purchase. Instant gratification was not the sole motivation for the customer. This is a form of strategic soothsaying.

Capability for disruption: From concept to implementation Netflicks captured the market with both: • Speed – less than 2 years from concept to market • Surprise – no one else was even in this market space

Tactics for disruption:

The largest impact of Netflicks in this area, is the simple fact they were willing to change the rules. Blockbuster was making a huge amount of their profits from late fees, which were perceived as non-­‐value added by the customer. In fact, it was said that Netflicks was created after the CEO

Reed Hastings had to pay a $40 late fee for Apollo 13. This is a value far in excess of buying the movie.2 Some additional competitive advantages that are worth mentioning are: Superior Selection: The Netflicks DC carried over 100,000 titles, whereas the average Blockbuster had maybe a 1000. What is interesting about this is the following: “Offer a nearly limitless selection and something interesting happens: there’s actually more money to be made selling the obscure stuff than the hits. Music service Rhapsody makes more from songs outside of the top 10,000 than it does from songs ranked 10,000 and above. At Amazon.com, roughly 60 percent of books sold are titles that aren’t available in even the biggest Borders or Barnes & Noble Superstores4. And at Netflix, over two-­‐ thirds of DVDs shipped are from back-­‐catalog titles, not new releases (Blockbuster outlets do about 70 percent of their business in new releases). Consider that Netflix sends out 45,000 different titles each day. That’s fifteen times the selection available at your average video store! Each quarter, roughly 95 percent of titles are viewed – that means that every few weeks Netflix is able to find a customer for nearly every DVD that has ever been commercially released.”3 Customer ratings and Friends community ratings on the web site:

Customers were able to form social networks and share opinions and rating of films, recommending films they liked to their friends, or give a film a bad rating. This community enabled the selection process to be one that was more certain and also allowed a certain amount of community development, although on a lesser level that we saw in the Threadless case.

2John M. Gallaugher, Ph.D. – Netflix Case Study: David Becomes Goliath http://www.gallaugher.com/chapters.htm 3Ibid 3. Based on your analysis of sustainability, what do you think is the likelihood Netflix (in its current form) will survive 5 years? 20 years? It is widely believed that Video on Demand will kill the video store, whether it is on line or down the street. Video on Demand exist in the states, and although it is at a higher cost point now, the utter convenience of being able to select a title and have the ability to pause, rewind and fast

forward a film on your television is amazing. With advancements in bandwidth, satellite and cable infrastructures, the day for VOD is right around the corner.

“Reed Hastings: Well, let's separate the market into two phases. One is the phase of DVD, which peaks in five to 10 years and lasts for 20 to 30 years. Then there is the phase of Internet delivery, which peaks 20 or 30 years from now and lasts for 100 years.4 4. Your group should compile a list of its own "demand-­‐side" requirements of a video rental company. List as many services as you can. Which of the items on those list are currently being accomplished by Netflix? Which are potential ideas that Netflix could adopt? Which could destroy the company? Group 3 lists of demands: o Video on demand, directly piped in via internet to the TV, PC, mobile device (similar to IPTV) o Extremely large selection, probably ideally every movie ever made.

o No penalties o Ability to buy video on line, download and save (download technology like Evolve) o Option to skip advertising o Archive accessing (example online access to first Mickey Mouse cartoon from 1928) o Excellent search engine, cross referenced, actors, title, theme, time period (i.e. year of release), academy award winners, golden globe, Cannes, etc...

o Strong interface, not like TV remote, but more like universal remote (iPad) or iPod with wheel to spin through lists.

4 Interview with the Motley Fool http://www.fool.com/investing/high-­‐ growth/2005/02/02/what-­‐is-­‐netflixs-­‐greatest-­‐threat.aspx

o Pause, fast forward, rewind features

o Available on all TVs in the house, with one account

o Parental controls

o Portable to mobile devices, iPad, Laptop, etc... o 5 -­‐10 day viewing period, you can view movie or parts at your leisure over a certain amount of time o Detailed reviews of the movie o Peer evaluations; maybe star method, 5 stars, etc.... o High quality HD as a minimum o Low cost, $1 a movie or monthly fee, unlimited rentals

Many of the demands listed above are already fulfilled by Netflicks: i.e. low monthly rates, unlimited movies, keep the movie as long as you want, watch it as many times as you want, and parental controls are physical security (put it away).

Netflicks cannot continue to have market penetration in areas where VOD will be offered. The transition may be slow, as prices for VOD will probably be higher than the Netflicks current subscription model. Netflicks will continue to have a market in rural areas, where broadband Internet is not available. The eventual inevitable result is that Netflicks will either have to completely rework their business model, or close once the economies of scale for profitability go down below the sustainable level. Eventually the DVD will be passé and new forms of data transfer will be the norm.

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