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Introduction
a. Company history
Netflix, Inc. is at the top of the market in DVD rentals online. The DVDs are sent directly to the
customer by mail for a moderately priced monthly fee. The company has over 15,000+ DVD
movie titles to choose from and has several distribution centers throughout the country. This
allows them to ship DVD discs to customers very quickly often with turnaround shipment of a
single day. Netflix has over a million customers that subscribe to their online service. The
company offers more than 15,000+ titles and maintains an inventory of more than 5 million
discs. The fee for services has multiple pricing points from under $5 a month to rent a single
DVD at a time to $19.95 for more DVDs to be sent during a single order. The movies can be
kept for as long as desired but must be returned to receive additional DVD rentals. The
customers order directly from the website. There is also video streaming right from the computer
for thousands of selections to see a movie immediately. Jay Hoag, has 33% of the company
(FundingUniverse.com, 2009).
The company began in Scotts Valley, California with two experienced IT businessmen Reed
Hastings and Marc Randolph in 1997. These Netpreneurs had already been successful in e-
commerce with Randolph starting up a computer by catalog company. He was also a vice
president with Borland International. Hastings had previously taught math students. He had just
sold his company Pure Software. The sale earned him $700 million. The idea for renting DVD
movies online originally came from Hastings after having to pay $40 fee for a late movie rental.
2002 Netflix decided to go public where it sold over five million shares allowing them to rise
$82 million dollars. The new name now Netflix Inc. used some of their new funds to pay off
debts of $14 million that related to advertising and marketing expenses (Taylor, 2002).
The firm also opened new distribution sites in more U.S. cities such as Boston and Los Angeles I
order to meet customer demands. This resulted in instant growth in those areas. Soon after
several more distribution sites were added in major U.S. cities. (i.e. Atlanta, Denver, Detroit,
2009).
Netflix was able to sign on several film distributors that would receive a 20% revenue sharing
profit from Netflix rentals in exchange for DVD distribution rights. This was immediately picked
up by the media, drawing more attention to the company causing sales to skyrocket. It also drew
the attention of competitors which begin to develop marketing tactics to compete with the
company. For example, the retail giant Wal-Mart lowered its pricing for their online rental
services below Netflix price. Columbia House also was looking into doing a similar deal.
Blockbuster changed their fee structure and offered unlimited and no late fee subscription
services. These competitors all targeted Netflix near the same time. This forced Netflix stock to
a. Strengths
• Customized ordering based on movie genre preferences. Also allows queue of movies to
be selected based on a wish list. These are automatically sent based on availability and
price tier.
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• The overhead for staff, property, and administrative expenses are very low because the
company is online. Therefore the competition with a brick and mortar offline expense
such as Blockbuster and neighborhood rental shops pay more in this area. Netflix
• There are over 30 distribution centers in the U.S. which allows for fast delivery of DVDs
to homes.
b. Weaknesses
• New movies require large investments of cash for licensing fees and manufacturing DVD
• Need more licensing to stream Video on Demand Movies only 10% available to day of
15,000+ titles
• Conversion to HD DVDs a major effort to reformat current titles for over a million DVD
c. Opportunities
• Increase number of Video on Demand options to compete with Comcast or other Cable
• Increase the number of contracts with movie distributors to expand content licensing
d. Threats
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• Cable companies such as Comcast that offer movies on demand. This allows instant
• Other rental movie companies such as Blockbuster, Wal-Mart offering rental services
• People choosing streaming movies on their computers, YouTube, Apple iPod, and Iphone
Blockbuster cannot compete. Once the biggest threat to Netflix, Blockbuster has had to concede
its attempt at online rental as they move to 2nd place. Wal-Mart, Best Buy, and Cable and satellite
companies, remain the major competitors for Netflix. Also new to the market is Apple, which
may, in time, cut into Netflix’ competitive advantage the most. The number of iTunes and
iPhone subscribers is also continuing to increase. The advantage of downloading movies with
current phone contracts for the long term (1-2 years at a time) may eventually outshine Netflix
However, to compete with the threats Netflix opened even more distributing centers that now
could offer overnight service to subscribers. This allowed members to get their movies at home
instead of having to drive out to retailers. This was a major competitive advantage of Netflix.
c.Strength of suppliers
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Netflix has partnered with over 50 movie distribution companies in a deal that promises access to
DVD of new releases as well as older movies that are being re-released such as Star Wars,
d.Strength of buyers
Surveys show that customers love Netflix. They remain loyal even when not taking advantage of
According to ComputerWorld (2008) Netflix is at the top of customer satisfaction index over
QVC and Amazon.com. The survey reports that subscribers are pleased with Netflix online
support and services and they most often decide to buy services. In addition they tell others about
their shopping experience which provides referrals that make the same decision (Rosencrance,
2009).
Threats of substitute products are mainly through Apple at present. The threat of iPhones and
iTunes will be a force to be reckoned with in the very near future. Another upcoming challenge
will be free movie distributors that are highly popular online. For instance YouTube offers many
movies free. This would be a major threat to Netflix and all other rental companies. There is a
limit to how much of a movie can be watched however it is over 1 hour if you are willing to
IV. Evaluation
a.Evaluate Netflix's value chain. Which elements in Netflix's value chain create value for them?
The service offering that needs the most improvement to date is the video on demand inventory.
Streaming movies to the desktop, laptop, Iphone, Ipod and other electronic devices for multiple
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users requires licensing. This is costly to a company as each individual copy of the movie that is
downloaded has a price tag. In addition the use of streaming technology requires a member to
watch the entire movie at one sitting. This has proved a drawback versus downloading the movie
b.Of those elements that create value for Netflix, do any meet the four criteria for a sustainable
competitive advantage? Explain in detail which ones and why they can be considered a
Most of Netflix success can be summed up in the ability to deliver movies to the door of
subscribers overnight. This very robust distribution system allows them to outshine all
competitors. Another plus is people simply love Netflix. They remain loyal customers even if
they rarely use the service. I have a membership at an entry level that I automatically pay each
month and I haven’t used the service for several months. This feature meets all four of the
Price- Netflix offers several pricing options from $4 a month to under $20. This meets nearly
Promotion- Netflix has advertising all over the Internet. Through Google and other search
engines the company has partnered with the entertainment industry to promote its pop-up ad any
time the word movie or even certain actors are mentioned. Referral marketing has also
contributed to an influx of new subscribers as perks are given to current members who refer
Place- Again as discussed Netflix has distribution centers in over 20 major metropolitan areas
Product – Everyone loves movies and Netflix has a library of the most titles in the world over
14,000. They have over one million copies in inventory to distribute. In addition stream video
access is also available free based on individual monthly subscription rates (Sandoval, 2009).
Patents.
Netflix has several patents on software programs that give them the ability to meet customer
demands quickly and accurately. Logging the return of DVDs in less than a day through bar code
check in once the item is mailed back to the distribution center. Automated postage handling
services that tie directly into the U.S. postal delivery system. Online the patents for tracking
individual customer taste and favorite types of movies. The email delivery service that sends the
latest movie selections that match individual customer’s favorites. The reminder that lets
customers know their monthly subscription fee is being billed. All these add up to great customer
satisfaction overall with the company. Translating into customer loyalty and ongoing sales
(FundingUniverse.com, 2009).
The greatest challenge at present is improving its VOD and streaming technology. This will
become even more important now that HD requirements have limited the viewing quality of
DVDs that are not HD quality. Though for now this is still a new trend. Soon the only DVDs that
people will want are those with HD quality as this is the latest technological advancement.
There is a short window that is open to Netflix to get this right. Once people get more
comfortable with digital movie viewing, this can be a major drawback to a DVD rental business.
For example, another major force to deal with, Apple is now targeting Netflix with iPhone and
iTunes movie downloads. In January 2008 Apple has also grabbed up licensing rights with
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several top film studios directly. They will get the right to offer on iTunes the latest movie
releases only a month after they are released to DVD (Sandoval, 2008).
Strategic options are to gain more cooperation with movie distributors as they already have a
relationship with over 50. Though Netflix offers revenue sharing in order to gain favor, this is
most likely one of the wisest moves made. This is one way to guarantee the latest releases and
discounts on licensing. It is a very strategic move that can be used to keep competitors at bay.
Another move that has been a target for Netflix is to gain one million subscribers. In 2002 they
Netflix hit the one million subscriber target in the spring of 2003. The price of their stock is was
beginning to upswing and by summer they were making a profit for the first time. In addition
they decided to offer stock options to employees. This has added more trust to their reputation as
a sound corporation that cares about employees. This is especially important as this was the era
Financially, Netflix has 10 million subscribers in 2009. They have experienced profits for a full
year and the first quarter of 2009. The revenue share is up from what was forecasted on $359
million they are earning over $38 cents on each share. Investors like Netflix and claim that they
Recommendations
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Netflix still has options to expand its growth. Since the change to all digital television in 2009, a
new opportunity for Netflix has arisen. The current economy has caused many homes to
discontinue cable, satellite, entertainment in the home due to expense. This opens the door for
Netflix to offer economically priced options. Once you become a Netflix subscriber, generally
the surveys show you remain one for years. Netflix should continue to take advantage of the
economic downturn to gain more customers. This is a peak season to go after this niche market
References
Beal, A. (2008). Watchout Netflix itunes aned youtube might offer movies for free. Retrieved
youtube-might-offer-movies-for-free.html
FundingUniverse.com, 2009). Netflix inc. company history. Retrieved July 13, 2009 from
http://www.fundinguniverse.com/company-histories/Netflix-Inc-Company-History.html
http://wiki.fool.com/Netflix
Sandoval, G. (2008), Move over Netflix, here comes apple. Retrieved July 14, 2009 from
http://news.cnet.com/8301-10784_3-9850701-7.html
Kafka, P. (2009). Netflix what recession Q4 beats estimates and 2009 looking strong. Retrieved
q4-beats-estimates-2009-looks-strong/
Rosencrance, L. (2008). Netflix tops customer satisfaction survey. Retrieved July 16, 2009 from
http://www.computerworld.com/s/article/9085779/Netflix_tops_customer_satisfaction_survey