Netflix

Anthony Farias
Strategic Planning for Organizations
MGT450
Professor: Vivian Scott
December 8, 2011

Abstract

Founded in 1997, Reed Hastings observed; noticed and assessed that there was a growing demand for motion picture rentals. Netflix began with an offer for their ever-growing customer base in which competitors like Blockbuster and Hollywood Video had not brainstormed with the idea that would allow customers to select and purchase movie rentals right from the privacy of their own home. No need to wait in line in a retail store anymore for a secondary movie pick because their primary selection was ‘sold-out’; Netflix posed its strategic move against all other competitors and thus came into existence. In 2011 the conditions that all the home entertainment companies must implement to meet or exceed current standards is now more than ever needed with a lagging economy of more than three years. At the same time, consumers are striving to save money, time, and gas as all three of these conditions effect the movie rental industry. This research paper will address a brief history of Netflix, the competitive industry in which they compete, potential breakdowns, and finally an offer of speculation for how to address forecasted future breakdowns in a way that will turn them into positive possibilities.

Netflix

The vision of Netflix is simplistic: “Our vision is to change the way people access and view the movies that they love.” (Netflix.com, Hastings Reed, 2011). With more than 15 million current members, Netflix is the world’s largest subscription service for the streaming of television and movie picks and sending movies in the mail. New entrants are always a threat to existing companies like Netflix in the industry; however, Netflix continues to innovate at a level which creates a new standard of satisfaction that competitors and new entrants mimic in order to continue existence in the market, and Netflix must continue in this posture in order to stay ahead of them. Though Netflix is an innovator of the online rental service other major competitors like Blockbuster Video offer competitive monthly pricing and additionally have brick and mortar locations strategically placed for quicker access than, say, the United States Postal Service. Other competitors like Dish Network and On Demand with Cox Communications are only frustrating for rentals if you cannot find where you last placed the remote control for your television at home or service breakdown does not allow you to access the programing. These rivalry examples will need to continue inventing actions that take care of fundamental concerns for their customers and their own survival; which among other things will result in pricing wars that consumers will benefit from. Unlike previous industry modifications of media streaming that have been predominantly high-cost; a contributing factor to the decline in pricing will be the scramble to shape the post-DVD era. Digital video discs replaced video tapes; which replaced 8 millimeter and the current revolution of internet streaming will increase portability in a way that will boost consumer engagement in a way like never before. While this produces negative profit for home entertainment production companies; others like Netflix in the rental business will have a changing of the tides and thrive off of this approaching revolution. According to the Digital Entertainment Group, the third quarter generated an estimated four billion dollars for the home entertainment divisions, down 3.2 percent from 2008; yet digital distribution contributed 420 million, which is an increase of 18 percent (Barnes, 2009). Rivalry: The competition is intense between the mainstream movie rental agencies, which include: Blockbuster, Wal-Mart, Movielink, Movie Gallery, and cable ‘on demand’ providers like Cox Communications, Comcast, and Disney. The geographic area of operations has grown from one nation to the entire globe overnight. Companies like Blockbuster may not be viewed as having a competitive advantage with their brick and mortar locations; in fact the trait speaks higher degree of operation costs that competitors don’t need to attack the firm’s market-share. Netflix should be most concerned with the barriers to entry and exit by competitors. While barriers to entry are low the barriers to profitability are very high. Competitors like Cox Communications, Dish Network and Disney have successfully begun vertical integration through use of their own distribution channels, the ‘cable box’ (Gamble & Thompson, 2011). Porters ‘Five Competitive Forces That Shape Strategy’ identifies five forces that diagnose competitive forces in the industry that are dependent upon (Porter, M, 1979): - The extent to which suppliers of movie rentals are able to shape the terms and conditions of sales of the items they supply to consumers. - The nature of collaboration between supplier-seller relations. As indicated by Gamble & Thompson in 2011, “The strongest of the five competitive forces is nearly always the rivalry among competing sellers of a product or service” In this case a service, or experience offered by Netflix and rivals like Block Buster is the strongest competitive force identified in this paper because the difference between what these rental companies can anticipate to produce as it relates with their market objective is small in differentiation. The vertical integration of cable television providers and the ease of consumer’s ability to switch because of no brand loyalty create cut throat intensity for the continuous capturing of new customer entry. Since Netflix’s key success factors are born out of technology so it is no surprise that the company’s strategic management in today’s market is to couple with other big name home entertainment companies like Apple, Microsoft, Nintendo, Sony and many others. Aside from the obvious perk of being able to reach customers through other brand name devices, Netflix is using the supply channels of these other major firms to continue the quest of selling and renting video products. The name exposure is also a mutual benefit for all firms involved because a customer may now be more inclined to buy a video gaming console once they realize that they can streamline a Netflix movie from the same devise; if not for the dual use then for the net savings. Compared against competition disadvantages for Netflix include weaknesses such as inventory control. Many Netflix movies are shipped through the United States Postal Service; as such there is a higher probability for movies to arrive late, damaged or even lost in delivery all together. Additionally, Netflix cannot get a firm grasp of how much inventory they really need to hold due to the customer privilege to hold DVD’s for as long as they choose. A second disadvantage is that Netflix may not be able to hold on to a certain percentage of their client base that only watches one movie each week. Finally, the partnership with other companies mentioned earlier creates fiduciary responsibility for proper name brand representation and ease of use. To address these possible threats Netflix needs to create a management team that strictly works with the web and flow of public relations with each partnership formed, especially the United States Postal Service. With Netflix being such a large customer themselves they will be able to share trends of strengths and weaknesses that the Postal Service might not have otherwise known existed. As mentioned previously, one of the greatest concerns for Netflix viability is to not fall to the interim strategies of price wars against competitors. Since the industry has virtually no customer loyalty because the primary focus for customers is ‘accessibility and price’. The expansion of a ‘customer reward program’ will assist in keeping their existing customer base and further gaining more market-share. Ideas like rewarding customers for turning in their DVD’s back to the firm within 5 days gives you ‘a’ credit; once 10 credits are earned the customer is rewarded with a discount in the following month’s subscription. This is the opposite of a late fee, it is a reward. By default this suggestion also addresses the previously mentioned inventory concern that Netflix has, and that its competitors do not. Recently Netflix found itself in a pickle, as the video giants latest strategic move backfired. Reed Hastings said his biggest mistake was trying to phase out Netflix's once-trailblazing DVD-by-mail rental service more quickly than millions of customers wanted. He and his management team concluded a few years ago DVDs that are destined to obsolescence, so they began concentrating on streaming video over high-speed Internet connections. Ending Netflix's practice of bundling DVD-by-mail and Internet streaming subscriptions together so people are forced to buy them separately was meant to push more households into weaning themselves from discs. Customers instead saw the move as a betrayal by a greedy company and canceled their subscriptions in droves. We became a sort of a Bank of America symbol, which is super unfortunate," Hastings said Tuesday in comments monitored on a webcast. "We berate ourselves tremendously for that lack of insight because it didn't need to be that way. But, you know, in three or five years, we aren't going to remember it. It's going to be: 'Did we succeed at streaming?' That's all people are going to care about in three or five years. So we are not losing too much sleep over it. We are charging ahead." In addition there's damage to repair along the way. Netflix entered October with 800,000 fewer U.S. subscribers than it had at the start of July, and the company has said there have been additional defections in the past two months, although the number hasn't been quantified. The result: Netflix isn't bringing in as much money as it hoped to pay for an expansion in in Latin America and Great Britain and cover rising fees to license movies and TV shows for its video-streaming library. The shortfall will saddle it with a loss next year, the first time that has happened in a decade. Hastings said he expects Netflix to enjoy robust subscriber growth next year, although he doubts the company will be able to match its performance during the first six months of this year when it added nearly 5 million subscribers. Virtually of the company's future growth is expected to come from streaming-only subscriptions. "DVD will do whatever it will do," Hastings said. "We are not going to hurt it, but we aren't putting a lot of time and energy into it." Netflix ended September with 25.3 million subscribers worldwide; including 23.8 million in the U.S. Nearly 14 million of the U.S subscriptions included a DVD-by-mail plan. To ensure it will have enough money to finance its ambitions, Netflix recently raised $400 million by issuing convertible debt to one of its major stockholders and selling 2.86 million discounted shares. That stock sale further irritated investors because Netflix spent nearly $200 million buying back 900,000 shares of its stock at an average price of $218 during the first nine months of the year. Hastings said Netflix probably could have gotten by without the extra money, but he decided to raise the extra cash to avoid a “crisis of confidence” among the company’s supplier including movie and TV studios that license their video and sell their DVDs to the company. Netflix has revolutionized the way that people rent movies by bringing the movies directly to them. The innovation is radical with its infection on the market-place because the firm cannot be understood from an understanding of prior technology. Netflix has created a new ontology that must be dealt with by competitors in order to succeed. With its first service of mailing movies directly to consumer’s homes, Netflix will continue to open new possibilities for the next three to five decades as they continually to grow and improve their market share with our ever-growing ever-changing technology advancements.
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