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Netflix and Porter’s 5 forces
I have been an active Netflix user for a couple of years now and have seen several different pricing strategies implemented. I was reading this article about the effects of the latest changes in the company’s pricing structure yesterday and I got to thinking about the “why’s” of this decision.
Why would Netflix choose to change it’s pricing structure? From the framework of the five forces:
Suppliers: as far as I can figure, suppliers don’t put a whole lot of pressure on Netflix. The company must keep enough DVDs in stock to handle customer demand (there are drops in the number of subscribers who will still be renting DVDs) but that hasn’t changed much.
Substitution: again, I don’t think this has much to do with the changes. Customers could choose to go see a movie in the theater, but that isn’t a very comparable substitute as movie theaters offer new movies (for about $8 a pop) while Netflix offers old movies (for a flat $8/$16 a month depending on the service (DVD, streaming, or both).
Threat of new entry: There aren’t too many threats of new entry here either, as the main players in this competition have already been well established (Netflix, Redbox, Hulu, Blockbuster).
Rivalry: I believe this is the driving force behind Netflix’s decisions in this case. In order to stay competitive with services like Hulu Plus (which offers streaming content for a $8 a month) Netflix has separated the streaming service from the DVD service (this change was made months ago). Now Netflix is trying to separate those who really only use the streaming service and those who use the DVD service (which is more in line with Redbox and Blockbuster). I think the idea is that rather than charging $10 a month for someone to use streaming and DVDs, the company and customers could benefit by a pricing change that allows those customers who really

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