Netflix, Blockbuster and Amazon are currently dominating the video content industry. The Netflix business model is dominated by rental DVD movies which includes online downloading from websites. The product differentiation in this industry is based on the type of services offered by each company, and the extent of their reach to customers. A new technology that poses a threat to the DVD rental model is the Video on Demand. Video on Demand or Audio Video on Demand allows instant access for viewers to their favorite movies, television programs, and music. The requested content is directly loaded on the viewer’s computers, mobiles, or televisions.
Keywords: Video on Demand, Streaming, business model, digital distribution.
Netflix possesses a comprehensive library of 100,000 DVD title including movies, films, and other filmed entertainment. According to McGregor et al. (2010), this qualifies Netflix as the biggest online video service provider. The company began its operations by shipping DVD’s to customers through first class mail along with prepaid return envelopes; thus involving no cost to the customer. This has been one of the major reasons for Netflix’s popularity. Netflix has over ten million subscribers because of its aggressive marketing techniques (Grinapol, 2013). The company has developed algorithms that enable them to track customer choices and personalize movie recommendations according to the specific customer. One of the major reasons for the popularity of Netflix is that they do not charge a late fee. (Grinapol, 2013)
The establishment of extensive distribution centers ensures timely delivery and returns. The company has recently introduced online DVD distributions and in-home content streaming of DVD content. Netflix acquires its distribution rights by purchasing title from movie studios and profit sharing agreements with networks and other distributors. The in-home entertainment industry in general offers a variety of formats to its viewers. Consequently, viewers have subscribed to several competitors simultaneously. This leads us to the argument that customer loyalty may not be a significant factor in this industry. The video distribution industry in which Netflix operates is constantly evolving; hence, this requires a flexible business model which adapts instantaneously to these changes. The current trends in the market are video streaming and Audio-Video on Demand. (Keating, 2012)
Video streaming allows for content to be played alongside transmitting it from the respective server. The client media such as television, computers, and mobile phones are able to play the content even before it finishes transmittal. Other media including; live closed captioning, real time text, and ticker tape have a significant implication in the context of Netflix and similar players. A VOD requires a complex technological infrastructure; therefore, it is cost-prohibitive for new players to take advantage of the delivery process. These costs will be reduced in the long-run as a result of technological advancements. These changes are going to have a direct impact upon the demand and market of traditional move renters. (Zink, 2005)
This secondary research paper was developed using sources such as newspaper articles, reports, books, and research papers. The selected newspaper articles and reports were checked for authenticity depending upon the newspaper and television in which they were printed or broadcasted. The newspaper which was selected was The New York Times. Television channels whose reports were chosen included; ABC News and CNN.
Oasis Consulting had conducted research specifically on Netflix; therefore, it helped in getting a clearer picture of Netflix’s business model in the competitive industry. Along with this various database searches were made which provided much more relevant and accurate data compared to results from search engines. Furthermore, the information collected from databases was relevant to the secondary research question. However, search engines were not completely ignored and they were used to develop a basic understanding of the topic.
As per the findings from the various sources mentioned above, a case can be deduced about Netflix’s business model. The CEO of Netflix and the co-founder of the company are in no way threatened by the changing trends of the industry. They believe that their 58 distribution centers are still competitive; however, they do recognize that over the years if nothing is done from Netflix’s end these will become obsolete (Grinapol, 2013). Reed Hastings and several other analysts including the Citigroup analyst Mark Mahaney are of the viewpoint that the DVD rental market still has growth market (Graham). This point is further emphasized by the 2008 recession as peoples buying power reduced. The DVD rental market still provides a cheaper form of entertainment compared to the streaming business. Henceforth, the DVD rental market is not going to go out of business in the near future; therefore, the management at Netflix does not have to worry about the business ending. (Delimitrou & Kozyrakis, 2013)
In order to stay competitive, Netflix has entered the market of media streaming. This adds diversity to the already existing product portfolio of the company. The video streaming offered by Netflix is still a supplementary service of the company. Their core business still lies in the DVD rental market. Streaming media is expensive as compare to DVD rentals mostly because of the use of better technology required as part of the distribution process. Sources have indicated that Netflix experienced a loss of customers when they announced a 60% increase in subscription charges for DVD and streaming content (Chiu, 2007). As the company has to pay licensing fees to movie studios and cable operators Netflix’s streaming service is not as attractive as its DVD’s. Along with this, there have been recorded complaints from customers regarding the higher prices and the less content which they receive in that price. In order to maintain a foothold in the media streaming sector of this industry the management needs to devise a unique selling point for Netflix. If they are not able to successfully differentiate themselves from the several competitors in the market they would soon lose their credibility. (Chiu, 2007)
An online CNN article cites Anthony DiClemente, an internet and media analyst at Barclays Capital as saying, “There may be a renewed sense of urgency for Netflix to go out to acquire film and TV content to replace Starz” (Pepitone & Smith, 2011). DiClemente said this in response to Starz decision to end the contract with Netflix. Even though the Netflix stock has risen significantly, either the company will have to enter the media streaming market as its core function, or they would have to see their business decline gradually.
The research conducted by Oasis Consultancy suggests that Netflix will have to enter the media streaming market or eventually face bankruptcy similar to its competitor, Blockbuster. The digital distribution of media content is a direct threat to DVD rentals, regardless of the difference in its distribution. Hulu and Boxee, are reatively smaller firms compared to Netflix but they are maximizing their market share is the streaming business. Companies like Hulu and Boxee may be planning for the long-term and if Netflix remains ignorant towards these trends then they may be sidelined by their competitor’s tactical edge. Consequently, Netflix needs to anchor itself in the streaming business alongside availing growth opportunities of the DVD rental business. Oasis Consultancy, in its report has provided business strategies for Netflix that would enable them to maximize on their short-term and long-term profitability (Carrol, Meneberg & Kwok, 2009). These new emerging businesses are not the only ones posing a threat to Netflix, traditional competitors including; Amazon and Apple need to be combated by Netflix, as they have a strong internet presence coupled with greater technological adaptability. (Carrol, Meneberg & Kwok, 2009)
Oasis Consultancy applied the concept of Porters Five Forces, to determine the market share of Netflix. Two of the five factors posed a threat to Netflix’s position in the DVD rental market. However, the other three including; internal rivalry, entry and exit, and buyer power were not linked to Netflix. However, the forces of substitutes and compliments along with the buyer’s power will be the deciding force for Netflix. The forces of substitutes will prove as having the greatest challenge for Netflix because there are several other formats available for viewers. These formats, in which media content reaches the customer is growing in popularity as time is progressing.
Netflix’s popularity is directly linked to its suppliers; hence, it even makes it vulnerable towards its suppliers. Netflix receives its content from direct purchases, revenue sharing agreements or licenses. However, all these methods may even be used simultaneously. The studios, network companies and distributors are the major three institutions which have a direct control over pricing. According to the First Sale Doctrine, once a copyright owner has sold its work, the purchasers may then redistribute this work at their own discretion (Zink. 2005). Hence, protection is difficult for streaming content as distributors of media streaming are active on the web.
In the previous year, Amazon introduced an on-demand deal in partnership with Viacom. This deal aimed towards bringing together a host of popular shows within a single catalogue. These shows were previously offered by Netflix when they had Viacom as their distributing partner. Netflix subscribers were outraged when their children were suddenly deprived of their favorite shows including; Dora the Explorer, Go Diego, etc. Subscribers even threatened Netflix of disconnecting their subscriptions with Netflix and joining its competitors. As Netflix majorly relied upon subscribers fees, this action taken by the company had devastating effects on its revenue. (Keating, 2012)
The aforementioned case of subscriber dissatisfaction by removing their preferred programs from its list of available channels, demonstrates that Netflix is not flexible in adapting itself to the changing market trends (Marriott, 2007). It also shows that Netflix is not yet ready to deal with competition. This would be a downfall for the market share of Netflix; since, competitors are providing what the customers are expecting. Even traditional rivals of Netflix have adapted themselves to the changing market trends; whereas, Netflix has failed in several instances.
As Netflix concentrated upon the market of DVD rentals it focused the company’s attention on logistics and library build-up. While these should not have been the core focus for Netflix in a competitive environment, consequently, they suffered when their subscribers turned to their competitors. Netflix now has to guide an organizational shift towards acquiring the technologies which are required to create digital distribution platforms. The need of the streaming video business requires the company to create strategic partnerships with studios, television networks, internet service providers, and with hardware and software suppliers. When Netflix’s competitors were developing these strategic relationships the company was focusing on the growth potential of the DVD rental market. As Netflix does not have prior experience in a multi-partnership environment they have a disadvantage in this area of business. The company always focused all its resources towards developing and retaining viewers and subscribers of its DVD rental business. Therefore, they now lag behind their competitors in this new and evolving business. (Keating, 2012)
Regardless, of the changes that the video industry has experiences, Netflix’s main strength lies in the distribution and selling of the media content in the DVD format (Grinapol, 2013). As research has outlined in several instances that the DVD rental market still has growth potential; therefore, the company can still benefit by creating a stronger foothold in this market. However, DVD’s are losing their appeal as compared to the digital content because of the convenience at which they are available both in terms of time and cost. In the near future, DVD’s will become an obsolete technology and Netflix will either go out of business or they will have to develop themselves according to market requirements. The subscribers of Netflix are eager to see how the company will deliver in the online market for media content. The DVD format would have to be left behind and the company needs to find ways to maintain its position in the media industry. The stakeholders, shareholders, and subscribers of Netflix want to know the future of Netflix in this industry.
Carroll, H., Meneberg, A. & Kwok, I. (2009). Strategic Report for Netflix Inc. Oasis Consulting Seminars. Retrieved March 12, 2009 from http://economics-files.pomona.edu/jlikens/SeniorSeminars/oasis/reports/NFLX.pdf
Chiu, R. et al. (2007). Netflix: Entering the Video on Demand Industry through Providing Streaming Movies. Retrieved March 12, 2014 from http://www.mcafee.cc/Classes/BEM106/Papers/2007/Netflix.pdf
Delimitrou, C., & Kozyrakis, C. (2013). The Netflix Challenge: Datacenter Edition. IEEE Computer Architecture Letters,12(1), 29-32.
Graham, J. (n.d.) Netflix looks to future but still going strong with DVD rentals. USA Today. Retrieved March 12, 2014 from http://abcnews.go.com/Technology/story?id=7973116
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Marriott, M. (2007). Nothing to watch on TV? Streaming video appeals to niche audiences. NYTimes. Retrieved March 12, 2014 from http://www.nytimes.com/2007/08/06/business/media/06stream.html?_r=0
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Pepitone J. & Smith, A. (2011). Netflix stock plunges as subscribers quit. CNNMoneyTech. Retrieved March 12, 2014 from http://money.cnn.com/2011/09/15/technology/netflix/
Zink, M. (2005). Scalable video on demand: adaptive Internet-based distribution. Hoboken, NJ: J. Wiley & Sons.