Netflix is considered one of the most successful e-commerce ventures. Starting from 1997, when the video rental market was dominated by Blockbuster Video, the company created an alternative delivery service model that used the US Postal Service to deliver and get back rental movie DVDs from a central distribution center, thus avoiding the overheads, costs and potential revenue losses created by having individual stores in specific locations. By targeting the growing DVD market which was small then but grew rapidly to cover 37 per cent of households in 2002, it avoided competition with Blockbuster and simultaneously cut costs, thereby changing the revenue model to a fixed fee structure based on subscription. It grew tremendously in the first half of the first decade after 2000, reaching a subscriber base of 6.3 million and subscription revenues of nearly $1 billion by 2006. The company now faces a challenge from online and cable based Video On Demand (VOD) services which negate the need for DVDs, and allow the subscriber to access movie content directly either through the television set-top box or through the computer. Netflix has to address this challenge and while it is geared to offer VOD services, the company has to decide what form that service will take – as a separate business, in partnership with the cable operators or as a bundled service with its existing DVD subscription business.
1a) What was Reed Hastings's original strategic vision for Netflix? Can we cast his strategy as a "Blue Ocean Strategy?"
Reed Hastings originally created Netflix as a movie rental service that provided movies to customers by mail, instead of having them visit a physical outlet. His vision was to have a situation where a customer could view a movie when he wanted at his or her convenience without having to go through the hassle of going to the local DVD rental store, searching through the racks for available titles and pay late fees for keeping a movie over the prescribed time limit. Understanding the restrictions that came with a physical store – problems with availability of new releases, popular titles, etc. and the cost borne by customers for late returns – Hastings created a service that allowed customers to view three movies a month for a monthly subscription, which later increased to unlimited movies with the rule of having no more than 3 DVDs at one time. By targeting early adopters of DVD players, he reached an untapped segment that was not yet addressed by competition like Blockbuster Video. Using coupons given away with every DVD player purchased, he was able to tap into customers from the beginning of their purchase cycle and create a customer base that generated profits right from the beginning of the business. In addition, by creating a portal where customers could provide their likes and preferences as well as rate movies that they had watched, Netflix was able to use the information to recommend movies thereby reducing the pressure on demand for new releases and therefore stock-outs and potential loss of revenue. This strategy bears the hallmark of a Blue Ocean strategy, wherein Netflix bypassed its competitors to target a new space in the market that was profitable and could succeed at a lower cost investment as compared to rivals.
1b) Who are Netflix’s rivals and why/how do they threaten Netflix?
In the early days, Netflix’s biggest competitor was Blockbuster Video, which worked on a brick-and-mortar business model for the video rental business. The company’s presence was widespread and it had over 5000 stores in 2006, covering 70 per cent of the population. Netflix bypassed Blockbuster by offering DVDs through the mail and creating a central distribution point which reduced the incidence of stock-outs thereby generating better customer satisfaction and fulfillment. Therefore, all the video rental companies working on a brick and mortar model, such as Video City and Movie Gallery. As the industry grew and new technology came to the fore, Video on Demand (VOD) services started presenting competition. These were of three types:
- Advertising supported video such as that offered by YouTube. This was streaming video that could be accessed at any time by the viewer.
- Digital file ownership formats, where the file was downloaded permanently by the subscriber for a fee per movie, similar to iTunes. Blockbuster announced that it was tying up with Movielink in this space to offer downloadable movies to viewers.
- Online video rental and pay TV, where the viewer pays for temporary time-bound access to a movie from the list of titles available. These were either delivered to the viewer’s computer in case of online services or to the viewer’s set-top box through which the movie could be seen on the viewer’s television. This segment represented the biggest threat, with Vongo, Cinema Now and Moviebeam all looking to capture subscribers in this space.
1c) What is your evaluation of Netflix's recent decision to split its DVD and streaming divisions and increase its prices?
Netflix initially offered the online streaming service as part of its DVD rental service, to generate sufficient viewers. However, the company later separated the two, and created a separate revenue model for Netflix. The online streaming service and the DVD rental business have different content, therefore addressing different audiences. By separating the two, the company is able to realize more revenue as well as provide user-centric content for viewers that cater to their individual tastes. The increase in prices is essentially to offset the cost of creating original content that the company provides exclusively on its streaming channel, as well as the cost of creating HD quality video. The company has clearly stated that users can also access standard quality video at the existing price if they desire (Netflix blog, 2014). Since some of its content such as House of Cards has gained immense popularity, being one of the most viewed shows across media, I believe the rise in prices is justified. Customers looking for quality are always willing to pay a premium for it.
1d) What recommendations would you make to Reed Hastings to sustain the company's growth and support continued strong financial performance in the years ahead?
Netflix has done immensely well in building up the business from DVD rentals to online streaming of content. By becoming an early adopter, from DVDs to the use of the internet for content, and creation of own content for internet-only, the company has defined itself as a true leader. As technology advances, companies need to keep pace with it to ensure they do not get left behind and replaced by faster more nimble competition. The next challenge for Netflix will be in the area of convergence, as devices across various media – television, internet, mobile, all come together. Netflix should look at integrating itself across multiple platforms so that it is present on the viewer’s every screen – first, second, third to the nth. For this, it needs to work on content streaming tie-ups with other popular platforms such as video games (Xbox, Wii, Play Station). In addition, interactivity is the new tomorrow. Netflix should look at creating content where the votes of viewers determine the outcome of the next episode of the content. This has been tried a few years ago, and can be revived now with the increased connectivity that viewers have.
Netflix is one of the success stories of e-commerce and the internet generation, having successfully negotiated past competition and found a profitable space that it could exploit, while retaining focus on revenue generation. At the same time, it has kept pace with technology and changing needs of consumers, which is the hallmark of a great organization. Hastings’ vision and strategic implementation has made Netflix a success story that few can beat. The company’s approach to changing the way business works has been the cornerstone of its success and this is the lesson that any next-generation entrepreneur needs to draw from the case study.
Netflix Blog (2014) A Quick Update On Our Streaming Plans And Prices, Netflix, retrieved from http://blog.netflix.com/2014/05/a-quick-update-on-our-streaming-plans.html