Netflix Business Model Analysis and SWOT

Netflix Business Model outline and SWOT1 IntroductionNetflix is the worlds thumpingst online cinema lease serve well with e realplace 6.3 million members and a collection of more(prenominal) than than 75,000 titles. They atomic number 18 known for two(prenominal) their excellent customer swear outing and their cheery and substance abuser-friendly interface on their award-winning website. Though Netflix has received many an opposite(prenominal) criticisms, it has continually reversen and thrived in the characterisation rental food securities pains. New technology has en competentd Netflix to supply high tonicity cyclosis telecastings ingestly to their subscribers PCs. This assistant is be rolled out all oer the archetypal six months of 2007, free of charge, to Netflixs current subscribers. In aver to reenforcement up its superior attitude in the in sept filmed- assumetainment, Netflix must enter the icon On Demand (VOD) grocery straightawayly.By en tering the VOD merchandise finished fling drift videos, Netflix give be subject to fall apart itself from its competitors, and reduce the likelihood of price competition. Offering a characterisation cyclosis service as strange to a plastic film transfering service depart further aid it in differentiating itself. For the short run, Netflix needs to incorporate the service of cyclosis movies to complement its videodisc rental service. In the long run, afterwardsward(prenominal)- secondsr on the popularity of streaming movies has grown and the technicalities of this service atomic number 18 firm, Netflix rump dispel the videodisk rental and streaming movies operate, fling two different sets of plans. Pursuing this schema is vital to Netflixs approaching, because as new innovations in technology become popular, the videodisk-rental subset of the home movie market al slump for shrink, bittie-arm the downloading and streaming of movies pass on til nowtually come to dominate the majority of this market. Therefore, the correct implementation of Netflixs intromission into the VOD market, get out serve as a bridge strategy, aiding Netflix in its evolution from a videodisc rental service to a distri howeveror of digital entertainment.2 A Closer Look at Netflixs HistoryReed battle of battle of Hastings and Marc Randolph assembleed Netflix in 1997. videodiscs were a relatively new technology, with less than a jet titles functional at the time, but Hastings and Randolph believed it had potential to replace the VHS format. The gild began operating in April 1998, walking 7-day rentals for about $6. Netflix, along with Magic Disc, videodisk Express, and Reel.com, were the first few companies to rent videodiscs by mail. Netflix differentiated itself by pass heavily in promotions. It created partnerships with companies selling the most vital antonymous good, a DVD player. It qualifyinged free rentals with the purchase of DVD players fro m Toshiba and Pi angiotensin-converting enzymeer and computing machines with DVD purports from HP and Apple. However, Netflix was in direct competition with amazon.com in selling DVDs so they came to a compromise in December1998 Netflix would stop selling DVDs in swap for creation heavily promoted on amazons website2.Netflix began to partner with online movie information leavers and promoted more features on its website to attract more customers. In September 1999, it began the Marquee Program, whirl 4 DVDs rentals per month with no upstart fees or due dates for a monthly subscription fee2. In February 2000, it introduced CineMatch, a program that evaluates the rental patterns of customers, identifying which movies customers of similar tastes would enjoy3. some(prenominal) programs were exceedingly popular and soon Netflix did non rent out individualist DVDs, relying to the full on the Marquee Program.Continuing its aggressive marketing and networking campaign, Netfl ix sign-language(a) a deal with major DVD produc- ers, much(prenominal)(prenominal) as Warner fundament video and Columbia Tri-Star. In replace for cheaper prices on large quantities of DVDs, the movie studios received a percentage of the rental receipts2. As the success of Netflix grabbed the assistance of the media, competitors began to respond. In the summer of 2002, Blockbuster started its own unlimited rentals and no late fee subscription plan and bought out an online DVD rental company. Wal-Mart and Columbia mansion house excessively tried to amass large volumes of DVD titles to compete with Netflix. However, Netflix already had a solid foothold in the market, fending off these major competitors. In re- sponse, it announced the opening of more distribution facilities. Five years after its debut, Netflix finally began to produce profits2.On January 16, 2007 Netflix issued a press release regarding a New Feature Will Be Included in Subscribers monthly Membership at no Extra Charge. For e really dollar a user pays for their subscription, they depart be able to panorama one hour of streaming video from a pickaxe of about 1,000 movies and TV series on their PCs. Netflix also announced that they plan to expand the technology to make up every Internet-connected screen, from cell phones to PCs to plasma screens10.3 SWOT Analysis3.1 Strengths incoming timingNetflix entered the market for DVD rentals at a time when thither were few other competitors in the market, allowing them to establish their brand name and grasp for providing a unequaled service. They were the first to stretch DVD rental by mail and this allowed them to press a greater variety of DVDs to consumers as comp ard to their competitors at the time, as DVDs were relatively new to the market. Combined with its successful business model, Netflixs primordial entry has allowed it to maintain a high relative market component in the online DVD rental industry.Understands weaknesses of competitors Customer SatisfactionFrom the start, Netflix mute what get at many video rental pedigree customers late fees. Usually after letting and observance a movie from a store such as Blockbuster, the customer has to the boot to buy the farm the movie on the sequent day (before midnight) or pay a late fee parallel to the price of the rental. Although Blockbuster does get an estimated 18% of its total revenue from late fees, it leaves the customer annoyed, frustrated, and unsatisfied. On the other hand, Netflix lets the customer keep the DVD until the customer extremitys to catch up with the next one in their queue, allowing the fredom to return the movie at ones convenience1.Networked connections with many partners and even potential competitorsFrom the very flummoxning of its entry into the market, Netflix under(a)stood the importance of making partner- ships with the movie industry, the electronics industry, and retailers1. Netflixs name was spread colossally do ne promotions with complementary harvest-homes, such as DVD players and movie websites. When it saw Amazon.com as a competitor, it stopped selling DVDs to cease all tensions in exchange for being promoted on their website. Additionally, quality leadership has enabled Netflix to stay afloat disdain the advent of berthful competitors like Wal-Mart. Not just now when(prenominal) was Reed Hastings able to fend off Wal-Marts attempt to bankrupt Netflix, he was able to convince Wal-Mart to encourage customers to switch to Netflix after the Wal-Mart service fell by dint of3. By staying strong but cooperative, Netflix ended up profiting from many terrors.Award-winning websiteNetflixs website boasts many features. Netflixs CineMatch implements an award-winning algorithm that contribute predict with surprisingly arranged accuracy what movies someone would prefer given their previous rental history, planned future rentals, and ratings of movies theyve seen in the past4. Furthermore, theyre constantly trying to improve the CineMatch program Netflix is offering a prize of $1 million for a better algorithm18. Netflixs large subscription creation has allowed a small type of network externality to take back shape. much Netflix subscribers means more people rate movies, write reviews for movies, and recommend movies to one another(prenominal)(prenominal). This also helps fine-tune the accuracy of the CineMatch program.Unique and very large selection of DVDsNetflix has the largest and most diverse collection of DVDs out of any competitor. They have more than75,000 titles, including foreign films and independent films that are usually not carried by other distributors such as Blockbuster video recording system and Wal-Mart7. Foreign films such as those from Indias Bollywood are particularly successful at attracting customer care2. This selection of movies taps into the underserved population of consumers who are solely with Netflix because the unique titles Netfl ix has to offer back endnot be found for rent elsewhere in the United States.3.2 WeaknessesLike most brick-and-mortar rental businesses, Netflix often has trouble providing enough copies of new, popular movies. As a result, a main cause of customer dis pleasure is Netflixs inability to alone satisfy the sign rush for a new movie. However, the company knows it would be unprofitable in the long run to buy more copies just to serve the rush when a movie first becomes visible(prenominal), because the copies leave not be rented with near as much frequency soon after the rush. Customers have caught on to the fact that Netflix only purchases a limited quantity of new releases unspoilt away, opting to postponement a few weeks to buy thebulk of its supply at lower exists. While this might save Netflix money, it also has the extendency to drive away current and potential customers. Finally, Netflix does not have a direct connection to any movie studios so it must purchase its immac ulate media through the consumer market5.One disadvantage of Netflixs rent-by-mail business model is that customers have to wait (often for several geezerhood) for the next movie on their queue to arrive in their mailbox. In many cases, by the time the subscriber receives the DVD, he or she may no longer be in the mood to see that particular movie. Likewise, a Netflix subscriber may feel like limiting a movie on a night where all of the DVDs that are part of their plan are currently on route to or from a Netflix distribution center. In such a case, the customer impart probable leave the home and rent a movie from a brick-and-mortar retailer, or perhaps order a movie from a service such as Pay-Per-View or iN DEMAND.3.3 OpportunitiesNetflix is in a position to expand right now. Previously, sending movies to customers through the mail was a transmutation in the rental industry. immediately, delivering movies straight to computers of customers is likely to be the next conversion in how consumers view movies in their homes6. Luckily for Netflix, this service is only available as a per- backwash basis. Netflix washbasin seize this chance if it is successful in efficiently providing streaming means to a customer on a time usage basis rather than a per-viewing basis. In addition, quick management could possibly enable Netflix to absorb current providers of this service, such as Movielink, in a way similar to how it absorbed Wal-Marts DVD division.3.4 ThreatsThe clearest threat to Netflix is Blockbuster and other established rental businesses. Beyond this, customer satisfaction is the only aspect of this business that whoremonger make or falling out a company. If Netflix were to lose its wholesome, reliable image, it might not be able to retain enough of the market to die hard. Also, companies like Apple great deal potentially disablement Netflix if they are able to provide work through ones computer that can be easily ported to ones TV6. Netflix is le ss suited to compete with ironware innovations such as Apple TV because it has little to no encounter in this area, though such innovations may eventually be complementary rather than competitive. More everyplace, there is always the threat of entry by another firm, especially into the VOD industry, a closely related industry, which Netflix is about to enter.4 sixsome Forces Analysis of the Video on Demand IndustryBy offering streaming movies through its website, Netflix is entering the Video on Demand (VOD) industry. This industry, along with DVD rentals (both from online providers such as Netflix, and cable work such as On Demand and Pay-Per-View), is part of the larger industry of lodgeing movies in the home. However, since Netflix is already positioned in this market, with its online DVD rentals, we pass on examine the smallerportion of the market that is streaming online movies. This business is too closely related to the movie downloading service to be considered as a se parate market.4.1 EntryThe Video on Demand industry requires a meaning(a) level of capital, so potential entrants face the large sunk costs of acquiring licenses to the movies they want to provide. Moreover, it is too expensive for a firm considering this market to merely ravel the waters. An established video rental retailer already has experience in marketing movies to people, giving them an experience advantage over potential entrants. Netflix, for example, invested over $40 million to launch its esteem Now streaming video service, shocking many shareholders6. These shareholders reactions only highlight the risk involved with such sunk costs. Netflixs Watch Now feature forget be fully integrated with its normal online DVD rental website. A firm without the technological advantage of a website with movie-recommendation algorithms like Netflixs CineMatch program is at a significant disadvantage. Moreover, Netflixs website alreay has reams of user reviews and input, that a new firm would be unable to duplicate for years. The technology to offer high-quality downloads is also a restraint to entry, but this barrier is small because such technology is available for licensing from third parties. In this market, harvest-tide differentiation takes the form of varying quality in the downloaded movies, yet it should be noted that all firms leave behinding at least have to offer quality that is very close to DVD quality in order to ensure that discerning customers embrace to use their service. Besides quality, differentiation exists in the type of service offered by a company streaming movies, ageless downloads, or limited time downloads. In sum, this is an industry where entry is heavy for all but the most experienced firms with already established online movie rental/sale experience. These firms are more likely to thrive in this market due to their experience, reputation, and recognizable brand names.4.2 RivalryThe movie download industry, like the onlin e DVD industry, is not very concentrated20, and so the few market leaders that share the market may engage in competitory price competition. A key example of this is Netflixs and Blockbusters recent price war8, which lasted until both resolved to settle on a higher(prenominal) price through tacit collusion. A variety of services are being offered in the online movie industry. Amazon Unbox sells movies that one can download and keep on ones harddrive for one to two days9. Netflixs Watch Now feature ties in its streaming movie service with its online DVD rental service. Current Netflix customers get out get this service for free, which will cost significantly less than Amazon Unbox. Because the product is not easy to differentiate, the competition focuses more on the services provided with the product than the price. An existing variety of movies is essential in this market because consumers will frown upon not assureing a movie they want to see. The entry barriers mentioned in the previous section will prevent small and unvarying firms from entering the market, practically ensuring that the prices will not be competitive. With a low concentration of firms and emerging differentiation, this industry will not likely be especially rivalrous.4.3 Supplier PowerNetflix and its competitors buy their movies from the movie studios that create the films. The major studios have marginal supplier power in the online movie download market because they are the exclusive character of big name movies that customers desire. These highly popular movies have practically no substitutes in the rental market. However, vendee concentration in this new market is relatively high20, so suppliers tend to want to sell their product to all of the companies in the market to maximize their revenue. This reduces competition for supply and therefore prevents supplier power from being very high. In this particular market, studios may be concerned with cannibalizing their own product6. By m aking inexpensive movie downloading available to customers, they may lose gross revenue on the more profitable hard case DVD sales. Therefore, large studios may be more willing to withhold licensing agreements to movie download providers such as Netflix, thus strengthening their own supplier power. Overall, the suppliers to this market have only enough power to slightly control prices, but not enough power to influence the evolution of the market as a whole because they must sell their product to survive.4.4 SubstitutesThe main substitutes to streaming movies are brick-and-mortar rental stores, online rentals, pay per view TV and theatres. Brick-and-mortar rental stores provide the equivalent service with possibly a better selection of movies as compared to movies available for download by Netflix, but they do not provide the instant gratification of downloading or streaming them whenever a customer desires3. Furthermore, the streaming movies service provided by Netflix is more cos t effective than these other substitutes because Netflix plans to spread its users a total amount of stream time. For instance, if a customer decides after 20 minutes of ceremonial occasion a movie that he does not want to watch it anymore, switching to another movie incurs no special(a) cost. Substitutes such as buying per download or traditional renting do not offer this convenience. For this reason, these are weak substitutes to streaming videos.4.5 buyer PowerBuyer power is very low in this market because one customers decision to buy the service or not will not affect the overall market at all. Similarly, one customers dissatisfaction will not influence a significant amount of other customers. The source of dissatisfaction would have to be concerning an inferior product or service to activate such a widespread response. Clearly, this is not something an independent customer can control. There are substitutes for movie rentals, but these are weak substitutes. Buyers can rent movies from local brick-and-mortar businesses, but this is not nearly as convenient as the instant-gratification downloading of movies. In a broader aspect, a customer always has the survival to not spend their free time watching movies, no depicted object what the source, so the price of rental services cannot climb much higher than they currently are. Overall, individual customers do not hold bargaining power over the price of products in this market however, the prices themselves are regulated by the substitutes and preferences of customers as a whole.4.6 ComplementsTechnology is the main complement to streaming videos offered by Netflix. The basic complement required is high bandwidth. According to Netflix, a consistent bandwidth of 3 megabits per second is required10 to watch streaming videos online at DVD quality. This bandwidth is already present in over 47% of US households, which means over 50 million households have broadband service available14. Because the required b asis is already well developed, Netflix has access to a large customer storey. This underframe is projected to grow to 55% by the end of 2007, making it a dependable complement. Apart from bandwidth, another possible complement is a product similar to AppleTV that allows users to watch streaming videos directly on their big-screen televisions15. Currently, users with S-Video capability can connect their desktops to their televisions but this does not provide the simple and elegant theme the average Netflix customer is looking for. With easy methods to view streaming videos on the television, animal(prenominal) media (CDs, DVDs, etc.) would be much less functional in the movie rental industry.5 Netflixs Entry into the VOD Industry via Streaming MoviesIn our depth psychology below we will examine Netflixs current business model to find that their business can suc- cessfully incorporate such VOD offering. Netflixs choice of providing streaming content as opposed to downloadable mov ies allows it to differentiate its service from others in the market, thus aiding Netflix in its strategic arrangement. There are both advantages and disadvantages in tying in this new service with Netflixs current subscription plans as opposed to offering the services separately, but the two can complement one another at this early stage in Netflixs entry. These proposed strategies will place Netflix in a strong position in the newly developing market of VOD, and can act as a bridge to allow Netflix to leave the DVD rental industry as physical media becomes obsolete.5.1 Business DefinitionThe inquiry arises, however, as to how streaming videos and DVD rentals can both fit deep down Netflixs business definition. There exist scale economies associated with the offering or pack both of the services, as Netflixs good relations with the movie studios will help enable it to negotiate better prices for its streaming movies. Much of Netflixs existing theme, including its award-winning website cited to be one of Netflixs keys to success, will also apply to streaming movies. The same page that allows one to add a movie to their queue will have a Watch Now button allowing the user to begin streaming the movie immediately. Moreover, a substantial proportion of customers who rent movies online will be open to watching streaming movies, as both are ways of watching movies at home. Streaming videos may be use as a way to sift through movies they are considering to watch on DVD. Since these two somewhat different services have a similar consumer report and share benefits in cost structure, they can both be successfully integrated into the same business model. On the downside, however, it should be noted that many of the elements that allowed Netflix to succeed in renting out DVDs via mail, will not carry over to the digital distribution market. For example,superior logistics in mailing out DVDs and processing receieved DVDs will not aid Netflix in addressing bandwidth problems. The business model will have to undergo some changes if Netflix decides to offer a stand-alone streaming plan in the future (see Tying-in DVD Rentals and Streaming Movies below).5.2 Netflixs Choice of Streaming Video over Movie DownloadsThe Online Video on Demand industry has consisted of services such as Amazon Unbox and Movielink which allow users to download a movie for a fixed cost of about $3 and have 24 to 48 hours to view it. Recently, Starz launched Vongo, which allows users to download and watch movies for an unlimited amount per month, but are only allowed to choose from a catalog that is mostly representative of movies currently ventilation on one or more of Starzs cable television channels11. Therefore, Netflixs immediate entry into the VOD market will mark the arrival of one of the first monthly payment-based content providers that will allow viewers to watch their movies via streaming video files, similar to the format that has been popularized on websites su ch as YouTube and Google Video with higher quality.Perhaps the greatest advantage to streaming video is that it offers an even greater instant gratification incentive than downloadable VOD movies, as one can get the former up and running within a twosome minutes with a modest connection speed, whereas a full movie download will often take about a half(a) hour or more. A disadvantage of Netflixs business model has been the wait times associated with the turn-around between DVDs. Netflixs competitors have been quick to make use of their infrastructure to exploit this disadvantage. Blockbuster frequently gives monthly in-store movie rental benefits to its online subscribers such as a speedier gratification bonus, where the customer can drive to the store and rent a DVD for free to watch for the night while the DVDs previously requested online are still in transit12. Now, Netflix can take the lead again in offering the fastest way to watch a movie in ones home.5.3 One Subscription Ty ing-in DVD Rentals and Streaming MoviesNetflixs Watch Now will be available at no supernumerary cost to all subscribes within the first half of 2007 there is no plan offering only the streaming download service without DVD rentals. The roll up of these two services is a necessary component of Netflixs strategy. By doing so, Netflix will differentiate its service from the services offered by its competitors and use these complementary goods to reinforce one another (as mentioned above in Business Definition). Netflix hardly needs to consider this new bundled feature as just another method of delivering their product.Movie studios who supply films to Netflix are afraid that this Watch Now feature will contribute to cannibalization of their own DVD sales market. They are also concerned with the potential piracy of streaming and downloaded videos6. Due to the studios queer supplier power in this particular matter, the catalog of movies that can be streamed with Netflix is much small er than the size of their total DVD catalog. If Netflix offered a separate streaming plan, it would have a library of only about 1,000 films and television series to offer to its subscribers, making it difficult to satisfy a wide range of consumers. Variety of selectionhas always been one of Netflixs keys to success, so spin around off a half-hearted stand alone service could potentially harm its brand name. Tying the two services together allows consumers to see that Netflix is expanding its features since it offers it at no increase in price. It is providing existing subscribers a greater valuate and giving potential subscribers more incentive to try Netflixs services.By offering the new product as a tie-in, consumers are presented with a unique service that they can only get from Netflix. Consumers are given the opportunity to see a movie precisely when they want to, but can still order a DVD they feel like watching later. This gives consumers the opportunity to see more movies for a relatively lower cost than using only rental services or only brief download services. The threat of price competition is reduced because the bundle of services makes Netflix appear to be less of a direct threat to download-only VOD services. The only firms able to replicate Netflixs bundling structure are those with an established DVD rental infrastructure.However, Blockbuster is such a firm capable of imitating Netflixs bundling model, especially as it has recently entered negotiations to acquire Movielink, a movie downloading service that offers both downloadable purchases and temporary downloads1320. Blockbusters interest in Movielink suggests that it will more specifically attempt to integrate movie download rentals and sales into its online subscription plans13, as opposed to streaming content. Should Blockbuster acquire Movielink, it will be able to offer a similar subscription plan to that being offered by Netflix. This apparently small difference reduces the threat of price competition because it will present consumers with a dilemma of preference, rather than an obvious choice of choosing the cheaper of two seemingly indistinguishable services.At this early stage in Netflixs attempts in the VOD industry, it is important that Netflix ties in its VOD offerings with its existing, time-tested DVD rental service. This ensures Netflix offers a unique and differen- tiated good, while not risking Netflixs brand name due to the lack of selection in the movies being offered, potential problems that may arise due to Netflixs lack of experience in the industry, and the relatively new and untested technologies being put to use to offer these services.5.4 Positioning for the FutureOver time, Netflixs bundling of DVD rentals with streaming movies will enable them to work out any kinks they have with their ability to administrate movies digitally, while continuing to build a large customer base of subscribers. Traditionally, Netflix has relied on a combina tion of word-of-mouth suggestions from their existing subscribers and an aggressive marketing campaign1. Should they continue to market their services effectively, their subscriber base will grow steadily, and Netflix will be able to collect more personalized user data and become even more proficient at being able to personalize their library to each subscriber by leverage their database of user preferences17. Netflixs compilation of this data and their subsequent understanding of their customer base will serve a vital part in aiding their positioning in the coming future.However, the future of the DVD rental industry is very unclear as newer forms of media are developed. There are several factors that could damage the industry that Netflix and other DVD rental outlets have been paying attention to. It is predicted that DVD and its successor formats (Blu-Ray and HD-DVD) will bemore prevalent than digitally distributed movies in the short term619. Yet as complementary technologies g row that will allow for streaming of high definition movies directly to HDTV, VOD will continue to gain popularity and will eventually unseat DVD and other physical forms of media as the dominant format for watching rented movies at home17.Technology, however, is not the only barrier to the inevitable prevalence of VOD. As previously mentioned, the studios are on the alert of allowing the legal digital distribution of films to take place on a major scale, as they rely on DVD sales for a large portion of their revenues. Moreover, if the studios start reducing the window of time in which a movie is exclusively available on DVD after its major theatrical run or allow movies to be distributed in the home in other formats before they can be distributed on DVD, Netflix and other DVD rental firms will be adversely affected17. They will no longer have a significant advantage in allowing consumers to view new releases first through their services and more substitutes cut for viewing those new releases (Pay-Per View, iN DEMAND, etc.). The fate of the DVD rental industry largely depends on factors outside of the hands of Netflix and its competitors.In order to build up for the demise of the DVD industry, Netflix must make its streaming services available under a separate subscription plan of its own. This point will likely come at a time when the penetration of technology allowing for viewing streaming content on high-end TVs is substantially high. The technology already exists in some ways the Apple TV is used to wirelessly connect to ones computer and retrieve movies downloaded from the iTunes store onto the computer, then play those movies on ones television16. However, it will be some time before this expensive technology is adopted by the mainstream population to such an extent that the digital distribution of movies onto those TVs will return large profits. It is also at this time that Netflixs experience with streaming under the previous tie-in structure will a id it in completely changing its business model toward eventually becoming a digital distributor of filmed entertainment as opposed to a DVD rental outlet. The one important factor it will maintain from its rent-DVDs-by-mail days will be the aforementioned personalized library available to its subscriber. Netflix will continue to benefit from the advantages associated with its superior understanding of its customer base through their databases, which they have acquired over the years and will continue to develop. Clearly, Netflixs competitors will be trying to do the same. As mentioned before, Blockbusters acquisition of Movielink only serves to signal that it is also pursuing a similar strategy in trying to survive beyond the death of physical media20. Yet, Netflix has historically been more adept at understanding its consumers and delivering easier to use cont