Netflix Case Study

Introduction

Impressive is the company that is able to make it to the top of their industry in a quick fashion and remain there atop of all the rest of the industries.

Taking away market share from other established companies is a feat that does not occur by accident. Netflix is a company that was born in 1997 and by 2007 had revenues exceeding $1 billion. Not all competitors were prepared to handle the new strategies being employed by NetFlix and some fell quickly. Strategies and changes within the movie rental business that allowed NetFlix to accomplish such a quick business success story and others to fall just as quickly will be explored to give a clear picture of some of the external factors that were relevant in the NetFlix movement.

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Reviewing and analyzing some of the business decisions by NetFlix over the past 10 years will provide a better understanding of the effects of these decisions. Although NetFlix has obtained some great results over these years, there are also lessons to be learned and recommendations that can be given so that some of the less beneficial business decisions will not be repeated. This exploration of the NetFlix business strategy and the results from executing their strategies will help gain insight into how important it is to stay involved with the customer and satisfy the needs of the market.

Changes Within the Movie Rental Business

The video rental industry has reinvented itself often and in impressive fashion. Providing entertainment in the most convenient and cost-effective fashion has become the motivator for multiple changes within the industry. The video industry began to take off in the 1980s with larger chains like Blockbuster and Movie Gallery rising over the previous smaller shops. These new avenues are providing videos granted a better selection and often better pricing for the common video consumer.

The popularity of these chains became more popular around the world and the businesses kept adding buildings and locations and became very popular for their wide selections, reasonable prices, and membership perks. Before long, these businesses added the increasingly growing gaming rentals as well making it convenient to now rent games for a much lower cost than purchasing the games. Convenience was impacted once again as NetFlix came on the scene in the late 1990s. No other businesses had made efforts to use the unorthodox method of mailing DVDs to their customers.

Rather than jumping in the car and heading to the nearest video store, NetFlix capitalized on bringing the videos to the customer using their mailbox. Not only was it convenient, but NetFlix also allowed customers to hang on to the DVD without incurring late fees until the customer was ready to return and pick a new movie to be shipped out. Rather than a charge for each movie, as the traditional method was for all other players, NetFlix charged in a monthly fee structure that allowed movie watchers to continue to watch videos as quickly as they could watch and send back a request for a new movie.

Although NetFlix was at first looked at as a non-threat with its entrance into the market, it was not long before others began making efforts to copy the methods that NetFlix had brought to life. “Further fueled by convenience, hassle-free Redbox kiosks offering $1 new releases at your local grocery store or gas station came on to the scene in 2004 and had grown to more than 25,000 kiosks by the year 2011”. Redbox began as an adventure with McDonald’s in order to add more convenience for McDonald’s customers.

In 2004, the concept of Redbox really started gaining steam. “With the majority of locations at McDonald’s restaurants, early headlines read, “Would you like a DVD with your fries? ” and “Order Your Big Mac and DVD to Go”. And what are the newest trends in making video rental even more convenient? Video streaming has taken movie watching to a new level as there are multiple companies competing in this method of delivering a wide selection of movies and TV episodes over the internet.

However, NetFlix has had a start on its competition by emerging as the world’s largest subscription service for movie watchers with over 15 million subscribers in 2010. NetFlix has enjoyed being at the top of the industry until recently. Over the past 10 years, NetFlix stock has increased by 1700%. The difference today is that other businesses have caught on to the successful NetFlix strategies and methods. Competition has risen significantly in the internet streaming method of delivering movies conveniently to home watchers.

Amazon Prime is one of NetFlix’s recent competitors in both DVD rental and streaming internet video. Amazon Prime is another company that has had significant and impressive growth in the past 10 years as stocks have soared over 1,100%. Although Amazon Prime had not reached the heights of growth NetFlix has accomplished, the ride for Amazon Prime has been at a steadier pace. And there are others that have entered the DVD and internet streaming movie distribution as well. Even Walmart has begun to enter the internet streaming market to share in this growing method of convenient movie watching.

DirecTV, Time Warner, DISH Network, AT&T, and Verizon are all companies that have created more competition in the market by utilizing existing or newer technology allowing for more opportunities for movie and TV entertainment by providing convenient movie selections while sitting at home.

NetFlix History and Strategies

NetFlix was formed and incorporated in 1997 by two “new technology” entrepreneurs Reed Hastings and Marc Randolph. The two entrepreneurs set out to sell and rent the recently created DVD over the internet and deliver it to the renter’s mailbox.

Few stores in 1997 carried DVDs which was a new format that was new technology as compared to the videotape. Although the DVD players were expensive as they entered the market, the two entrepreneurs set their strategy that the DVD would soon replace the videotape and began to figure out how to best get it to the movie watcher. Experimentation with different mailers ended with a package that would successfully be sent to and from the renter for the price of a postage stamp. The company began to purchase copies of the nearly 1,000 available titles available on DVD and 30 employees opened for business on August 14, 1998.

Pricing and discounts were created to invite the consumer to rent more while giving ample time to watch the movies and return. Soon after opening, promotions were given through sweepstakes and additional free DVDs with the purchase of some brand-name DVD players. Not only could movie watchers rent but they also could keep and purchase that same DVD if it was to their liking to do so. NetFlix was not born, however, to only send DVDs through the mail. As the name implies, the founders had a vision and strategy to expand further into the access that the internet would provide.

With year after year major growth, in 2006 NetFlix ended the year with over 6. 3 million members. In 2007, NetFlix introduced to its members the ability to stream and watch movies and TV shows right on their personal computers. Now the challenge for the NetFlix team was to invent a way of getting streaming movies into everyone’s homes. And the strategy began new life again creating and experimenting with devices to attain this. After several ideas and some failed concepts, NetFlix's strategy changed once again.

The widespread adoption of broadband connections to the internet had taken place in consumers’ homes and Microsoft and NetFlix strategies met up. Microsoft had already put out the Xbox and had envisioned it to be more than just a serious gaming system. Microsoft t found NetFlix’s ideas of streaming movies over the Xbox device to the screen to be a good fit. Soon, many other devices and TVs were built with a chip and the NetFlix application to stream thousands of movies and TV shows right to the living room. NetFlix continued to grow and be the leader in this industry while taking away market share from other “traditional” methods of renting and watching videos. NetFlix management believed that the subscriber consisted of three types of customers: those who liked the convenience of home delivery, bargain hunters who liked a good-priced movie, and movie buffs who wanted a wide selection of movies. The content was a weak spot for NetFlix, however. Despite having a new large movie rental business, NetFlix did not have the contacts it needed to bring the wide selection of Hollywood movies to the consumer’s screens.

Although access to NetFlix may be cutting-edge, few would watch if it only had older videos and TV shows. NetFlix began to search out ways to combine forces with other businesses that would give them access to more content. Not only was it lacking in content, but also needed to somehow gain access to the movie blockbusters much sooner. In many cases, hit movies would not be available to NetFlix for months and in some cases, it would be years before these would be able to be watched by NetFlix subscribers.

In 2008, NetFlix found an agreement with Starz enabling the addition of 2,500 fresh videos to NetFlix’s services. Underlying NetFlix’s great success from the years 2007 – 2011 was the understanding that they had to deliver additional content and make more available for streaming. Another strategy emerged in September 2011. Hastings announced that the company would charge separately for DVD rental and streaming video and that a new company named Qwikster would be formed to handle the DVD rental portion.

With substantial increases in consumers and issues like separate billings, users began to voice their displeasure with this strategy and many subscribers began to cancel their subscriptions. New subscriptions began to suffer as well with the new format and the price increase that was introduced. NetFlix reasoned that the change was needed due to the increased costs in licensing and streaming videos. It was not long before the outcry of the customer and the loss of subscribers made Hastings rethink this strategy.

By the end of 2011, Hastings admitted that strategy was not appropriate and dropped the division of the DVD and streaming making them once again one entity. But by then, the damage had been done and the poor strategy had taken its toll on the business while its stock had dropped by 75%. The current strategy being pursued by NetFlix is one of moving to International expansion. Though many countries may not have the infrastructure in place to be able to stream from the internet, many countries do and this may be a unique opportunity for NetFlix to continue to grow.

Netflix has gained over 6 million subscribers within two years of its launch into International markets. Although NetFlix seems to be leading now in the movie streaming industry just as it did with its strategy to mail deliver DVDs, competition is already on its way in the streaming movie business. The competition will continue to come up with their own unique strategies in their efforts to steal away some of the market share and success that has enabled NetFlix to continue to be successful.

Analyzing NetFlix Results

The successful results of NetFlix over the years since its beginning can be seen in many statistical views. Focusing on the customer to tell us how NetFlix has performed would show us that from 2002 it grew from 600,000 members to over 6,000,000 members in 2006. Each year after, NetFlix has gained a substantial quantity of members, and in 2010 had over 20,000,000 members. Although there was a loss of subscribers in 2012 due to the Qwikster strategy of about 1 million subscribers, 2013 is estimated that NetFlix has over 33,000,000 subscribers in 40 different countries.

The rebound has definitely made up for the loss of a year ago. This is amazing growth in a short amount of time and NetFlix has done well to keep ahead of its growth with its infrastructure and planning. Many of the new subscribers every year were customers of local video outlets which have now suffered a reduction in business due to NetFlix’s success. The opposite effect of NetFlix’s success can be seen in businesses like Movie Gallery and Blockbuster as they have taken a large hit even to the extent of bankruptcy.

Although it may be a short trip down to the video store, consumers have definitely shown by the number of subscribers that they enjoy the benefit and value of being able to have the movies come to them. Revenues are another way to show the success of NetFlix over the past 15 years. Like many other startup companies, the early years were not profitable. In 1999, the coming had to swallow $30 million in losses on only $5 million dollars of revenue. However, by 2005 revenues had exceeded $600 million with a net income of $42 million.

By 2008, these amounts had doubled and in 2012 NetFlix reported $3. 6 billion of revenue which was an increase from the prior year by about 12% with a $226 million net income. 2011 saw a large growth of about 48% when compared to 2010 and while there was some growth of competitors in recent years, many have seen negative growth in revenues partly due to the success of NetFlix. Netflix has dominated the market share in the digital online viewing of movies. According to a report by Sandvine Inc. in 2012, Netflix had captured 33% of prime-time web viewing.

As well, NetFlix has gained over 61% of all movie watching in the United States and its aggressive strategy marches on to increase that as well as move aggressively internationally. Although international business continues to grow in subscribers, it is not yet profitable and currently is erasing much of the profits of the US business. It will take some time to get established internationally and provide profits. Stock prices for NetFlix had escalated significantly from the 2009 level of about $30 per share to the peak high value of $300 per share in 2011 but began a sharp downward trend in 2011 after the introduction of Qwikster.

Basic earnings per share rose from a 2009 level of $2. 05 to that of $4. 28 in 2011. It has taken some time to rebound from the events that surrounded the Qwikster disappointment, but stocks now seem to be continuing to increase as they appear to be reaching the $175 per share level.

Review and Recommendations

Over the short existence of the NetFlix company, it has done a good job at giving the customer what it has wanted and more. Over 90% of subscribers have indicated that they would recommend the NetFlix service to a friend.

Netflix has been able to stay ahead of the rest of the movie rental industry by staying in touch with its customers and providing the services and movie selections that are important to them. The software that NetFlix has developed has made it easy for the customer to choose movies by category and provides detail for each movie that helps subscribers make their decisions as to what to watch. The NetFlix software is also able to personalize the movie selection experience by capturing what the viewer has chosen before and what likes and dislikes the viewer has recorded after watching their selection.

This personalization brings to the subscriber's attention other movies that they may want to watch based on their preferences and likes in the past. Netflix has given the opportunity for first-time users to use the NetFlix services for an entire month for free. This allows the customer to feel like they are getting a real bargain as well as gives them ample time to try out the service before paying for it. The pricing structures that NetFlix has instituted give the subscriber options as to how many DVDs can be rented at a time along with unlimited streaming.

The $8. 99 membership is a bargain as unlimited DVDs and unlimited streaming of movies are included. The largest interruption to the NetFlix business was in 2011 when it decided to split the DVD portion of the business separately from the internet streaming portion. This move was not along the same lines as their customers were wanting. Qwikster was the new company that would handle all of the DVD rentals and NetFlix would continue to provide the streaming video. The two companies would not be separate and charge separately as well for their services.

With this change, a large price increase would be incurred as well as subscribers would pay separately for each service. It almost seems as though in this instance that NetFlix was not interested in what their customers wanted. The strategy to break these services into two distinct companies was not born from what would satisfy the customer but was rather an internal strategy to satisfy what the owners of NetFlix thought to be advantageous. Along with the change, communication with the subscribers was ineffective and poorly distributed.

This poor decision did not sit well with about 1 million lost customers and stock prices fell dramatically during this period. After the fact, NetFlix heard the voices of the customer and decided to abandon this strategy and go back to the original format, but the damage had been done. The recommendation here is to find out what the customer views as important before fully developing and implementing new changes. NetFlix had been following this well until the 2011 Qwikster event.

Now they have learned the hard way how important it is to know what the customer views as valuable in their services. Even with the loss of 1 million customers, NetFlix began to rebound and grow with additional subscribers, but how much more could they have accomplished without this major setback.

Conclusion

I have enjoyed the services that NetFlix has provided related to DVD rental and streaming movies and TV shows over the internet right to my living room. Netflix has worked hard to ensure that its customers have many selections at a reasonable price.

The company has grown substantially year after year with more customers, revenues, and profits and has taken and maintained the lead in this industry. Although this success has come quickly, it has not come easy. Netflix has had to effectively plan, implement, and successfully change its strategies to satisfy its customers and stay in the industry leader. It has done well in implementing these strategies and the results speak for themselves.

References

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