Netflix Tech Strategy

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Strategic Analysis

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SGMT 6800 S - Group Project

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Schulich School of Business Schulich School of Business

Kevin Andrews Kevin Andrews Ebube Anizor Ebube Anizor Nasir Gondal Nasir Gondal John Selvakumar John Selvakumar

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COMPANY OVERVIEW

Netﬂix was founded in Scotts Valley, California, in August of 1997 by Reed Netﬂix was founded in Scotts Valley, California, in August of 1997 by Reed Hastings

Hastings and and Marc Marc Randolph. Randolph. The The idea idea for for the the “DVD-by-Mail” “DVD-by-Mail” business business waswas born out of Hastings’ own personal frustration from paying $40 in late fees for born out of Hastings’ own personal frustration from paying $40 in late fees for a video he

a video he had forgotten had forgotten to return to Bloto return to Blockbuster. ckbuster. Hastings’ was coHastings’ was compelled tompelled to ﬁgure out a better way for consumers to experience what was then the new ﬁgure out a better way for consumers to experience what was then the new video format – DVDs - and began his quest to disrupt the traditional movie video format – DVDs - and began his quest to disrupt the traditional movie rental market and create a new industry.

rental market and create a new industry.

In just over a decade Netﬂix has developed into the world's leading DVD In just over a decade Netﬂix has developed into the world's leading DVD rent-by-mail and vi

by-mail and video streaming deo streaming company. company. With over 14 miWith over 14 million subscribers llion subscribers in thein the US and growing, more than 10% of US households currently subscribe to either US and growing, more than 10% of US households currently subscribe to either Netﬂix’s m

Netflix’s mail or ail or streaming servistreaming services. ces. Netflix Netflix employs 1,700 employs 1,700 stastaf f and reportedand reported revenues of

revenues of US $1.67 billiUS $1.67 billion in 2009. on in 2009. Projections foProjections for 2010 include r 2010 include revenuesrevenues nearing $2.5 billion and a subscriber base approaching 17

nearing $2.5 billion and a subscriber base approaching 17 million.million.

PRODUCTS & SERVICES PRODUCTS & SERVICES

Netﬂix’s DVD-by-Mail service straddles the end of one particular technology Netﬂix’s DVD-by-Mail service straddles the end of one particular technology cycle (traditional DVD rental service) and the beginning of another (on-line cycle (traditional DVD rental service) and the beginning of another (on-line streami

streaming). ng). Though Though Netﬂix’s Netﬂix’s early early attemptattempts s at at streamistreaming ng technology technology (see(see Streaming below) were met with failure their foresight and “big bet” into this Streaming below) were met with failure their foresight and “big bet” into this technology has led to their dominant status in the movie streaming market, and technology has led to their dominant status in the movie streaming market, and

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has provided the

has provided them with signiﬁcm with signiﬁcant power in ant power in the industry. the industry. Figure 1 deFigure 1 depicts howpicts how the mail and streaming services operate.

the mail and streaming services operate.

Figure 1:

Figure 1: Neﬂix’s Mail and Streaming ONeﬂix’s Mail and Streaming Of f eringering

While plans for geographical expansion are underway Netﬂix currently only While plans for geographical expansion are underway Netﬂix currently only operates in the United States; o

operates in the United States; of f ering one of four ering one of four subscription choices:subscription choices:

•

• 3 DVDs at-a-time/Unlimited Streaming - $17/month3 DVDs at-a-time/Unlimited Streaming - $17/month

•

• 2 DVDs /2 hours str2 DVDs /2 hours streaming - $5/montheaming - $5/month

TECHNOLOGY TECHNOLOGY

Netﬂix’s attempts to move from a

Netﬂix’s attempts to move from a solely mail-based service faced challengesolely mail-based service faced challenges. Ins. In 2000, engineers developed a streaming service that took 16

2000, engineers developed a streaming service that took 16 hours to downloadhours to download a two

a two hour movie hour movie – need– needless to less to say the say the project the project the scrapped. scrapped. NoticeableNoticeable improvements were made in 2003 when using a TV connected to Linux PC at a improvements were made in 2003 when using a TV connected to Linux PC at a

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cost of $300 it took two hours to download a two hour ﬁlm.

cost of $300 it took two hours to download a two hour ﬁlm.11 _{However, the}_{However, the}

technology was still not yet ready to be commercialized. Improvements in technology was still not yet ready to be commercialized. Improvements in broadband speeds and Netﬂix’s technology were required to make streaming a broadband speeds and Netﬂix’s technology were required to make streaming a viable o

viable of f ering. Progress in both regards will continue to aering. Progress in both regards will continue to af f ect growth in theect growth in the Internet delivered video (IDV) industry and

Internet delivered video (IDV) industry and Netﬂix’s fortunes.Netﬂix’s fortunes.

Adoption Adoption

Netﬂix’s service o

Netﬂix’s service of f erings reside in distinct stages in the technology life cycleerings reside in distinct stages in the technology life cycle (Figure 2).

(Figure 2).

Figure 2:

Figure 2: Technology Adoption CurveTechnology Adoption Curve

DVD-by-Mail DVD-by-Mail

DVD-by-Mail lies somewhere between the “Early Majority” and “Late Majority” DVD-by-Mail lies somewhere between the “Early Majority” and “Late Majority” stages.

stages. The service is The service is still growing; still growing; however the ehowever the entire model as ntire model as a means of a means of distributing movie content is changing, foreshadowing the decline of the distributing movie content is changing, foreshadowing the decline of the model.

model. Ultimately deliveUltimately delivery will be replaced as streamry will be replaced as streaming improves, optimizing improves, optimizationation

1

1_{“Netﬂix Inside” (Wired), October 2009}_{“Netﬂix Inside” (Wired), October 2009}

DVD-by-Mail DVD-by-Mail

Streaming Streaming

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of the delivery chain peaks and the cost of shipping DVDs becomes too high of the delivery chain peaks and the cost of shipping DVDs becomes too high relative to revenue in a competitive market.

relative to revenue in a competitive market. Streaming

Streaming

The “Streaming” model however, would have still be considered to be in the The “Streaming” model however, would have still be considered to be in the “Early Adopters” stage, however that is being driven full steam ahead into the “Early Adopters” stage, however that is being driven full steam ahead into the “Early Majority” as an increasing number of devices support the Netﬂix “Early Majority” as an increasing number of devices support the Netﬂix platform.

platform. Televisions, Televisions, Blu-Ray Blu-Ray players, players, gaming gaming consoles, consoles, mobile mobile phones,phones, tablets, PCs, and just about any device that can connect you to the internet are tablets, PCs, and just about any device that can connect you to the internet are all becoming “Netflix enabled” devices that will likely catapult the Netflix all becoming “Netflix enabled” devices that will likely catapult the Netflix streaming service into majority adoption.

streaming service into majority adoption.

Evolution Evolution

Several factors including technological improvements and customer behaviour Several factors including technological improvements and customer behaviour foretell

foretell the gthe gradual radual dominance dominance online online delivery. delivery. That beThat being ing said, said, NetflixNetflix anticipates the continued growth of the DVD-by-Mail business into 2013 (see anticipates the continued growth of the DVD-by-Mail business into 2013 (see Figure 3) driven by the growing closures of video stores and Netflix’s delivery Figure 3) driven by the growing closures of video stores and Netflix’s delivery excellence

excellence. . Clearly what is Clearly what is being witnessebeing witnessed is the saturation d is the saturation of the shipmentof the shipment business as the streaming business emerges and approaches a breakthrough in business as the streaming business emerges and approaches a breakthrough in market acceptance. See Figure C4 is Appendix C for a

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Figure 3:

Figure 3: DVD-by-Mail Shipments (Source: Netﬂix)DVD-by-Mail Shipments (Source: Netﬂix)

perspect

perspective ive on on the the attractattractiveness iveness of of service service delivery delivery models. models. While While thethe technology Netflix employs in delivering a movie via mail or via streaming can technology Netflix employs in delivering a movie via mail or via streaming can be classified as key; providing Netflix with short term advantage, they are be classified as key; providing Netflix with short term advantage, they are imitable in the

imitable in the longer term. longer term. See Appendix D See Appendix D for details on for details on Netﬂix’s technologyNetﬂix’s technology life cycle and evolution.

life cycle and evolution.

CURRENT STRATEGY

BUSINESS STRATEGY BUSINESS STRATEGY

The core business objective of Netﬂix is to grow a large subscription business The core business objective of Netﬂix is to grow a large subscription business consisti

consisting ng of of streaminstreaming g and and DVD-by-maiDVD-by-mail l content. content. In In order to order to achieve thisachieve this objective and di

objective and dif f erentiate itself in the marketplace, Netﬂix uses a customererentiate itself in the marketplace, Netﬂix uses a customer intimacy strategy heavily rooted in innovation to make it simple, fast and easy intimacy strategy heavily rooted in innovation to make it simple, fast and easy for subscribers to access a wide selection of content on a wide selection of for subscribers to access a wide selection of content on a wide selection of devices.

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is most convenient to the

is most convenient to them, all at one low pricem, all at one low price. . This strategy has proven to beThis strategy has proven to be a highly e

a highly ef f ective strategy as it helps grow and ective strategy as it helps grow and entrench the company’s greatestentrench the company’s greatest resource:

resource: its loits loyal subscriyal subscriber baseber base. . Through iThrough its focts focus on us on customer customer service service andand user experience, Netﬂix has built itself into one of the leading brands in home user experience, Netﬂix has built itself into one of the leading brands in home entertainment.

entertainment.

TECHNOLOGY STRATEGY TECHNOLOGY STRATEGY

At the genesis of Netﬂix in 1997, its founder Reed Hastings was said to have At the genesis of Netﬂix in 1997, its founder Reed Hastings was said to have envisioned a future for online streaming content – thus

envisioned a future for online streaming content – thus the name “Netﬂix” - butthe name “Netﬂix” - but knew the

knew the timing was not timing was not right. right. It was It was obviously too early in obviously too early in the technologythe technology cycle (or “S-curve”) for online streaming content and the technology had not yet cycle (or “S-curve”) for online streaming content and the technology had not yet reached its breakthrough point

reached its breakthrough point22_._. _When_{When the}_{the company}_{company sensed}_{sensed that}_{that the}_the

incumbents in the traditional video rental business such as Blockbuster were incumbents in the traditional video rental business such as Blockbuster were beginning to catch up and that streaming had become more pervasive, the beginning to catch up and that streaming had become more pervasive, the company quickly changed its business model to include streaming content company quickly changed its business model to include streaming content through its ‘watch now’ online streaming feature.

through its ‘watch now’ online streaming feature.33

Creating, Delivering and Capturing Value Creating, Delivering and Capturing Value

Technology strategy and innovation are at the heart of Netﬂix’s ability to deliver Technology strategy and innovation are at the heart of Netﬂix’s ability to deliver a compelling customer experience and its ability to sustain competitive a compelling customer experience and its ability to sustain competitive advantage.

advantage. At the tecAt the technology strateghnology strategy level, y level, Netﬂix oNetﬂix operates as perates as a leader a leader byby

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2_{Wolf, Michael (2010}_{Wolf, Michael (2010, July 1, 2010).}_{, July 1, 2010). How Netﬂix Shaped}_{How Netﬂix Shaped Skype’s Platform Strategy.}_{Skype’s Platform Strategy. Message posted to Gigaom}_{Message posted to Gigaom}

archived at

archived at http://www.gigaohttp://www.gigaom.comm.com

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investing in new technologies to enhance the “subscriber experience” and investing in new technologies to enhance the “subscriber experience” and “operate e

“operate eciently”ciently”44_..

•

• Netﬂix creates value by continuously adding to its extensive inventory of Netﬂix creates value by continuously adding to its extensive inventory of

content, by building a

content, by building a recommendation engine which allows the companyrecommendation engine which allows the company to maximize its library utilization and by leveraging its customer to maximize its library utilization and by leveraging its customer database and online merchandising experience to digitize the database and online merchandising experience to digitize the relationship with the customer

relationship with the customer55_..

•

• The company delivers value to customers through its recommendationThe company delivers value to customers through its recommendation

and merchandising technology by providing a quick and personalized and merchandising technology by providing a quick and personalized way to enjoy and experience content and through its pricing strategy way to enjoy and experience content and through its pricing strategy which entails charging

which entails charging oone price for quick delivery of DVDs through mailne price for quick delivery of DVDs through mail or via online streaming.

or via online streaming.66

•

• Netﬂix then captures value through fees charged to its large installedNetﬂix then captures value through fees charged to its large installed

base of 14

base of 14 million users. million users. By charging a minimum fee By charging a minimum fee of $8.99 per of $8.99 per monthmonth to its membership, In 2009 Netflix earned a $116 million profit on $1.67 to its membership, In 2009 Netflix earned a $116 million profit on $1.67 billion in revenue.

billion in revenue.

Platform Strategy Platform Strategy

In addition, the company’s platform agnostic approach to spread its software In addition, the company’s platform agnostic approach to spread its software across multiple platforms is proving to be a

across multiple platforms is proving to be a strong source of subscriber growth,strong source of subscriber growth,

4

4_{Netflix Annual Report (2009}_{Netflix Annual Report (2009)) Retrieved from}_{Retrieved from www.netflix.co}_{www.netflix.com}_m

5

5_{Bulik, Beth Snyder (2}_{Bulik, Beth Snyder (2010).}_{010). How Netﬂix Stays}_{How Netﬂix Stays Ahead of Shifting}_{Ahead of Shifting Consumer Behaviou}_{Consumer Behaviour.}_{r. Advertising Age, 81}_{Advertising Age, 81(8), 28}_{(8), 28}

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guided by the company’s goal “to be ubiquitous on whatever device gets the guided by the company’s goal “to be ubiquitous on whatever device gets the Internet to the TV”

Internet to the TV”77_._{. By}_{By attempti}_attempting_{ng to}_{to establi}_establish_{sh its online}_{its online streamin}_streaming_{g technology}_technology

as the standard service for getting internet content connected to electronic as the standard service for getting internet content connected to electronic devices, Netﬂix has positioned itself to beneﬁt from network e

devices, Netﬂix has positioned itself to beneﬁt from network ef f ects andects and capture more val

capture more value in the form ue in the form of subscription feof subscription fees and loyal ces and loyal customers. ustomers. ThisThis strategy also helps the company defend its position against other competing strategy also helps the company defend its position against other competing technologies and services that are quickly emerging in the market.

technologies and services that are quickly emerging in the market.

INNOVATION STRATEGY INNOVATION STRATEGY

Disruptive innovation has been the hallmark of Netﬂix since its inception in Disruptive innovation has been the hallmark of Netﬂix since its inception in 1997.

1997. It was It was one of one of the ﬁrst cthe ﬁrst companies to ompanies to oof f er DVD by mail ordered over theer DVD by mail ordered over the internet.

internet. This service This service provided a provided a cheaper, more cheaper, more convenient wconvenient way for customay for customersers to enjoy DVD movies and television shows compared to the traditional brick to enjoy DVD movies and television shows compared to the traditional brick and mortar video rental store, with the added convenience of no late fees. and mortar video rental store, with the added convenience of no late fees. Netflix perfected the fulfillment of its DVD rental by mail business by investing Netflix perfected the fulfillment of its DVD rental by mail business by investing in technology and developing processes to make it fast and e

in technology and developing processes to make it fast and ecient forcient for customers to receive and easily return DVDs by mail.

customers to receive and easily return DVDs by mail.88 _{Faced with competition}_{Faced with competition}

from kiosks and other mail based rental companies, improving broadband from kiosks and other mail based rental companies, improving broadband penetration, and increased customer acceptance of online video Netﬂix is penetration, and increased customer acceptance of online video Netﬂix is gradually shifting its innovation focus from DVD by mail to growing its library gradually shifting its innovation focus from DVD by mail to growing its library

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7 _Anonymous._{Anonymous. (2010,}_{(2010, Jan}_{Jan 2}₂₃_3)._{). Netﬂix Announces Multiple Partners to Instantly Stream Movies}_{Netﬂix Announces Multiple Partners to Instantly Stream Movies and TV}_{and TV Episodes from}_{Episodes from}

Netﬂix to the TV [Electronic version].

Netﬂix to the TV [Electronic version]. Leisure & Travel Week, p. 34Leisure & Travel Week, p. 34

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of online movie o

of online movie of f ering and from a technology perspective, perfecting itsering and from a technology perspective, perfecting its online recommendation engine and expanding its presence across multiple online recommendation engine and expanding its presence across multiple platforms.

platforms.

Open Innovation Open Innovation

Netﬂix has taken an open innovation approach to improving its Netﬂix has taken an open innovation approach to improving its recommendation technology and executing on its platform strategy to expand recommendation technology and executing on its platform strategy to expand across multiple

across multiple platforms. platforms. In one oIn one of its most f its most well knowwell known initiatives, n initiatives, NetﬂixNetﬂix engaged the general public and open source community by o

engaged the general public and open source community by of f ering $1 millionering $1 million to the person(s) who could “use Netflix movie-ratings data to build a to the person(s) who could “use Netflix movie-ratings data to build a recommendation engine 10% better than Netflix’s current tool”

recommendation engine 10% better than Netﬂix’s current tool”99_._. _In_{In another}_another

example, open innovation supported its platform strategy as Netﬂix saw example, open innovation supported its platform strategy as Netﬂix saw hundreds of new apps built when it opened up its API including apps to queue hundreds of new apps built when it opened up its API including apps to queue movies for a m

movies for a mobile phone. obile phone. According to a According to a November 2009 FNovember 2009 Forbes magazineorbes magazine article, the $1 million competition illustrated how Moore’s law may not be article, the $1 million competition illustrated how Moore’s law may not be applicable

applicable to innovation to innovation in the softwin the software industry. are industry. As opposed As opposed to Moore’s to Moore’s lawlaw which states that hardware power will double within approximately two years, which states that hardware power will double within approximately two years, the author contends that the ‘Netﬂix law’ illustrated by this competition the author contends that the ‘Netﬂix law’ illustrated by this competition suggests that you will only realize a 2-3% improvement rate and only for a suggests that you will only realize a 2-3% improvement rate and only for a short period of time.

short period of time.1010 _{In addition to cost and time savings, this example}_{In addition to cost and time savings, this example}

9

9_Klaasse_{Klaassen, Abbey.}_{n, Abbey. (2009) Brands get}_{(2009) Brands get boost by}_{boost by opening up}_{opening up APIs to}_{APIs to outside developers}_{outside developers . [digital version] Advertising Age.}_{. [digital version] Advertising Age.}

80 (40), 17 80 (40), 17

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highlights the rationale for Netﬂix utilizing an open approach to speed up highlights the rationale for Netﬂix utilizing an open approach to speed up innovation and the challenges in terms of making further improvements to its innovation and the challenges in terms of making further improvements to its recommendation software given that it took approximately three years for a recommendation software given that it took approximately three years for a winning team to emerge.

winning team to emerge.

INVESTMENT PRIORITIES INVESTMENT PRIORITIES

In terms of investment priorities, Netflix has applied significant resources in In terms of investment priorities, Netflix has applied significant resources in web based strategic technology assets (STAs) such as subscription account web based strategic technology assets (STAs) such as subscription account signup and management, personalized mo

signup and management, personalized movvie merchandising, inventoryie merchandising, inventory optimization and streaming software

optimization and streaming software1111_._. _These_{These investments}_{investments were}_{were made}_{made to}_to

optimize subscriber satisfaction and management of the company’s library of optimize subscriber satisfaction and management of the company’s library of content by promoting the right movies to customers and ensuring correct content by promoting the right movies to customers and ensuring correct inventory le

inventory levels. vels. The other The other important STAs important STAs in whicin which Netﬂih Netﬂix invests x invests is inis in technology to manage the processing

technology to manage the processing aand distribution of DVDs and streamingnd distribution of DVDs and streaming content, including third party

content, including third party delivery networks.delivery networks.1212

SUMMARY SUMMARY

Overall Netﬂix has made well timed adjustments in strategy according to both Overall Netﬂix has made well timed adjustments in strategy according to both consumer

consumer behaviour behaviour readiness readiness and and technology technology maturity. maturity. Its Its technologytechnology strategy

strategy has has supported supported its its business business strategy strategy of of consumer consumer intimacy. intimacy. ThisThis involves a well tuned DVD distribution system, excellent streaming technology involves a well tuned DVD distribution system, excellent streaming technology

11

11_{Netflix Annual Report (2009)}_{Netflix Annual Report (2009) Retrieved from www.netflix.com}_{Retrieved from www.netflix.com}

12 12_IBID_IBID

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and e

and ef f ective recommendation engine. ective recommendation engine. This “intimacy” is This “intimacy” is likely how likely how Netﬂix willNetﬂix will di

dif f erentiate itself erentiate itself in the broader anin the broader and to-be-hotly d to-be-hotly contested IDV contested IDV industry. industry. SeeSee Competitive Analysis on below.

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ENVIRONMENTAL ANALYSIS

In what is expected to be a US$80 billion dollar business, the subscription In what is expected to be a US$80 billion dollar business, the subscription segment of the IDV industry exhibits growing rivalry, the existence of many segment of the IDV industry exhibits growing rivalry, the existence of many substitutes and the

substitutes and the threat of pthreat of powerful enowerful entrants. trants. Table 1 sumTable 1 summarizes the marizes the FiveFive Forces analysi

Forces analysis. s. Appendix B Appendix B provides full provides full details.details.

FORCES ANALYSIS FORCES ANALYSIS

F

Foorrccee SSttrreennggtthh Competitors

Competitors Medium/HighMedium/High

•

• Market rapidly growing. Estimated at US$13B by 2011Market rapidly growing. Estimated at US$13B by 2011 •

• Online based services lowers entrance costsOnline based services lowers entrance costs

Suppliers

Suppliers HighHigh

•

• Several distribution avenuesSeveral distribution avenues •

• Threat of forward integration (i.e. providing InternetThreat of forward integration (i.e. providing Internet

delivery services) delivery services)

•

• Flexibility in licensing contentFlexibility in licensing content

Buyers

Buyers HighHigh

•

• Demand < SupplyDemand < Supply •

• No switching costsNo switching costs

Substitutes

Substitutes Medium/HighMedium/High

•

• IPTV, Download Services (e.g. iTunes)IPTV, Download Services (e.g. iTunes) •

• Traditional Cable and Satellite TVTraditional Cable and Satellite TV

New Entrants

New Entrants MediumMedium

•

• Potential for M&A among Major PlayersPotential for M&A among Major Players •

• Strength could beStrength could be highhigh if content providers forwardif content providers forward

integrate integrate

Table 1:

Table 1: Forces Analysis SummaryForces Analysis Summary

The environmental analysis provided below examines the opportunities that The environmental analysis provided below examines the opportunities that cancan be exploited by Netﬂix to grow and strengthen its market position, and the be exploited by Netﬂix to grow and strengthen its market position, and the regulatory issues that can

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OPPORTUNITIES OPPORTUNITIES Game Consoles Game Consoles

With a high speed connection, Netﬂix content can be streamed via a game With a high speed connection, Netﬂix content can be streamed via a game console. There are over 60 million game consoles in the US

console. There are over 60 million game consoles in the US1313_{; representing a}_{; representing a}

potential asset that Netflix can exploit to expand its customer base. In April potential asset that Netflix can exploit to expand its customer base. In April 2010, the firm

2010, the firm signed a contract with Nintendo whereby Netflix subscribers cansigned a contract with Nintendo whereby Netflix subscribers can stream video on the Wii at no additional cost. At the end of first quarter of stream video on the Wii at no additional cost. At the end of first quarter of 2009, 55% of Netflix subscribers had watched at least 15 minutes of streaming 2009, 55% of Netflix subscribers had watched at least 15 minutes of streaming video; but this

video; but this sstill accounts for only till accounts for only 30 percent of Netﬂix-enabled devices30 percent of Netﬂix-enabled devices1414_..

Mobile Devices Mobile Devices

As of June 2010, or 80 days after product launch, Apple has already sold 3 As of June 2010, or 80 days after product launch, Apple has already sold 3 million iPads

million iPads1515_{. Netﬂix has launched an iPad app that allows ex}_{. Netﬂix has launched an iPad app that allows exist}_isting_ing

subscribers to stream for free. The increasing penetration and capabilities of subscribers to stream for free. The increasing penetration and capabilities of smartphones and tablet devices will enhance the complementary asset base for smartphones and tablet devices will enhance the complementary asset base for Netﬂix and provide further incentive for the new customers to sign up and Netﬂix and provide further incentive for the new customers to sign up and reduce churn when competition escalates.

reduce churn when competition escalates. International Expansion

International Expansion

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13_{NPD sales}_{NPD sales ﬁgure}_{ﬁgure analysis. Accessed}_{analysis. Accessed from http://www.digital-digest.com}_{from http://www.digital-digest.com/blog/DVDGuy/2}_{/blog/DVDGuy/2010/07/02/ga}_{010/07/02/game-consoles-}

me-consoles-may-2010-npd-sales-ﬁgure-analysis/ may-2010-npd-sales-ﬁgure-analysis/

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14_{http://www.zdnet.c}_{http://www.zdnet.com/blog/btl/netﬂ}_{om/blog/btl/netﬂix-55-perc}_{ix-55-percent-of-subscrib}_{ent-of-subscribers-now-streaming}_{ers-now-streaming-movies/3341}_{-movies/33415}₅

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Currently, Netflix streaming is available only in the United States. However, the Currently, Netflix streaming is available only in the United States. However, the increasing penetration of broadband connection especially in developed increasing penetration of broadband connection especially in developed countries presents a significant opportunity for Netflix to expand its o

countries presents a signiﬁcant opportunity for Netﬂix to expand its of f eringering beyond the US. According to research by Morgan Stanley

beyond the US. According to research by Morgan Stanley1616 _{there are 124 million}_{there are}_{124 million}

households in the top 10 countries that meet key criteria for Netﬂix such as households in the top 10 countries that meet key criteria for Netﬂix such as broadband usage rate, GDP, and a

broadband usage rate, GDP, and anity for Western culture. By graduallynity for Western culture. By gradually expanding its services into these countries Netflix can further leverage its expanding its services into these countries Netflix can further leverage its digital content library and build on its brand recognition in the US to become a digital content library and build on its brand recognition in the US to become a firm w

ﬁrm with iith international nternational scope scope and reand reach. ach. Naturally Naturally obtaining obtaining the the contentcontent licensing for new markets will be

licensing for new markets will be a separate challenge.a separate challenge.

LICENSING AND REGULATORY ISSUES LICENSING AND REGULATORY ISSUES Content Licensing

Content Licensing

New ﬁlms are released by studios in

New films are released by studios in a process called windowing whereby film isa process called windowing whereby film is first released at di

first released at dif f erent times in dierent times in dif f erent distribution channels. Thus a newerent distribution channels. Thus a new film is initially available only in theatres, then hospitality channels, followed by film is initially available only in theatres, then hospitality channels, followed by release on DVD, and then pay-per-view TV (See Figure A1 in Appendix A).

release on DVD, and then pay-per-view TV (See Figure A1 in Appendix A). As aAs a result, streaming on Netflix and other players in the digital streaming is result, streaming on Netflix and other players in the digital streaming is controlled through licensing by film studios.

controlled through licensing by ﬁlm studios.

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For Netﬂix, only 25% of the content represents new releases

For Netﬂix, only 25% of the content represents new releases1717_{. However, with}_{. However, with}

the focus of the company shifting to

the focus of the company shifting to digital streaming, the company might havedigital streaming, the company might have to rely more on library

to rely more on library or older content. Netﬂix’s reliance on an older catalogueor older content. Netﬂix’s reliance on an older catalogue will be disadvantageous especially if its competitors obtain licensing deals that will be disadvantageous especially if its competitors obtain licensing deals that allow for be

allow for better access to netter access to new content. w content. Content acceContent access will be a kss will be a key challengeey challenge going forward in light of a recent agreement Netflix has signed. Realizing that going forward in light of a recent agreement Netflix has signed. Realizing that the firm needed to improve its

the firm needed to improve its relationship with movie studios to gain access torelationship with movie studios to gain access to wider variety of new content, Netflix signed an agreement with Warner Brothers wider variety of new content, Netflix signed an agreement with Warner Brothers Home Entertainment whereby Netflix will not sell new releases until 28 days Home Entertainment whereby Netflix will not sell new releases until 28 days after they go on sale. In return, Netflix will be “able to extend the range of after they go on sale. In return, Netflix will be “able to extend the range of choices available to be streamed to [its] members”

choices available to be streamed to [its] members”1818_..

Net Neutrality and Managed Services Net Neutrality and Managed Services In 2009, the

In 2009, the Federal Communication CommiFederal Communication Commission (FCC) introduced its proposedssion (FCC) introduced its proposed rule changes whereby certain “managed services” will be exempt from net rule changes whereby certain “managed services” will be exempt from net neutrality rule. Managed services are those services for which network carriers neutrality rule. Managed services are those services for which network carriers can reserve certain bandwidth on priority basis so that network data is can reserve certain bandwidth on priority basis so that network data is transferred more quickly. Since many of the US network carriers are a

transferred more quickly. Since many of the US network carriers are aliatedliated with subscription TV or video content providers, these carriers might use with subscription TV or video content providers, these carriers might use managed services rules to reserve high bandwidth for their a

managed services rules to reserve high bandwidth for their aliated contentliated content providers. For example, Comcast (who recently acquired NBC) might provide providers. For example, Comcast (who recently acquired NBC) might provide

17

17_{Cannaccord (2010).” Netﬂix”.}_{Cannaccord (2010).” Netﬂix”. Accessed form}_{Accessed form http://research.thom}_{http://research.thomsonib.com/gap}_{sonib.com/gaportal/ga.asp}_ortal/ga.asp

18 CNET (2010). “netﬂix, warner bros. Rejigger movie renting”. Accesse

18 CNET (2010). “netﬂix, warner bros. Rejigger movie renting”. Accesse d ford formm http://news.cnet.com/http://news.cnet.com/ 8301-31001_3-10426792-261.html

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priorit

priority y access to access to bandwidth for bandwidth for its own its own content. content. Thus if Thus if subscrisubscription videoption video streaming becomes part of managed services, then companies like Netﬂix streaming becomes part of managed services, then companies like Netﬂix which don’t have an a

which don’t have an aliation with any network carrier may be at a competitiveliation with any network carrier may be at a competitive disadvantage.

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COMPETITIVE ANALYSIS

When Netﬂix launched in 1998 it e

When Netflix launched in 1998 it ef f ectively disrupted the video store industry.ectively disrupted the video store industry. In exchange for the delayed gratification of receiving a DVD by mail instead of In exchange for the delayed gratification of receiving a DVD by mail instead of heading to the store Netflix o

heading to the store Netﬂix of f ered quick ered quick turnaround and turnaround and no late no late fees. fees. By 2007By 2007 the company soared to

the company soared to nearly a billion dnearly a billion dollars in revenue. ollars in revenue. Naturally BlockbusterNaturally Blockbuster fought back toying with no-late-fee schemes and launching its own cheaper fought back toying with no-late-fee schemes and launching its own cheaper DVD mailing service (with the option of pick ups at one of its 5000 retail DVD mailing service (with the option of pick ups at one of its 5000 retail locations).

locations). Blockbuster’s Blockbuster’s resurgence resurgence seemed seemed eef f ective – for a while – as Netﬂixective – for a while – as Netﬂix dropped prices to compete.

dropped prices to compete. 1919 _{Today Blockbuster is ﬂirting with bankruptcy; its}_{Today Blockbuster is ﬂirting with bankruptcy; its}

stock value has dropped 79% in 2010 to under 20 cents and is no longer listed stock value has dropped 79% in 2010 to under 20 cents and is no longer listed on the New

on the New York Stock ExcYork Stock Exchange. hange. As Blockbuster struggAs Blockbuster struggles to transform iles to transform itself tself into a digital and mail-based operation; Netﬂix can by no means declare into a digital and mail-based operation; Netﬂix can by no means declare victory.

victory. Netﬂix’s Netﬂix’s move move intointo ththe IDV business has multiplied its challenges ande IDV business has multiplied its challenges and garnered it a new roster of wealthy and

garnered it a new roster of wealthy and powerful competitors.powerful competitors.

COMPETITORS COMPETITORS

Outside of traditional video stores Netﬂix now competes with Kiosk/Vending Outside of traditional video stores Netﬂix now competes with Kiosk/Vending Machine services, Television Stations, Cable/Distribution Service Providers and Machine services, Television Stations, Cable/Distribution Service Providers and likely soon

likely soon to be the to be the content provicontent providers ders (primarily movie (primarily movie studios) themsestudios) themselves.lves. Currently the market for Internet delivered video consists of three segments: Currently the market for Internet delivered video consists of three segments:

19

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video-on-demand (VOD), ad supported, and subscription. Table 2 details the video-on-demand (VOD), ad supported, and subscription. Table 2 details the key competitive ﬁrms and

key competitive ﬁrms and their positioning.their positioning. S

Seerrvviicce e TTyyppee//AArreeaa KKeey y FFiirrmmss PPoossiittiioonniinngg//OOf f eringering K i o s k s / V e n d i n g

K i o s k s / V e n d i n g Machines

Machines

•

• RedboxRedbox •• Last-minute movie renter’s best friendLast-minute movie renter’s best friend •

• cheapcheap

Ad Supported Video

Ad Supported Video •• YouTubeYouTube •• User loaded video (not professional)User loaded video (not professional) •

• Channels for professional / studioChannels for professional / studio

content content

•

• No movie distributionNo movie distribution •

• HuluHulu •

• TV stationsTV stations •

• Content from TV stationsContent from TV stations •

• 24 hours after air date24 hours after air date •

• Deep ArchivesDeep Archives

Pay-Per-View

Pay-Per-View •• AppleApple •• Movies are downloaded. PurchasedMovies are downloaded. Purchased

content is owned, rented content content is owned, rented content expires after 24 hours

expires after 24 hours

• • Amazon onAmazon on Demand Demand (Microsoft, Best (Microsoft, Best Buy, Wal-mart) Buy, Wal-mart) •

• Wide variety of content is available forWide variety of content is available for

streaming streaming Set-Top Boxes / Set-Top Boxes / TV’s TV’s • • TiVoTiVo • • DVR’sDVR’s •

• Current content – immediately availableCurrent content – immediately available •

• HD video on large screensHD video on large screens •

• Partnerships with Amazon and NetﬂixPartnerships with Amazon and Netﬂix

Traditional Cable Traditional Cable and Satellite and Satellite Providers Providers • • HBOHBO • • ShowtimeShowtime • • Roger’s onRoger’s on Demand Demand etc. etc. •

• HD video on large screensHD video on large screens •

• Large install baseLarge install base •

• Complementary assets in onlineComplementary assets in online

distribution of traditional content distribution of traditional content Free (with “cable”

Free (with “cable” subscription) subscription) • • R o g e r s ,R o g e r s , C o m c a s t , C o m c a s t , T T VV Everywhere, Everywhere, etc. etc. •

• Existing subscribers have access toExisting subscribers have access to

“home” channels on-line and on mobile “home” channels on-line and on mobile devices

devices

Table 2:

Table 2: Competitive OCompetitive Of f eringserings

Competitive

Competitive Factor: Factor: Access to Access to ContentContent

The key competitive factor is access to content or the ﬁlm release windows (See The key competitive factor is access to content or the ﬁlm release windows (See Figure A1 in Appendix

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in early proﬁts from DVD releases (the most lucrative) and through other in early proﬁts from DVD releases (the most lucrative) and through other distribution c

distribution channels ovehannels over time. r time. This factor This factor alone malone may be ay be enough enough to keepto keep Blockbuster in business.

Blockbuster in business. Blockbuster is a place where consumers stillBlockbuster is a place where consumers still

congregate to buy DVDs; and while rentals remain 75% of its business, sales of

DVDs are far more proﬁtable for studios. Studios earn up to $18 on each DVD

sold compared to around $4 for a rental. In March 2010, Warner Bros. signed a

deal permitting Blockbuster to rent DVDs online and through mail order the

same day they are released for sale; Netﬂix and Redbox are held to 28 day wait

period.

Competitive Factor: Pricing / Ownership Model Competitive Factor: Pricing / Ownership Model

This primary delivery model is a streaming service (with no ownership) as This primary delivery model is a streaming service (with no ownership) as employed

employed by most by most ﬁrms. ﬁrms. The otheThe other, less r, less prevalent, prevalent, model model is a is a purchasepurchase download mode

download model primarily deployed l primarily deployed by Apple iTunes and Bloby Apple iTunes and Blockbuster. ckbuster. Netﬂix’sNetﬂix’s “all you can eat” in a month model has brought it early success and has been “all you can eat” in a month model has brought it early success and has been acceptable by studios for the

acceptable by studios for the DVD-based product because Netﬂix purchases theDVD-based product because Netﬂix purchases the DVD’s in

DVD’s in cash up cash up front. front. With the With the streamistreaming model ng model lucrativlucrative e DVD sales DVD sales are lostare lost and Netﬂix (because of its market strength) becomes increasingly more of a and Netﬂix (because of its market strength) becomes increasingly more of a threat than customer.

threat than customer.

Competitive Factor: Existing Business Competitive Factor: Existing Business

Cable companies, satellite providers and similar entities with established Cable companies, satellite providers and similar entities with established businesses and customer bases have both an advantage and disadvantage in businesses and customer bases have both an advantage and disadvantage in

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the emergi

the emerging IDV ng IDV industry. industry. The existing The existing customer base customer base gives the gives the companiescompanies access to customers and eases the transition to complementary streaming access to customers and eases the transition to complementary streaming services. However these businesses also have existing revenue streams and services. However these businesses also have existing revenue streams and investments to

investments to protect. protect. In the loIn the long term, IP ng term, IP based televisibased television and delion and delivery mayvery may threaten margins and protected revenue made on its traditional business (e.g. threaten margins and protected revenue made on its traditional business (e.g. hardware). Netﬂix, and the like, don’t have this conﬂict.

hardware). Netﬂix, and the like, don’t have this conﬂict.

NEW ENTRANTS NEW ENTRANTS

Interestingly enough as online and on-demand video threatens to wither the Interestingly enough as online and on-demand video threatens to wither the high margin DVD business that studio the biggest threat from new entrants to high margin DVD business that studio the biggest threat from new entrants to Netﬂix are the studios themselves; should they choose to forward integrate – Netﬂix are the studios themselves; should they choose to forward integrate – either directly or vi

either directly or via exclusive partnershia exclusive partnership agreements. p agreements. As will be discusseAs will be discussed ind in the Industry Outlook section, the future success of the company will rely heavily the Industry Outlook section, the future success of the company will rely heavily upon its agreements with movie studios and what part the studios themselves upon its agreements with movie studios and what part the studios themselves want to

want to play in the play in the IDV value chain. IDV value chain. As a As a whole the comparatively low marginswhole the comparatively low margins IDV earns mitigates against aggressive entry from large players.

IDV earns mitigates against aggressive entry from large players.

NETFLIX POSITIONING NETFLIX POSITIONING

Netﬂix augments, rather than replaces, the standard video or television Netﬂix augments, rather than replaces, the standard video or television package that consume

package that consumers use. rs use. Its success is based on clIts success is based on clearly deﬁning where aearly deﬁning where andnd how it competes:

how it competes:

•

• Segment.Segment. Netflix defines its segment as consumer-paid streamingNetflix defines its segment as consumer-paid streaming

subscription of movies and TV shows. subscription of movies and TV shows.

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•

• Content.Content. Focus on extensive catalogue of archived and relFocus on extensive catalogue of archived and relatively newatively new

content. Other content (user-generated, news, sports, music videos, content. Other content (user-generated, news, sports, music videos, adult & in

adult & inststructional) is ructional) is not in sconot in scope. pe. Pay-per-View Pay-per-View and DVD wand DVD will likelyill likely always o

always of f er better content.er better content.

•

• Revenue Model.Revenue Model. Single, simple subscription based revenue model.Single, simple subscription based revenue model.

Di

Dicult for existing providers to mimic because it cannibalizes existingcult for existing providers to mimic because it cannibalizes existing revenue streams.

revenue streams.

COMPETITIVE ADVANTAGE

Netflix’s disruption of the traditional movie rental industry has not only Netflix’s disruption of the traditional movie rental industry has not only garnered the company financial success but several assets that can be garnered the company financial success but several assets that can be leveraged to also lead in the online streaming business.

leveraged to also lead in the online streaming business.

INTELLECTUAL PROPERTY INTELLECTUAL PROPERTY

Netﬂix use a combination of patent, trademark, copyright and trade secrets to Netﬂix use a combination of patent, trademark, copyright and trade secrets to protect its intel

protect its intellectual property lectual property both in the U.Sboth in the U.S. and abroad. . and abroad. The company uThe company usesses patented in-house video streaming technology that uses an Adobe ﬂash patented in-house video streaming technology that uses an Adobe ﬂash interface (in addition to standard protocols) to be compatible with the majority interface (in addition to standard protocols) to be compatible with the majority of desktop and mobile devices.

of desktop and mobile devices.

In 20006 Netﬂix was granted a patent describing its mailing DVD rental In 20006 Netﬂix was granted a patent describing its mailing DVD rental business model

business model2020_{. Just hours after receiving the patent, Netflix filed a patent}_{. Just hours after receiving the patent, Netflix filed a patent}

20

20_{http://patft.uspto.}_{http://patft.uspto.}_{gov/netacgi/nph-}_{gov/netacgi/nph-}_{Parser?Sect1=PTO2&}_{Parser?Sect1=PTO2&}_{Sect2=HITOFF&p}_{Sect2=HITOFF&p}_{=1&u=/netahtml/searc}_{=1&u=/netahtml/searc}_h-

h-bool.html&r=1

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infringement lawsuit against Blockbuster seeking damages and the halting of infringement lawsuit against Blockbuster seeking damages and the halting of their online rental operati

their online rental operation. on. The The suit suit was was settled settled in in 2007 2007 – – wwith termsith terms undisclosed.

undisclosed. Blockbuster did Blockbuster did indicate that the indicate that the settlement materialsettlement materially aly af f ected itsected its ability compete. While patents are an important element of Netﬂix’s business, ability compete. While patents are an important element of Netﬂix’s business, its operation is not materially dependent on any one or a combination of its operation is not materially dependent on any one or a combination of patents patents2121_.. COMPLEMENTARY ASSETS COMPLEMENTARY ASSETS Installed Base Installed Base

Netﬂix’s published subscriber count increased from 1 million in 2002, to just Netﬂix’s published subscriber count increased from 1 million in 2002, to just under than 6 million at the end 2006, to 14 million by the spring of 2010

under than 6 million at the end 2006, to 14 million by the spring of 20102222_{. The}_{. The}

company’s large install base and high level of customer satisfaction is arguably company’s large install base and high level of customer satisfaction is arguably its most valuable complementary asset.

its most valuable complementary asset. Distribution

Distribution

When Netflix first launched the business didn't seem to require cutting-edge When Netflix first launched the business didn't seem to require cutting-edge technical know-how. All the company needed to do is “stick discs in mailers technical know-how. All the company needed to do is “stick discs in mailers and get those mailers to customers”

and get those mailers to customers”2323_{. But keeping customer high did in fact}_{. But keeping customer high did in fact}

require

require ssome heavyweight technology. Netflix has sped up mailing times byome heavyweight technology. Netflix has sped up mailing times by building a network of 15 distribution centers across the country. The objective building a network of 15 distribution centers across the country. The objective has always been building enough centers so that most Netflix subscribers has always been building enough centers so that most Netflix subscribers

21

21_{Netflix company 2009 annual report <}_{Netflix company 2009 annual report < http://ir.netflix.co}_{http://ir.netflix.co}_{m/secfiling.cfm?filing}_{m/secfiling.cfm?filing}_ID=1193125_ID=1193125_-10-3618_-10-3618₁₁_>_>

22

22_{http://ir.netﬂix.com/}_{http://ir.netﬂix.com/}

23

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receive their movies within a day of shipping. The centers also give Netﬂix a receive their movies within a day of shipping. The centers also give Netﬂix a competitive advantage over Wal-Mart and Blockbuster, each of which sends out competitive advantage over Wal-Mart and Blockbuster, each of which sends out discs from only one warehouse

discs from only one warehouse2424_..

Customer Service Customer Service

Now that Netflix has settled into the leader in DVD rentals, they have decided to Now that Netflix has settled into the leader in DVD rentals, they have decided to focus on another aspect of business, customer service. One might find this odd focus on another aspect of business, customer service. One might find this odd due to the fact they do not have a physical store and are online only business, due to the fact they do not have a physical store and are online only business, but they have eliminated e-mail based customer service inquiries, thus forcing but they have eliminated e-mail based customer service inquiries, thus forcing all complaints, questions, and suggestions to their call

all complaints, questions, and suggestions to their call ccenter. Unlike otherenter. Unlike other companies where it sometimes feels impossible to locate a telephone number companies where it sometimes feels impossible to locate a telephone number to contact customer service, they have made it very simple and easy to ﬁnd on to contact customer service, they have made it very simple and easy to ﬁnd on their main page. And unlike the

their main page. And unlike the increasing trend of many other companies, theyincreasing trend of many other companies, they have chosen not to outsource their call center. Their call center is located in have chosen not to outsource their call center. Their call center is located in Oregon and along with being local is open 24 hours a

Oregon and along with being local is open 24 hours a day.day.2525

License Agreements License Agreements

The company has license agreement with large content providers such as The company has license agreement with large content providers such as Warner Bros. and various studios and distributors granting Netﬂix the right to Warner Bros. and various studios and distributors granting Netﬂix the right to provide its subscribers with movies and TV shows on DVDs and Blue-ray discs. provide its subscribers with movies and TV shows on DVDs and Blue-ray discs. On the other hand,

On the other hand, streaming content over the Internet involves the licensing of streaming content over the Internet involves the licensing of rights which are separate from

rights which are separate from aand independent of the rights that the companynd independent of the rights that the company

24

24_{PC Magazine website 2003 <}_{PC Magazine website 2003 <http://www.pc}_{http://www.pc}_{mag.com/article}_{mag.com/article}_2/0,2817,89_2/0,2817,89_4278,00.a_4278,00.a_sp_sp_>_>

25

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acquires when obtaining DVD content

acquires when obtaining DVD content2626_{. Unlike DVD, streaming content is not}_{. Unlike DVD, streaming content is not}

subject to the First Sale Do

subject to the First Sale Doctrine (Netflix’s right to do whatever it desictrine (Netflix’s right to do whatever it desires with ares with a physical disc). As such, Netflix is completely dependent on the studios, content physical disc). As such, Netflix is completely dependent on the studios, content providers and distributor providing the company with additional licenses in providers and distributor providing the company with additional licenses in order to access and stream content. Nonetheless, having strong relationship order to access and stream content. Nonetheless, having strong relationship with those studios and content providers, Netflix is in a very strong position in with those studios and content providers, Netflix is in a very strong position in to acquire the most popular movies and TV shows available for streaming over to acquire the most popular movies and TV shows available for streaming over the net

the net2727_..

Netﬂix Ready Devi Netﬂix Ready Devicecess

Roughly 50 percent of Netﬂix members are now instantly watching movies and Roughly 50 percent of Netﬂix members are now instantly watching movies and TV episodes without commercial interruption, on computers, televisions, and TV episodes without commercial interruption, on computers, televisions, and via game consoles, Blu-ray disc players and other devices that have been on the via game consoles, Blu-ray disc players and other devices that have been on the market since 2008

market since 20082828_{. The viewing experience is enabled by Netﬂix controlled}_{. The viewing experience is enabled by Netﬂix controlled}

softwar

softwaree that can run on a variety of consumer electronics devices (“Netflixthat can run on a variety of consumer electronics devices (“Netflix Ready Devices”). These Netflix Ready Devices currently include Blu-ray disc Ready Devices”). These Netflix Ready Devices currently include Blu-ray disc players manufactured by LG, Panasonic, Philips, Samsung, Sony and may more. players manufactured by LG, Panasonic, Philips, Samsung, Sony and may more. Also customers can stream the content via Internet-connected TVs, digital Also customers can stream the content via Internet-connected TVs, digital video players and game consoles such as Xbox 360, Nintendo Wii, PlayStation video players and game consoles such as Xbox 360, Nintendo Wii, PlayStation 3. Even Home Theatre systems that are “Netflix Ready” enable users to have 3. Even Home Theatre systems that are “Netflix Ready” enable users to have

26

26_{Netflix company 2009 annual report <}_{Netflix company 2009 annual report < http://ir.netflix.co}_{http://ir.netflix.co}_{m/secfiling.cfm?filing}_{m/secfiling.cfm?filing}_ID=1193125_ID=1193125_-10-3618_-10-3618₁₁_>_>

27

27_{Netflix company 2009 annual report <}_{Netflix company 2009 annual report < http://ir.netflix.}_{http://ir.netflix.}_co_co_{m/secfiling.cfm?filing}_{m/secfiling.cfm?filing}_ID=1193125_ID=1193125_-10-3618_-10-3618₁₁_>_>

28

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access to the streaming content only if they have internet feed available access to the streaming content only if they have internet feed available 2929_..

Thus, users do not need to acquire any hardware as long as they have one the Thus, users do not need to acquire any hardware as long as they have one the mentioned devices. Netﬂix elegantly o

mentioned devices. Netﬂix elegantly of f ers convenient and practicality for anyers convenient and practicality for any type of customer who may be comfortable using only one of those devices.

type of customer who may be comfortable using only one of those devices.

29

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INDUSTRY OUTLOOK

The now infamous failure of the music industry to adapt to the digitization and The now infamous failure of the music industry to adapt to the digitization and online distribution of music – and eventual dominance of Apple’s iTunes has online distribution of music – and eventual dominance of Apple’s iTunes has many in the movie business contemplating their future in light of the success of many in the movie business contemplating their future in light of the success of Netﬂix.

Netﬂix. The aforementiThe aforementioned “28 daoned “28 day agreement” y agreement” that studios hathat studios have negotiateve negotiatedd with Netﬂix can only be interpreted as an o

with Netﬂix can only be interpreted as an of f ensive move to protect futureensive move to protect future revenues.

revenues. While the measureWhile the measures that studios put in s that studios put in place to not place to not commoditize commoditize itsits business is key to industry outlook, activity in other areas will also shape the business is key to industry outlook, activity in other areas will also shape the outcome.

outcome.

STUDIO REVENUE STUDIO REVENUE

Historically, studio revenue comes from the distribution of

Historically, studio revenue comes from the distribution of their movies throughtheir movies through a chain of di

a chain of dif f erent channels and the importance and value of second rightserent channels and the importance and value of second rights (see Figure A2 in Appendix A) has grown over time to produce the kind of (see Figure A2 in Appendix A) has grown over time to produce the kind of revenues and

revenues and splits seen splits seen in in Figure 4 Figure 4 below. below. ConsequentConsequently studios ly studios will treadwill tread lightly in addressing IDV given the revenues other competing channels provide lightly in addressing IDV given the revenues other competing channels provide to the industry.

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Figure 4

Figure 4: US Movie Revenues (2009): US Movie Revenues (2009)

The movie industry has been wrestling with where online ﬁts into the The movie industry has been wrestling with where online ﬁts into the distribution window. Online could follow theatre releases, or

distribution window. Online could follow theatre releases, or alongside DVDs, oralongside DVDs, or even after TV. With all traditional provide

even after TV. With all traditional providersrs of services for each of theseof services for each of these windows capable of o

windows capable of of f ering online, many models are possible and have beenering online, many models are possible and have been tried. Placement is key to not only maximizing revenues from the new format tried. Placement is key to not only maximizing revenues from the new format but to minimizing losses from existing ones.

but to minimizing losses from existing ones.3030 _{For example VOD, with its pay-}_{For example VOD, with its}

pay-per-view model and revenue share for studios, makes a far more appealing per-view model and revenue share for studios, makes a far more appealing proposition for studios than Netﬂix subscription model and therefore VOD proposition for studios than Netﬂix subscription model and therefore VOD services are getting access to

services are getting access to movie releases earlier.movie releases earlier.

According to Telco 2.0, an initiative designed to catalyze change in the According to Telco 2.0, an initiative designed to catalyze change in the Telecoms-Media-Technology sector, “the problem for studios though is that Telecoms-Media-Technology sector, “the problem for studios though is that once they release a ﬁlm for rental, any purchaser of a licensed rental copy can once they release a ﬁlm for rental, any purchaser of a licensed rental copy can rent it out for

rent it out for whatever price they choose and the same whatever price they choose and the same goes for online. Studiosgoes for online. Studios

30

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have no control over pricing, just license conditions, such as time, geography have no control over pricing, just license conditions, such as time, geography and revenue share.”

and revenue share.”3131

So what can studios do? Should they try and starve Netflix and the likes of So what can studios do? Should they try and starve Netflix and the likes of content, compete directly with them by setting up their own online distribution content, compete directly with them by setting up their own online distribution channels? Needless to say the answers to these questions are of keen interest channels? Needless to say the answers to these questions are of keen interest to Netflix.

to Netﬂix.

31 31_Ibid_Ibid

Netflix Tech Strategy

Strategic Analysis

Strategic Analysis

SGMT 6800 S -

SGMT 6800 S - Group Project

Group Project

CONTENTS

CONTENTS

COMPANY OVERVIEW

COMPANY OVERVIEW

CURRENT STRATEGY

CURRENT STRATEGY

ENVIRONMENTAL ANALYSIS

ENVIRONMENTAL ANALYSIS

COMPETITIVE ANALYSIS

COMPETITIVE ANALYSIS

COMPETITIVE ADVANTAGE

COMPETITIVE ADVANTAGE

INDUSTRY OUTLOOK

INDUSTRY OUTLOOK