The Vision of Netflix - Essay Example

?Movies have been a popular pastime in the United s since technology to project movies was invented at the end of the 19th century. The movie rental industry became a profitable booming business after the invention of the VHS player. In the late 1990’s the industry was fragmented with lots of mom and pops stores operating single outlets. Blockbuster was the industry leader in the industry. In 1997 Netflix was founded. At that time the DVD became the hottest trend in the industry. Today Netflix has become the industry leader in movie rental business. The industry has changed a lot in 2011. The movie producers who once had all the power in the industry had to adapt to the market changes and have become more willing to negotiate profit sharing deals with vendors such as Netflix that provide many movie producers with an mechanism that promotes and increases the demand of many small budget movies that in the past got lost in the information highway a few months after they left the theaters. One of the technological trends that have shifted the focus of the industry is the influence of the broadband age. The consumer behavioral trends have changed and the use of the internet to watch movies has risen as faster speeds and the compatibility of electronic devices have made it possible for people to plug the internet their TVs to watch programming and movies online through popular websites such as Hulu.com. Despite the movie rental industry having lower profitability than in the past and higher competition the industry still generates massive sales. Last year in the United States the movie rental industry achieved over $4.8 billion in sales. The sales of DVD rentals have been negatively impacted by rising piracy as many illegal websites have flooded the internet with knockoff copies of new movies which movie users can watch for free. The future prospects for the industry and companies such as Netflix are still positive due to the fact that the demand for box office theater movie releases is still on the rise. This means the secondary market for movies which is movie rentals will still generate lots of revenues for years to come. The hottest trend in the industry is video on demand (VOD). The number of movies available for download via the internet has increased exponentially during the past five years. VOD has arrived and for companies to succeed in the new environment they must adapt to the changes in the marketplace. Netflix has been able to succeed and become the market leader in the video rental industry by providing greater value than the competition. The firm faces hefty competition from different segments of the industry. Its main competitor used to be Blockbuster Video. Blockbuster Video has fallen on hard times and the firm in 2010 file for bankruptcy protection as it closed over 1,500 stores. A new competitor that has risen out of nowhere with a simple, yet innovative model for movie rentals is Red Box. Red Box is a firm that operates video rental vending machines. These machines rent movie for a low price of $1 per day. The customer selects the movie from the machine and then returns it to the Red Box machine. The transactions are paid for via credit card. Red Box created a model with minimum overhead, which has given the firm a competitive advantage. The thousands of independent video rental stores in the fragmented video rental industry also compete directly with Netflix. Netflix also faces competition from the retail marketplace. Major retailers such as Target, Wal-Mart, and K-Mark indirectly compete with Netflix due to the fact that these businesses sell DVD movies at their stores. Online retailers such as Amazon and EBay also compete in the movie marketplace. EBay provides a unique proposition because many movie collectors prefer to purchase movies instead of renting. Buying used DVDs is much cheaper than buying brand new releases. Netflix incorporated a grand strategy to provide greater value than its competition. The first step of the strategy was the elimination of late fees. Movie renters often complained about the abusive late fees many video rental companies charged. The company after evaluating its external and internal environment realized that many customers were not satisfied with the time it took to receive the movies by mail from Netflix. To fix that problem Netflix expanded its distribution network. Today the company is able to deliver any movie order by its subscribers the next day. The subscription model incorporated by Netflix was its greatest achievement. The company differentiated its service by offering its customers unlimited movie rentals each month. The way the system worked was that customers were eligible to have in their possession up to three movies at a time. Once a movie was return they could replace that movie with another title. Prior to Netflix incorporating this system nobody in the industry offered such an arrangement. This implementation of the unlimited movie concept gave Netflix a competitive advantage. Another strategy the company used to keep its competitors at bay was the development of an artificial intelligence system customized to the customer preferences. The system collected information from the customer based on surveys and searching patters which help the firm determine the types of movies the customer liked to watch. It then provided the customer with movie recommendations based on their preferences. The system was a marvel from a customer satisfaction and operating standpoint. The customers were happy that Netflix help them select movies among their library of hundreds of thousands of movies. From an operating standpoint the system also provided benefits to the company because the Netflix viewers watched more old movies than the new releases based on the recommendations. This lowered the inventory costs of the company and prevented movie stockouts. The service of movie recommendation Netflix incorporated was a service aspect that was impossible to duplicate by traditional video rental stores. Today Netflix has continued its dominance in the movie rental business. There are different strategies the company could utilize to increase its income. One of those strategies is to diversify its product and service offering. The company has built a great reputation in the industry and has a database of millions of customers. One of the fastest growing industries is the video game industry. Netflix could incorporate a new division dedicated to offering unlimited rentals of video games. A secondary service the firm could provide is television programming utilizing its streaming capabilities. The company could offer this service as an upgrade to its current users by charging an additional nominal amount such as $5 extra a month. The vision of Netflix was to become the best online movie provider in the world. As VOD technology has finally become a reality the firm should consider in the long run completely switching its business model to offer only VOD movies and eliminating its mail DVD operation. The shipping cost of mailing 1.6 million DVD each day and the overhead associated with employee payroll to process that many orders are extremely high. The VOD business model can be sustained with a much lower overhead. Today people can plug in their internet directly to their television which means that people could enjoy the VOD Netflix service in their large LCD flat screen television sets. The future of Netflix is very bright. Blockbuster once claimed that Netflix was not a threat to their business. Apparently the Blockbuster executives were complete wrong as Blockbuster is in the process of complete phasing itself out from the market, while Netflix has become the industry leader in the movie rental business. By 2012 the company is expected to reach 30 million subscribers. The Netflix story shows that in the business world change is inevitable and companies have to adapt to the changes if they want to continue to participate in the competitive marketplace of the 21st century. Read More