The Analysis of Netflix - Case Study Example

Netflix Case Study Analysis Introduction The movie rental industry is one of the most competitive industries today. This industrydepends mostly on technology advances and content right management. In the past few decades, the movie rental industry has made significant shifts from physical DVD-delivery services to online video streaming services. This essay will analyze the current market of video on demand with the specific emphasis on the Netflix. A Five-Forces Analysis Of Netflix Movie rental marketplace has become very competitive these days due to the rise of the number of companies offering services to win customer’s loyalty. Movie rental companies have developed new and innovative modes of operations with the aim of responding to customer needs and winning customer’s loyalty. There are quite a number of companies that still offer the disc-by-mail services for instance Netflix, Blockbuster and RedBox. Blockbuster is the most famous brand in movie rental in the past. However, Blockbuster has been surpassed by Netflix in the “all-you-can-eat” subscription plans in which the subscriber pay a certain amount of money and enjoy unlimited numbers of discs views (David, 2013). On the other hand, RedBox is relatively new in this field and mainly uses vending machines that allow people to rent movies and games conveniently in stores or malls. With advances in technology, online streaming has become more popular than the other conventional methods of movie distribution. This shift has increased competition in the movie rental industry with every firm competing for a bigger market share. Firms that are fighting for a bigger market share in the industry include Apple, Amazon, and Hulu among others. To survive in the market place, companies are adapting new strategies and business models to keep up with modern technologies and the changing consumer tastes and preferences. The following is the five force analysis of Netflix; Threat of new entrance: New entrants pose a medium level threat for Netflix because the company requires a lot of money to enter new markets. Most of the resources required are content acquisition fees. Unless the company already possesses a network of supplied channels, it costs a company a fortune to make an impact in the market. Moreover, customer services are also an important goal in this industry. Only huge companies such as Amazon or Apple have the capacity and resources to provide high level customer services. However, new entrants are not a big threat to Netflix because all the company’s rivals are already known. Power of Suppliers: The power of suppliers is substantial. The main source of input for Netflix is video content which is retained by the cable companies, movie studios who also want a share in the movie rental market. In short, Netflix is facing a problem that its competitors control the access to its products. Netflix’s competitors can increase the price for the content just to reduce the impact of Netflix. Power of Buyers: As mentioned earlier, customers have high bargaining powers as they are very well-aware of what they are paying for. Since the cost for switching between entertainment’s services is low or even non-existent, viewers can easily shift to another kind of entertainment besides movies and TV shows such as video games, sport or change to another company offering the same services. Product Substitutes: This threat is quite high in the case of Netflix. People can decide to go watch movies right when they come out in theatres for better experiences or they can download the video contents illegally from the Internet. Piracy has always been a problem for entertainment providing companies like Netflix since the rise of the Internet. There are thousands of websites that let people watch or download movies and TV shows for free. The company must come up with new strategies to attract customers to pay for the services instead of getting the content illegally from the Internet. Intensity of Rivals: Netflix is currently in a highly competitive industry. It has to face big names from the TV-cable providers, movie rental to technology companies. Although Netflix has a huge advantage as being the first in the market to come up with the idea of online streaming video to users, it can easily be surpassed by giant names in the technology field such as Apple and Amazon as they have more resources and better organization. Forces Driving Change in the Movie Rental Industry Below are some forces which are driving changes in the movie rental industry Economy and cost: Watching movies and TV shows are a type of entertainment, which is not essential. People can always be affected by the economic conditions and reduce spending on non-essential services such as movies. Therefore, price is the main element in determining the winner in the movie rental industry. Convenience: The consumers are always looking for easier and more convenient ways to do things. With all movie rental industry competitors moving in the same direction, it will ensure that there are choices for everyone. Also, the existence of selection and recommendation software is encouraged since it greatly benefits the customers. Technology: With the rise of portable devices such as smartphones and tablet, the ability to stream videos through mobile networks is critical. It requires close collaboration with network providers as well as maintaining a strong server and database. The need for partnership with big names in multimedia entertainment such as Microsoft Xbox 360, Sony PS3 and various Smart TV brands should be considered, as well. The strategic group map for the industry The strategic group map for the video on demand industry looked like this in the year 2012: From the figure above, it is clear that Netflix is quite attractive and takes a high position in market coverage based on a large amount of subscribers. The added value for Netflix is also good especially after the exclusive deal it made with Disney in November 2012. Factors Determining Success in the Movie Rental Industry Based on the driving forces mentioned above, a company that wishes to be successful in the next 3-5 years needs to have following key factors: Large and updated database of videos as soon as possible Offer reasonable prices. Provide the best convenient service to the consumer that distinguishes themselves against their competitors Innovate and keep up to date with technological advances. Strong advertising Netflix’s generic competitive strategy and competitive advantage Among five generic competitive strategies, the most competitive approach Netflix has adopted is the broad differentiation strategy. This strategy is evident in the way Netflix seeks to differentiate the companys product offering from its competitors in ways that will appeal to a broad spectrum of buyers. It is predicted that the future of viewing movies is streaming rented movies directly to the big screen, high definition TVs. Netflix has taken the initiative to adapt to this market trend and has taken a considerable market share in the online rental movie market. Their change has distinguished their services from other peer competitors, which has been quickly accepted by a wide spectrum of consumers. This move has made other traditional video store competitors lose their competitive advantage which is noticeable from the dramatic decrease of their annual revenue and decreasing financial performance. What Netflix SWOT analysis reveal about its attractiveness The following is the SWOT analysis of Netflix and what it reveals about company attractiveness. Strength: Despite increasing in competition, the company’s revenue is continued to rise Strong brand reputation Various subscription plans including the unlimited ones Weakness: Require Internet connection to use the services Mostly rely on other parties content. Netflix hasn’t been able to create enough exclusive shows. Opportunities: Joined the gaming industry by partnering with Microsoft Xbox and Nintendo Wii Expand the online streaming services globally Create a social networking service where users can comment and recommend the videos they like. Threats: The rise of Amazon and Apple iTunes, both which have a bigger capital base compared to Netflix. Big studios might increase the content prices to reduce the influence of companies such as Netflix Piracy is likely to reduce company financial performance (Daniel, 2013) Netflix’s operating and financial performance appraisal Netflix has done considerably well financially in the past few years. Its revenues increased from 500 million in 2004 to 1.7 billion in 2009. In addition Netflix stock price has also remained relatively high throughout the period. Weighted competitive strength assessment for Netflix and Blockbuster Netflix is likely to have a competitive advantage over Blockbuster in the near future. This is based on Netflix’s strategy to build a large base of subscribers. As the first one in the market, Netflix already has the advantage of gaining loyalty among rental movie consumers. Netflix can leverage on this advantage to identify consumer habits and trends a factor that can be used to improve the service to attract more customers. Besides offering different plans that give the subscribers various options, Netflix also spends more money in advertising to keep the customers as well as attracting new ones. All these factors give the company a competitive advantage over Blockbuster and Amazon (Charts, 2013). Top priorities for Netflix and Blockbuster management As the increasing in market competitors, Netflix has to face several issues that might lead the company to its downfall. The first issue is the support of the content rights owners. At first, the creators of the shows and movies agree to lend Netflix the right to use their products with the belief that the viewers will tune in their channels to what the recent episodes after they’re done watching the old versions of the show in Netflix. That turns out to be wrong as the ratings of some programs drop in households streaming Netflix. The second issue for Netflix is the need to raise the fees as the content costs are rising faster than the company’s revenue is. However, the problems faced by Netflix are still trivial compared to Blockbuster’s. The biggest issue facing Blockbuster is one of its unique features: physical stores. The costs of running a physical store are much more than a mail order or online streaming delivery system. As a result Netflix has more freed up funds for advertising on TV, radio, online, social media while Blockbuster drastically cut back on their marketing investment in the last 7-8 years. The second issue of Blockbuster is that they are distracted to sell different services besides video contents like soft drinks, snacks, magazines, and movie promotion toys. Recommendations to Netflix CEO Reed Hastings To be able to fix the issues facing Netflix, CEO Reed Hastings needs to secure long term partnership with the content owner especially because Netflix doesn’t want to enter in the TV-cable industry. Secondly, Netflix has to think about raising the subscription plan fees, especially after they just earned exclusive rights to Disney movies in late 2012. Although this seems like a big risk, slightly higher price can make Netflix a premium provider in the movie rental industry since people are eager to pay more in exchange for better quality. The higher price also gives Netflix enough funds to pursue bigger brands (James, 2013). References David.H. (2013). Netflix plans debt sale to cover licensing costs, original content. Retrieved from: Daniel.S. (2013). Netflix: A SWOT Analysis. Retrieved from: Charts.Y. (2013). Is Netflix About to be a Has-Been? Suddenly, Problems Seem Overwhelming. Retrieved from; James.B. (2013). Why Netflix Should Raise Its Rates Now. Retrieved from: Read More