Netflix SWOT and Porters Five Forces Analyses - Admission/Application Essay Example

?Netflix SWOT and Porter’s Five Forces Analyses Netflix’s Strategy Bylund s that, while Netflix has long been known for its video rentals and video streaming, its current strategy is to expand its brand into original programming. To this end, they have introduced original series. This means that they are attempting to be competitive with other brands, such as HBO, which offers original programming, along with its usual cadre of movies. In doing so, they are trying to compete with all other video streaming services, by expanding its brand. 2. Porter’s Five Forces Analysis In the movie rental business, in looking at Porter’s Five Forces Analysis, perhaps the most pertinent factor is the threat of new entrants. This is because the field is crowded, and will only get more crowded, as there are constantly new companies who are venturing into the movie rental business. For instance, Netflix faces the established names of Apple’s Itunes, RedBox, and Blockbuster’s online, and it also faces the fact that Microsoft’s X-Box is now enabling its customers to rent movies online (Thurrott, 2012), as well as Android (Fong, 2011). As technology increases, and more and more companies are getting into the handheld device market, it stands to reason that more companies will also offer movie rentals, as shown by Android, which started offering movie rentals in 2011. The field is already pretty crowded, so the threat of new entrants is probably the force to which Netflix must pay the most attention. This also ties into another of Porter’s Five Forces, which is the bargaining power of consumers. As the field gets more crowded with new entrants, then the consumers will have more options. This would mean that the consumers will have the power to bargain, and this will necessarily force the entrants in the field to either offer more content or lower their prices. Maybe even both. This is shown by Netflix’s attempt to enter the Ireland and UK markets, where SkyGo and BBC IPlayer are already established (Plaehn, 2012). Because Netflix is entering markets where there already established competitors, it will necessarily have to undercut the established competition or provide better services, because the customer will have tremendous bargaining power in these two countries. Since the customers are already with these two services, they have the upper hand on Netflix in these countries. This will be the same whenever Netflix faces stiff competition. Another of Porter’s Five Forces focuses upon the bargaining power of suppliers. According to Plaehn (2012), this is an issue with Netflix, as it has had issues with getting enough content to satisfy its customer base. This is because the providers either will not supply content, or will supply content at a premium price that it cannot afford (Plaehn, 2012). This also has to do with the crowded marketplace. Since there are so many content providers out there, all of them fighting for market share, providers also have the upper hand in negotiating with these entities. The content providers know that, if Netflix does not pay premium prices for their content, they can find somebody who will, such as X-Box, which is owned by Microsoft. Microsoft is such a powerful company, it can afford to pay top dollar for its content, and, since it is a relatively new entrant in the field, it probably will pay top dollar, in an effort to get a toehold in the market. As for the threat of substitute products, this is explained in full below. Basically, there are always going to be different products which compete with video rentals, which include streaming, which Netflix is also involved with. And, as noted below, HBO is offering consumers a chance to view all of HBO’s content that it has produced, at any time, with one price, with movies added for an additional price. This “TV Everywhere” concept is set to be used by other networks as well (Plaehn, 2012). This is just one substitute product that is worth noting, because it is a newer substitute product, unlike video streaming, which is a known-entity. Depending on HBO’s price point, this could prove to be a great threat to Netflix, as HBO has been known, over the years, as a network that offers quality original programming, therefore this could be a popular service that might offer even more than Netflix would be able to offer, in the way of popular series and HBO original movies. If other networks did the same, then this would also be a threat to Netflix, as they might not be able to access the same material, if these networks wanted to offer their material exclusively on their own programs. 3. SWOT Analysis According to Plaehn (2012), Netflix is currently facing at least one major threat and has one major weakness. For the threat, there is the up and coming competitor called “Television Everywhere.” This is not exactly one competitor, but the concept that multiple competitors are going to be streaming television, live, to any kind of device a person might have – including pads, phones, laptops, etc. A good example of this is HBO Go. The HBO Go concept is that subscribers can get any and all content that HBO has ever produced, plus a wide variety of movies at no extra cost. Moreover, according to Plaehn (2012), this is a model which will soon be copied by most of the major networks. As for weaknesses, Plaehn (2012) states that Netflix either cannot afford content, or the content producers will not provide to Netflix. At least this is true for enough content producers that the consumers for Netflix will not stay engaged, when considering the variety of content that they will have available. There is another major weakness, according to Shankland (2011), and that is that the company is still recovering from its earlier, ill-fated decision to split up its services into two branches – Qwikster would have been the name that Netflix chose for its DVD services, while Netflix would still be the name for its streaming service. And, instead of charging $10 per month for both services, they would start charging $7.99 for each service. This produced a might backlash, even though the company tried to explain that the move was necessitated by the fact that streaming is expensive, and they wanted more content, so the price hike was necessary. This decision – to divide the company up into two different entities, with different names and different ways to subscribe – produced a backlash so strong, and so deep, that it affected the stock price tremendously. As Duncan (2011) notes, the stock plunged to roughly fifty-percent of its value because of this – in July of 2011, just before it announced its decision to split the company, the stock was trading at over $298 per share. By October of that same year, after months of criticism, its share price had plummeted to $117 per share. Its market capitalization had plummeted to $6.1 billion, after having been $15 billion before the announcement and the subsequent backlash. Today, according to Google Finance, the share price is just over $64, which is a stunning plunge in value from its high (Google Finance, 2012). Plaehn (2012) also states that Netflix has some major strengths and opportunities. Of the strengths, Plaehn (2012) states that Netflix has a leg up on the competition, simply because it was a pioneer, or one of the pioneers, of video streaming. Because it started video streaming in 2007, which is well before many of the other providers got into this area, the learning curve has been mastered by the company. Also, because of the fact that the company has been around for so long, it has a lot of name recognition, which means that people know about it more than they might a newer competitor. Plaehn (2012) states that, in addition to having name recognition, it also obtained consumers long before the other competitors got into the market, and this is a major advantage, because consumers tend to stay with services that they know and with whom they are comfortable. Moreover, Plaehn (2012) states that, even if Netflix cannot obtain all the content that it wants, it obtains enough to keep their consumers happy. Plaehn (2012) further states that Netflix has a good strength in its cash reserves. Notably, it has a high profit margin in its DVD services, as the margin is 52% for this service. Domestic streaming also has a high profit margin, but not nearly as high as the DVD profit margin, as the profit margin for this service is 11%. Plaehn (2012) notes that Netflix also has some good opportunities. One of these opportunities, upon which it is captalizing, is an expansion into the UK market, along with an expansion into Canada, Latin America and Ireland. Of these expansions, Plaehn (2012) notes that the Latin American market presents the best growth potential. This is because this is an emerging market, where there is little competition, yet the infrastructure is in place, as it has fast broadband Internet. It also has a large population. As Plaehn (2012) notes, the only real competition for DVD services are stores who sell boot-legged copies, and, moreover, Direct TV is in the market, and they have done well. Plaehn (2012) states that the UK and Ireland will be harder to penetrate, as each of these countries have their own services which are similar to Netflix. 4. Netflix v. Blockbuster Hess and Jordan (2011) provide a good comparison of Netflix to Blockbuster. They state that Blockbuster’s share price collapsed during the same time that Netflix’ share price soared. They looked at a variety of factors as to why this would be, and found that promotional activity was one reason why Netflix increased its market share. Since Blockbuster’s was already a household name, and had been for sometime, promotional activity did not have as much effect on share prices as it did on Netflix. They also note that Netflix rolling out its instant watch streaming service was initially a high cost, which resulted in loss of firm value, but that it proved, in the long run, to be an excellent investment, as it became the primary driver of Netflix’ increased market share. They also note that service improvements also helped Netflix, but that service improvement did not affect Blockbuster’s. Since Hess and Jordan (2011) found that the factors they studied did not explain why Netflix gained so much market share, while Blockbuster’s essentially collapsed, they concluded that Blockbuster’s collapse began before Netflix even originated. According to LeClaire (2012), Blockbuster’s has since been bought by Dish Network, after it went through Chapter 11 Bankruptcy protection. Dish Network initially had plans for Blockbuster to stream video, so that it could be a direct competitor to NetFlix. However, this is not going to happen. Because of this, the future looks bleak for Blockbuster, as LeClaire (2012) quotes Phil Leigh, who is an industry insider. Leigh states that Blockbuster has a subscriber base which is too small to compete with Netflix, therefore it cannot pay the same for content as does Netflix. And, Leigh states that video rentals are soon going to be obsolete, as video streaming completely takes over. Since Blockbuster is apparently not going to enter the video streaming market, it stands to reason that it does not have a business model which is expected to survive. Therefore, since Netflix not only has more content, but more subscribers, than Blockbusters, and it can stream video, where Blockbuster’s cannot, it has a sustainable competitive advantage over Blockbuster, both in the long run and the short run. 5. Advice to Netflix My advice to Netflix would be to continue to look for open markets to expand, such as Latin America. As markets are emerging, they are increasingly able to get high speed broadband, and there is limited competition in these markets. This is perfectly exemplified by Latin America, who has decent infrastructure, yet little competition in the video rental market. My other piece of advice would be to find a way to get past the PR disaster that was Netflix’ threat to slice its business into two companies, and the backlash that occurred because of it. The reason why Netflix wanted to try this is sound, in that it knows that it needs more content, therefore it must charge more to subscribers to get this content. This message was apparently not very well conveyed to subscribers, who screamed about raising prices and splitting up the company, thinking that there wasn’t a good reason to do so. While Netflix has abandoned its plans to divide the company, it probably still needs to increase subscriber prices, so that it can also increase the amount of content available. They need better messaging on this, and a better PR campaign to explain this. 6. Advice to Blockbuster’s My advice to Blockbuster’s would be to not give up on streaming video, as this is apparently the only way that it will stay in business in the future. Perhaps it can look into partnering with a streaming service that is getting started and needs market share, such as the streaming service currently being offered by Android or the service being offered by X-Box. These are new entities that might not have the content that it needs to launch, and Blockbuster’s might be able to offer the content that they need. This would be a win-win for both. Sources Used Bylund, Anders. “Netflix Strategy Plays Out: If You Build It, They Will Come.” Daily Finance. 12 March 2012: n. pag. Web 10 Oct. 2012. Fong, Tim. “Android Marketplace Now Offers Movie Rentals.” Examiner.com. 21 Oct. 2011: n. pag. Web 10 Oct. 2012. Google Finance. “Netflix.” Jordan, Andrew K., "The Effects of Netflix and Blockbuster Strategies on Firm Value" (2011). CMC Senior Theses. Paper 154. http://scholarship.claremont.edu/cmc_theses/154 LeClaire, Jennifer. “Blockbuster Gives Up Plan to Dethrone Netflix.” CIO Today 5 Oct. 2012: n. pag. Web 10 Oct. 2012. Plaehn, Tim. “The Netflix Long-Term Business May Actually Work.” Seeking Alpha 19 March 2012: n. pag. Web 10 Oct. 2012. Shankland, Stephen. “Netflix’s CEO Apology Brings New Backlash.” CNet 19 Sept. 2011: n. pag. Web. 10 Oct. 2012. Read More