Competitive Strategy for Netflix and Direct TV - Research Paper Example

?Running head: Netflix & Direct TV Case Study Insert Insert Grade Insert 11 November Netflix Case Study The Generic competitive strategy for Netflix Netflix is the leading internet subscription company with over 20 million subscribers who enjoy unlimited television shows and movies via internet connection to their computers. In addition, Netflix has continued to enjoy an increase in the number of subscribers, which has contributed to its success. Despite being in a competitive market, Netflix has managed to stand out among the rest, by achieving a competitive advantage. According to Porter (1998, p.22), a company has to adopt a generic strategy that fits it well, hence enabling it to achieve a competitive advantage. These generic strategies include cost leadership, differentiation and cost focus. Netflix has managed to woo customers over the years; for instance, it offers free trial membership to its new customers, which enables customers to try out its services. Differentiation Strategy Netflix has managed to maintain its market share via achieving a competitive advantage. This was the first company to break the norm of driving to a movie store to purchase a movie, therefore attaining a first mover advantage (Noise between stations, 2007). Other companies like Blockbuster required an individual to drive all the way to the stores to purchase or rent a movie, although this company followed in the footsteps of Netflix, shortly after. Therefore, due to technology in this industry, customers can now select from thousands of movies online and choose their favorite. In addition, customers enjoy movie shopping from the comfort of their homes or offices. The growth of online sales has contributed to the success of Netflix; indeed, over the years, the company does not charge its customers for movie return delays, unlike Blockbuster. This differentiation strategy enables Netflix to be unique compared to its rival competitors; customers are attracted to a business that caters for their needs effectively compared to other businesses. Netflix’s Target Customers Netflix targets all levels of customers by implementing a subscription plan, which enables clients to subscribe to their preferred plan. This is an added advantage to the company as all levels of customers are catered for, therefore ensuring that customers receive the best services at affordable prices. Netflix Rivals and Threats Posed In an industry, competition is evident either from existing businesses or from new entries in the market. According to the New York Times (2007), netflix experienced a heavy blow of loses due to the stiff competition from Blockbuster, which had implemented a total access program that enabled customers to swap a rented movie online for an in store movie. This strategy enabled Blockbuster to attract Netflix’s customers. DIRECTV is another rival competitor, which provides direct broadcast satellite, and delivers exemplary video experience at a much cheaper price, hence posing a threat to Netflix (form 10K, 2010, p.2). Fig 1. The competition analysis of Netflix and Blockbuster (2007) Netflix and Direct TV Netflix and Direct TV companies are seeking a competitive advantage in their operating industry; hence, they have different strategies of achieving their success. Direct TV aims at delivering the best services at all times and in any place; the company is emphasizing on quality video experience and targets the entire American population, especially with the popularity of DVRs. They are working towards breaking the norm of watching television only at home, therefore working towards introducing television and video experience any time and anywhere. Movie packages Direct TV is a threat to Netflix, since it is competing for the same market, therefore, customers can either choose to use either of the two companies’ services, to easily access entertainment. Both companies offer services at a specific monthly fee; Direct TV offers four television packages in English language, with the minimal packager comprising of 150 digital channels. Netflix also offers full seasons in DVD form, which are delivered to an individual, though customers have an option of watching programs online (Badger, 2011). Instant Streaming Movies Netflix offers unlimited movies to its subscribers at a monthly fee; therefore, customers gain access to instant streaming of movies in addition to an advantage of ordering a DVD delivery to home. With direct TV, a customer can subscribe to various movie channels, for instance, cinemax. Such subscription allows a customer to gain access to instant streaming of movies via online (Badger 2011) Satellite Direct TV subscribers require a satellite dish installed on the roof of their homes. Customers are also offered a receiver that is hooked to the television. However, Netflix has outweighed direct TV in that, Netflix customers do not require a satellite dish; instead, internet connected devices are required, like Blu- ray. The Length of Contract Direct TV contract lasts for a year if it includes the satellite dish; however, for advanced equipment like the DVRs, a two-year agreement is required. However, if a client decides to cancel his contract before the end of the year, the company charges a cancellation and deactivation fee. Moreover, Netflix does not include contracts in its agreements with the customers. A customer can therefore cancel his subscription any time, and no fee is charged; however, there are no refunds (Badger 2011). Cost of Products Netflix requires its members to pay a monthly fee, which is determined by the number of DVDs the customer orders. However, an additional fee is required for the DVDs. Therefore, they are allowed access to unlimited access to instant streaming movies and programs. The minimal package amount is $30, while the highest goes for $84 per month for direct TV, whereby, pricing depends on each package (Badger, 2011). Direct TV faces stiff competition from its rival competitors such as the Netflix. The above examples indicate the various types of strategies used by these companies to attract customers and to maintain their market share. According to Direct TV annual report, (2010, p.7), direct TV focuses on quality, customer service, price and the variety of its products. It is evident that the company has achieved enormous growth with over 19.2 million subscribers. However, Netflix has over 20 million subscribers, therefore outweighing Direct TV, but with only a small margin. This is an indication of stiff competition that exists in this industry. Fig 2:Financial data comparison Years 2006 2007 2008 2009 2010 Netflix revenues $996,660 $1,205,340 $1,364,661 $1,670,269 $2,162,625 Cost of revenues $626,985 $786,168 $910,234 $1,079,271 $1,357,355 % cost of revenues 6269.85% 7862% 9102% 10793% 1357.3% Subscribers - - - 10,464 14,786 Cost of subscription - - $761,133 $909,461 $1,154,109 Monthly gross profit per paying subscriber - - $4.58 $4.71 $4.54 Netflix long term Debt - - - $200,000 $200,000 Equity $413,618 $429,812 $374,155 $199,143 $290,164 Return on investment capital- (ROIC) $48,839 $66,608 $83,026 $115,860 $160,853 DirecTV 2006 2007 2008 2009 2010 Cost of revenues $12,398 $14,760 $16,998 $18,892 $20,206 Long term debt $3,395 $3,347 $5,725 $6,500 $10,472 Equity $413,618 $429,812 $374,155 $199,143 $290,164 ROIC $1,420 $1,434 $1,515 $ 942 $ 2,198 It is evident that netflix is performing much better compared to Direct TV; Netflix obtains its revenues from the monthly subscriptions offered to customers in the United States and Canada. As per 2010, 85% of their customers had subscribed to unlimited streamline plan, which costs $7.99 per month (Form 10K, 2010, p. 23). The average monthly revenue per subscriber added up to 8.3% fro the years 2009 and 2010. The 41.3% growth in number of paying subscribers resulted to $492.2 million increase in revenues. Investing in Netflix would be an added advantage to an individual, as their level of debt is low, hence eliminating the risk of bankrupt in future years. In addition, the pace at which Netflix is growing can contribute to increasing success in the future. Nevertheless, improving the marketing strategies for both companies can lead to the continuous growth of both companies. In addition, the companies are under the threat of new emerging companies such as DISH, which are penetrating the market with unique services and affordable prices. Therefore, it is important for these companies to review their competitive strategies to avoid being compromised by the new entrants, who are imitating their services but using technology to advance them. Nevertheless, Netflix should work hard towards maintaining its market share; this is due to the competitive new entrants, which are a threat to the existing companies. Therefore, competitive advantage is a contributing factor to the success of the company. References Badger, S. (2011). Netflix vs. DirecTV. White fence; compare, connect & save. Retrieved from http://servicetips.whitefence.com/netflix-vs-directv-2995.html DirecTV. (2010). Direct TV annual report. Retrieved from http://files.shareholder.com/downloads/DTV/1500335433x0x452600/6F388A00-C35E-4D06-9D10-D2A9C51FA726/DIRECTV_2010_Annual_Report.pdf Form 10K. (2010). Netflix Inc. Retrieved from http://files.shareholder.com/downloads/NFLX/1500335316x0x460274/17454c5b-3088-48c7-957a-b5a83a14cf1b/132054ACL.PDF New York times (2007). Stronger competition. Retrieved from http://www.nytimes.com/imagepages/2007/08/15/business/20070816_NETFLIX_GRAPHIC.ready.html. Noise between Stations. (2007). Netflix’s Competitive Advantage. Retrieved from http://noisebetweenstations.com/personal/weblogs/?p=2011 Porter, M. (1998). Competitive advantage: creating and sustaining superior performance with a new introduction. NY: The Michael E. Porter Trilogy. Read More