Netflix was founded by Reed Hastings and Marc Randolph in August of 1997. The company started with renting of DVD’s to consumers by posting them in branded Netflix envelopes to customers using the US postal system. The initial model is simple; they started renting out DVD’s based on a monthly subscription without the hassles of late return fees. The company was quickly able to recognize the convergence between traditional brick and mortar movie rental business and the streaming of digital contents. The company view of itself has metamorphosed over the years due to the disruption of traditional business in the digital media and the increase in availability of digital media content and most importantly a convergence with streaming capability on various devices.
Netflix originally identifies their main competition to be Blockbuster and Comcast. However it was evident that they also play against traditional studios such as Time Warner, and online retailers such as, DirecTV, Best Buy, Wal-Mart, Amazon and also companies with streaming technology such as Apple, EchoStar, RedBox and carriers like AT&T. These competitors exist across the array of different segments of the home video entertainment industry, with Netflix in both the mail-delivery and online rental segments. Nonetheless, they compete against all of these firms, which capture some share of the market through their respective channels. The company’s offerings can be divided into two models.
The DVD-By-Mail Model
The company started out as a DVD rent-by-mail outfit allegedly after Hastings happened upon the idea after he was charged $ 40 in fees after late returns of a rented DVD of Apollo. The initial business model where Netflix buys DVDs inexpensively and mailed them to subscribers each month
Pictorial of the DVD-By-Mail Model
This model involves selection of desired movies and DVD and receipt of same within a few days of postal through the US postal system. The DVD are then returned in a Netflix branded envelopes
The Streaming Model
This models relies on the use of Netflix-enabled devices to stream video and play games by connecting them to a TV.
Netflix started video streaming service in 2011, in the past streaming used was treated as add-on service to DVDs. The streaming has grown by over 5 million new subscribers since then2.
Netflix operations and business straddles the traditional video home entertainment business such as old-style Video rentals and sales, DVD Vending and the Digital world where presence can open up a massive customer base. This is the world of online streaming of Video, online delivery and sales and Video-on-demand.
NETFLIX VS COMPETITION MATRIX
COMPETITION TRADITIONAL in-Store RENTAL(MAIL DELIVERY) VENDING ONLINE RETAIL ONLINE STREAMING VOD PAY-PER VIEW
Netflix ‘ ‘ ‘ ‘ ‘ ‘
Walmart ‘
Best Buy ‘ ‘
Blockbuster ‘ ‘
Redbox ‘
ITunes ‘
Amazon ‘
HBO ‘
Showtime ‘
Industry Overview
Netflix plays in the home video entertainment industry. The industry is a subset of the Video entertainment industry as a whole. This includes theatres, Studio, Access to catalogues, titles is very important for the industry. Netflix in addition to creative alignment with big studios for access to titles, the online platform has also created a platform for hitherto unavailable shelves for independent films; this was not achievable with the traditional video rental model. The other avenue to titles is vertical integration through content creation. Blockbuster did with DEJ AND Netflix also did enter the fray. This allowed the online entertainment companies to achieve returns on movies without the corresponding production cost. One of the reasons for the success of the online video rentals is the ability of the platforms to direct traffic to titles that were not blockbusters. Chris Anderson the editor of wired wrote concerning this phenomenon which he called ‘Long tail’
‘According to this new model, it was possible to build a profitable business on the low but steady demand for a wider range of inventory as opposed to the fleeting but large-scale demand for the most popular goods’3
It created opportunities to sell back-catalogues to a wider audience. Traditional video rental served those walk-in customers with the available offerings on the shelf. Unavailable titles must be requested. The current model because of the growth in digital device capability serves in addition to walk-in to people in the comfort of their homes or office or on-the-go subscriber. With the introduction of Netflix-enabled consoles, the customer base and experience has been enhanced.
The opportunities in the industry is enormous. There is the ever increasing improvement in streaming capabilities, availabilities of different platform for streaming and the better technology in the industry. Alliances could bring about a new disrupter easily. A big studio and a company with streaming capability for example. There is the ever present threat of new entrants and imitators.
2. INPUT-TRANSFORMATION-OUTPUT
Input Transformation Output
DATA
LABOR
SERVERS
COMPUTERS
INFRASTRUCTURE
DVD
DIGITAL MOVIES
ENGINEERING
UPDATING
DOWNLOADING
SUMMARIZING
CLEANING
MERGING
DISTRIBUTING DATA
PROGRAMMING
SCANNING
COPYING
MAILING
WAREHOUSING
LABELLING
VENDING
ANALYSIS
DIGITAL MOVIES
GAMES
DVD
SOFTWARE
CAPACITY PLANNING
Capacity planning for company like Netflix is mainly to make provision for future growth in subscribers and the demand for movies and streaming capabilities
Capacity planning for Netflix must be looked at from two different spectrum of their operation. The traditional in-store business and the Digital side of their business. The in-store business has the peculiarity of traditional brick and mortar business such as location, traditional logistics management, shelf space capacity etc. Greasely (2009)4 outlined that demand must be measured, capacity must be measured and the two reconciled to be able to plan capacity. In order to obtain extra capacity Netflix always try as much as possible to have access to so much titles and catalogues. They built their catalogues to over 80,000 titles. They can never have too much capacity
The product mix of Rentals and the increasing shift online has determined the way in which Netflix planned for capacity. More streaming are now being done than the traditional rentals and vending. Netflix has a growing customer base. Because of the rate of growth of Netflix, data usage far outweighs how many datacenters they can build hence5.
The challenge is to manage the capacity and demand; the company has adopted some strategies namely
1. Adoption of Cloud technology
According to Adrian Cockcroft2011 at the QCON conference, Netflix switched to the use of Amazon Web System to handle capacity for Netflix. This has allowed the streaming of movies and music more seamless than ever. This addresses storage capacity needed to handle the traffics. With more than 40 million customers streaming on the website it is imperative that the right storage capacity is available rather than buying servers indiscriminately to cope with demands of streaming.
‘We had a single data center, which meant we had a single point of failure,’ explains Adrian Cockcroft, cloud architect at Netflix. ‘We were approaching limits on traffic and capacity. Now that people can watch Netflix streaming programming from their phones, from Wii devices, Roku boxes and many others, the demand for availability increases all the time. We have more customers every quarter, more customers are using streaming, and they’re using streaming at a greater rate.’
2. Investment in analytics to determine what movie to license and the price to pay. Jenny McCabe, Director of Global Media Relations said
‘We look for those titles that deliver the biggest viewership relative to the licensing cost. This also means that we’ll forgo or choose not to renew some titles that aren’t watched enough relative to their cost’ 6
3. Also used Analytics termed the ‘recommender’ to manage customer usage and experience online. They monitor consumer habit and preferences. By analyzing patterns and habits such as pauses, rewinds, ratings time of viewing etc., the software can then recommend movies to the viewer.
PROCESS DESIGN
The operations of a company like Netflix straddle the traditional DVD-by-Mail model and the streaming model. The process involves many sub-processes, people and various activities. The business landscape for Netflix changed rapidly from DVD’s that can be manually handled to digital streaming of videos. As stated by Cecil Bozarth (2011) in the article A Quick Primer on BPM: Business Process Management
‘Netflix’s traditional supply chain strategy has centered on three major pieces:
1. A Web-based ordering system that gently guides subscribers toward available DVDs.
3. The US Postal Service, through which the DVDs are mailed. Each of these pieces contains literally hundreds of processes, sub-processes, and activities. Netflix has succeeded because these pieces were carefully designed to work together seamlessly. For example, Netflix’s Web-based ordering system provides the DCs with information on what DVDs to pick and where to stage DVD inventory, and the DCs pre-sort outgoing shipments by zip code to speed up handling by the USPS’.7
The challenge was for Netflix to integrate the traditional with the modern and to the platform of various content suppliers and distributor such as cable companies and other networks, to deliver seamless service to the customers. They achieved this by using SOA approach and deployment of business activity monitoring software such as cinematics. The service composition is well defined using the industry standardized technology