In this case study, the company being analyzed is none other than the revolutionary streaming service known as Netflix. A detailed narrative of the company's history and innovation processes will be outlined as well as the challenges it faced to achieve such a success. This will be explained further through the use of “Porter's Five Forces Model” analyzing the internal and external environment of the company and the movie rental industry in order to understand which factors have helped Netflix to thrive over the years through their innovative concepts. Following this analysis, a Business Canvas Model will be used in order to show and explain Netflix's competitive advantages within the movie rental industry and how they aim to grow and expand upon them. In order to support this analysis, the SimVenture software allowing the simulation of elements such as redesigning a product and its impact on the financial side of the business will be used. This last aspect will help consolidate the understanding of how Netflix has managed to become the world's leading internet entertainment service over the span of 20 short years.
Narrative of the business:
Netflix is a business specialized in the distribution of streaming services for customers to be able to watch their favorite movies and tv-shows on virtually any device with an internet connection in exchange for a small monthly subscription fee. In this day in age, it is the world's leading company within the streaming market. “Netflix is the world's leading internet entertainment service with 125 million members in over 190 countries enjoying more than 140 million hours of TV shows and movies per day, including original series, documentaries and feature films. Members can watch as much as they want, anytime, anywhere, on nearly any internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments” (Netflix.com: Company Profile, 2018).
In order to grasp how Netflix has become the world's leader in the internet entertainment service, it is important to know where the company started and the different challenges it had to overcome. The initial idea in 1997 behind the business was to create an online video rental service without any late fees after Reed Hastings (CEO and founder of Netflix) was with a $40 late fee for a rental movie (Boardroom Insiders, 2017). Even though the business was employing the same business model as the giant company known as Blockbuster by having late fees implemented into it, this quickly changed in 1999 where Netflix opted with their “real” revolutionary business model getting rid of these late fees (Kaplan, 2012). This was surely made in order for Netflix to implement themselves on the market as efficiently as possible at the start to be competitive. To achieve this, the company decided to launch a subscription-based service of DVD rentals by mail which consisted of ordering a DVD on their website and receiving the physical copy of the DVD the next day in the mail. Once the customer had watched the DVD, they would simply place it in the provided envelope and put it back in the mailbox where the postman would pick it up and send it back. Not only did Netflix provide this service, it was also revolutionary in the sense that after ordering DVDs of a certain genre or regrouping certain actors, a system known as CineMatch relying on an algorithm would compare them and recommend new movies or shows to watch based on the customer's tastes and what other customers with similar tastes were watching.
Once videos on demand through the internet was becoming a viable option for the company to push its service forward and the fact that more and more people were having access to broadband internet (Zhu, 2001), in 2007 Netflix decided to alter their business model allowing their subscribers to stream movies and shows instantly on their personal computers. The goal of this change was to get their subscribers to switch to streaming, and it also led to the company reducing costs of postage from mailing DVDs to its subscribers. By doing so, the company managed to identify the opportunity that was streaming and innovate within the internet entertainment industry and the movie rental industry by providing such a service through a simple subscription process.
Porter's Five Forces Model Analysis:
The Porter's Five Forces Model is important to understand where the competition is coming from within the movie rental industry and what Netflix can control from the internal environment and what it cannot control from the external environment (Fahy, Jobber, 2015).
Rivalry Among Existing Competitors:
Netflix's main competitors are without a doubt Amazon Prime Instant Video and Hulu Plus, which are both services using the same business model of subscribing to the service for an unlimited number of movies and TV shows with no due dates nor late fees. This renders the competition intense as these companies are all competing with each other as well as new companies entering the market constantly such as Disney which will be launching its streaming service in 2019.
It is easy to see that streaming movies and shows on Netflix isn't the only way to go, consumers have a number of different ways to be able to watch movies including in-store rental or streaming via Video on Demand. These different options offer low switching costs for consumers and therefore they are not bound to one single type of service. What sets Netflix apart from these is the fact that it has been able to achieve economies of scale. These economies of scale have allowed Netflix to be in a position where they can lower their prices, spend more un customer acquisitions, new features, or other efforts. Due to this, Netflix can be characterized as “the king of the hill” since smaller rivals will struggle to implement themselves on the market and established companies attempting to imitate Netflix with a similar service are in a position where they cannot gain full efficiency from their efforts (Gallaugher, 2008, p10).
Threat of New Potential Entrants:
The threat of new potential entrants is moderately low as the branding and image of the largest companies leading the market such as Netflix, Amazon and Hulu is causing difficulty for new companies to enter the market. This is due to the fact that an entering company would have to spend a lot of resources into marketing and advertising in order to be competitive with these leading companies and create customer awareness.
Threat of Substitute Products or Services:
The threat of substitute products is high as in order to be competitive in this market, the costs have to be low and there are a variety of substitute products including, watching television, going to see a movie in theaters and illegally downloading movies. It also has become increasingly easy for consumers to search for the best deals due to the advances in technology over the years and therefore find substitute products which are better suited for their individual needs.
Bargaining power of buyers:
The bargaining power of buyers is high in this market because of the fact that there are little to no switching costs from one option to another and therefore, highly price sensitive consumers have a lot of power. Due to this, there might be a lack of brand loyalty and companies have to be aware of the price sensitivity of their consumers.
Bargaining power of suppliers:
The bargaining power of suppliers in the movie rental industry is moderately high as, for instance, Netflix's main suppliers are the movie studios providing the material which Netflix then makes available for streaming. These studios have licensing agreements with Netflix and therefore can choose whether or not to sell these rights to the streaming business. To counter this lack of power Netflix has, it chose to start its own movie production studio and become the suppliers of their own service for some specific content.
Netflix's competitive advantage using a Business Model Canvas (Mariotti, Glackin, 2016):
One way Netflix managed to gain a competitive advantage over its competitors through an innovative process is by producing its own shows and movies which have led to an amazing success with shows like House of Cards, Narcos or Stranger Things. This bypasses the problem of having to buy rights to certain shows and movies, in other words Netflix becomes its own supplier of content. By doing so, Netflix has managed to gain a new stream of revenue other than its subscriber fees as competing companies are likely to try and purchase the rights in order to keep their existing consumers. It is therefore clear that Netflix should continue to produce its own shows in order to maintain that competitive edge as well as retaining their existing customers and attract new ones through this original content. This proves to be true if they want to be competitive with Disney's new streaming platform known as Disney Live where Netflix lost the rights to Disney franchises and therefore all of the Disney content will only be available on this new platform.
SimVenture Simulations Analysis:
After running some simulations on the SimVenture software, it is easy to see that Netflix had researched the market in order to assess whether a switch to internet platforms instead of mail delivery of DVDs would be a viable option or not. They realized that with customers benefiting from a higher access to broadband internet, the switch would be viable and most likely successful and therefore decided to completely redesign their service accordingly. It is also clear that Netflix is trying to grow by creating its own shows and therefore increase their market share as well as redesigning their existing service again to appeal to new customers.
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