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Essay: Netflix: How One Company Achieved International Expansion and Domination in the Canadian Market

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Founded in California in 1997 with over $7.16 billion dollars in sales, Netflix is the leading player in the Internet and Catalog Industry. Netflix is an Internet subscription service company that offers streaming for both television and movies. Originally, Netflix started out as a DVD-by-mail subscription but with the uprise in technological advancements, Netflix has expanded it’s service. The company has attained success through its strategic development of unique products and their expansion in both domestic and international markets.

After years of widespread success within the United States, in 2010, Netflix decided to expand its product into Canada to test its potential in foreign markets. This expansion into Canada turned out to be widely successful. In only 1.5 years Netflix was able to reach 10% penetration in the Canadian Market (Forbes). In the following paragraphs we will analyze how Netflix has been able to be so successful within this market.

Key Success Factors

Netflix shifted strategies from delivering DVDs via mail (which is how they beat out their initial rival Blockbuster video), to focusing on its streaming service. Netflix realized early on with exponential increases in internet speed that they could bring even more convenience to their customers by switching to a streaming service. Netflix was the first major company to do this and was able exploit this niche market. Netflix continues to dominate this market even with the entry of competitors such as Hulu by offering superior shows and movies. Netflix’s ability to adapt faster than its competitors is one of the main reasons for its success and domination in this market.

 A recent example of how Netflix is continually adapting is how it now has widely popular shows and movies that they have produced, known as “Netflix Originals”. Shows with Netflix’s name attached such as “House of Cards”, “Orange is The New Black”, and “Fuller House” have been enormous successes and have formed cult followings. This is difficult to imitate because creating new shows and movies requires a lot of talent and connections, such as big name actors, talented directors, producers etc. Netflix also signs deals with major actors to star in their “Netflix Originals”, a recent example being Adam Sandler who signed a four movie contract with the company. Another example is Kevin Spacey, who is the main character in “House of Cards”

Netflix forms strategic partnerships, with companies such as Sony and Microsoft to make it even more convenient to use Netflix by allowing it to be downloadable on their gaming consoles and other electronic devices. They forms strategic partnerships with companies such as Marvel so they can make “Netflix Originals” using characters and storylines from the Marvel world. This would be difficult to imitate because Marvel’s parent company, Disney, would only allow the best firms with the most resources to produce television series using its characters and storylines.

The development of “Netflix Originals” has also allowed the profitable opportunity of international expansion. With the high volume of frequency and demand in the United States, Netflix has been aggressively expanding to offers their streaming-only plan of TV and movies in over 190 countries. They have been able to successfully offer their original content in many other parts of the world. However, the most interesting part of their international expansion is that the other streaming content varies by location due to local laws and regulations. Our goal was to understand and analyze how Netflix is employing their international expansion in our neighboring country, Canada.

Netflix in Canada

The first step is to understand the cultural, administrative, geographic, and economic differences between the United States and Canada as it relates to Netflix.

Cultural: In Canada, English and French are the official languages. The cultural similarities between the United States and Canada allowed Netflix the opportunity to enter Canada easier. Netflix has recently offered more selection in its Canadian library, adding to its rising popularity as a preferred streaming service (Harris, 2016). Both Canadians and U.S citizens enjoy TV entertainment and view it as a worthwhile expense; however, in both countries, TV subscribers are diminishing in numbers (Harris, 2016) Instead, streaming subscriptions are on the rise. Both nations value no commercials, no episode wait time, and fewer monthly expenses on television. This shift from television to Internet streaming positions Netflix Canada as an attractive product that is meeting the consumer's’ current demands.

Administrative: Region-exclusive licensing agreements prohibits certain shows from playing to everyone that has Netflix. Netflix has been cracking down on “border hoppers” that download shows which are only available for viewing in the U.S. In some cases, Netflix would freeze many Canadian accounts altogether when an unblocking service was being used (Harris, 2016). In addition, both countries allow streaming services with no censorship. With the creation of NAFTA, the manufacturing and trade partnerships between the U.S and Canada substantially strengthened. Signed into law early January of 1994, NAFTA made intellectual property changes, specifically regarding motion pictures entering the public domain and their protection of property rights. Because of this, high legal standards are enforced. (Smallson, 1994)

Geographic: Similar to the U.S, Canada has strong infrastructure, network connectivity, and facilities to comfortably equip their people with technologies to stream Netflix. Canadians that wish to watch some of the shows that Netflix that are not available in their country will oftentimes try to fake out servers by using a VPN that gives the illusion users are accessing the web from another country.

Economic: Canada and the United States are very similar economically, both have advanced and diversified economies, have a large middle class, and are each other's largest trading partners. NAFTA has also made doing business between these two countries very easy by lifting barriers and regulations between the two countries. Currently, the Canadian dollar is worth less than the American dollar where one Canadian dollar is $0.74 U.S Dollar.

Strategic Entrance into Canada

Netflix has focused on aggregation in delivering its streaming service to Canada, but has also had to adapt to the differences in the area. Netflix Canada does not offer a DVD delivery service like they do in the United States, but do offer the same streaming service as the U.S. to allow for customers to access their digital libraries regardless of where they are. (Hartley, M., & Herald, C., 2010). In order to adapt to the area, Netflix has kept an eye on specific factors that could become a hindrance to using the service. For instance, they have payed close attention to the bandwidth caps in Canada to make sure that Canadians are not getting a surprise on their bill from streaming too much (Press, T.C., 2010).

Netflix has also created variations in their content to adapt to and meet the specific demands of Canadian Netflix customers. At first, their streaming-only service allowed Canadian customers to watch only older movies and TV shows; to fix this they updated their steaming catalogue and advanced their digital distribution deals with their prior and current providers, Relativity Media and Epix (Seeking, A. 2010). While some Canadian users still argue that the U.S. has far more variety in their content than Canada for basically the same price, Netflix argues that, “there is no best” and that “the Canadian list includes more hits and fewer stinkers.” (Edwards, P. & Eastwood, J., 2015). They have started to focus more on their marketing in the area, stating that “…we’re going to be very proactive in announcing when we have new titles [and] we’re going to be more focused on [the] specific titles as we announce them in Canada.” (Press, T.C., 2010). At the same time, Netflix has also exploited arbitration as a strategy by capitalizing on not creating a larger library for Canada since they know that Canadians have already found ways to access the U.S. service and content (Edwards, P., & Eastwood, J., 2015).

It appears that Netflix has been effective in its strategies of adaptation and aggregation – and small focus on arbitration – as their expansion has been successful and they are now profitable in Canada (O’Rourke, P., 2014).

A possible area for improvement in their strategic entrance to Canada is increasing their social media presence in Canada. With competitors like CraveTV, it is possible that Netflix could have missed out on a opportunity for increased profit by failing to adapt to the growing trend of social media and aggregate successful social media strategies. They decided to not pursue social media on Netflix as they did not have the time, energy, and engineering resources; stating that they “run lean and efficient at Netflix” and “have about 600 salaried employees running a $2-billion company – so [they] have to marshal resources and make tough decisions.”(Press, T.C., 2010). Although Netflix has a strong brand identity, expanding its resources to accompany the growing trend of social media in other countries could be a potential strategic improvement to their current operations.

Value Added by Expanding into Canada

Adding Volume: Canada was the first market Netflix entered into outside of the United States. By entering into a foreign market, Netflix was able to spread the allocation of certain costs, such as Technology and Development costs, wider. This allows for  higher profit margins per subscriber (see Fig 1). By adding this volume, Netflix is better able to manage their content costs by either adding buyer power or purchasing global rights (Ball, M 2015).

Decreasing Cost: Netflix was the first video streaming service to be offered in Canada. Netflix began offering content in Canada as early as 2010. The next streaming service to come along, known as CraveTV, did not appear until 2014. Amazon Prime Video began offering content in Canada in 2016 but with very few options (Press, T. C.,  2016). By being the first movers into Canadian territory, Netflix was able to adjust to the market before  any new competitors entered in.

Differentiation: In comparison to CraveTV and Amazon Prime, Netflix offers more platform availability to its consumers (O’Rourke, P, 2016). Netflix’s original content and relationship with various networks like Disney allow them to provide unparalleled content that is not offered by any other streaming services in Canada (O’Rourke, P, 2016). This allows for Netflix to have the same initial price point ($7.99) as CraveTV and a higher volume of subscribers.

Improving Attractiveness: When improving attractiveness, the company must understand its industry’s market while being careful of the legal and ethical problems that may arise around expanding internationally. In 2014, Quebecor, Inc. publicly warned the industry about Netflix’s entrance into the Canadian media and content market to the Canadian Radio-Television and Telecommunications Commission (CRTC). The communications company is encouraging the CRTC to strictly mediate the implications of Netflix’s entrance into the mix and it’s impact on the future of broadcasting. An important risk factor for Netflix in Canada is the future of regulations in the country. Pierre Dion, President and CEO of Quebecor, foreshadows that Netflix could become the largest broadcasting provider  in Canada which will force Netflix to follow regulatory laws that broadcast networks also obey. (Brownell, 2014)

When analyzing improvements on attractiveness, the company must consider the advantages between transnational border operations. When comparing Netflix in the U.S. and Netflix Canada, Netflix Canada has fewer titles but it includes more popular choices compared to Netflix in the U.S. (Brownell, 2014)  Another way to improve attractiveness is to determine how to decrease or increase the degree of rivalry. Netflix dominates the online streaming service industry in Canada by taking advantage of adapting to niche streamers and offering content to specific types of views in the market. According to the Toronto Sun, when the much-anticipated launch of Amazon Prime Video finally came in December 2016, it didn’t live up to most expectations. In addition, Hulu has not attempted any action for a big move to Canada. (The Canadian Press, 2016) Both of these further decrease the level of rivalry in the industry for Netflix, leaving CraveTV as it’s only major rival in Canada.

Normalizing Risk: A major risk for Netflix was offering Canada their services as the first location outside of the United States. According to Forbes, Netflix took about a year and a half to reach 10% penetration in Canada, which is quicker than when Netflix entered the market in the U.S. Their ability to create a strong and reputable brand, and their history of effective online streaming, has led to a strong presence in Canada. (Trefis Team, 2016) In April 2016, 46% of Canadians said they used Netflix to stream a full-length movie or TV show in the past month. According to CNC News, five years ago that percentage stood at 11%. During November 2016, the Canadian government began developing a damaging new digital tax that would require Netflix to contribute 5% of its revenues. The risk here is Netflix’s reaction to this imposed tax and how it might alienate Canada from its international service. (McCarthy, 2016)

A major part of normalizing risk is assessing how much cross-border operations increase or reduce risk. Due to content licensing agreements, the content offered can vary between countries. Recently, Netflix has been focused on ending all illegal cross border watching in other regions. Individuals try to sneak across “cyber” borders to watch a show like Sons of Anarchy on Netflix U.S., which not accessible to Canadian subscribers. Netflix has developed a range of technologies to better support their efforts. (Harris, 2016)

Generating Knowledge: According to Geist in TheStar.com article, “The Canadian service — much like the other international services — is more curated from the start with the company trying to identify content of interest to the local market before it appears on the service.”  Netflix in Canada has a competitive advantage compared to other services because it conducts research first about the local audience’s interests. (Edwards, Eastwood, 2015). According to The Media Technology Monitor (MTM), a recent major discovery reports that the percentage of Canadian households subscribing to Netflix is growing but most specifically the English-speaking households in Canada. The numbers have skyrocketed over time. The drastic change in percentage has gone from just 10% overall in Canada to a huge increase in English speaking households at 20% and French-speaking households at 5% in November 2012. These accomplishments have been reached within two years of its Canadian launch. (Desjardins, 2013) To further engage the Canadian audience, this particular research estimated Netflix Canada invests somewhere around $5 million a year in original Canadian content production. The goal behind this research is to identify exactly what Canadian audiences are interested in order to improve their own product. (Desjardins, 2013) The information gathered from these investments can also be beneficial when creating content in countries with similar demographics where Netflix currently (or intends to) operate in.

Conclusion

Netflix’s expansion into Canada was an obvious choice, and was bound to be successful. The United States and Canada share similar cultures, similar tastes in entertainment, and have a common language. These factors along with the ease of doing business in Canada, due in large part to NAFTA, have allowed Netflix to penetrate and succeed in the Canadian market.

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