Netflix as an Online Rental DVD - Case Study Example

Netflix – Case Study Analysis SUMMARY The case study under consideration is about the company d as Netflix, an online rental DVD business. In this case, the emergence of Netflix has been highlighted since the time the company founded in 1997 as of late 2006. The development of high speed and sustainable internet connectivity is the biggest trigger that boosted the business of Netflix as the company altered its business strategy as the internet connectivity got better and convenient for the users. At the time the company was private and had limited resources, it could barely serve the very narrow part of the movie rental industry. Before Netflix, Blockbuster had been a sole giant of the industry but its business was totally focusing the rental DVDs through retail outlet points. Those retail outlets carried few employees who can hardly recommend to the customers about the movies except the hit releases. Yet, the company was serving the whole United States as no other competitor had such resources to expand such bigger chain of DVD rental locations. What Blockbuster strived hard is to open so many DVD rental outlets such that the farthest retail outlet is around ten minutes drive in the urban areas of United States. The hit movies and recent releases were the ones that were the major occupiers of the shelves of the Blockbuster’s rental outlets as the demand for lesser-known movies had been very slow and uncertain. With the entry of Netflix in the rental DVD industry, Netflix adopted a first mover strategy such that rather opening rental DVD outlets, it started its operations by renting out the DVDs through internet based web portal. The company made an investment in its website such that the subscribers subscribed their accounts on Netflix’s website and then they can choose their preferred movies from a wide collection of movies held by Netflix. Those DVDs, which are selected by the subscribers, are sent to them via direct mail through US Postal Services. In around a day, those movies are shipped to their respective destinations at a cost of $4 per movie along with $2 cost of shipping and handling. The biggest advantage reaped by the customers was that now they can even have the access to the lesser-known movies, which ordinarily cannot be easily available at the rental DVD outlets. Another greater advantage that Netflix provided to its customers was the waiver of “late fees” which substantially boosted its business. Pricing was also an important aspect through which Netflix climbed quickly in terms of reaping the profits. Firstly, the company introduced a pricing system in which advance subscription charges are received from the renters and they are allowed to keep maximum of four movies at a time as well as they can receive at least four new releases in a given month. This really increased the charm for the renters to go for more movies at a particular time while allowing Netflix to enjoy more turnovers. Later on, Netflix brought in yet another significant change in its pricing policy by allowing unlimited rentals to the customers but now they can keep three movies every time as they have the opportunity to change them as frequently as they are interested in. As a result, this initiative created new fans for the company especially to those customers for whom the daily entertainment means a lot. There were stances where Netflix seemed to struggle a lot such that the subscription cost to a customer was quite high. This means that around 50% of the movies shipped to the customers are brand new and the company has to incur a substantial cost of acquiring those movies. In this way, the company could not earn as much as it could because it takes at least 4 to 5 customers to rent a movie in order to cover the cost of that movie. Netflix wanted to rent out those movies, which are already available in catalog of Netflix especially the ones that are lesser known. Another problem faced by Netflix was the use of traditional merchandising system, which could complement the search engine developed by Netflix. That merchandizing system also let the customers connected to the library of movies from where they can pick out their liked movies based upon the recommendations written by content editors. The problem faced under this merchandizing system was that every time the customers were receiving the similar sort of recommendations, which was effective not adding value to both the customers and Netflix. This problem was later resolved by Netflix when it launched its new proprietary recommendation system. That recommendation system was quite smart such that after logging into account for the first time by the subscriber, filling out the survey, and picking up his/her favorite genre etc, the recommendation system automatically recommends that customer those movies that they might want to watch because of their preference. To Netflix, the recommendation system cannot be altered by the staff working at rental DVD outlets because of the limited knowledge that those employees have regarding the movies. Blockbuster, on the other hand, considered DVD-by-mail as the niche market and remained complacent until 2004 when they also launched a web based service to rent out the movies to the subscribers. However, it was quite late for Blockbuster because this online DVD rental market was already tapped by Netflix. The good aspect that can be sorted out from this activity of blockbuster is that they linked their rental DVD outlets with their website to provide an integrated rental movie service to their customers. What Blockbuster had to forego was the fat amount of revenue that it used to receive in regard of “late fees” amounted to $600 million just because it was waived of by Netflix. Video-on-Demand (VOD) is the concept, which had been worked out by team of Netflix to launch in 2007 through which the customers could see their favorite movies online on their computers and television sets. INDUSTRY ANALYSIS DVD rental industry can be analyzed through Porter’s five forces, which are given below: Barrier to Entry Netflix was the first company, which shaped up this market of renting out the DVDs through internet especially at that time when internet connectivity was not quite speedy and sustainable. However, the company kept on making efforts to rent out DVDs to its subscribers by offering different sorts of attractions that cannot be offered by rental DVD outlet such as waiver of late fees, recommendation service especially to lesser-known movies etc. Until Blockbuster entered into this market, Netflix already has acquired substantial market share. Later on, when the concept of Video-on-Demand increased, the DVD market started to decline and because of this reason, this market segment is currently not as attractive to the new entrants as it was around a decade ago. In short, the barriers to enter into this market, is the presence of industry giants in the form of Blockbuster and Netflix as well as the declining phase of the DVD industry because of VOD. Substitutes DVDs were the substitutes of VHS cassettes and now there are different sorts of alternatives to DVDs are present. Video-on-Demand is the most obvious and highly increasing substitute of the DVD such that customers can watch out their favorite movies through internet on their television and computers anytime they want. Netflix also provided three different packages of VOD under which movie can be rented out online for a single time view, movie in the form of a permanent file, and lastly, the temporary downloads for specific number of times. Rivalry among Competitors Under DVD rental business, Netflix did not experience any strong rivalry with its competitors. The only major competitor was Blockbuster but it did not enter into online DVD rental industry until 2004. Besides that, business models used by both the companies were a bit different as well. Blockbuster had to spare $600 million because of Netflix’s strategy of not earning any money in respect of “late fees”. This was the only major move adopted by any competitor in response to a strategy followed by other competitor in online DVD rental industry. Power of Buyers Since the switching cost is very negligible and the services offered to the subscribers quite low cost, therefore, the buyers do not have much power to influence the industry participants. Netflix in previous year provided its customers some power by deactivating their accounts through its website. Earlier it could be done only through telephone. By giving this power to the buyers, the churn rate for Netflix increased significantly. However, this initiative also eased out the process of re-subscription by the older customers who had left out Netflix. Power of Suppliers The suppliers of rental DVD industry also do not possess much power. Suppliers of DVDs can be the big retail stores like Wal-Mart, Best Buy etc. They can be distribution companies to the industry participants as well as the major studios such as Universal, Warner Brothers, Sony, etc. Once a movie is released on to DVD, anybody can purchase that DVD and rent it out to other people is legal and the content owners do not have any right to prohibit such renting of DVDs. In this way, very less power can be influenced by the suppliers of this industry. COMPANY – VALUE CHAIN ANALYSIS Inbound Logistics The value chain of Netflix can be framed out in such a manner that as part of inbound logistics, it purchases DVDs from distributors, retail stores, and studios. However, with the negotiations with the studios, Netflix now can acquire DVDs at much cheaper rates such that it has made different revenue sharing arrangements with those studios. Operations As part of the operations, Netflix receives subscribers’ orders from the website directly and then package it into proper form in order to ship it to the respective customers. Inventory management techniques are also established by Netflix in order to avoid any stock out situations. Outbound Logistics For outbound logistics, Netflix uses the service of US Postal Services as the primary carrier of the DVDs because of the vast network coverage of USPS. Netflix also have increased its distribution centers across the country in order to ship movie on “over-night” basis. Marketing and Sales From marketing and sales perspective, the company uses its own website as a platform to market and sales its services through web portal where customers can pick up their preferred movies and then rent them out. Services Services provided by Netflix include the most worthy service of Recommendation System. This systems acts in a very smart fashion and recommends the movies according to the taste and preference of the customers. Only those movies are recommended by this system, which are available in the stock as well as can be shipped over night. USE OF INFORMATION TECHNOLOGY Netflix adopted information technology as the main source of its business operations. Right from using internet in its early business models, the company is still utilizing this technology at its best along with its major evolutions. Following are some of the areas in which Netflix has showed excellent results by implementing IT based techniques and applications: Recommendation System Recommendation system launched by Netflix is one of the most critical developments, which not only facilitated customers but also Netflix itself. Not only this, the recommendation system was quite adequate to recommend only those movies, which are available in the inventory in Netflix. This prospect of the recommendation system also helped the inventory department of Netflix as they are given the caution whenever a movie is out of stock. Another trustworthy feature of the recommendation system was that it only recommends those movies, which can be shipped on overnight basis. Video-on-Demand This is the most desirable area in which Netflix is planning to penetrate such that besides renting out the DVDs from its distribution centers to the customers through mail, Netflix has planned to provide a facility of watching out the movie instantly whenever demanded by the customers. This allows high definition movies that can be watched online either on television or computers. CASE ISSUE The issue that has been raised in the given case of Netflix is regarding the launch of Video-On-Demand (VOD) service to its subscribers. Since the online DVD rentals industry, is on its declining phase and it can be predicted that this would be ultimately replaced by VODs. Netflix faces a dilemma from the content owners’ side as the online streaming of movies can bring substantial of infringements of copyright acts. RECOMMENDATION From analyzing the whole case of Netflix, it is indispensible for Netflix to enter into VOD industry because it is the ultimate future of the movies. Netflix is advised to launch its VOD services in cooperation with the content owners so that the company can avoid legal issues. UPDATE The update from the recent page of Netflix’s website is that the company has successfully launched its VOD services and it is facing significant competition with Blockbuster, which is also providing the similar services (Netflix, 2012). Netflix has also started providing its services to mobile phones and tablets as well. References Netflix. (2012). Netflix Blog. Retrieved November 02, 2012, from Netflix: http://blog.netflix.com/ Read More