Netflix-Case Study-- When a Pioneer Has to Reinvent Itself
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Transcript of Netflix-Case Study-- When a Pioneer Has to Reinvent Itself
Running Head: NETFLIX: CHANGING STRATEGIES AND THE PORTER FIVE FORCES OF ANALYSIS 1
Netflix: Changing Strategies and the Porter Five Forces of Analysis
James Rothaar
MBA 8800
Wilmington University
August 23, 2014
NETFLIX: CHANGING STRATEGIES AND THE PORTER FIVE FORCES OF ANALYSIS
Netflix: Changing Strategies and the Porter Five Forces of Analysis
Introduction
Cofounders Marc Randolph and Reed Hastings started Netflix in 1997. The firm, which
is located in Gatos, California, began its subscription-based service in 1999. The revolutionary
company forever changed the business model of the home-entertainment industry delivering
programs directly to the homes of consumers via mail and then video streaming online. Netflix
has more than 10 million subscribers and more than 100,000 programs, ranging from TV shows
to films to special programming. Reed Hastings is the CEO of the company. (Netflix n.d.)
Strategy Reformation
Being among the pioneers in an industry that is heavily influenced by advancements in
technology could be a challenging proposition, as competitive forces are formulating and
evolving at the speed of reality. Netflix established its effectiveness in a market prior to the
industry operating at optimal efficiency. Mailing DVDs to subscribers was the early focus of the
industry. However, when online streaming also became popular, two modes of delivering the
same products became available. A firm had to determine whether it wanted to deliver products
by mail, online streaming, or both. Netflix wanted to be a major player in both markets,
announced that it was splitting its original model into two businesses models, and, in the process
irked customers and investors alike.
However, after the company split up its original business platform and morphed it into
two separate business models, consumers felt that the company was charging them twice for a
similar service. While each business model actually was unique, the perception of consumers
toward Netflix put the firm in a difficult position. It created a public-relations dilemma to go
along with its new business models (The New York Times, 2011).
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NETFLIX: CHANGING STRATEGIES AND THE PORTER FIVE FORCES OF ANALYSIS
Threat of New Entry
The threat of new entrants into this business sector is low to medium due to the high-cost
of acquiring the rights to distribute programs produced by the various entertainment companies,
which range from major film and TV studios to midsize production studios to videogame
suppliers. It would take billions to obtain sufficient programming to compete directly with
Netflix. Additionally, the financial commitment required for state-of-the-art information
technology and regional distribution centers would be substantial as well. A niche or a specialty
program producer may be able to compete on certain types of programming. However, doing so
across-the-board would be at this mature stage of the industry could be a real money-pit for a
newcomer entering the business (Cable News Network, 2011).
Bargaining Power of Suppliers
The bargaining power of program suppliers would be high, as the only way to compete
directly with a firm the stature Netflix would be for a company to have the same or similar
programs that are available through Netflix. If any of mainstream program suppliers, such as a
Disney, or an NBC-Universal, opted not to allow a competitor to offer their programming, that
firm would be at a measureable disadvantage trying to go head-to-head with Netflix. Since the
pipeline of high-quality programming is limited, having relevant programs is a key issue that
leverages the bargaining power of program suppliers in the home-entertainment industry
(Forbes, 2012).
Bargaining Power of Buyers
The bargaining power of buyers, as a competitive threat, is low, as no single subscriber
(i.e., customer) rents enough products to directly influence the prices charged by Netflix.
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NETFLIX: CHANGING STRATEGIES AND THE PORTER FIVE FORCES OF ANALYSIS
Individual subscribers have little power to negotiate terms and conditions of sale. The bargaining
power of buyers does not exceed the terms and conditions of their membership. While this does
not circumvent subscribers from tapping another service provider to buy the same programs or
canceling their subscriptions, the bargaining power of buyers is not significant (The New York
Times, 2011).
Competitive Rivalry
The competitive rivalry for Netflix is medium to high, as the key variables that
differentiate competitors are quality of programs available, quantity of programs available,
associated costs, and timeliness of delivery. All competitors pretty much tap in to the same mix
of programs and convenience of delivery to attract new subscribers and to retain existing
patronage. It is relatively easy for households to either switch their subscriptions from one source
to another or to have a subscription to more than one service. Additionally, the differentiation
from one competitor’s product-line to another is minimal (Forbes, 2012).
Threat of Substitution
The threat of substitution via alternative product is low, as the cost to buy an individual
DVD versus renting it or having it streamed online is significantly higher. A buyer’s demand for
purchasing a DVD is not practical for casual-interest consumers. The practicality of owning
physical DVDs versus having online access to those on an as-needed basis is considered. What
could be better than having a real product that takes up no space except for computer memory?
Why drive to a store when you can instead click and save time and money (Cable News
Network, 2011)?
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NETFLIX: CHANGING STRATEGIES AND THE PORTER FIVE FORCES OF ANALYSIS
Recommendations
Perhaps Netflix should phase out its by-mail service from its current offerings. Taking on
an extensive DVD to fill orders by mail could require the firm to maintain a cost-prohibitive
inventory. Netflix may want to restructure and re-price its current subscription packages.
Separate fees for each service is workable, but if a subscriber wants to utilize both the mail and
the online streaming services, a discounted price point, such as $10.99 for both services, instead
of charging full price for each service. It may be more palatable to consumers.
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NETFLIX: CHANGING STRATEGIES AND THE PORTER FIVE FORCES OF ANALYSIS
Figure 1. Michael Porter’s “Five Forces” Model for Netflix. This figure illustrates Porter’s “Five
Forces” as these apply to Netflix.
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NETFLIX: CHANGING STRATEGIES AND THE PORTER FIVE FORCES OF ANALYSIS
References
Wingfield, Nick and Stelter, Bryan. (October 24, 2011). How Netflix Lost 800,000 Members and
Goodwill. The New York Times. Retrieved from
http://www.nytimes.com/2011/10/25/technology/netflix-lost-800000-members-with-price-rise-
and-split-plan.html?pagewanted=all&_r=0
Gross, Douglas. (September 20, 2011). Customers Fume Over Netflix Changes. Cable News Network.
Retrieved from http://www.cnn.com/2011/09/20/tech/web/netflix-reaction/
Hardtung, Adam. (January 29, 2013). Netflix: The Turnaround Story of 2012. Forbes.com. Retrieved
from http://www.forbes.com/sites/adamhartung/2013/01/29/netflix-the-turnaround-story-of-
2012/
Hastings, Reed. (September 18, 2011). An Explanation and Some Reflection. Netflix U.S. and Canada
Blog. Retrieved from http://blog.netflix.com/2011/09/explanation-and-some-reflections.html
Porter, M. E. (1979). The Five Competitive Forces that Shape Strategy. Harvard Business Review.
Retrieved from http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/ar/1
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NETFLIX: CHANGING STRATEGIES AND THE PORTER FIVE FORCES OF ANALYSIS
APPENDIX A.
Competitors of Netflix
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APPENDIX A (page 2) Insight on Netflix and Its Top 3 Competitors
References
Paramesh, Santhosh. (June 5, 2013) The Beginning of the Movies Rental and Streaming Wars. ISanthosh.com.
Retrieved from http://isanthosh.com/netflix-the-beginning-of-the-movies-rental-and-streaming-war/
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NETFLIX: CHANGING STRATEGIES AND THE PORTER FIVE FORCES OF ANALYSIS
APPENDIX B
Key Issues:
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APPENDIX B (page 2)
“The Netflix monopoly is starting to erode. Given the news coming out of both Amazon and Hulu recently, competition is about to get even more fierce.”
References
Protalinkski, Emil. (June 4, 2013) Netflix accounted for dominant 89% of TV show streaming in
Q1 2013, but lost share to Hulu and Amazon Prime. TheNextWeb.com. Retrieved
http://thenextweb.com/insider/2013/06/04/npd-netflix-accounted-for-dominant-89-of-tv-
show-streaming-in-q1-2013-but-lost-share-to-hulu-and-amazon-prime/
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