Project Report, 2016
33 Pages, Grade: 1.7
List of Tables and Figures
List of Abbreviations
1 The Five Forces of Competition Model
1.1 Illustration of Value Chain
1.2 Threat of New Entrants (Moderate)
1.2.1 Low Switching Costs
1.2.2 High Product Differentiation
1.2.3 Low Access to Distribution Channels and High Capital Requirements
1.3 Bargaining Power of Suppliers (High)
1.4 Bargaining Power of Buyers (High)
1.5 Threat of Substitute Products (High)
1.6 Intensity of Rivalry among Competitors (High)
2 Netflix’s Core Competencies
2.2 Global Coverage
2.4 Ability to understand Consumers’ Needs
3 Business-level Strategy
4 Competitive Rivalry and Competitive Dynamics
4.1 Market Commonality
4.2 Resource Similarity
4.3 Netflix’s Awareness of Competition
5 Corporate Level Strategy
5.1 Reasons for Diversification
5.2 Operational Relatedness
5.3 Corporate Relatedness
6 Merger and Acquisition Strategies
6.1 Netflix and Apple
6.2 Netflix and Hulu
6.3 Netflix’s Influence on Industry’s Mergers and Acquisitions
7 International Strategy
8 Cooperative Strategy
8.1 Business-level Strategic Alliances
8.2 Corporate-level Strategic Alliances
8.3 Other Alliances
Bibliography and Online References
Figure 1: Netflix's Value Chain
Table 1: Alternative Services for Netflix – Three Examples
Table 2: U.S. Market Shares of Netflix, Amazon Prime and Hulu
Figure 2: Leading Netflix Markets 2015
Table 3: Criteria of a Global and Multidomestic Strategy
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Netflix is one of the most successful dotcom ventures and are the market leader and pioneer as the provider of film and television streaming worldwide. Founded in the United States in 1998 as a DVD-by-mail service, its growing success effectively lead to the demise and bankruptcy of Blockbuster in 2010. Netflix reports around 46 million subscribers in the U.S. and over 81 million subscribers globally spanning over 190 countries.
This paper aims to deconstruct and further analyses the strategy and its effectiveness of Netflix. As the paper outlines each strategy, it will also critic its decision and re-evaluate its strategy to continue expansion in the global market especially India and China as well as offer counters proposals on each strategy.
Due to low barriers and easy of entry, Netflix’s focus should be targeted primarily towards its external environment especially its industry rivals and the direct and indirect threats they pose e.g. Apple TV which is set to launch soon as well as alliances that have begun forming with existing streaming services.
Further, Netflix should strive to diversify in order to reduce risk and maintain if not innovate its core competencies improving their ‘original’ content. Business level strategies such as agreements with ABC for example to earn rights to producing Marvel content are a good example of successful partnerships. The introduction of Anne Sweeney onto the board was a positive move in this direction.
As competition between streaming services increase, Netflix will have to give up the advantages as new market entrant. Rival companies increasingly have more bidding power, thus Netflix should strive to invest more time and resources in corporate level strategies such as expanding to LIVE streaming such as sport. Further, as they are diligently penetrating deeper into the global market with plans to launch in India and China, a clear international strategy should be aimed at first understanding the local markets content as well as rights issue for example, China and their high censorship laws means it is increasing difficult to broadcast shows even with successful rights Ownerships. The radical actions of the Chinese can just as easier overthrow the strategy as it can be fashionable.
We begin with an analysis of its five forces as well as identification of its core competencies. Analysis of external and internal forces will ensue, identifying its threats as well as opportunities. Then it will delve into assessing the various business and corporate level strategies it may explore in maintaining its status of innovation and leadership.
The following chapter gives an overview about Netflix’s five forces of competition, which are “the threats posed by new entrants, the power of suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competitors.” (Hitt, Ireland and Hoskisson, 2007, p. 51) As an introduction to the chapter, the value chain of Netflix is illustrated.
Netflix’s value chain can be illustrated as follows:
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Figure 1: Netflix's Value Chain
Netflix has multiple suppliers, ranging from small movie studios to large broadcast networks. They deliver the content for the streaming platform. Netflix then bids for multi-year video-on-demand subscription for a given title. It also operates on a flat-fee unlimited subscription model. The subscribers at the end of the value chain receive a super customized and personalized viewing experience from the suggestion Netflix gives, based on the viewing habit and information given by the customer.
Threat of new entrants in the Video-on-Demand industry is high due to low barriers of entry especially in the IT sector where technology is readily shared, available and easy to emulate. Netflix distributes video contents to Internet-connected screens, and unlike traditional TV set top boxes, subscribers needs only an Internet connection. This simplicity translates into low switching costs for the consumer, which allows them to easily switch from pay or cable television and ultimately the same minimalism can be adopted by users of competitor companies.
Netflix relies on the different studios and other broadcast networks for much of its contents that go onto its library, through exclusive licensing for a period of time. As the pioneer in the Video-on-Demand industry, Netflix was able to exclusively secure a large number of demanded titles and build its database, due to the willingness of studios to license their contents and expand their distributor base. These rights secured by Netflix would be a deterrent to new entrants, as they would be left with a smaller pool of producers for contents.
However, customer loyalty may not necessarily lie with the Netflix brand, as it is merely a distribution platform for them to catch their favorite films or series. In the event where their favorite movies are be found on another platform, these viewer can easily switch over. In addition, content owners (suppliers) are, over time, more reluctant to grant rights to only one bidder, to lessen their reliance on just one distributor. To differentiate itself, Netflix started to integrate backwards into producing its own series, such as the Emmy-nominated “House of Cards” series. This was done through analyzing viewers’ preference and producing contents based on viewers’ demands. Having secured a loyal following based on their series, Netflix was able to expand beyond a mere distribution platform and differentiate their offerings even more, making it even more difficult for new entrants to compete.
By 2016, Netflix has already started its expansion plans globally and is virtually available in every market except for China. By aggressively expanding into the different markets, Netflix hopes that it gives them the first-mover advantage to develop its database with exclusive licenses, in order to capture large market share.
In FY2015, Netflix raised approximately $920 million for its global expansion plans, a scale at which would be very difficult for its competitors to match, a reinforcement of its secured position in the current market. However, existing alliances between competitors have already proven a challenge.
Netflix’s media content is currently its strongest asset and competency. The high power of supplies lies within its ability to choose which content provider at its own discretion. Both parties must be readily available to negotiate rights ownership as well as engaging in bidding wars with other competitors, although alliances have allowed competitors to have more bidding power, Netflix still has its reputation as well as loyalty based customers. However, such strategic dilemmas do arise, for example in 2010 Netflix agreed with Warner Brothers to delay their streaming for 28 day, in 2012 situation repeated, but delay was already 56 days (Duncan, 2012).
Such delays allow content provider to maximize their sales of a new product hence withholding Netflix’s power in the matter. This is because content providers namely the studios, have full rights to decide when they want to release their product in-home. DVD`s are preferred by content providers, because they get a huge profit from selling them. They also decide who will be the first provider of in-home video.
Signing profit sharing agreements, Netflix may be able to reduce power of supplier, raising the percentage of their profit, as they already did: Netflix established their own solution to this problem by introducing their own Netflix Originals content.
According to data from end of 2014 (the latest data available) Netflix’ market share in American households is 36% compared to 13% of Amazon Prime and 6.5% of Hulu Plus, the two biggest competitors (see table 2).
The switching costs are low. There is no annual contract and the cost of signing up for service is minimal. In addition to that Netflix offers free trials which makes it easy for customers to switch between different providers, from Netflix to Amazon Prime and then to Hulu. (Investopedia LLC, 2016) In order to keep buyers loyal Netflix produced own shows and movies which are only shown on the own platform. In addition to own productions Netflix also keep the viewer preferences in mind by providing the shows in different languages and producing consecutive shows when they are successful.
Due to the Annual Report 2015 (Netflix Inc., 2016 (a), p. 21), 61% of the company’s net income comes from the membership fees which leads to the fact that the buyers’ purchases are a significant portion of the company’s annual revenue.
Considering the high market share, the dependence of the membership fees and the low switching costs it can be summarized that the bargaining power of buyers is high.
Netflix's reputation was built upon its struggle and it has been providing finest DVD rental service over a period of ten years. However, the threat of substitute products is high in this industry and expenses must be kept near to the ground in order to be viable. Substitute products to the movie rental industry are broad in number and include physically attending a movie, watching television, surfing the web or even playing a video game. Technology has enormously supported to enhance the threat of substitute products.
In that circumstance, here's a list of all the alternative services Netflix’s customers can use.
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Table 1: Alternative Services for Netflix – Three Examples (Griffith, 2013)
Looking at the video streaming industry closely, Netflix is facing internal competition which is quite high, because the industry is dominated by few large companies.
Currently, Netflix, Hulu and Amazon Instant Video operating in the same sector and the table below illustrates the market share in the U.S. market, which contributes the most to Netflix’s revenues. The streaming service of Amazon can be seen as the main threat to Netflix.
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Table 2: U.S. Market Shares of Netflix, Amazon Prime and Hulu (Moskowitz, 2015)
The market for entertainment video is extremely competitive and matter to quick change because of low switching cost. Many customers maintain instantaneous relationships with several entertainment video providers and can effortlessly shift spending from one provider to another. The long-term fixed cost of content licenses may edge flexibility in planning for, or reacting to changes in industry and the market segments. As demand transitions into instant viewing segments, variable costs will drop with the increased use of communication technology, which at the same time will enhance fixed costs, making rivalry fierce, and less constructive. Currently, the expenses associated to amortization of streaming content assets account for the largest expense in Netflix’s operating activities.
New-fangled technologies and growing business models for delivery of entertainment video continue to build up at a rapid rate. New entrants may enter the marketplace with exclusive service offerings or approaches to providing entertainment video and other companies also may enter into business combinations or alliances that toughen their competitive positions. If Netflix is not able to effectively compete with existing and new competitors, programs and technologies, their business will be negatively affected, and they might not be able to enhance or sustain market share, revenues or profitability.
Due to Hitt et al. (2007) competitive advantage is provided by the firm’s resources, capabilities and core competencies. Resources on the one hand lead to capabilities, whereas capabilities on the other hand lead to core competencies. (Hitt et al., p. 79) Further they describe core competencies as “capabilities that serve as a source of com- putative advantage for a firm over its rivals.” (Hitt et al., p. 84) In addition to that the company competitiveness is defined by these core competencies. Due to McKinsey & Co. it is recommendable that a company defines three to four core competencies. (Hitt et al., p. 85) According to Hill, Ireland and Duane core competencies are characterized by four criteria of being valuable, rare, costly to imitate and not substitutable. (Hitt et al., p. 86 ff.)
Applying these criteria to Netflix, the following four core competencies can be defined as follows:
2. Global Coverage
4. Ability to understand consumers’ needs/ customer relationship
In the following part the four core competencies will be explained.
On its Annual Report 2015 Netflix points out that the company is “a pioneer in the Internet delivery of TV shows and movies.” (Netflix Inc., 2016 (a), p. 1) Due to its website, Netflix produced more than 320 hours of content in 2015. With the releases of award winning TV shows, such as “House of Cards”, “Narcos” and “Orange is the New Black”, Netflix has developed to an international content leader on that field. Since 2013 the company has been “changing the rules of how serialized television is produced, released and distributed globally.“ (Netflix Inc., 2016 (b)) Talking about Netflix’s content it is not only the quantity but also the quality that has to be mentioned: 45 Emmy nominations, 15 Daytime Emmy nominations, two Oscar nominations and 10 Golden Globe nominations during the first two years prove that Netflix is well recognized by the TV and film industry. (Netflix Inc., 2016 (b))
Keeping the variety and quality of self-produced shows is one of Netflix’s main goal for the future, as it is a reason to prefer Netflix compared to its competitors. That makes the competence valuable for the organization. Therefore Netflix could employ an expert in the field and one of ‘Time Magazine's 100 Most influential People of 2013’, Ted Sarandos, as Chief Content Officer. He has experience within the industry by also being a producer for shows, films and documentaries. To watch these exclusive shows, one has to sign up for a Netflix account, which brings additional members and money to the organization. That high amount of exclusive content is still rare, although Amazon tried to close the gap during the last year. It is also very cost intensive for others to imitate, as own high quality productions are more expensive than buying licenses, as the whole production as well as the actors, amployees and equipment have to be paid. Therefore competitors need to decide for high investments first with no secured success afterwards. For Netflix the content as a core competence is also not substitutable, as it is the main revenue source and reason for choosing Netflix.
In January 2016 Netflix announced the launch in 130 more countries. In addition to the at that time already existing 60 countries Netflix is available in 190 countries. The only main and relevant market missing is China. Because of that Netflix expects up to 100 million more customers until end of June 2016. (Deutsche Presse-Agentur GmbH, 2016) This global coverage is valuable and rare, as the biggest competitor Amazon Prime is available in six countries2. That are compared to Netflix only 3.2 %. For Amazon and other competitors it will be harder to enter new markets, as Netflix was first available and already attracted the customers. Though, competitors have to invest more time and money to enter new markets. As new customers will also increase the income of the firm, this global coverage is a unique and no substitutable core competence
One of the core competencies of Netflix is the technology, which “provides easy to use technology for customers to use to order and identify what they wish to view.” (Bowen, Daigle, Dion and Valentine, 2014, p. 5) The registration for a new account is done within four to five steps, the frontend is designed clearly: big screens showing a trailer of the selected movie, small introductions are given and the usage through wiping or klicking to the right or left is easy, whereas the frontend of Amazon Prime is adapted to the Amazon frontend design, which makes it harder to lead through the website due to e.g. small letters and hidden information. Furthermore the movies are not clearly structured on Amazon, as the same movie can show up in the genre of Kids and Comedy. “It is also allowed for a subscriber to rate the titles that they had previously viewed and receive recommendations based on the titles they previously rated highly. This service was and continues to be highly successful with a good portion of titles being viewed coming from the recommendations provided.” (Bowen et al., p. 6) Netflix also offers to stream movies and shows on up to four different devices at the same time. That is something unique, as Amazon does not offer it. Due to that, on account can be shared between a family or friends using different devices for watching.
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