SWOT analysis of Netflix

Table of content

Abstract

Table of content

List of figures

List of tables

List of abbreviations

1. Introduction

2. Definition and methodology of SWOT
2.1 The SWOT matrix
2.1.1 SWOT combination and norm strategy
2.1.2 Benefits and limits
2.1.3 Preparation and execution

3. Presentation of Netflix
3.1 Offering and subscription variety
3.2 Business model
3.3 Management
3.4. Corporate and employee culture

4. Presentation of the Video-on-Demand market
4.1 Video-on-Demand market in Germany

5. SWOT analysis and matrix for Netflix
5.1 Strengths
5.2 Weaknesses
5.3 Opportunities
5.4 Threats

6. SWOT strategy
6.1 Strengths and Opportunities
6.2 Weaknesses and Opportunities
6.3 Strengths and Threats
6.4 Weaknesses and Threats

7. Conclusion of strategy

8. Critical reflection

9. Conclusion

List of references

List of figures

Figure 1. SWOT Matrix

Figure 2.. Revenues of Netflix

Figure 3. Video-on-Demand revenues in Germany

Figure 4. Long term debt of Netflix

List of tables

Table 1. SWOT analysis of Netflix

Table 2. SWOT matrix of Netflix

List of abbreviations

App = Application

AVoD = Advertising-financed on Demand

BA = Bachelor of Arts

CCSA = California Charter School Association

CAGR = Compound Annual Growth Rate

DVD = Digital versatile disc

e.g. = For example

etc. = et cetera

HD = High definition

KIPP = Knowledge is power program

MSCS = Master of Science in Computer Science

MVPD = Multichannel video programming distributor

n.d. = no date

SD = Standard definition

SO = Strengths and opportunities

ST = Strengths and threats

SVoD = Subscription on Demand

SWOT = Strengths, weaknesses, opportunities and threats

TOWS = Threats, opportunities, weaknesses and strengths

TV = Television

TVoD = Transactional on Demand

USA = United Stated of America

VoD = Video-on-Demand

VR = Virtual reality

WO = Weaknesses and opportunities

WT = Weaknesses and threat

1. Introduction

The SWOT analysis is regarded worldwide as a concept for a systematic situation analysis and belongs to the strategic management. It comes from the military field and is the basis of many Asian martial arts. In the 1960s, several professors at Stanford University and Harvard Business School took up the SWOT analysis in the context of the strategic planning debate. SWOT stands for Strengths, Weaknesses, Opportunities and Threats. Heinz Weihrich, professor of global management, calls it TOWS matrix (in reverse). The initial point of the strategy is the confrontation of strengths and weaknesses of a company in terms of resources (finance, employees, organization, technology) and opportunities and threats arising from the external environment (competition, technology, customer expectation, policy) to develop strategies. By displaying the dimensions in a matrix, numerous measures become visible. As founding father of the SWOT analysis, Sunzi (Sun Tzu) can be considered in this context. This Chinese general, military strategist and philosopher described in his book "The Art of War" about 500 BC the cornerstones of the strategist, which was then intended exclusively for military purposes. (cf. Pelz, 2004; cf. Wodetzki, 2017)

The Book states:

“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”

(Sun Tzu, 2015, p.41)

In this project thesis, the SWOT analysis will be applied to one of the largest media companies worldwide, the video-on-demand provider Netflix, Inc. It is claimed that Internet television replaces linear television.[AB1] Changes of this magnitude are rare. For about 50 years, radio was the dominant home entertainment medium, until television came to power in the 1950s and 1960s. A decade ago, the new era of Internet TV began and its providers include Netflix. Internet TV has expanded rapidly, especially in recent years. The reasons for this is the growth of the ecosystem as the Internet becomes faster and more reliable, the freedom and flexibility because the consumer is not tied to fixed times and locations and last but not least, the rapid innovation as there are frequent enhancement updates and that streaming is the primary source for UHD 4K video content. ((cf. Netflix’s View, 2017; cf. Fleig, 2016)

The project thesis focuses on the strengths, weaknesses, opportunities and threats of Netflix and these are analysed using the SWOT matrix with the SO, WO, ST, and WO strategy. At the end of this analysis a conclusion of the result follows as well as a critical reflection.

2. Definition and methodology of SWOT

The SWOT analysis represents strengths, weaknesses, opportunities and threats of a company. It is an instrument of the strategic planning. It connects opportunities and threats of the environment with strengths and weaknesses of the company. Its responsibilities also include the connection of the idea resources oriented perspectives with the positioning oriented approach. The SWOT model has been used since the 1960’s and has a long tradition in strategic management. Some researches assign the origin of the concept to the research work of the Stanford Institute while others attribute it to the Harvard business school. They originate from the planning orientated perspective. The SWOT analysis bases on the central statement with the assumption, that the opportunities and threats are seen from the environment in collaboration with their own strengths and weaknesses. This is done to assess whether an environment actuality is a threat or an opportunity. (cf. Gattringer, Reisinger & Strehl, 2013, p.90-91)

The SWOT analysis should help to define a strategy for the company, to place budget and resources correctly, to initiate the projects and to take action. That’s why it is also an important building block for a business plan. (cf. Fleig, 2016)

Among the strengths belong factors and features of the company that are an advantage in competition. For example: innovative products, qualified employees, low fixed cost, good location etc. To the weaknesses and also to the disadvantages in the competition of the enterprise belong for example a lack of expertise, dependence of partners, low financial strength or no own sales. The opportunities of a company could be a new trend in the society, a change in the behaviour of the customers, technological development or product improvement. The threats include factors or developments in the environment or in the market activity of a company from which disadvantages or dangers may arise which weaken the company or which may lead to wastes. For example: entry of new competitor, change of the exchange rate or changes in law. (cf. Fleig, 2016)

The goal is to pay attention to the strengths, to maximize the benefits of the opportunities and to minimize the threats. Therefore, the SWOT analysis should use the strengths to seize new opportunities and to minimize the weaknesses, risk and threats. (cf. Wodetzki, 2017)

2.1 The SWOT matrix

The confrontation of the intern and extern business analysis happen very often with the help of a pattern, the so-called SWOT matrix. Firstly, the main strengths and weaknesses respectively the opportunities and threats need to be identified for the development of the SWOT matrix. The SWOT matrix combines two analyses to get a complete result. On the one hand, an internal company analysis is carried out, in which one considers one’s own strengths and weaknesses. On the other hand, an environment analysis is made by analysing the market for opportunities and threats. These two analyses come together into a matrix. If such an encompass analysis process is not possible, the strengths/weaknesses and opportunities/threats can also be identified by means of a simple search process. In this process, the critical success factors of the company will be identified while the focus is on the key factors which are most important for the competiveness of the company. The selected factors are evaluated on the basis of a scale from very bad/very risky to very good/very promising (e.g. -5 to +5). The knowledge and experience of employees and management, as well as the assessment of customers and experts are used for the evaluation. External information also belongs to the evaluation. If possible the strengths and weaknesses are also documented in proportion to the biggest competitor. Accordingly, the strengths, weaknesses, opportunities and threats are entered in the SWOT matrix. (cf. Gattringer, Reisinger & Strehl, 2013, p.91)

Abbildung in dieser Leseprobe nicht enthalten

Figure 1. SWOT Matrix (Gattringer, Reisinger & Strehl, 2013, p.91)

2.1.1. SWOT combination and norm strategy

The above figure shows that there are four combinations (SO, ST, WO and WT[AB2] ). Different systematic SWOT combinations are being generated. Four questions open up from these combinations. How can you use your strengths to take advantage of the opportunities? (SO), how can you take advantage of your strengths to avoid real and potential threats? (ST), how can you use your opportunities to overcome the weaknesses you are experiencing? (WO), and the last question: how can you minimize your weaknesses and avoid threats? (WT). From the following norm strategies can be deduced that based on the principal ‘use from strengths and avoid weaknesses’. [AB3]

In the SO-strategy (“Maxi-Maxi” strategy), the strengths of the company should be exploited for the new opportunities. So, this is about “dismount[AB4] ” and the strengths-opportunities combination is the ideal case. The WO strategy (“Mini-Maxi” strategy) is about eliminating internal weaknesses in order to seize opportunities. A medium-term target is to achieve the SO position by converting the weaknesses into strengths. This can be achieved, e.g. through cooperation with other companies or personnel development arrangements. The ST strategy (“Maxi-Mini” strategy) uses strengths to minimize threats with the target of defending the previous successes. The last strategy is the WT strategy (“Mini-Mini” strategy). It seeks to reduce internal weaknesses and minimize the impact of environmental risks. A company that has to operate with many combinations here is in a critical situation and often uses defensive measures like e.g. sale, liquidation or turnaround forced. [AB5] (cf. Bishop et. al., 2016)

2.1.2. Benefit and limits

The SWOT analysis can bring new knowledge due to its simple course of action and clear representation of analysis. It focuses on the essentials, meaning the key internal and external factors affecting the company and therefore it is very popular. The SWOT helps to identify future goals and initiates further analysis. However, the simple basis of the SWOT analysis is often criticized because there is a risk that the result will be too superficial and therefore of no benefit. The SWOT gives no excessive list of strengths, weaknesses, opportunities and threats and has no prioritization of factors. Also, the factors are often just options and not facts. (cf. Queensland Government, 2016; cf. Microtech Kaufmännische Software, 2017; cf. Gattringer, Reisinger & Strehl, 2013, p.92)

2.1.3. Preparation and execution

The usefulness of the SWOT depends on professional preparation and execution, as the instrument is relatively unstructured and open and there are no concrete requirements to apply. For this reason, the SWOT matrix will be combined with appropriate tools from strategic analysis and early enlightenment in order to explain specific strengths and weaknesses or opportunities and threats. This is to avoid that the matrix consists only of vague statements that could be valid for many companies in the industry. In addition, it is advised to make sure that a distinction is made between the external and internal dimensions and that the opportunities and threats or strengths and weaknesses are independent of each. (cf. Gattringer, Reisinger & Strehl, 2013, p.92)

3. Presentation of Netflix

The media company Netflix was founded by Reed Hastings and Marc Randolph in 1997 in Los Gatos in the USA. (cf. Netflix Media Center About Netflix, n.d.) Hastings came up with the idea to introduce a video rental flat-rate, after he had been angry at a high fine of a lent DVD because he gave it back too late. In the end of the 90’s it was a risky undertaking to launch a video rental, because at this time just two percent of the households had a DVD player. But Hastings and Randolph are visionary and they launch the first website for rental and sales of DVD’s on Netflix.com. The company name ‘Netflix’ was a clear statement for the belief that even DVD in the long term become less important in favour of digital means of transmission. (cf. Heeke, 2017)

In 1999, they introduced a subscription service where they offered customers unlimited DVD rentals for a monthly flat rate. The primary competition for Netflix at this time wasn’t Amazon or Hulu, it was the video store chain named Blockbuster. But after a hard rat race Hastings won this competition. Meanwhile Hastings wanted to sell 49 percent of his company to Blockbuster because of financial straits, but they refused the tender. Ten years later Blockbuster was bankrupt. (cf. Netflix Media Center, n.d.; cf. Heeke, 2017)

In 2000, Netflix introduced a personalized movie recommendation system for the first time. It used ratings from Netflix members to provide new movie suggestions to users and predict them better to all Netflix members. In the following years Netflix kept on improving its market situation and made its initial public offering. Over the years the number of Netflix members rose continually. Between 2002 and 2005 the company increased its client base to 4,2 million members. From 2007-2010 Netflix offered the possibility to watch series, movies and documentation by video streaming anytime on every gadget e.g. on the Xbox 360, Blue-ray disc players, PlayStation3, Nintendo Wii and Apple products. Since 2002 the Netflix stock gained by around 9925 percent. In 2012 Netflix won they first Primetime Emmy Engineering Award and became available in the United Kingdom, Ireland, Europe and in the Scandinavian Countries. The first own original production series ‘House of cards’ was published in 2013 with star director David Fincher. (cf. Netflix Media Center, n.d.)

A less successful year was 2011 as Reed Hastings tried to cut the part of the DVD distribution from online streaming business and to continue under a different name called ‘Qwickster’. His goal was to bundle the resources and responsibilities from Netflix to make gains at the forward looking and promising online market. Furthermore, it was an answer from Netflix of the reduced members and the loss at the stock market after a preceding increase in price of the membership fee around 60 percent. The separation of the two category groups was not the solution of Netflix’ problem. It followed a lack of understanding and upset by users who used both platforms and needed to register on both with different accounts and had to pay separately. After a few months Hastings took the consequences and stopped the chapter ‘Qwickster’ before its commercial launch. (cf. Heeke, 2017; cf. Netflix Media Center, n.d.)

The next years until 2017 Netflix worked on becoming available in more countries. Nowadays Netflix is available worldwide and the leading internet entertainment service. 109 million members in over 190 countries use Netflix daily. The content ranges from original series, documentaries and films and it can be displayed on a lot of devices with access to the internet. (cf. Netflix Media Center, n.d.; cf. Netflix Financial Statements, 2017)

3.1. Offer and subscription variety

At Netflix one can choose between three different streaming subscriptions. The selected subscription determines the number of gadgets you can stream Netflix simultaneously. Netflix provide a basic-, standard-, and a premium subscription. With the basic subscription members can watch movies and series on only one device in standard definition (SD). The price for the SD streaming is 7,99€ a month. The standard subscription allows the member to watch movies and series on two devices at once in high definition (HD) (if it’s available) and it costs 10,99€ per month. The last subscription is the premium subscription. You can watch in HD and ultra HD (if it’s available) and on four devices at the same time. The price for the premium subscription is 13,99€ per month. Also, one can download movies/series to a smartphone or tablet with all subscriptions. In the USA, a DVD subscription plan is also available. The customers in the USA can either choose a DVD subscription or they add a DVD subscription to the current streaming subscription. Additionally, Netflix offers a free month of testing. Moreover, the subscription models and prices of Netflix may be adjusted from time to time because of increased variety of more movies and series, new product features or other improvements.

Netflix’ offer is different depending on region and it can change after a certain time. The more the customer is watching, the better gets the recommendations from Netflix for series and movies the customer could possibly like. In addition, the member can play, stop and continue without commercials. The customer can also download the Netflix App on their mobile phone (iOS or Android) or their computer/tablet (windows 10) and can then watch series or movies without internet connection. Another advantage for customers is that you can quit the subscription whenever you want without a period of notice. (cf. Netflix help., n.d.; cf. Maciej, 2017)

3.2. Business Model

The target audience of Netflix includes women and men aging between 17 and 60 and households with an income of $30.000 or more. In terms of psychographic, users are divided into three different groups. [AB6] Netflix gives them legal access to a movie and TV show with a personalised suggestion algorithm, all without interruption through advertising.

The Business segment of Netflix consists of ‘domestic streaming’, ‘international streaming’ and ‘domestic DVD’ (digital versatile disc). The domestic streaming segment includes users from the United States. The monthly subscription fees refer to services that consist solely of streaming content. The international streaming segment also refers to the monthly membership fees for streaming services of members who are not from the united states. The last segment is the domestic DVD segment, which focuses exclusively on monthly subscription fees for DVD by mail services inside the USA. (cf. Netflix Annual Report, 2016)

Netflix’ revenues are unevenly distributed among the three segments. The table below shows that most of the revenue in 2017 was generated by the domestic streaming segment with $4,522,751 billion. With international streaming, they generated $3,538,862 billion. The smallest revenue was generated with domestic DVD with $345,345 million. (cf. Pahwa, 2017; cf. Netflix Annual Report, 2016)

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Figure 2. Revenues of Netflix (Own figure according to Netflix Annual Report, 2016)

3.3. Management

Reed Hastings, the co-founder and CEO of Netflix received a BA (Bachelor) from Bowdoin College in 1983 and a MSCS (Master) in Artificial Intelligence from Stanford University in 1988. He founded ‘Pure Software’ in 1991. ‘Pure’ made tools for software developers and it was sold to ‘Rational Software’ in 1997. Hastings is involved through various membership of non-profit organisations. Especially, he is an active educational philanthropist and was a member on the California State Board of Education from 2000 to 2004. Hastings claims he wants to spend most of his earnings, he has made with Netflix, for charity. At the moment, he is on the board of serval educational organisations, for example the Hispanic Foundation of Silicon Valley, California Charter School Association (CCSA), DreamBox learning, Knowledge is power program (KIPP) and Pahara. He is currently the board member of Facebook and was on the board of Microsoft from 2007 to 2012. (cf. Netflix Median Center Management Team, n.d.; Heeke, 2017)

3.4. Corporate and employee culture

The motto of Reed Hastings is “Freedom and Responsibility” and he rejects the bureaucratic structure of big companies. Netflix claims to have an unusual way of working together to entertain their employees. Values in employee culture are characterized by integrity, excellence, collaboration and respect. The core philosophy of Netflix is ‘people over process’ and is characterized by five points: 1. Encourage independent decision-making by employees, 2. Share information openly, broadly and deliberately, 3. Be extraordinary honest with each other, 4. Keep only our highly effective people, and 5. Avoid rules. Netflix is known for its special way of employee culture. At Netflix itself, there is always talk of the ‘Dream team’, which makes the company so successful. It is said that employees receive an above-average salary and that divorced employees receive a high severance payment. However, getting started with Netflix is more difficult and only brilliant heads are sought. Netflix is also known for its innovative approach to working hours. The employees are responsible for their holiday or illness regulation according to the motto “take as much vacation as you want”. At the end of 2016, Netflix had approximately 4.700 employees, of which 4.500 full-time employees, and this number includes 1.300 temporary employees. (cf. Netflix Jobs, n.d.; cf. Heeke, 2017; Netflix Annual Report, 2016)

4. Presentation of the Video-on-Demand market

The market by Netflix established is the Video-on-Demand (VoD) market. The name ‘Video-on-Demand’ already describes the system. It is a modern dissemination from digital media. The system allows users to watch and select video content of their choice over cable or the internet. The users can use the system when they are on the road with mobile devices like a mobile phone or a tablet and this mobile access gives the users a high flexibility. (cf. Video on Demand Test, 2017; cf. Technopedia, n.d.)

In the commercial Video-on-Demand market are three different models: Advertising-financed (AVoD), Transactional (TVoD) and Subscription Video-on-Demand (SVoD). An example of the first group is the NOW-offers from the German RTL media group. Their content is mostly online and free for seven days and is financed via advertising. At the Transactional VoD the content is purchased separately, that means that the customer just has to pay, when he is watching something. This business model is being used e.g. by iTunes or Videoload. Netflix, Amazon Prime etc. belong to the Subscription Video-on-Demand and are characterised that the customer has to make a subscription. Afterwards they can watch unlimited videos. (cf. IP Deutschland, 2014)

The turnover of the ‘Video-on-Demand’ industry was about 17.944 billion euros in 2017. According to forecasts a market volume of 25.000 billion euros will be reached in 2022, this corresponds to annual sales growth of 6,9% (CAGR 2017-2022). The biggest market segment is Video-Subscription (SVoD) with a volume of 11.344 billion € in 2017. (Statista, 2017)

4.1. Video-on-Demand in Germany

In 2016, the market volume was still around 800 million euros in the German market. The turnover increased with Video-on-Demand in 2017 around 18 percent to 945 million euros. Therefore, sales increased of series, films and short video clips on the internet for the seventh year in a row. Bitkom, expert for consumer electronics & digital media, also says that the media consumption on television is changing and viewers want to decide for themselves when to watch which films and series. (cf. Bitkom, 2017)

There are different revenue sources in video streaming. In 2017, the largest part of the turnover is generated by offering content for payment with 511 million euros. Depending on the business model (AVoD, TVoD or SVoD) the video portal provides unlimited access for films and series for a monthly fee. An example for liable pay cost video streaming platforms on the German market are Amazon Prime, Apple iTunes, Google Play, Maxdome, Sky Online or Netflix.

For the first time ever, the Video-on-Demand industry will presumably generate more turnover with subscription model then single retrieval in 2017. (cf. Bitkom (2017))

You can see on the following chart which depicts the VoD revenues in Germany from 2010 until 2017 that the advertising-funded offers will generate 434 million euros in 2017. The providers in this area are video portals like YouTube, Facebook or online-portals like T-Online, Web.de or also the website of private television transmitter. The video content creates a higher range on the internet. The mobile internet coverage is getting constantly faster and the people watch more mobile content on their tablet or cell phone. (cf. Bitkom, 2017)

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Figure 3. Video-on-Demand revenues in Germany (cf. Bitkom, 2017)

According to a ‘Bitkom’ survey at the beginning of the year 2017 77% of the German internet users from 14 years and older stream movies, TV-series and other videos on the internet. The most popular age of streaming videos on the internet is the age between 14 and 29 years with 88% and between 30 and 49 years with 90%. That shows that video streaming is especially popular in the younger to middle aged group. Among the 50 to 64-year old internet users 66 percent indicate that they stream videos online. Among the 65+ year old people this value is at 36%. (cf. Bitkom, 2017)

5. SWOT analysis of Netflix

The SWOT analysis is evaluated with the help of the SWOT Matrix. In step one the internal (company) strengths and weaknesses and the external (environment) opportunities and threats are listed.

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Tab. 1 SWOT analysis of Netflix (Own figure)

5.1. Strengths

Firstly, one of Netflix’s strengths is its large reach. Netflix is represented in 194 countries worldwide and thus the high awareness level. This means almost anyone with an internet connection can access Netflix. A large selection of series and films with good to very good quality indicates a high level of customer satisfaction.

Netflix offers their own original series that are not available for any other vendor, such as ‘Stranger Things’ or ‘Orange is the new Black’. Before, during, or after the series or films no advertisement is played. If anybody wants to become a customer of Netflix, they can decide for themselves which offer to choose and how much they want to pay for it. The price performance ratio is thus characterized by the subscription offer and also the video/audio quality. For potential customers, Netflix offers a free trial month, allowing customers unlimited access to all Netflix series and movies. In order to make the decision of the customer easier, one can quit the Netflix subscription at any time. Finally, Netflix puts a lot of emphasis on marketing. There are special teams of employees at Netflix who work on their advertising ideas. The marketing and presentation of its own brand is therefore also a major strength of Netflix.

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