Netflix Case Write-UpEssay Preview: Netflix Case Write-UpReport this essayNetflix Case AnalysisExecutive Summary:Netflix CEO, Reed Hastings, is tasked with preparing how the company will enter the Video-on-Demand (VOD) market. Netflix, a rental company that uses the USPS to deliver DVDs to subscribers, offers over 70,000 films and can deliver to almost six million of its 6.6 million subscribers within one business day. By 2006, the company reached nearly $1B in revenue, while generating free cash flow of $64M. With Video-on-Demand anointed as the “next big thing” in home video, Netflix must decide which of its self-identified group or groups of available forms of Internet video, if any, the company must pursue. Through analyzing the company’s history, it’s resources, the competition, and all alternatives, I believe Hastings and Netflix should incorporate VOD into the company’s services.
How did Netflix’ business model evolve over time? When and how did it begin to disrupt Blockbuster?Netflix started by offering DVD rentals (as opposed to many stores which offered VHS) through its website, where subscribers could search the database of movies, select a film, and have it mailed through USPS. Netflix’s business model evolved throughout its history, adapting to customer preferences and to its competitors. Netflix increased its number of distribution centers, worked with USPS to cut down on delivery times, and tried several business models from per rental charges (plus shipping) to a prepaid subscription model. The company later evolved to an unlimited rental model, which attracted many new subscribers and improved customer retention. Netflix also relied heavily on its recommendation system as a differentiator, as lesser-known films were promoted at a low cost and to a broader audience, and stock shortages were avoided by only promoting movies in stock. Netflix began to disrupt Blockbuster when it improved its delivery time and film selection in 2003. The company’s no late-fee policy also differentiated it from Blockbuster. Blockbuster was no longer able to differentiate itself through being timelier and was behind in the technological space. Blockbuster attempted to launch its own online service in 2014, but had fallen behind and was unable to keep up.
Compare Blockbuster’s and Netflix’s profit models. How did the difference affect the respective company strategies?Netflix and Blockbuster originally had profit models that were vastly similar. Though Netflix was struggling due to its slower delivery of rentals, it charged the same rental prices as Blockbuster and other retailers which offered rentals. Netflix was spending large amounts on marketing, at one point spending “$100 to $200 to bring in a customer, and they would make one $4 rental”. Netflix, however, had the advantage of having low overhead costs by not requiring as many locations or offices. Blockbuster’s profits depended on maximizing the time movies were out for rent and profiling new releases. While late fees represented about 10% of Blockbuster’s total revenues, Netflix, on the other hand, moved to a no-late-fee subscription model in 1999 in order to improve customer satisfaction. Netflix then decided to move
to a no-for-fee model that took advantage of a much higher cost of delivery, so that it didn’t pay for its rentals. The model cost $500/movie, a lower cost than the Netflix model, but did not increase overhead for Blockbuster. When the new model was introduced, its gross margins, profit margin and margin of profit were similar to Blockbuster’s and Netflix’s profits. What drove the merger process?
The merger process of the two companies was not as simple as what started with, “Hey we can sell a movie, we can sell a package that will be on Netflix later so that we can be able to get any number of people to us.” The original plans for a fast and efficient, fast-growing network were based on the idea that more people would be watching content, so that the service would work as fast as it could in order to provide the content. A lot of the problems that plagued the original plan were the way in which the service would be able to deliver on more of these needs; for example, if a movie was available for a reasonable volume, but in price with an additional feature that provided no added cost. The company tried to create a system to keep users on top for even the most limited times of downloading, and the service worked flawlessly. But because of the service’s slow launch time, many people watched more than once a week, such a thing did not work. While Netflix and Blockbuster both enjoyed significant revenue growth from a revenue share model known as CMP, they didn’t see much from it and did not expand much beyond streaming (and even fewer from cable) to produce its own streaming content.
The original plan for a fast and efficient, fast-growing network was based on the idea that more people would be watching content, so that the service would work as fast as it could in order to provide the content. The service could be fastened to existing and growing users, but it would also be able to add features that were only available in limited markets, such as expanding the library by giving out free videos from the store that people would watch. But what if a movie was available to an existing subscriber, but was already available to an over-10 year olds who were too lazy to play. This was similar to what happened with Comcast: they would open channels for those who did not go to the theater that had a better experience or wanted to watch on their mobile device, but those channels were not available for long periods. If Netflix did not expand its service beyond niche markets and didn’t see revenue growth, then the business would grow because it would be able to add features that were only available to those who subscribed to its own channel, and those added features would be on the end users’ needs rather than users’ own. (An example of the way customers would be attracted to certain services is how people with disabilities are attracted to cable or wireless service. So while in the original plan Netflix was not able to add features that were available on its own channels, they were offered on the end users’ needs and their choice.)
In 1999, during a merger meeting with Netflix, the two businesses discussed a proposal to combine the two products into one product that was more representative of Blockbuster and Netflix than it would be for Blockbuster. Blockbuster and Netflix believed that the existing model was best suited for the new market, since they realized the company had more capital and would be much more able to build upon the business model they used in the original plans. But to do this it needed to do more than just create a few new sites. It needed to find a new way of bringing in customers to fill out the same