1 Adam Monticollo Professor Elkes Microeconomics 11/11/13 Netflix Netflix (Ticker Symbol-­‐ NFLX) is a publically owned company that is most known for its video rentals and online streaming of movies and TV series. Netflix (SIC Code-­‐ SIC 7841 Services-­‐Video Tape Rental) is the world’s leading television network, with over 100,000 titles for rental and 40 million members in 41 countries, which explains why movie stores, such as Blockbuster, are going out of business (BarChart). Netflix was founded in 1997 and conducts business in countries outside of the United States such as Canada, Mexico, most of South America, United Kingdom, Ireland, Netherlands, and other Nordic countries (Netflix). Centers around the nation allow for subscribers to receive their order of a DVD the next day, which is a very important part of keeping customers happy with the product (Valueline). The company does not have due dates, late fees, shipping fees, or pay-­‐ per-­‐ view fees. Netflix also has its own personalized system which it allows the user to select for specific movies he/she likes which will result in recommendations of other movies that are similar to their favorites or in the same genre. When Netflix entered the market they began as a small firm in an oligopolistic market with some other well-­‐known firms such as Blockbuster, Hulu, Amazon, On Demand, and HBO. This quickly began to change as technology improved and movie streaming from the Internet became a popular item. Today, Netflix is known to be in a monopolistic competition because competing products act as substitutes for each other (Devan). The competitors remain the same even with a change from an oligopolistic market to the monopolistic competition. In this monopolistic competition, Netflix maximizes their profit 2 when marginal revenue equals their marginal cost. Their pricing is only affected by what consumers are willing to pay, or their demand for the product. What makes Netflix superior to their competitors is the way they are able to successfully market their product to their fullest potential. One specific way Netflix markets their product is by creating ubiquity. This means that Netflix found ways to distribute content in the formats its customers wanted such as through DVDs, tablet, smart phone, etc. (Bodnar). The interesting part about Netflix is the idea that a consumer must pay $9.99 a month to rent one DVD at a time as well as to stream live videos online. The trick is that a consumer will have to pay $15.98 per month to keep both of these services. This is a 60 percent increase in price which can happen just overnight (McKenzie). Netflix currently builds its stock through direct purchase and revenue sharing with distributors, allowing for it to boom in the market (Valueline). Netflix’s owner and CEO, Reed Hastings, has stated that the stock is absolutely too high and is therefore overvalued in the market, which has and will continue to result in a major collapse in the market for his shareholders (Tillier). Regardless of this, the stock has dramatically increased for about a year in addition with the company’s improvement in its operating performance. The company continues to show a strong balance sheet and probably will until something else takes its place (Valueline). As streaming customers continue to grow, especially in Europe and South America, so too will the popularity of the company’s content offerings. The current stock value per share is $341.50, which is 20 percent higher than the stocks price in September of 2013 (Valueline). An article that best illustrates some of the common microeconomic principles learned over the semester about the new and upcoming statistics states that it is more 3 profitable for Netflix to stream to its United States customers instead of sending DVDs to users (Roettgers). Therefore the demand for DVDs has lowered exponentially and the demand for streaming videos online has increased greatly. For the first time in Netflix’s history, in the first quarter, Netflix made money off of strictly streaming (Roettgers). This allowed the economies of scale to arise because higher production levels allowing specialization. This news allowed for Netflix to shutdown distribution centers by decreasing them from 58 to 39 around the United States (Roettgers). The improvement in technology most definitely has something to do with this. It seems as though things are beginning to be shared online more then ever before, causing demand in DVD players to decrease. This also means that marginal cost will be increased because Netflix was able to cut
costs. Another interesting aspect this article points out is the idea that Netflix’s success in
streaming could accelerate the decline of its DVD business (Roettgers). This means that Netflix
would be using business-stealing externality from itself, which will cause Netflix to lose a
specific share in one part of the market, but will add to another aspect in their market. Another
very important fact as stated in this article is in January 2014, the Postal Service is going to
increase postage fees again (Roettgers). This largely affects demand because Netflix is going to
have to pay extra fees to deliver DVD’s that they once did not have to pay. This will also lead to
a depletion of distribution centers throughout the United States, causing Netflix to become more
and more of an online DVD streaming type of business. 4 Works Cited McKenzie, Matthew. "Has Netflix Lost Its Mind?" All Business. Dun &
Bradstreet, n.d. Web. 20 Nov. 2013. <http://www.allbusiness.com/salesmarketing/advertising-marketing-pr/15859424-1.html>.
Napoli, Michael. "Netflix, Inc." Valueline. Value Line Publishing, 15
Nov. 2013. Web.
<http://www3.valueline.com/secure/vlispdf/stk1700/vlispdf/f17604.pdf>
.
Tillier, Martin. "If Netflix (NFLX) Is Overvalued, Where Does That
Leave These Three?" NASDAQ.com. N.p., 23 Oct. 2013. Web. 20 Nov.
2013. <http://www.nasdaq.com/article/if-netflix-nflx-is-overvaluedwhere-does-that-leave-these-three-cm290601>.
"Netflix, Inc. Stock Chart." Yahoo Finance. N.p., 20 Nov. 2013. Web.
20 Nov. 2013.
<http://finance.yahoo.com/echarts?s=NFLX+Interactive#symbol=nflx;ra
5 nge=3m;compare=;indicator=volume;charttype=area;crosshair=on;ohlcv
alues=0;logscale=off;source=undefined;>.
Roettgers, Janko. "Netflix May Ditch DVDs Sooner Rather Than Later."
Bloomberg Business Week. N.p., 21 Oct. 2013. Web.
<http://www.businessweek.com/articles/2013-10-21/netflix-may-ditchdvds-sooner-rather-than-later>.
Devan, Alexis. "Netflix and Blockbuster: Video on Demand." Yahoo
Contributor Network. N.p., 10 Apr. 2010. Web. 20 Nov. 2013.
<http://voices.yahoo.com/netflix-blockbuster-video-demand5779634.html?cat=15>.
Bodnar, Kipp. "Inbound Hub." 5 Marketing Lessons from Netflix.
Hubspot Inc., n.d. Web. 02 Dec. 2013.
<http://blog.hubspot.com/blog/tabid/6307/bid/12694/5-MarketingLessons-from-Netflix.aspx>.
"Overview." Netflix :. N.p., n.d. Web. 01 Dec. 2013.
<http://ir.netflix.com/>.
"Netflix Inc." NFLX. BarChart, n.d. Web. 02 Dec. 2013.
<http://www.barchart.com/profile/stocks/NFLX>.
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