www.netflix.com
Case Study
BUS 550
The Contemporary Firm
Aaron Contreras
CSUCI
Agenda
Company History
 Company Financials
 Five Influencing Forces
 CineMatch
 Netflix’s Quantum Theory
 Challenges
 Conclusion

Who is Netflix
Netflix is a internet TV company providing
online streaming content as well as DVD/Blu
Ray rentals direct to home
 CEO Reed Hastings
 Main headquarters located in Los Gatos,
California
 2,022 Employees at end of 2013

Company Timeline
1997 - NetFlix.com founded to offer online movie
rentals
 1999 - Launches subscription and selling service
 1999 – Secures $30M in investment capital from Group
Arnault
 2000 - Launches personalized movie recommendation
service CineMatch
 2002 - IPO with ~850,000 members
 2006 – Announces Netflix Prize $1M for 10%
improvement in recommendation accuracy

www.netflix.com
Company Timeline,
cont.






2007 – Netflix introduces streaming
2008 – Partners with consumer electronic
companies to incorporate Netflix streaming
on their devices
2010 – Launches in Canada
2011 – Launches in Latin America and
Caribbean
2011 – Announces Qwikster a separation of
online streaming services and DVD rentals
2013 – Original programing is started with
“House of Cards”
www.netflix.com
Company Financials
•
•
•
•
•
Company is traded under NFLX:NYSE currently valued $322.08 (4/26/14)
Had $4.3B in Revenues in 2013
Spent over $3.04B in content in 2013
As of Q1 2014 48M worldwide subscribers
Announcement of Qwikster results in a 60% devaluation of Netflix stock
Announcement of Qwikster
www.yahoo.finance.co
m
Netflix evolved a progressive view on
culture and talent management
• Personal Management
– Hire the right people
• Have them use their logic
• If they hire the wrong person they part ways quickly
• Performance Reviews
– Elimination of Formal Performance Reviews
• Implemented peer reviews
• Team Rapport
– Strategy is understood by the team
• Company Culture
– Knowledgeable employees
• Understand the drivers of the business
• Human Resource
– Innovative approach
• Vacation and Absences are not tracked
Five Competitive Forces on Netflix
Bargaining Power
of Suppliers
- Film industry
- Original Content
Developers
Threat of Substitute
Products
- Pirated On-line Content
- Gaming
Threat of new
entrants
- Cost of entry is low
Rivalry of
competitors
- Amazon Prime
- Hulu Plus
- Redbox
Bargaining Power
of new buyers
- Services for
competitors is
relatively similar
Is Netflix threaten by new entrants

Supply side Economies of Scale
◦ Cost relatively equal, lack of net neutrality may make it easier for smaller
firms
Demand-side benefits of Scale
•

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Netflix large content library and extensive deals allows them to leverage deals across
the industry
Customer Switching Cost
◦ Relatively Low
 Collaborative Filtering and Profiles increases consumer switching cost

Capital Requirements
◦ Large content libraries and original content drives up capital investment

Incumbency Advantages
◦ Collaborative Filtering – Netflix has more history of collecting this data on
viewers

Unequal access to distribution channels
◦ Not highly impactful

Restrictive government policy
◦ Changes in policy on net neutrality could increase or decrease entrants
Power of suppliers
Netflix has leverage content from suppliers that otherwise would
not provide profit
 By Expanding their offering in the tail end of demand increase
Netflix profitability
 Netflix also obtains independent films which are not picked up by
large film companies.
 Licensing and windows play a large role in content availability

Rivalry of Competitors

Netflix
◦ Offers Original Content
◦ Subscriptions - $119.88/yr10
www.netflix.com
◦ Highly Personalized via CineMatch, Collaborative Filtering and Profiles

Amazon Prime
◦ Offers Original Content
◦ Subscription - $99/yr10
◦ Some content available to purchase
www.amazon.com

Hulu Plus
◦
◦
◦
◦
◦
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Subscription - $95.88/yr10
Original Content
Ad supported
Personalized via Recommendation Algorithms
Associated with Networks
www.hulu.com
Video On-Demand (VOD)
◦ Offers Original Content
◦ Cost is variable
www.comcast.com
www.timewarner.com
Threat of Substitute Products

Netflix is on the benefiting side of
substitution
◦ On-line streaming is the substitute product
for in home DVD/Blu Rays as these devices
become commodities
Increased access to content through
Piracy could be an influence for Netflix
 Increase in gaming communities could
detract viewers of traditional format into
more interactive content

Recommendations – CineMatch

DVD recommendations delivered based on
ratings
◦ Initially launched as part of the DVD delivery service

Basic Principle
◦ Captured likes and dislikes of categories – Romance,
Action, Foreign, etc.
◦ Based on viewers ratings it would suggest movies
◦ Linked to distribution center and availability
◦ Claimed a 60% accuracy on selected options from
recommendations
◦ Netflix Prize ($1M) was for the first to obtain a 10%
increase in accuracy
◦ Final algorithm was not implemented
Collaborative Filtering Netflix’s
Quantum Theory
Current algorithms process petabytes of
information
 This has led to over 76,000 alt-genres

◦ Alt-genres are compilations of several larger genres
sliced into more specific targeted audiences and
tastes

Micro-tagging is done by individuals trained on
Netflix’s Quantum Theory document (34 pages)
on how to micro-tag for consistency
◦ Includes for all content measuring such things as
 “social acceptability” of lead characters
 Ending Type
 Romance
A reverse engineered version of
Netflix’s alt-genres categories
http://www.theatlantic.com/technology/archive/2014/01/how-netflix-reverse-engineered-hollywood/282679/
Profiles have enhanced the ability to
personalize content

Allowing profiles allows for more specific viewing
which allow for less mash up of preferences
www.netflix.com

Urge you to develop different profiles for different
timeframes
◦ Daytime viewing
◦ Weekend viewing

Linking these profiles to Facebook® allows for further
personalization as increased viewing experiences also
fostering a expanding network
Netflix faces a big challenge against
it’s future profitability and expansion
Obvious position for Netflix is net
neutrality

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Netflix’s monitors
and publishes the ISP
providers with the
best primetime
delivery
Netflix entered into
a peering deal with
Comcast for an
undisclosed amount
Potential impact to
customer satisfaction
Conclusions
Netflix knows your viewing habits better
than you do
 Competitors are developing with slightly
different business models

◦ Firms will need to rely on original content
and licensing agreements to edge out the
competitors

Without net neutrality larger streaming
firms may need a long term strategy on
profitability impact due to peering fees
Questions
1.
What business decision resulted in a 60% stock devaluation in
Netflix’s history?
a.
b.
c.
2.
What are potential substitutes for Netflix services/products?
a.
b.
c.
d.
3.
Amazon Prime Launch
Qwikster Annoucement
Blockbuster On-line Launch
Amazon Prime
Hulu Plus
Gaming
Pirated Content
How can peering with ISP’s affect Netflix customer service
experiences?
a.
b.
c.
Slow internet speeds
Increase cost of subscriptions
Increase streaming performance
References
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www.netflix.com
Netflix broke the rules and won according to stanford business school research. (2008, Apr 16).
Business Wire. Retrieved from http://search.proquest.com/docview/444648479?accountid=10043
Mccord, P. (2014, Jan 20). How netflix reinvented HR. Businessline. Retrieved from
http://search.proquest.com/docview/1490574625?accountid=10043
Seitz, P. (2013, Mar 13). Netflix feature will test limits of facebook sharing. Investor's Business Daily.
Retrieved from http://search.proquest.com/docview/1324599727?accountid=10043
Shalvey, K. (2013, Apr 12). Netflix files to disclose key data via social media some investors may
object follows up fast on SEC report saying facebook, twitter 'perfectly suitable'. Investor's Business
Daily. Retrieved from http://search.proquest.com/docview/1325836202?accountid=10043
The Pragmatic Theory solution to the Netflix Grand Prize, Martin Piotte, Martin Chabbert, August
2009
http://www.businessinsider.com/amazon-prime-versus-netflix-versus-hulu-plus-2014-4
Netflix Case Study: David Becomes Goliath, www.gallaugher.com, Copyright 1997-2008, John M.
Gallaugher, Ph.D.
The Five Competitive Forces that Shape Strategy, Michael E. Porter, Harvard Business Review
How Netflix Reverse Engineered Hollywood, The Atlantic, Alexis C. Madrigal, Jan 02 2014,
http://www.theatlantic.com/technology/archive/2014/01/how-netflix-reverse-engineeredhollywood/282679/