Individual Case Write up – Netflix
Almost 20 years ago this August, Reed Hastings and Marc Randolph revolutionized the
movie delivery industry by disrupting the system as we knew it. As consumers, we were
trained to believe the only way we could obtain the latest movies was to drive to the nearest
Blockbuster or Movie Gallery, and archaically rent a move that if not retuned on time, would
incur a late fee. Netflix gambled on early adopters to the DVD market and focused solely on
offering a DVD by mail service. Although highly profitable by keeping their prices low and
the convenience unmatched, being a disrupter or a leader in a market tends to place large
targets on one’s back. The true test for Netflix was continuing to be a leader in movie
delivery services. As the market needs changed over the next 20 years, so did their
services.
So how was Netflix able to beat industry giants like Blockbuster? The key to this disruption
was through constant innovation and adaptation of their business model, which became
their main competitive advantage.
Did Netflix do the same jobs for consumers that Blockbuster did? How did this
evolve over time?
Although Netflix and Blockbuster both serve the same consumer needs, Netflix was vastly
different in terms of its offerings to consumers- particularly in the beginning. They
revolutionized a market segment that had not been previously marketed to, and that in itself
is a key differentiator between the companies’ distinguishable “jobs”.
Netflix saw an opportunity with a new and growing market segment. Prior to its founding, an
individual would have to go to great lengths to find an “unpopular” movie or one that was not
recently released. Once online sales became more prevalent, tracking down the original
copies became more obtainable, but at a price. It was very clear to Netflix that consumers
were not willing to pay full price for movies, in particular older ones that were not in high
demand. They realized that although their market may be small (consumers with DVD
players in home interested in a plethora of movie options), this tapped into a bigger market
segment that they could've ever anticipated. With the increase of DVD player sales in
homes increasing from 5% to 13% from 1999 to 2000, it became evident that the adaptation
of DVD players was growing at a much faster pace than other technologies had in previous
years. It was at this point where Netflix posed a direct threat to Blockbuster by offering
similar services with more convenience. By eliminating late fees, developing a queue of
movies for the subscriber, and increasing their number of distribution centers, Netflix could
guarantee next day delivery to over 90% of their national subscriber base. It became almost
a no–brainer to subscribe rather than deal with late fees and driving to drop off movies.
One of the biggest positives of the Netflix business model doesn't even come from their
strategic success, but in fact the lack of success or strategy from Blockbuster. In the words
of Hastings in 2005: “We’re just thankful Blockbuster didn’t enter in four years ago.” 1
Blockbuster was very confident that Netflix did not pose any imminent threat to their
business model, at least for the first five years. It was not until Blockbuster’s 2003 annual
report where they made a comment about entering into the online distribution market.
Compare Blockbuster’s and Netflix’s profit models. How might the difference affect
the respective company strategies?
In the early years at Netflix, the profit model was a DVD by mail and subscription model.
Blockbuster was direct rental for a flat fee from its brick and mortar retail stores, and
consumers would incur late fees if not return on the specific requested day. Netflix was one
of the first companies to provide this service, because the business model relied on
consumer homes owning a DVD player. However, Hastings believed this to be a benefit,
and it significantly served their business model in the early days.
Following Porter’s Model and the five forces as it relates to Netflix in the beginning, the
potential for new entrants was moderately low, in large part due to the high cost and capital
requirements resulting from stocking and products needed. The threat of substitutes (such
as attending a movie, watching television, or surfing the web) was very high, as Netflix had
to truly consider keeping costs low in order to be competitive. The bargaining power of
buyers is also pretty high. Although offering a different service structure than Blockbuster,
Netflix must be price sensitive to buyer’s needs and expectations in order to gain market
share. Lastly, the bargaining power of suppliers is also high. The movie rental industry relies
on the studios as their suppliers. Netflix lessoned this bargaining power with the hiring of
Ted Sarandos, who as CCO, worked closely with studio execs to form strategic
partnerships, inevitably helping all parties involved.
As we fast forward, Netflix’s profit model continues to fly under the radar of competitors
such as Blockbuster. They were continuing to gain in market share while also making
remarkable technological advances. By diversifying services packages (adding Video on
Demand, original content streaming, etc), and including the additions in the original
subscription, Netflix clearly became a disruptor in how we obtain movies and digital content
for our viewing pleasure.
Where will the money be in the VOD world?
Reed Hastings had once said that Netflix’s purpose was not to provide DVD rentals through
the internet, but rather to allow for the best home video viewing for its customers (Shih
2009). Netflix entered into the Video on Demand (VOD) market in 2007, and keeping the
basis of their original business model, offered it as an addition to the monthly packages.
The significant cash flow for Netflix came as a result of technological improvements in
internet capabilities, beta’d by many of the company’s internal investment in great people.
This along with a global expansion in 2010 propelled the company to the industry leader in
streaming technology. Moving forward, Netflix must continue to be apt to consume
preferences. The implementation of original content from Netflix and more international
market penetrations have shown a 56% rise on profits and a global customer base of 93.8
million people as of year-end 2016.1 As a true disrupter of an industry, Netflix defined a key
market segment, stayed true to its original business model, and constantly evolved and
challenged the status quo.
1
http://www.wired.co.uk/article/netflix-2016-earnings-revenue-original-shows