Netflix Leading with Data:
The Emergence of Data-Driven Video
Jason C. H. Chen, Ph.D.
Professor of MIS
School of Business Administration
Gonzaga University
Spokane, WA 99258
chen@jepson.gonzaga.edu
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
The Case
• Learning Objective: To examine the benefits and risks of
investment in analytical technology as a means for mining
customer data for business insights. Students will develop a
strategy position for Netflix's investment in technology and its
digital media business. Students must also consider how new
corporate partnerships and changes to the customer channel
model will allow the company to prosper in the highly
competitive digital space.
• Subjects Covered: Analytics; Data mining; Databases;
Marketing; Strategy; Technology
• Setting:
– Geographic: United States (2000s)
– Industry: Media & telecommunications
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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The Case Synopsis
• Description: By 2009 Netflix had all but trounced its traditional
bricks-and-mortar competitors in the video rental industry. Since
its founding in the late 1990s, the company had changed the face of
the industry and threatened the existence of such entrenched giants
as Blockbuster, in large part because of its easy-to-understand
subscription model, policy of no late fees, and use of analytics to
leverage customer data to provide a superior customer experience
and grow its e-commerce media platform.
• Netflix's investment in data collection, IT systems, and advanced
analytics such as proprietary data mining techniques and
algorithms for customer and product matching played a crucial role
in both its strategy and success. However, the explosive growth of
the digital media market presents a serious challenge for Netflix's
business going forward.
• How will its analytics, customer data, and customer interaction
models play a role in the future of the digital media space? Will it
be able to stand up to competition from more seasoned players in
the digital market, such as Amazon and Apple? What position
must Netflix take in order to successfully compete in this digital
arena?
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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Information System Strategy Triangle
~Become premier videos rental store
~Differentiation: Convenient service (quickly
delivered movies and no late fee)
~Innovation: Web-based home delivered video
rental business
Business (Firm)
Strategy
Organizational Strategy
~ Long-tail selection and variety
~ Relationship with movie houses
~ Employee management
~ Compete in physical DVD rentals and digital
streaming service market
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
IS/IT Strategy
~ Internet (technology-based)
~ Using technology to harness data
and thereby better serve customers
and vendors
N
~ Analytics (BI)
Case Questions (for Leading Data case)
1.
2.
3.
4.
5.
6.
In its competition with Netflix, where did Blockbuster go wrong? How was the
use of customer data a key differentiator? How might Blockbuster have better
positioned itself against Netflix?
What are the core competencies/capabilities of Netflix’s current business model
(primarily DVD-by-mail with an online component)? Assess the value of
Netflix’s business as described in the case.
What effects will the rise of the VOD market likely have on Netflix’s business
model? How does VOD threaten Netflix’s business? What opportunities does it
present?
Which of Netflix’s current competencies can it best leverage as a competitive
advantage in VOD? Which might be liabilities? (For this question, refer to the
“Comparing Value Drivers in the Video Rental Market” section.)
What kind of partnerships should Netflix prioritize: partnerships with content
providers or with hardware/device manufacturers?
What factors led to Redbox’s growth? How and why was it able to capture
market already dominated by big players such as Blockbuster and Netflix?
(extra from the case , you need to do research for this question, especially, if
you do not know “Redbox”)
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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#1 & #2
• 1. In its competition with Netflix, where did
Blockbuster go wrong? How was the use of
customer data a key differentiator? How
might Blockbuster have better positioned
itself against Netflix?
• 2. What are the core competencies of
Netflix’s current business model (primarily
DVD-by-mail with an online component)?
Assess the value of Netflix’s business as
described in the case.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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Movie Rental Business: Blockbuster,
Netflix, and Redbox
• Jim Keyes, CEO of Dallas-based Blockbuster Inc., was facing the
biggest challenge of his career. In March 2010 Keyes was
meeting with Hollywood studios in an effort to negotiate better
terms for the $1 billion worth of merchandise Blockbuster had
purchased the year before. In recent years, Blockbuster's share of
the video rental market had been sharply decreasing in the face of
competitors such as the low-cost, convenient Redbox vending
machines and mail-order and video-on-demand service Netflix.
• While Blockbuster's market capitalization had dropped 47 percent
to $62 million in 2009, Netflix's had shot up 55 percent to $3.9
billion that year. The only hope for Blockbuster, as Keyes saw it,
was to shift its business model from primarily brick-and-mortar
physical DVD rentals to increased digital and mail-order video
delivery.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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Why Blockbuster Lost
1• Slow & Inadequate Response
– “No Late Fees” program was misleading
– “Total Access” program was not well integrated – customers had to
maintain separate accounts for the Web-based system and the store
– Debuted in 2006!
2• Structural Issues
– Stores were franchise-based and Web site was maintained by corporate
– Capex requirements for starting a separate Web-based logistics system
to deliver DVDs by mail
3• Lack of Information Systems
– Lack of knowledge about its customers’ preferences and behaviors
– Lack of an appropriate CRM system
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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Why Netflix Won
Netflix’s core capabilities
Flexibility
Selection / Logistics
Convenience
Customer Insights
• Subscription
model – no late
fees!
• Customers could
rent and watch
movies on their
own schedules
• No physical stores
allowed deep
selection in a
wide variety of
genres
• Focus on logistics
allowed Netflix to
not only have a
broad selection
across genres and
deep selection
among popular
movies, but also
to efficiently get
films to
customers
• Mail delivery
obviated the need
to drive to bricksand-mortar stores
(new way:
delivery by
Broadband digital
streams)
• Queuing system
on Web site
allowed
customers to have
a constant flow of
movies
• Cinematch
collaborative
filtering
algorithms aided
the discovery
process – better
customer
experience
• Recommendation
system and
analytics allowed
deeper
understanding of
customer trends,
which let Netflix
adapt better and
more quickly
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
#3 & #4
• 3. What effects will the rise of the VOD market
likely have on Netflix’s business model? How
does VOD threaten Netflix’s business? What
opportunities does it present?
• 4. Which of Netflix’s current competencies can
it best leverage as a competitive advantage in
VOD? Which might be liabilities?
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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Impact of VOD Market Growth on Netflix
Business Model
Impact on Netflix business model
Opportunities
• Ability to license its platform
• Be the benchmark in movie
streaming
• Higher impact of Netflix’s
existing CRM system
Growth
of VOD
market
Threats
• Current physical distribution
channel will become a liability
• Competitors like Apple, which
has the know-how to sell online
and holds a huge customer
database and brand equity, will
become a threat
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
• Shift organizational focus
from logistic efficiency to
technology excellence
• Need to invest in owning a
platform to provide the
service
• Shift investment from
logistics to technology
• Continue to build the
Netflix brand as an instant
provider of movies from
studios to customers’
homes
• Continue to invest in
customer loyalty and CRM
solutions
11
Netflix Competitive Advantages for VOD Market
Netflix’s core competencies to succeed in VOD market
Wide
selections
Brand equity
and
customer
relationships
Netflix’s weaknesses for VOD market
Warehouse
/
facilities
Recommend
ation tool
and
customer
knowledge
Employee
overhead
Value in VOD
market
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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#5
• 5. What kind of partnerships should Netflix
prioritize: partnerships with content
providers or with hardware/device
manufacturers?
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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Partnership Prioritization: Parallel Tracking
• Netflix should not limit itself; goal is to be a service provider, not a content producer or a hardware manufacturer.
• Don’t compete in areas where Netflix is at point of parity; compete where Netflix has advantages (i.e.,
recommendation algorithm, user community). Amazon and Apple are strong in delivery and devices but weak in
recommendations and user community.
• Roll up Roku effort under umbrella of device partnerships; devote resources across all initiatives evenly.
• Becoming the service provider and content recommender on all cable platforms is a top priority.
• Assume that movie studios and other content producers will want to distribute via Netflix; it is in their best interest.
• Google needs to monetize and distribute YouTube; opportunity for strategic partnership.
Priority
Hardware
Partnerships
Software/Platform
Partnerships
Content Producer
Partnerships
Roku
Comcast and other
cable operators /
ISPs
Movie studios
Smart phone
ecosystems
Google (as a
YouTube
syndicator)
Television studios /
networks
TV
manufacturers
Hotels, airlines,
venues, and events
Independent producers
(perhaps via YouTube
fulfillment / syndication
partnership with Google)
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
14
Partnership Prioritization: Parallel Tracking
• Netflix should not limit itself; goal is to be a service provider, not a content producer or a hardware manufacturer.
• Don’t compete in areas where Netflix is at point of parity; compete where Netflix has advantages (i.e.,
recommendation algorithm, user community). Amazon and Apple are strong in delivery and devices but weak in
recommendations and user community.
• Roll up Roku effort under umbrella of device partnerships; devote resources across all initiatives evenly.
• Becoming the service provider and content recommender on all cable platforms is a top priority.
• Assume that movie studios and other content producers will want to distribute via Netflix; it is in their best interest.
• Google needs to monetize and distribute YouTube; opportunity for strategic partnership.
Priority
Hardware Partnerships
Software/Platform
Partnerships
Content Producer
Partnerships
Roku
Comcast and other
cable operators / ISPs
Movie studios
Smart phone
ecosystems
Google (as a YouTube
syndicator)
Television studios / networks
TV manufacturers
Hotels, airlines,
venues, and events
Independent producers
(perhaps via YouTube
fulfillment / syndication
partnership with Google)
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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The days of the set-top box are surely numbered – with more televisions than
ever either on walls or so slim that they sit practically next to them, there simply
isn’t the space that there used to be. But there’s still a burgeoning demand for
boxes we plug in to TVs so that we can all get access to more TV, films and
games., from Sky and Virgin Media to a host of boxes such as Apple TV. Roku is
the most popular in America and finally it’s launched in the UK.
At just 84mm x 84mm x 23mm, it’s tiny and only 85g – but there’s still plenty of
room for an HDMI connection and a wireless adapter to connect to the web.
There’s an Ethernet port, AV out and a USB port too.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
#6
• 6. What factors led to Redbox’s growth?
How and why was it able to capture market
already dominated by big players such as
Blockbuster and Netflix? (extra from the
case , you need to do research for this
question, especially, if you do not know
“Redbox”)
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
17
More on Blockbuster …
• The only hope for Blockbuster was to shift its business model
from primarily brick-and-mortar physical DVD rentals to
increased digital and mail-order video delivery.
• Consumers still made frequent purchases of DVDs at its
stores-purchases which were much more profitable for
studios than the rentals that remained Blockbuster's primary
business. Blockbuster had made efforts at making its business
model more nimble, but the results had been disappointing,
and its debt continued to skyrocket.
• By the end of 2009, the company's debt had climbed to $856
million, its share of the $6.5 billion video rental business had
fallen to 27 percent, and its revenues had tumbled 23 percent
to $4.1 billion.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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Three Essentials for a Successful Enterprise
1. Business model
a. Customers could rent and watch movies on their own schedules
b. Subscription model – friendly and no late fees!
2. Core Competency
a. Wide selections
b. Brand equity and customer relationships
c. Recommendation tool and customer knowledge
3. Execution
a. Reed Hastings, a visionary leader.
b. Understand that they should meet potential challenges while
maintaining Netflix’s profitable core business.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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Conclusion
• The key to successful business on the Internet
is not the formulation of a conceptual strategy
execution of that strategy.
but the __________
• To execute effectively, content ownership has
to be exploited..
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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