REPORT PREPARED FOR:
NETFLIX
BUSINESS MODEL ANALYSIS
BY DIGITAL GURU : Nitish Kumar
Esha Sharma
Beenu Mathews
Vladimir Baskov
POSTGRADUATE DIPLOMA IN BUSINESS
APMG 8119: DIGITAL ENTERPRISE
2015
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Netflix.com
“We promise our customers stellar service, our suppliers a
valuable partner, our investors the prospects of sustained
profitable growth, and our employees the allure of huge
impact.”
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Netflix.com
• Netflix was founded in 1997 by software executives Reed Hastings and Marc Randolph
to offer online movie rentals mailed to the customers’ doors.
• Netflix is now the leading internet subscription service for streaming movies and TV
shows with over 62 million members in over 50 countries enjoying more than 100
million hours of content per day.
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Services
•
•
•
•
•
•
Netflix provides a diverse and customizable library of movies
and television shows available for unlimited streaming or
mail delivery at low cost and user-convenience.
Netflix customers are avid movie and television watchers
that are not very particular in the viewing selection. They
value easy and immediate access, as well as the portability
and transferability of the product.
Consumers are typically younger and tech-savvy. Netflix has
an international audience.
Streaming is available online, on mobile devices, and game
consoles such as the Wii, Xbox, and PlayStation.
Netflix retains their customers by continuously growing their
library of content, producing Exclusive Netflix content such
as ‘House of Cards’ and ‘Orange is the New Black’.
Netflix’s ability to recommend content to watch based on
user interests and preferences is a unique customization
feature.
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COMPETITORS
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Market Share
44.50%
45%
40%
36%
35%
30%
25%
13%
20%
15%
6.50%
10%
5%
0%
Netflix
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Amazon
Hulu Plus
Others
• Netflix launched its operations in New Zealand in March 2015. Netflix
launched its service at a cost $9.99 a month with one month free
subscription. This is a lot cheaper than its competition in New Zealand. It’s
half the price of Sky TV's Neon, and also cheaper than Spark's $12.99/month
Lightbox and the $12.99/month Quickflix.
• Netflix will be the first streaming video on-demand service to offer ultra high
definition, or four times the picture quality of HD. Sky TV's Neon is still on
standard definition (SD), let alone HD or Ultra HD.
• Netflix also brought its multiplatform approach to NZ, which includes making
its content available through apps on various brands of smart TV, Xbox,
PlayStation 4, Nintendo Wii, iOS and Android phones and tablets, Google
Chromecast and Apple TV.
• Quickflix, the pioneer in making its content available through multiple
devices in NZ can’t match Netflix range of options.
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Netflix Business Model Canvas
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Digital Business Model
• Netflix works on a classical
service business model in the
video-on-demand industry
where users of the service and
payers are the same.
• Netflix was the first of its kind
who offered entertainment
content using video streaming in
exchange for subscription fee.
Netflix is a B2C subscription
business and does not carry any
advertising.
• Netflix allow the account holder
to register up to six devices per
account.
Netflix Digital Tribes / Target
Customers
•Netflix tries to cater to everyone who
has an excess to internet. In regards to
demographics, Netflix targets both
males and females between the ages of
17-60.
•Netflix’s products are targeted towards
the lower-middle class and up.
•Netflix offers movie and TV titles that
cater to different racial and ethnic
groups.
•In regards to psychographics, Netflix
appeals to people who are too busy to
go out and shop for desirable titles
•Netflix also targets those who are
movie buffs and TV fans.
Netflix Revenue Model
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NETFLIX REVENUES BY BUSINESS SEGMENTS
Netflix has three operating segments: Domestic
streaming, which refers to the content streaming
business in the US; International streaming, which refers
to the streaming business from countries other than US;
and Domestic DVD, which refers to the DVD-by-mail
services business in the US.
In 2014, Netflix generated $5.5 billion of total revenues.
Of these total revenues, Netflix generated:
• $3.4 billion revenues, 62.3% of the total, from the
domestic streaming business;
• $1.3 billion revenues, 23.8% of the total, from the
international streaming business. The share of
international streaming revenue increased from 8% in
2012 to 23.8% in 2014;
• $765 million revenues, 13.9% of the total, from
domestic DVD business. The share of domestic DVD
business declined from 31.5% in 2012 to 13.9% in
2014.
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Netflix Quarterly Revenues
• In quarter two of 2015 Netflix reached
total revenues of $1.64 billion, up
22.7% yoy, from $1.34 billion in Q2’14.
• The quarterly revenues yoy growth
remains steady. Netflix continues to
make shift towards providing the
exclusive content and expanding the
original content. It helps them
differentiate the service and motivates
the users to join Netflix.
• Nearly ninety percent of Netflix
members have engaged with Netflix
original content. Netflix continues to
invest in not only series, documentaries
and stand-up but also original feature
films.
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http://www.expedia.co.nz
Netflix quarterly profits
• Netflix Q2’15 operating profit reached $74.9 million, down from $129.6 million in
Q2’14.
• The Q2’15 operating margin reached 4.6%, down from 9.7% in Q2’14.
• Netflix Q2’15 net profit reached $26.3 million, down from $71.0 million in Q2’14.
• The Q2’15 net margin reached 1.6%, down from 5.3% in Q2’14.
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Cost Analysis
Netflix spent $607 million, $472 million, and $270 million on marketing, technology and
development, and general and administrative expenses respectively.
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Key Costs & Operating Expenses Areas:
•
Cost of Revenue: This includes content expenses and
other cost of revenue. For the domestic and
international streaming segments, content expenses
include amortization of the streaming content library
and other expenses associated with the licensing and
acquisition of the streaming content.
•
Streaming Delivery: 1.8GB of date is used to watch a 2
hour movie and it would cost 6 cent for Netflix to
deliver a movie. 3GB data is used to watch the HD
movies and it would cost 9 cent for one HD movie.
•
Content: In 2014, Netflix’s spend more money on
programming than HBO, Amazon and Hulu. It is
estimated that Netflix will spend $US5 billion in 2016
for programming. Because of this huge cost Netflix has
invested more money to generate original content. But
the implementation of original content is very
expensive and Netflix cost $100 million dollars for first
two seasons of House cards alone.
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Key Costs & Operating Expenses Areas:
•
Marketing: Advertising expenses include promotional
activities such as television and online advertising.
Payments to affiliates and device partners include fixed
fee and/or revenue sharing payments. Marketing
expenses are immaterial for the domestic DVD
segment.
•
Technology and development: These consist of payroll
and related costs incurred in making improvements to
the service offerings, including testing, maintaining,
and modifying the user interface, recommendation,
merchandising, and streaming delivery technology, as
well as the telecommunication systems and
infrastructures. These also include the costs associated
with computer hardware and software.
•
General and administrative: These consist of payroll
and related expenses for corporate personnel, as well
as professional fees and other general corporate
expenses.
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Key Costs & Operating Expenses Areas:
Location
Los Gatos,
California
Estimated Square Footage
250,000
Lease Expiration Date
March 2018
Primary Use
Global streaming corporate office,
general and administrative, marketing
and technology and development
Beverly Hills,
California
79,000
Santa Clara,
California
23,000
October 2016
Global streaming customer service center
Columbus, Ohio
90,000
August 2016
Domestic DVD receiving and storage
August 2018
Global content acquisition, marketing
and general and administrative
center, processing and shipping center
for the Columbus area
Fremont,
California
57,000
March 2019
Domestic DVD corporate office, general and
administrative and technology and development
Property: Netflix don’t own properties and they prefer to lease the properties for the primary usage.
They entered into the lease agreement for the global distribution centre. And expiration of the lease will
be a huge cost for Netflix.
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Financial Risk
•
•
The Netflix’s revenue and expenses is highly co related with the Euro, The Canadian Dollar, Brazilian
Real and The British pound. So there will be a negative influence on the revenue and net income of
company which is expressed in US dollar due to the changes of exchange rate.
Netflix cash from operations continues to be negative due to Netflix investments in originals which is
working capital intensive
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VALUE CREATION
Netflix has a clear view of it’s target market and customers, and has concentrated
on markets where they have strength and more competitive edge. Digital
technology is changing the way companies work and the way customers expect
them to work. Many opportunities exist to profit from digital business models. But
building radically new ones can be expensive, difficult, and highly risky. There are
many opportunities to do something perhaps less revolutionary, yet still highly
valuable – evolving the business models using digital technology.
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Digital business model
VALUE CREATION
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What makes the difference ?
The Role of Innovation
Future
In today’s age, internet streaming is
replacing the traditional TV and
apps are replacing channels. Netflix
is leading the way to internet TV.
Netflix not only optimized their
mail delivery rental service, but
were first movers in the internet
rental subscriptions market and has
now become the dominant player.
•
Netflix has been able to capture
consumer attention and keep it
through their growing library of
shows and movies, as well as their
production of original content. With
so much content at an affordable
cost,
Netflix is successful and
growing.
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Customer Growth
Netflix strives to grow 60-90 million
members in the domestic market
over 5 years (2015-2020) based on
upon their past trajectory and
continued growth of internet video.
•
Domestic Margin Structure
Netflix will grow content spending
and marketing slightly slower than
they grower. Over 5 years (20152020), they want to move the 30%
contribution margin close to 40%.
•
Original Content
Netflix will continue to grow their
original content offering as they
gain scale and confidence. The goal
is to premiere a new original show
or season every two and a half
weeks (20 new shows or seasons
per year).
•
Global Expansion
Netflix
wants
to
expand
internationally as fast as possible
while staying profitable. Expected
completion of global expansion is
2016. They should return o growing
global profits in 2017 and beyond.
Reference
•Albattikhi, M. (2015). Business Model Canvas Workshop. Retrieved from
http://www.slideshare.net/MohammadAlbattikhiMB/business-model-canvas-workshop47361091.
•Business model “Canvas”. Retrieved from
https://en.wikipedia.org/wiki/Business_Model_Canvas.
•Follow, S. 2015. The economics of Netflix. Retrieved from https://stephenfollows.com/theeconomics-of-netflix/.
•Lindsay, MM. (2014). Netflix: Target Market. Retrieved from
https://storify.com/mmlindsay/netflix-target-market.
•Mikhalkina, T. (2014). Netflix Business Model. Retrieved from
http://www.cass.city.ac.uk/data/assets/pdf_file/0017/220517/Netflix.pdf.
•Netflix. Retrieved from https://en.wikipedia.org/wiki/Netflix
•Netflix (2015). Retrieved from http://ir.netflix.com/index.cfm.
•Wikinvest.com. Retrieved from http://www.wikinvest.com/stock/Netflix_(NFLX)/Filing/10K/2014/10-K/D18086827#sC6B9E5BE634C5CF0F4ED0127B0AB0FF3
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