Netflix in Two Acts: The Making of an
E-commerce Giant and the Uncertain Future of
Atoms to Bits
Case study analysis by Tricia Vega
History
• Netflix founded by Reed
Hastings & Marc Rudolph
in 1997
• Hastings was fed up with
paying high late fees for
his rented movies
• DVD by mail with a
monthly subscription
• Pre-paid envelopes for
return
History
• Hastings understood the power of the internet
early on:
– Netflix.com queue
– Cinematch technology
• 2007: Online streaming was added on the
website with a “Watch Now” button
• Hastings focused on the future of streaming
videos rather than DVDs
History: Competition
– Blockbuster:
•
•
•
•
Traditional brick & mortar store
added DVD by mail services to compete
Lost $4 billion in revenue with the rise of Netflix
Filed bankruptcy in Sept ’10, purchased by Dish Network April ‘11
– Wal-Mart:
• Largest retailer of DVD sales (economy of scale)
• Bought streaming outfit VUDU for $100 mil
– Amazon
– Hulu
– YouTube
– Television shows being streamed online directly by
the network
History: Competition
• Netflix’s triple advantage over competitors:
– Largest selection of titles
– Largest network of distribution centers
– Largest customer base
*Economy of scale advantage*
** Netflix was also had the first-mover advantage**
History: Initial Success
• Netflix was the ranked #1 ecommerce site based on
customer satisfaction from
2005-2011
• Success built on HUGE
selection of films (about
125,000 titles). Brick & mortar
stores typically have only
3000 titles
• Obscure, older titles
accounted for 75% of revenue
History: Initial Success
• Capitalized on “long-tail” selection, where a company
can make a huge profit off of a near limitless
selection. Netflix was able to do this because of
warehouses and lack of costs associated with brick &
mortar stores and streaming.
Systems & Operations Leading to Success
•Warehouses
–58 strategically located
distribution centers in US
–2 day turnaround
–Centers handle 1.8 mil
DVDs/day
–Costs $300 mil/yr to run
–Coordination with Cinematch
to recommend titles that are
available
Netflix’s VP of Operations, “Anyone can replicate the Netflix
operations if they wish. It’s not going to be easy. It’s going to
take a lot of time and a lot of money.”
Systems & Operations Leading to Success
Systems & Operations Leading to Success
• Cinematch
– Netflix’s recommendation system
– “Collaborative Filtering”: software monitors trends
among customers and uses this data to
personalize a custom experience
• Ex: Pandora, book recommendations on Amazon
• This tech lead to a low turnover of customers,
high amount of recommendations by users
Systems & Operations Leading to Success
• DVD Streaming:
– Develop their own set-top box vs partnering with other
existing devices
– Accessible in over 200 devices
• Increases audience
– Roku: Netflix’s set-top box ($99)
• At its height, Netflix accounted for 30% of North
America’s internet traffic!
The Downfall Begins
• Hastings always understood the world was
moving from “atoms” to “bits”: The idea that
many media products are sold in containers
(atoms) eventually switch to bits. Physical
inventory is eliminated.
• What other products have moved from atoms
to bits?
The Downfall Begins
• July 2011: Profits, customer base, and stock
price are at an all time high
• Wanting to maintain the first mover position,
Hastings announces Netflix will split into to
separate entities: 1) online streaming and 2)
Qwikster, the DVD by mail segment
• Original monthly subscription of $10 was split
into two separate $8 subscriptions
• Website was also split into two
The Downfall
• Customers were very unhappy with the
change
• Hastings went from industry leader to
laughing stock
• Netflix eventually dropped Qwikster, but held
the price increase
The Downfall
• Within 3 months, Netflix lost 800,000
customers, stock price decreased from $304 to
$75, and market value lost $12 billion
Since the downfall…
• The end of 2011 saw Netflix adding 610,000
subscribers in the US by the end, bringing the
subscriber count to 24.4 million.
• Netflix continues to work towards making
deals with studios to be their exclusive
provider
• Netflix launched its own series, House of
Cards
• Netflix had hopes of global expansion, but has
since held off
Current Events
• On April 23, Netflix announced a stock price
surged 25%
• This was attributed to the 2 million new
subscribers during the first quarter of 2013
• Netflix shares are now up 125% this year,
making the company the best performing
stock in the S&P 500 so far in 2013.
Current Events
• Netflix will be adding new original series to their lineup, hoping to eventually have 20+ shows
• However, Netflix is launching all of its new shows at
once- is Hastings moving too fast once again??
• Some suggest that Netflix should charge by the hour
of usage, and not a flat monthly rate (to increase
revenue). This may further anger viewers, however.
Current Events
• Netflix Introduces New Pricing Plan: Another
Qwikster Disaster or the Right Move?
– Netflix is proposing a new pricing plan in order to
tackle those people who are streaming without
paying (ie using someone else’s password).
– The streaming subscription would rise from $7.99
a month for 2 simultaneous streams to $11.99 a
month for 4 simultaneous streams
– Is it worth it to anger customers once again after
the Qwikster debacle?
Recommendations
• Hastings should move slower
• Continue to be compatible with as many
devices as possible, including new devices.
• Fight for position as the cost leader, maybe
offer a yearly subscription plan like Amazon
• Avoid any moves that would further annoy
customers
Multiple Choice Questions
• Netflix introduced Qwikster in:
a) 2010 b) 2011 c) 2012 d) 2009
• Netflix can be streamed on which device:
a) Roku b) iPad c) Play Station d) all of the above
• Netflix is difficult for competitors to duplicate
because:
a) Most titles are exclusive to Netflix b) It is
an economy of scale c) Netflix owns the rights
to stream films online d) Netflix owns its own
series