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Question 1. Create a Swot Analysis using the information provided
Question 2. Create a grand Strategy matrix using the information provided
Lori Radulovich Baldwin-Wallace College NFLX http://www.netflix.com It is mid-2011 and Netflix is preparing to offer subscribers a "family plan" to expand its presence on Facebook. The family plan will allow Netflix customers to add multiple users to a single account at a discounted price, similar to a cell phone family plan. Warner Brothers already offers streaming movie rentals via Facebook. Headquartered in Los Gatos, California, Netflix competes in the fiercely contested web/cable/television industry that is technologically changing faster than any on the planet. Distinctions among web, cable, and television are blurring rapidly as content is delivered seamlessly across all media channels via streaming. Netflix's stock price was $304 in July 2011 but dropped to $240 the next month amid worries about the economy, heightened competition, and S&P downgrade U.S. Treasury bonds. Bold strategic moves by Reed Hastings, chairman and CEO of Netflix, and aggressive bartering to acquire rights to air original series programs, have ballooned Netflix's subscriber base, earnings, and stock price. Netflix's stock price jumped to $175 at the end of 2010 from $55 at the beginning of 2010. If Netflix's subscriber base continues growing at current rates then content manufacturers may soon be compelled to seek Netflix as their primary content distributor for movies and TV, similar to Apple Inc. in the music industry. Even Apple now uses Netflix to stream movies to its Apple TV, iPhone, and iPad. Consumer pressure for on-demand, instant-gratification video is changing the media industry landscape and causing competitors in the media industry to become concerned about Netflix becoming a 400-pound gorilla. Cable and satellite TV service providers offer low-cost, pay-per-view movie rentals without the necessity of a computer or Internet access, but TVs now have Internet access and video streaming capabilities. A concern among rival firms is that Netflix is removing the reason for consumers to pay for expensive cable TV. History Netflix, Inc. was incorporated in Delaware on August 29, 1997, and completed its initial public offering in May 2002. By 2007, Netflix began streaming content over the Internet and is now the world's largest Internet subscription service to offer streaming movies and TV episodes over the Internet. With over 100,000 DVD titles for rental by mail and more than 20 million members in the United States and Canada, Netflix subscribers can instantly watch streaming content without commercial interruption on their PCs, Macs, Internet-connected TVs, home theater systems, digital video recorders, and Internet video players; Apple's iPhone, iPad, and iPod touch, as well as Apple TV and Google TV. Streaming is delivered using Netflix software that runs on more than 200 "Netflix ready devices" including: Blu-ray disc players, Internet-connected TVs, digital video players, and game consoles such as Microsoft's Xbox 360, Nintendo's Wii, and Sony's PS3 consoles. For traditional movie viewing, subscribers receive DVDs by mail and return them via prepaid mailers. Upon receipt of a returned DVD, Netflix mails the next available DVD on a subscriber's list. Netflix employed 2,180 full-time employees and 2,197 part-time employees as of December 2010 and had revenues of $2.4 billion. In contrast, much larger Amazon had 33,700 full-time employees and generated $34 billion in sales in 2010. Unlike rival companies, Netflix offers sev- eral subscription plans with no due dates, no fees for late returns, and no shipping or pay-per-view fees. Subscribers choose from a growing library of movie titles that can be viewed instantly and a large selection of DVDs. Customer satisfaction is assured with the customer experience being
Netflix is continually examining new ways to improve the subscriber's experience. For example, single user accounts allow single movie streaming to one location; however, Netflix is exploring ways to allow subscribers to watch multiple, simultaneous streams. Alternatively. Netflix is considering a family price that would encourage multiple accounts in one house- hold for greater customization of viewing. Ultimately, Netflix's goal is for each user to have a personal account an option that is in line with the increased use of mobile devices. CASE 1. Global Expansion Netflix expanded internationally in September 2010 by offering an unlimited streaming plan without DVD rentals in Canada. A recent five-year licensing agreement with Paramount Pictures in Canada has increased Netflix's title library by providing streaming access to classic hits from 350 movie titles and new Paramount Pictures movies. Although expansion into Canada has surpassed initial growth estimates, internationaliza- tion requires significant resources, greater management attention, and exposes the company to regulatory, economic, and political risks. Specific risks include cultural adaptation of content and interfaces; international financial operations; greater political, social, and economic insta- bility, additional legal complexities of international trade and local laws; greater environmental turbulence and regulatory change; less favorable intellectual property laws; complex tax effects, fluctuations in currencies and exchange rate risk; greater competition, and varying degrees of reli- able Internet penetration and connectivity. In the international marketplace in particular, Netflix will face the challenge of content licensing and identifying the most effective marketing channels. Marketing Netflix has earned high online retail customer satisfaction ratings by independent research firms, such as Nielsen. Over 90 percent of subscribers would recommend Netflix to a friend. High levels of customer satisfaction and a loyal subscriber base make it expensive and difficult for competitors to displace Netflix as a subscription segment leader. Netflix uses multiple marketing channels. Traditional advertising is undertaken using regional and national TV, radio stations, package inserts, direct mail, and newspaper print. Netflix also uses partnerships with consumer electronic companies and cooperative advertising agreements with studios, whereby Netflix receives cash for featuring studios' movies in Netflix promotions. Word- of-mouth advertising and subscriber referrals are also believed to significantly enhance sales. Online advertising by Netflix encompasses search listings, banner ads, text links and permission- based e-mails, and third-party web-based banner ads. Technology Netflix's proprietary technology enhances consumers' search process and also manages and integrates operations, the Netflix website, order processing, fulfillment operations, and cus- tomer service. Netflix software also serves as the user interface on Netflix-ready devices. This technology maximizes the content library utilization and fulfillment with minimal capital to deliver superior service and efficient inventory management. Netflix owns patents, trademark, copyrights, and confidentiality agreements to protect its proprietary software and website to maintain a competitive advantage. Netflix's proprietary technology customizes and enhances each subscriber's Netflix experience. Data from more than 3 billion subscriber ratings are used to provide recommen- dations that are tailored to specific user preferences to create demand and maximize content utilization. By creating demand and balancing subscriber requests for new and older content while maintaining high customer satisfaction levels, Netflix maintains a stable client base, keeps subscriber acquisition costs low, and increases lifetime subscriber profit. Superior Service Netflix offers convenient and quick access to titles for multiple viewing options including deliv- ery to over 200 Netflix ready devices. The customer's experience is uniquely customized for ease of website use, title selection, and fast and convenient delivery. Netflix creates a unique experience for subscribers by generating user interfaces on its website and Netflix-ready devices that are tailored to subscribers' individual rental and ratings history. A large DVD title inventory coupled with nationwide distribution centers and streaming titles available for viewing without
Netflix is continually examining new ways to improve the subscriber's experience. For example, single user accounts allow single movie streaming to one location; however, Netflix is exploring ways to allow subscribers to watch multiple, simultaneous streams. Alternatively, Netflix is considering a family price that would encourage multiple accounts in one house- hold for greater customization of viewing. Ultimately, Netflix's goal is for each user to have a personal account an option that is in line with the increased use of mobile devices. CASE Global Expansion Netflix expanded internationally in September 2010 by offering an unlimited streaming plan without DVD rentals in Canada. A recent five-year licensing agreement with Paramount Pictures in Canada has increased Netflix's title library by providing streaming access to classic hits from 350 movie titles and new Paramount Pictures movies. Although expansion into Canada has surpassed initial growth estimates, internationaliza- tion requires significant resources, greater management attention, and exposes the company to regulatory, economic, and political risks. Specific risks include cultural adaptation of content and interfaces; international financial operations; greater political, social, and economic insta- bility, additional legal complexities of international trade and local laws; greater environmental turbulence and regulatory change; less favorable intellectual property laws; complex tax effects: fluctuations in currencies and exchange rate risk; greater competition, and varying degrees of reli- able Internet penetration and connectivity. In the international marketplace in particular, Netflix will face the challenge of content licensing and identifying the most effective marketing channels. Marketing Netflix has earned high online retail customer satisfaction ratings by independent research firms, such as Nielsen. Over 90 percent of subscribers would recommend Netflix to a friend. High levels of customer satisfaction and a loyal subscriber base make it expensive and difficult for competitors to displace Netflix as a subscription segment leader. Netflix uses multiple marketing channels. Traditional advertising is undertaken using regional and national TV, radio stations, package inserts, direct mail, and newspaper print. Netflix also uses partnerships with consumer electronic companies and cooperative advertising agreements with studios, whereby Netflix receives cash for featuring studios' movies in Netflix promotions. Word- of-mouth advertising and subscriber referrals are also believed to significantly enhance sales. Online advertising by Netflix encompasses search listings, banner ads, text links and permission- based e-mails, and third-party web-based banner ads. Technology Netflix's proprietary technology enhances consumers' search process and also manages and integrates operations, the Netflix website, order processing, fulfillment operations, and cus- tomer service. Netflix software also serves as the user interface on Netflix-ready devices. This technology maximizes the content library utilization and fulfillment with minimal capital to deliver superior service and efficient inventory management. Netflix owns patents, trademark, copyrights, and confidentiality agreements to protect its proprietary software and website to maintain a competitive advantage. Netflix's proprietary technology customizes and enhances each subscriber's Netflix experience. Data from more than 3 billion subscriber ratings are used to provide recommen- dations that are tailored to specific user preferences to create demand and maximize content utilization. By creating demand and balancing subscriber requests for new and older content while maintaining high customer satisfaction levels, Netflix maintains a stable client base, keeps subscriber acquisition costs low, and increases lifetime subscriber profit. Superior Service Netflix offers convenient and quick access to titles for multiple viewing options including deliv- ery to over 200 Netflix ready devices. The customer's experience is uniquely customized for ease of website use, title selection, and fast and convenient delivery. Netflix creates a unique experience for subscribers by generating user interfaces on its website and Netflix-ready devices are tailored to subscribers' individual rental and ratings history. A large DVD title inventory coupled with nationwide distribution centers and streaming titles available for viewing without that
a threat, as does the development of new technologies for viewing entertainment videos. In summary, key competitors of Netflix include: DVD rental outlets, such as Blockbuster and RedBox • Pay-per-view and VOD content cable providers-Time Warner and Comcast Direct broadcast satellite providers-DIRECTV . Telecommunication providers-AT&T and Verizon . Online DVD subscription rental websites-Blockbuster Online Retailers Best Buy, Wal-Mart, and Amazon.com . . Internet providers-Amazon.com, Apple iTunes, Hulu.com, and YouTube CASE 1 NETFLIX, On the video streaming front, there are rumors that RedBox will join the fight for the online streaming business. RedBox is a supermarket-based DVD Kiosk business owned and operated by Coinstar (ticker = CSTR). RedBox generates $1.5 billion in annual sales. RedBox rents movies for 28 days for $1 a day. Blockbuster was just acquired by Dish Network. CEO Joe Clayton says Dish will now use its library and studio connections to offer a streaming alternative to Netflix. Clayton plans to keep 1500 to 1700 of Blockbuster stores open. However Netflix is worried most about Amazon. Amazon Why should Netflix be concerned with Amazon? Amazon has strong brand recognition, an established online history, a large customer base, and greater financial, marketing, and human resources. If consumer preferences shift to VOD, a key provider of VOD is Amazon. Coincidentally, Amazon also provides the software, data processing, and storage (also known as cloud computing services) for Netflix. Netflix relies upon Amazon for a majority of its computing and has stated that it cannot easily switch to another cloud provider. Amazon is a 400-pound gorilla in the media business. With its expanded offerings and one-stop destination format, Amazon's business is forecasted to generate a 30 percent average annual earnings growth over the next three to five years. Amazon reported an impressive 39 percent year-over-year revenue growth of late. In 2008, Amazon launched an expansive online library of titles ranging from the 1939 famous classic Gone with the Wind and Alfred Hitchcock's 1959 title North by Northwest to the most recent releases. Amazon Instant Video, also known as VOD (Videos on Demand), offers over 6,400 TV shows and 37,000 movies in an instant streaming or commercial-free download for- mat. Prices start as low as 99 cents. Amazon also offers unlimited free video streaming to Amazon Prime customers who pay $79 per year for special rates on shipping. In comparison, Netflix charges a higher annualized fee of $95 for their lowest-priced plan of unlimited streaming without DVDs. The cost increases when subscribers include rentals of DVD titles. Currently, Amazon's media (books, music, and videos) represents 52 percent of sales, with 48 percent of Amazon's sales obtained internationally. Amazon plans to expand its online video streaming business and has greater access to financial resources generated from its diversified business services. If Amazon chooses to aggressively increase its customer base by offering a lower-priced VOD service, Netflix may not be able to withstand the competition against a giant with deeper pockets. Amazon has committed to the expansion of 10 additional fulfillment cen- ters to support growing demand. Amazon's business segments and growth rates by geographic sales region are provided in Exhibit 3. Industry Issues Entertainment service providers are affected by sales of home electronics, which continued to increase through 2011. Standard and Poor's forecasts that movie ticket and music/video retail sales will increase by $0.7 billion and $3.4 billion respectively through 2014. The home video rental business industry is changing dramatically with advances in technology and new video streaming capabilities. If Netflix is unable to acquire preferred content or sufficient DVD titles, subscriber satisfac- tion and operations will be negatively affected. If the costs to fulfill the demand for new titles are not funded by increased subscriber profits or improved operating margins, Netflix's service may be devalued and demand may disappear. If the cost to manufacture DVDs falls and the retail price for DVDs declines to a level where consumers prefer to purchase DVDs, again the value of Netflix's service dissipates. Netflix acquires content by direct purchases, revenue sharing agreements, and license agreements with studios and distributors. DVDs may be purchased in volume discounts or at
rebates based upon Netflix selling at specified levels. DVDs and streaming content purchased through revenue sharing agreements are obtained for a low initial cost in exchange for a percent- age of subscriber revenues or a fee for a period ranging from six to twelve months. The initial cost may require an up-front, nonrefundable payment of future revenue sharing obligations. As of December 31, 2010, Netflix had contracted more than $1.2 billion due over the next several years and is expected to increase these levels. CASE 1 NETFLIX, IN Supply Chain Netflix relies upon channel providers for delivery of content. Netflix is also subject to possi- ble nonrenewal or renegotiation of revenue sharing contracts with distributors upon expiration. Channel providers may also offer the same service as Netflix, which would eliminate Netflix's access to a delivery channel. In addition, regulations similar to a "do not call" restriction may limit the use of channels. Similarly, amendments to copyright laws or release and distribution may adversely affect Netflix. Subscriber value is also a function of the availability and timing of the release of videos to distributors or competitors as well as release on DVD. Current licensing agreements typically require that Netflix not offer new DVD releases until 28 days after the retail sale date. Delays in the availability of DVDs or streaming content offered by Netflix would negatively affect sub- scription revenues. Currently DVDs enjoy a competitive advantage over distribution channels such as pay-per-view and VOD due to early distribution. Recently, major studios have shortened the release time and simultaneously released movies on DVD and VOD. If other distributors receive priority or equal DVD release dates, Netflix demand could be reduced. Netflix has contractual agreements lasting one to three years with several electronics part- ners to offer streaming content on Netflix ready devices. If Netflix is unable to maintain these relationships or create new partnerships, Netflix's growth will be hampered. In addition, partners must update devices in order to remain compatible with Netflix technology. With regard to DVDs delivered via the U.S. Postal Service, increases in postage rates would reduce profit margins and may lead to an increase in subscription fees. Political/Legal Issues The growth of online commerce may lead to more regulation, which may require that Netflix alter its business model. If U.S. copyright laws are amended to allow studios to delay the availabil- ity of new DVD releases for rental yet permit release of DVDs for retail sale, Netflix would be harmed since retailers would have primary access to new releases. Currently Universal Studios and Twentieth Century Fox are involved in litigation with Redbox for this type of practice. Furthermore, content owners have begun to negotiate exclusive deals with a limited number of outlets, such as when Blockbuster exclusively received content on DVDs. To the extent that content is exclusively distributed, Netflix's value proposition could dissipate if competitors gained exclusive access to highly valued entertainment content. Infringements on Netflix's patents, trademarks, and proprietary assets by competitors may decrease the Netflix brand value. Competitors every day are trying to duplicate Netflix's service and business model. There are numerous patents that broadly claim the means and methods of conducting business on the Internet. Netflix is involved in long-term contractual agreements with distributors and suppliers of viewing content and technology computing services. If Netflix's revenue, subscriber base, or profit margins decline, Netflix may not be able to meet contractual obligations. Security/Privacy Issues Breaches in data security are on the rise. Significant resources are needed to maintain security and insurance policies to cover potential losses in the event of a breach of security. Netflix is depen- dent upon the reliability of its computer systems and third parties. Interruptions in service, such as in August 2008, impact Netflix's ability to ship and receive DVDs and stream movies. Netflix also relies upon its own engineering and software development teams for software and computer systems performance. Netflix's website periodically experiences direct attacks intended to disrupt service. Current insurance does not cover expenses related to attacks. Netflix also collects data from subscribers. Some firms have received criticism for linking per- sonal identities with data collected on the users' browsing and other habits. Increased regulation of
commercial interruption provides fast delivery and high customer satisfaction. In December 2010, the American Customer Satisfaction Index (ACSI) named Netflix the number one e-com- merce company for customer satisfaction. Market Segments Netflix revenues are derived from monthly subscription fees in two business segments, 1) the United States and 2) the international market. In September 2010, Netflix expanded internation- ally by offering an unlimited streaming plan without DVDs in Canada. Netflix does not break out the Canadian international sales yet in their financials. Instead, the company indicates that the venture has not generated a profit yet and will begin reporting the two separate geographic revenue streams individually in the future. Netflix's subscriber growth is seasonal, being greatest October through March. A summary of Netflix's marketing expenses is provided in Exhibit 2. Competitors Netflix has traditionally been a competitor in the subscription segment of the in-home enter- tainment video market but has expanded its business model to include streaming content over the Internet. The market for streaming video consists of three segments: 1) video-on-demand (VOD), 2) ad supported, and 3) subscription. The U.S. home entertainment subscription service is currently a $66 billion business and is expected to grow to $84 billion by 2013. Competitors in the VOD segment include Amazon, Apple, and Microsoft; while key players in the ad-supported segment are Hulu and YouTube. Currently, Netflix is the primary provider in the subscription segment, but competition will increase as consumers shift to Internet deliv- ery of videos. According to Standard and Poor's, Amazon, a provider of VOD, currently ranks 10th among the top 25 Internet properties with a 36.5 percent reach in the Internet marketspace (Kessler 2010). In addition, 75 percent of U.S. households had access to the Internet in 2008, and this rate is expected to reach 80 percent by 2013. According to Nielsen estimates, there are 116 million households with at least one TV and Netflix has achieved a penetration rate of 14.5 percent (Downing 2011). Among online video content providers, Hulu ranks second behind Google as of mid-year 2010 in the number of videos viewed. Netflix did not even rank in the top ten. Warner Brothers has also initiated a trial offering of movie titles available for rental and streaming via Facebook. Competition is heating up! Moreover, the online streaming business is still in its formative years. According to eMarketer, two-thirds of Internet users, or 147.5 million people, in the United States watch online videos, and this number is expected to reach 193.1 million by 2014. Product substi- tution, however, is high, since consumers use multiple entertainment sources in the same month, such as subscribing to a cable provider, renting a RedBox or Blockbuster DVD, buy- ing DVDs from Wal-Mart or Amazon, downloading a movie from Apple iTunes, and watch- ing a TV show on Hulu.com. Industry barriers to entry are low since start-ups can be launched at a relatively low cost. Furthermore, innovation and growth of existing technologies pose
Netflix revenues are derived from monthly subscription fees. As of December 31, 2010, approximately 85 percent of Netflix subscribers purchase the unlimited streaming plan with- out DVDs at $7.99 per month or a one or two DVD-out unlimited plan, priced at $9.99 and $14.99 per month, respectively (Netflix.com 2011). Customers purchasing high definition Blu-ray discs pay a surcharge from $1 to $4 for plans. Increased revenues are primarily due to a 41.3 percent growth in the number of subscribers. Detailed subscription information is provided in Exhibits 7 and 8. Growth in subscriptions was offset by an 8.3 percent decline in the average monthly revenue per subscriber, resulting from growth in the low-priced subscription plans. Subscriptions in the one- and two-out plans grew by 69.8 percent while all other plans declined by 15.0 percent over the 2010 year. In the fourth quarter of 2010, more than one-third of new subscribers chose an unlimited streaming plan without DVDs when this option was introduced. Some critics argue that the DVD rental business is a maturing industry. Exhibit 9 provides a breakdown of library content values. The Future International expansion opportunities appear attractive, but can Netflix extend its business model contentwise and simultaneously expand internationally? Netflix management has undertaken a commitment to grow its streaming entertainment business to fuel future revenue growth. Content deals are becoming more expensive and competitors are becoming more adept at imitating and duplicating Netflix products and services less expensively. Amazon is still a major concern. In 2010, Fortune named Netflix CEO Reed Hastings "Business Person of the Year" and Barron's added Reed to its 30 most respected CEOs list. It is a daily challenge for Mr. Hastings to keep Netflix on track, however, amidst a sea of competing firms and technology conver- gence blurring the differences among cable, TV, and the Internet. Reports are that Walt Disney Company will soon extend its reach into the content delivery industry. Prepare a three-year stra- tegic plan for Mr. Hastings and his management team that is illustrated in Exhibit 10.