Company Analysis: Netflix

Executive Summary

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Netflix, Inc. has a strong and successful business model, which has allowed it to easily outperform traditional content distributors on the market. Its effective marketing and constant improvements have ensured excellent customer experience and 57 million subscribers. Its strong financial performance, coupled by the fact that the US and global economies are expanding fast, will ensure that Netflixs success continues in the short (MarketLine, 2015; Rugman & Collinson, 2012). The US GDP grew by 2.5%, while the unemployment and interest rates stood at 2.5% and 0.25%, respectively (World Bank, 2014). Similar trends exist across the OECD. Further, content streaming is not only growing, but so is the total customer spending on digital entertainment media. However, this report finds that Netflix is excessively dependent on the US market, despite having operations in 60 other countries (Netflix, Inc., 2015; MarketLine, 2015). Further, the company struggles with piracy, widely varied legal frameworks, litigations against it, and above all, the possible entry of Apple in the streaming business. It is clear that Netflix operates in an intensely competitive industry, with high supplier power, buyer bargaining power, and a moderately high risk of new entrants (MarketLine, 2015). To ensure that the company is sustainable, this report recommends increased diversification (including backward integration), new product development (live streaming services), and intensification of operations abroad (Yip & Hult, 2011).

Corporate Objectives

To become a leading provider of digital entertainment content across multiple platforms, with a particular emphasis on mobile phones and portable computing devices

To achieve a 10% increase in the number of subscribers before the close of 2016

To create partnerships with strategic partners to build the companys subscriber base

To intensify its operations outside North America, to ends its dependence on the domestic market segment

To counter the possible disruptive effects of Apple launching a streaming service, which will drive away content creators from Netflix

External Analysis

PESTEL Analysis

Political Factors

By the very fact that Netflixs operations are mainly concentrated on the Internet, the company has operations across multiple countries (Rugman & Collinson, 2012). In some countries such as China, Internet censorship and content regulation remains a major difficulty, besides the differing regimes of rating systems. Regulatory permissiveness (including weak law enforcement systems) for piracy and illegal downloading of content in key markets such as New Zealand, China, and Eastern European countries is also a major challenge for digital content businesses such as Netflix (Google, Inc., 2015).

Economic Factors

The economies in North America, Europe, Asia Pacific and elsewhere across the world have fully rebounded following the global economic crisis. The US economy grew by 1.5% in the third quarter of 2015, with the unemployment rate, inflation rate, and interest rate rates standing at 5.5%, 0.2%, and 0.25%, respectively (World Bank, 2014). On the other hand, key markets in the OECD (including major European, Asia Pacific, and North American countries) have equally posted excellent growth, which positively impacts the spending power and consumer confidence (Federal Reserve Bank of St. Louis, 2015). The consequences of this are already evident. The demand for online streaming has increased with the number of viewers for TV shows on premium, on-demand, subscription services increased by 35% in 2014, largely driven by the increased content consumption over the Internet. In addition, the U.S. Department of Commerce estimates that electronic commerce transactions have risen from $163 billion in 2010 to $297 billion in 2014, with the second quarter of 2015 posting $81.9 billion in sales. The advertising marketis also growing. With upwards of 57 million subscribers and a dominant market position, Netflix should readily benefit from these movements in the economy/market (Yip & Hult, 2011; MarketLine, 2015).

Social Factors

There is a widespread shift in consumer preferences from the cinema-going culture to home-based entertainment systems, in part because of the increasing availability of high quality TV/entertainment systems and low costs of content. Similarly, DVD sales are falling in favor of digital content, on flash discs and other memory sticks. Convenience remains a major driver for 74% of people that use streaming services, and this is likely to grow even further. Even most importantly, the increasing number of millennials (generation Y and Z) who are Internet natives, means that there is likely to be an expansion in the customer base for Netflix (Rugman & Collinson, 2012).

Technological Factors

Rapid technological advances in the content delivery necessitates massive investments in research and development. Customers are accessing content from consoles in cars, video game consoles, Blue-ray players, portable computing devices, among others. Further, the increasing availability of affordable high-speed Internet in North America and other leading markets, e.g. Google Fiber, means that the demand for streaming services will increase because it eliminates the frustrations of streaming/downloading large video files. Cloud computings rise will also prove influential to firms such as Netflix, which need large storage services (Google, Inc., 2015; MarketLine, 2015).

Legal Factors

Increasing cyber crimes, involving sensitive data loss has the effect of denting customer confidence in using the Internet. Further, other than net neutrality regulations by the FCC, legal rights over the distributed content is a legal minefield for the company and others in the content distribution business. Netflix already faces multiple lawsuits related to copyright infringements and royalty distribution. In 2013, Netflix paid $9 million to settle a suit for violating the Video Privacy Protection Law of 1998, and a year earlier, the company faced allegations of issuing materially false statements about its business model, contracts with content providers, and other practices. In 2011, the company was sued for violating the federal securities regulations. These legal problems undermine the companys brand and its customers confidence (MarketLine, 2015). Illegal content downloading and piracy is also a major legal problems that undermines the market for Netflix, because a large number of people can get access to premium content though illegal hosting websites (Netflix, Inc, 2015).

Porters

Five Forces

Supplier power (Very High)

Content is critical to this industry, and content providers are increasingly ware of this power and set high royalty demands for distributors (MarketLine, 2015).

Consumer power (High)

Large range of options available to consumers and low level of product differentiation means that customers are the king

Industry rivalry (Very High)

Extremely high due to the existent of large and resource-rich competitors in the streaming business such as BBC Worldwide Ltd, Amazon.com, Inc., ViaPlay, Best Buy, Co., Wal-Mart Stores, Inc. and YouTube, LLC (Rugman & Collinson, 2012).

Threat of new entrants (High)

Large companies such Apple, Beats Electronics LLC, and Hulu run streaming services, and may extend their services to Netflix markets. If Apple enters the streaming business, content creators that use Netflix will move to their Apple accounts and sell their content directly to customers, cutting out the middleman (MarketLine, 2015)

Threat of substitutes (High)

The existence of a wide range of alternative sources of premium content makes Netflix and its products easily substitutable (Yip & Hult, 2011)

Internal Analysis: Strategic Capabilities

Resource Audit

Netflix has posted excellent results in the past, giving considerable muscle for investing in R&D and marketing activities. The high brand awareness and equity, having been a pioneer in the industry is a key resource for Netflix, besides the fact that it has an efficient and high capacity infrastructure that not only gives it scale economies, but will also allow it accommodate new subscribers (MarketLine, 2015). It also has established operations in key markets in North America, Asia Pacific and Europe (Netflix, Inc., 2015; Yahoo Finance, 2015).

Business Functions and Core Competencies

Netflix is an online television network involved in the delivery of television shows, movies and other entertainment content directly to the computers, mobile devices, and televisions. Its operations are divided into three administrative divisions i.e. domestic streaming, domestic DVD, and international streaming. International and domestic streaming derives income from subscription fees for content streams in the US, and key international markets in Europe, and Asia Pacific. The domestic DVD division derives revenues from selling DVDs through the mail. Currently, the company is the largest subscription streaming service with 57 million subscribers

Its core competencies include:

A large and fast-growing subscriber base (57 million)

The subscription model avoids the difficulties of traditional content distribution outlets such as the excessive reliance on advertising and unpredictability of sales

It offers many DVD titles than is possible in traditional outlets who would need to stock large stocks

While traditional outlets reserve large spaces for new releases, Netflix can offer both at no additional costs to it

Technology allows easy browsing as against rummaging through store shelves

A first mover advantage in the industry

High brand awareness and equity (Yip & Hult, 2011)Basis of Competitive StrategyBowmans Strategy Clock

Figure 1: Netflix uses a hybrid strategy

Netflix uses the hybrid strategy, by providing high quality streaming services, a large selection of content and first rate shipping services with competitively low costs. In August 2015, Netflix posted some of the lowest subscription prices. Its price was $7.99 per month for a plan that included standard high definition quality streaming per screen per time. A two-screen streaming plan cost $8.99 and the third premium plan cost $11.99 per month (Pelts, 2015).

Figure 2: Netflixs prices its products competitively

Market SegmentationThe similarity of the content and the technologies means that market segmentation is not necessari...