Case Study III.

2
Netflix Inc.: the US internet subscription service company is dominating the
television and movies streaming world

Netflix, Inc. began operations on April 14, 1998. The
Company is now the world’s leading internet television
network with 69 million members in nearly 50 countries
(most countries are in South America) enjoying more
than 2 billion hours of TV shows and movies per month,
including original series, documentaries and feature
films. Members can watch as much as they want, any-
time, anywhere, on nearly any internet-connected
screen. Members can play, pause and resume watch-
ing, all without commercials or commitments. Addition-
ally, in the US, members can receive DVDs.
The company has three reportable segments:
1. Domestic streaming
2. International streaming
3. Domestic DVD
A majority of Netflix’s revenues are generated in the
US, and substantially all of the company’s long-lived
tangible assets are held in the US. The company’s
revenues are derived from monthly membership fees
(for the streaming part, the flat monthly payment is
US$9).
significant difference between Netflix and Blockbuster
Inc. at that time was that Blockbuster Inc. attracted cus-
tomers to their various retail locations whereas Netflix
offered home delivery through the mail. In 2000, Netflix
introduced an extensive personalized video recommen-
dation system where the system recommends movies to
customers based on their preferences, movie ratings
and reviews by other customers. This innovation has
given Netflix a competitive edge compared to its rivals.
It was not until 2007 that Netflix finally introduced the
new video-on-demand and streaming services, which
allow consumers to play, pause and play again anytime
and anywhere without limit.
According to the recent statistics on the Netflix web-
site, the company has reached 70 million users globally
(as per 1st September 2015), which is a tremendous
increase compared with that of 2014. Table  1 shows
the key figures for Netflix from 2012 to 2014.
Netflix financial and membership
Table 1
development 2012–14

Netflix history 2012 (US$ 2013 (US$ 2014 (US$

million) million) million)
How did it all start? Of course, there is always an inter-
Revenues 3,609 4,375 5,505
esting story associated with any business. Reed Hast-
ings and Marc Randolph founded Netflix in 1997 in • marketing 439 470 607
costs
Scotts Valley, California. The idea of Netflix came to
Hastings when he was charged US$40 late fees after •  other costs 3,140 3,737 4,549
returning Apollo 12. The fact that consumers need to Net profits 30 171 349
pay high overdue fees frustrated Hastings; at the same (before taxes)
time, Hastings was trying to come up with a better way Global streaming 2012 2013 2014
to provide customers with better video rental service. members (millions of (millions of (millions of
members) members) members)
With this objective in mind, Hastings started Netflix,
which at that time offered home movie delivery service. Total (end of the 33 44 57
year)
Netflix used the US Postal Service to deliver all the
DVDs to its subscribers. Different from the industry giant US members 27 33 39
Blockbuster Inc., which offered the traditional pay per International 6 11 18
movie rental delivery/pick-up service, Netflix’s subscrip- members
tion plan was unlimited monthly rentals with a flat rate of Domestic (US) 8.0 6.7 5.7
US$17.99. Netflix allowed its customers to hold up to DVD customers
three movies at any one time in a month. Another Source: based on the Netflix Financial Report 2014.

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 474 Part III  Market Entry Strategies
At 1st September 2015, there were 69 million
streaming members (42 million US members and 27
million international members).
By the end of 2014, there were 2,189 full-time
employees in Netflix.
Revenues
Revenues come mainly from membership fees in the
streaming business. Netflix offers three types of stream-
ing membership plans.
In the US, the basic plan is priced at US$7.99 per
month and includes access to standard definition qual-
ity streaming on a single screen at a time.
The most popular streaming plan, which includes
access to high-definition quality streaming on two
screens concurrently, is priced at US$8.99 per month.
Existing members were grandfathered in at US$7.99
for two years, as long as they remain a member.
The premium plan, introduced in the second quarter
of 2013, is priced at US$11.99 per month and includes
access to high-definition and ultra-high-definition qual-
ity content on four screens concurrently.
Internationally, pricing for the three types of mem-
bership plans is structured similar to the US and
ranges from the US dollar equivalent of approximately
US$6.00 per month to US$19.00.
Costs
Payment for content
For the domestic and international streaming seg-
ments, content expenses, which include the amortiza-
tion of the streaming content library and other expenses
associated with the licensing and acquisition of stream-
ing content, represent the vast majority of cost of rev-
enues. Streaming content rights are generally specific
to a geographic region and accordingly international
expansion will require the company to obtain additional
streaming content to support new international mar-
kets. Other costs of revenues such as streaming deliv-
ery expenses, customer service and payment
processing fees tend to be lower as a percentage of
total cost of revenues as compared to content
expenses.
Netflix utilizes both their own and third-party content
delivery networks to help them efficiently stream a high
volume of content to the members over the internet.
Streaming delivery expenses, therefore, also include
equipment costs related to the content delivery network
and all third-party costs associated with delivering
streaming content over the internet.
Cost of revenues in the domestic DVD segment
consist primarily of delivery expenses, content
M13_HOLL0111_07_SE_C13.indd 474
expenses, including amortization of DVD content library
and revenue sharing expenses, and other expenses
associated with their DVD processing and customer
service centres. Delivery expenses for the domestic
DVD segment consist of the postage costs to mail
DVDs to and from the members and the packaging and
label costs for the mailers.
Marketing
For the domestic and international streaming seg-
ments, marketing expenses consist primarily of adver-
tising expenses and payments made to affiliates and
device partners. Advertising expenses include promo-
tional activities such as television and online advertis-
ing. Payments to the affiliates and device partners
include fixed fee and/or revenue sharing payments.
Marketing expenses are primarily incurred by the
domestic and international streaming segments given
the focus on building consumer awareness of the
streaming offerings. Marketing expenses incurred by
the international streaming segment have been signifi-
cant and will fluctuate dependent upon the number of
international territories where Netflix is marketed.
Source: IanDagnall Computing/Alamy Images.
International expansion
The company first began offering an instant streaming
service to the international market in 2010. It was in that
year, on September 22, that the service became avail-
able in Canada. At the time, Canadians could subscribe
to Netflix for US$7.99 a month. However, despite the
proclaimed low price, content selection in Canada was
extremely limited. In 2012, data showed that in the US
there were 10,625 unique titles in ­Netflix’s library,
whereas in Canada there were only 2,647. This could
be blamed on differences in distribution deals in the US
and Canada. At 1st September 2015, there are about
6 million Netflix members in Canada.
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On July 5 2011, Netflix announced its plans to launch
a streaming service in Latin America, its largest expan-
sion to date. At the time, Netflix had 23 million subscrib-
ers in the US and Canada. Entering the Latin American
market meant Netflix had access to approximately 600
million people, or twice the number of people living in
the US. Although high-speed internet in Latin America
is not as accessible as it is in the US and Canada, upon
the announcement of its expansion to Latin America,
Netflix stock immediately surged 8 per cent.
Beginning in September 2011, the company began
its expansion to 43 countries and territories in Central
and South America, as well as the Caribbean, offering
content in English, Spanish and Portuguese. Brazil
became the first country in Latin America to launch the
service on September 5. There the service was offered
at $BR14.99 or approximately US$9.10 per month,
making it more expensive than in the US and Canada.
Rounding out the first five countries to launch stream-
ing service in Latin America were Argentina, which
followed on the 7th September, Chile on the 8th,
Colombia on the 9th and Mexico on the 12th. Service
spread to the other 38 countries in the following weeks.
Among the content distributed to Latin America was
programming from CBS, Showtime, and Miramax.
The launch in Latin America was not as successful
as the company had hoped. While in Latin America
Netflix had no streaming competitors as it did in
­Canada, the digital divide (a lack of high broadband
internet penetration) hindered rapid growth. In Brazil,
for example, only 20 per cent of the population had an
internet speed greater than 500-kbs a second; 800-kbs
a second are needed to stream Netflix’s content.
Further, the lack of competitors in some ways
slowed growth as well. Whereas in Canada new sub-
scribers had been exposed to streaming content by
other companies, the concept was newer to a wide
Latin American audience, making some sceptical of the
prospect. A banking system unused to recurrent
monthly transactions exacerbated the problem. Still,
while Latin American expansion happened more slowly
than expected, their Canadian expansion happened at
a faster rate than expected, making their first two forays
into the international market fairly successful.
The initial launches in Canada and in Latin America
happened before Netflix’s 2011 controversy in the US.
In September of that year, the company decided to
switch to two separate plans (one for streaming and
one for DVD), hiked its prices accordingly, and
attempted a move to two websites (one for streaming
and one for DVD rentals). The change to its business
model was accompanied by a loss of approximately 1
million American users and a plunging stock price.
M13_HOLL0111_07_SE_C13.indd 475
Case Study III.2  Netflix Inc. 475
Prior to announcing the change to service, stock was
valued at just around US$300; after the announcement
the price plunged to less than US$53 a share. Prior to
this debacle, Netflix had been having its most success-
ful quarter, mainly due to the decision to expand to
Latin America. The company quickly lost all the money
it made in the quarter it announced growth to Latin
America, and was forced to apologize and rethink its
changing model.
Bringing people back to Netflix after the 2011 con-
troversy came in two forms. First, it began work on
producing its own original content – announcing its
adaptation of House of Cards in 2011 for a 2013 air
date and its revival of Arrested Development in 2012
for a 2013 air date. Second, it continued international
expansion.
Netflix started its expansion to Europe in 2012,
launching in the UK and Ireland on January 4. By Sep-
tember 18, it had expanded to Denmark, Finland, Nor-
way and Sweden.
At that time, Netflix had developed a strategy for its
international expansion. They start with a limited offer
which does not cost them very much money and mini-
mizes the risk. Then they collect very detailed data
about what people like, and structure programming
and investment around consumer behaviour. This takes
into account cultural taste differences and allows distri-
bution deals to develop accordingly. For example, by
September 2013, Netflix had added content from
Channel 4, ITV and the BBC.
Netflix UK and Ireland reached its millionth sub-
scriber faster than Netflix Canada, nabbing its millionth
member by July 2012. In the UK, BARB (Broadcasters
Audience Research Board) reported Netflix as being
extremely successful in the UK market. More than one
in ten households in the country subscribed to the ser-
vice by 2014. More than twice as many people sub-
scribed to Netflix than to Amazon Prime. As of autumn
2014, Netflix had 3 million UK subscribers which was
more than twice as many as it had in 2013.
Following the UK and Scandinavia, the next country
in Europe to receive Netflix service was The Nether-
lands, on September 11, 2013. The Netherlands was
the only country that Netflix expanded to in 2013,
although, as the company decided to slow expansion in
order to control subscription costs. The company spent
US$3 billion on subscription content that year. Netflix
said that shows that performed well on BitTorrent net-
works and other pirate sites were more likely to be
offered as part of the expansion. Netflix thinks that ille-
gal downloading helps to create demand, as users may
switch to legal services for an improved user
experience.
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 476 Part III  Market Entry Strategies
In the final quarter of 2013, Netflix gained more new
subscribers from its pool of international countries than
it did from the US for the first time since it began its
European expansion, making international expansion
increasingly important. At the end of 2013, the com-
pany had reached approximately 32 million users in the
US and additionally had approximately 10 million users
internationally.
By September 19, 2014, the service was also avail-
able in Austria, Belgium, France, Germany, Luxem-
bourg and Switzerland. While reception throughout the
rest of Europe was relatively warm, it was fairly hostile
in France because of fears that the launch of Netflix
would begin to ruin the country’s cultural exception – its
focus on culturally specific media. This led to Netflix’s
decision to create a series called Marseille, essentially
a remake of its hit series House of Cards within a
French context and one of the company’s first non-
English language shows.
Prior to its international expansion in 2010, Netflix’s
subscriber base grew on average by 2.4 million people
a year. Following its arrival in Canada, Latin America
and eventually Europe, its subscriber base has grown
on average by 7 million people a year, making interna-
tional expansion key to Netflix’s continued growth in
the global marketplace. Notably, the company has over
20 original shows planned for release in 2015 and
2016. In that bunch are Netflix’s first non-English lan-
guage series.
Expansion to Australia and New Zealand occurred
on March 24, 2015. On February 4, 2015, expansion to
Japan was announced to begin during the fall of 2015.
In May 2015, Netflix revealed it was in talks with Jack
Ma’s Wasu Media Holding (part of Alibaba) and other
partners to enter China’s online video market. Also
Spain and Portugal is in reach for further expansion.
Comparison of major suppliers of video streaming services – number of subscribers at September 2015
Table 2
(million)
US Millions of
subscribers
Netflix (app. US$10 per month) 42.0
Amazon Prime / Instant Video (US$99 45.0
membership per year)
HBO Television service/cable owned by 36.0
Time Warner (US$15–20 per month)
HBO NOW (app. US$15 per month) NA
Hulu Co-owned by Fox, Disney and 7.0
Comcast (US$8 per month)
Google Play (US$ per movie – 2 day ? ?
watch
Source: based on different public sources.
M13_HOLL0111_07_SE_C13.indd 476
Competition
Table 2 compares the major suppliers in the streaming
video business:
HBO
Netflix has long considered HBO (owned by Time
Warner Inc.) to be its biggest rival in terms of content,
but HBO has a long way to go to catch up with Netflix’s
subscriber numbers. HBO has over 114 million sub-
scribers globally through their cable and satellite televi-
sion network.
In Spring 2015, HBO offered a new service – HBO
Now – which is available as a standalone service and
does not require a television subscription to use. The
new service targets customers who prefer ‘pure’
streaming services like Netflix and Hulu. HBO Now
contains access to shows like Girls and Game of
Thrones and other premium TV series and films,
whereas Netflix now focuses on its original content
shows such as House of Cards, Unbreakable Kimmy
Schmidt and more. HBO Now charges US$15 per
month – nearly double the price of Netflix, but they
claim it contains more original content. Of course,
HBO has had 25 years to position its brand as one
delivering quality content that’s worth a premium. The
network piled up a record 126 Emmy nominations in
2015, while Netflix is just beginning to make its pres-
ence felt in that sphere. But Netflix has had a strong
start and received 34 Emmy nominations of its own in
2015 for House of Cards, Orange Is the New Black
and Unbreakable Kimmy Schmidt.
However, in September 2015, HBO Now was
already considering lowering its price of US$15 per
month, in order to meet the competition from Amazon
Prime and Netflix.
International Millions of Total Millions of
subscribers subscribers
27.0 69.0
10.0 55.0
78.0 114.0
(mainly cable subscribers)
NA NA
? -
?
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Source: epa european pressphoto agency b.v./Alamy Images.
Amazon
As the largest e-commerce company in the US, Ama-
zon’s entry into ‘video on demand’ is no surprise. The
company rebranded its video services as Amazon
Instant Video in 2011, and Amazon Prime members
now have unlimited access to a large library of movies
and TV shows. The price of a Prime membership is
US$99 per year, which then also provides access to
the following services:
● free two-day shipping
● free access to Prime Instant Video (access to
40,000 videos)
● prime Music Library (access to 1 million music
tracks, compared to Spotify’s 30 million)
● instant access to over 500,000 Kindle book titles to
borrow for free.
Amazon’s own research has shown that Prime mem-
bers spend more than double, compared to what non-
members spend on Amazon.
Amazon Prime had between 3 and 5 million sub-
scribers around October 2011, but this had increased
to around 45 million by September 2015 in the US
alone. Amazon has expanded the Prime membership to
other countries such as the UK, Spain, Japan, Italy,
Germany, France, Austria and soon also India.
Amazon has aggressively added content to its ser-
vice, so that in some countries for exmple Germany, they
are actually market leader.
A Prime membership will not give the customer
access to every streaming video on Amazon. The com-
pany offers only certain TV shows and movies for
unlimited streaming. When it comes to brand-new mov-
ies and recently broadcast episodes of TV shows, for
example, the customer will have to pay US$2–3 per
episode/movie. Amazon marks its unlimited streaming
shows and movies with a Prime graphic across the top
of the box art; everything else is pay-as-you-go. In total,
M13_HOLL0111_07_SE_C13.indd 477
Case Study III.2  Netflix Inc. 477
the Prime service offers about 150,000 videos, of
which about 40,000 are available for unlimited stream-
ing with a Prime subscription (compared to Netflix’s
estimated 75,000).
Amazon Prime now hosts two (own) original series:
Alpha House (starring John Goodman) and Betas, with
more shows planned to debut in 2016.
Hulu
While Netflix initially began as a DVD rental service,
Hulu’s business model was established as a video
streaming service founded by NBC Universal, Fox and
ABC to satisfy consumer demand for web-based con-
tent. Hulu currently offers basic services free of charge
or a premium service, Hulu Plus, for US$7.99 per
month. Unlike Netflix, Hulu is structured to source reve-
nue from monthly subscribers and on-screen advertise-
ments. In an attempt to replicate the cable industry, Hulu
distributes videos from major networks aside from NBC,
ABC and Fox. Through its 200 content partners, it is
reported that Hulu retains between 50 and 70 per cent
of advertising revenue generated from its videos. With
7 million Hulu Plus subscribers and US$1 billion in rev-
enue, Hulu’s business model, in contrast to that of Net-
flix, supplements cable television rather than replaces it.
Amazon is both supplier and competitor for
Netflix
Netflix relies upon Amazon Web Services (AWS) to
operate certain aspects of their service and any disrup-
tion of or interference with use of the AWS operation
would impact their operations and their business would
be negatively impacted.
Figure 1 shows the supplier-competitor relationship.
Amazon Prime / Instant Video is Amazon’s own solu-
tion targeted at end users. AWS provides a distributed
computing infrastructure platform for Netflix’s web
platform. This is also commonly referred to as a cloud
computing service. Netflix has architected their soft-
ware and computer systems so as to utilize data pro-
cessing, storage capabilities and other services
Source: Carlo Allegri/Reuters/Corbis.
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 478 PART III MARKET ENTRY STRATEGIES

Amazon Web
Services (AWS) E
A Netflix
B2B ‘cloud’ solution N
M
D
A

Z U

S
O
Amazon’s own solution
Amazon E
N Prime / Instant
R

Figure 1 The supplier—competitor relationship between Amazon and Netflix

provided by aWs. currently, netflix run the vast major-
ity of their computing on aWs. this, along with the fact
that Netflix cannot easily switch their AWS operations
to another cloud provider, makes netflix dependent on
Amazon as a supplier of cloud computing services.
consequently, any further netflix international expan-
sion would also benefit aWs, which now comprises
more than 10 per cent of amazon’s total revenue, but
much more if we measure the importance of AWS for
amazon’s total profits. on the other hand, the retail
side of Amazon (Amazon Prime – Instant Video) also
competes with Netflix towards the end-customers.
1. Which of the following strategic options would you
recommend Netflix for future implementation in order
to increase revenues:
(a) create more own original content, like Wet Hot
American Summer;
(b) increase the price of monthly subscription;
(c) allow advertising to be integrated in the
service?
2. Which countries (mentioned in Appendix 1) would
you recommend as future Netflix markets? Please
argue for your ranking 1, 2 and 3.

3. Does the supplier relationship to Amazon (through

QUESTIonS AWS) harm the international competitiveness of
you are hired by reed hastings (ceo of netflix) as a netflix? If yes, how?
specialist in International Marketing and given the fol-
lowing tasks to carry out. Source: based on www.netflix.com and other public sources.

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