Competitive Dynamic and Rivalry Group 3:

Bayu Eka Putra

Lia Anggraini Setiawan
Case Study: Netflix
Noviko
Ricca
Waila Fitri Sudharyanto

Netflix Case Summary

Netflix, an on-demand streaming and DVD-in-mail provider company, was founded in
1997 by Reed Hastings, Marc Randolph, and Mitch Lowe. Netflix launched its website on April
1998 and positioned itself to take advantage of the new DVD technology because the founders
believed that DVD technology will eventually replace VHS as the preferred playback format.
The company had it IPO on February 2002, selling 5.5 million shares of common stock and
raising as much as $82.5 million in equity. To boost its brand awareness, Netflix provided a free
rental coupon to consumers that purchased Toshiba, Sony, and Pioneer DVD players as well on
selected Hewlett-Packard PCs and Apple computers. In terms of competition management,
Netflix management is very initiative as they called an early truce with Amazon to preempt the
rise of formidable competitor. In 2000, Netflix introduced online content streaming that allowed
subscribers to watch movies and TV shows on their PCs at no additional cost, In 2009, its
streaming library has grown eightfold and is compatible in many different devices includes PCs,
Macs, Blu-Ray Players, Sony PlayStation 3, Xbox 360, TVs, Roku, and TiVo.

By 2002 the company has signed revenue sharing agreements with an unprecedented 50
film distributors including Warner Home Video, Columbia Tri-Star, Dream Works, Artisan, and
many more. Despite the growing revenues, the company is not without competition; strong
competition was given from different players in the market such as Blockbuster, Walmart, and
Redbox – with Blockbuster and Walmart in particular attacking Netflix’s DVD rental services.
Despite the strong competition in the market, Netflix still managed to double its subscribers and
reach one million subscribers by February 2003 and continue to turn its customer base into
profit.

The new era of digital media brought the industry’s barriers of entry to be very close to
non-existent, converting in the increased number of competitors for Netflix in the recent years.
Since the switching cost between competitors is relatively low, it forces Netflix to move
carefully in the competition as the subscribers are not particularly loyal to the brand, but to the
content it provides. Thus as long as there are other competitors, offering a better services and
with a lower fees, customers are more likely to switch to the competitors. To compete better in
the market, Netflix does not only did revision on its subscription packages and price, but also to
its distribution channels and partnership with its competitors such as Walmart and Amazon as
well as with hardware providers such as Sony, Toshiba, and many other strong brands to ensure
that its products and services are easily accessible and convenient to use.

Netflix as a company, understands well its products and services and what actually
matters to its customers. The management understands that time and money are the most
valuable resources for the customers today, thus the management focuses in offering values to its
customers through fast delivery, outstanding customer services, and updated contents. To
encourage potential new subscribers, Netflix also did on and offline advertising from web-based
banner ads to direct mail promotion. Netflix also offers a no-obligation first month of free
service and a 10 percent discount in the first month to its existing subscribers after they stream
content using particular device, such as Nintendo’s Wii. Netflix also shows its commitment on
giving outstanding customer services by getting itself on the first place in 90 percent of polls
measuring e-commerce customer satisfaction and American Customer Satisfaction Index
(ACSI).

Looking on its financial performance, Netflix largest part of its revenue is contributed
from monthly subscription fees where its net income increased by 40% and 39% in 2009 and
2010 respectively. The company took $200 million long term debt financing in 2009 and resulted
in much higher debt ratios relative to its industry median. However, the strong position of Netflix
in the industry is maintained by the outperforming performance of its profitability and operation
ratios compared to the industry median. Netflix as a company carry high cash balance and has
been primarily used to finance its stock repurchase program, content acquisition, delivery
expenses, and capital expenditures related to information technology and automated equipment
for operations, marketing, and fulfillment; thus leading to an increase on assets growth rate and a
significant decrease on liability growth rate between 2008 to 2010. In April 2010, Netflix
exceeded expectations by achieving outstanding first quarter results with grown subscriber base
by 35% y-o-y as per Q1 2010.
 Despite all the good signs and performance by Netflix, questions regarding the business
sustainability remains, especially since USPS, its delivery partner, was considering stopping
Saturday delivery as way to staunch its financial losses. Another question is on the business
model sustainability, with the close to non-existent barriers of entry, the number of worthy
competitors are to be expected in the industry, especially with the growing demand for digital
movie rentals provided by Internet and cable companies. To remain competitive in the market,
Netflix has to also somehow deal with the 28 days delay on content release in Netflix website,
after the original DVD of the movie released in the market by the major Hollywood studios and
content providers.

Netflix Case Questions

1. Review Netflix’s organizational strengths. What core competencies have led to the
company’s remarkable success? Under new industry conditions, will they qualify as
sustainable competitive advantages? Can anything be done to lengthen or strengthen the
advantage(s)?
Answer:
We analyze the market industry of Netflix with Five Forces Porter’s framework below.

Five Forces Porter Analysis

 Threat of new entrance is High.
Netflix have many competitors for both online DVD rental and content streaming
segment. In DVD rental by mail they have Magic Disc, DVD express, Reel.com, and also
major studio companies that sell their movies in DVD format. In online content streaming
segment there are direct and indirect competitors. Direct competitors such as VOD
segment (Apple’s iTunes, Amazon.com, and CinemaCom), the ad supported segment
(Hulu.com, Google’s Youtube, Google TV), and the subscription segment (Blockbuster
Online). Netflix’s indirect competitors such as video package providers with pay-per-
view and VOD content. With the great amount of competitors we can see that there are
low barriers of entry in the industry and high threat of new entrance.
 Bargaining power of suppliers is High.
Netflix suppliers are the Amazon Web Services (AWS) as a server provider,
content providers (major Hollywood studios), and US Postal Service (USPS) for delivery.
Netflix and AWS is a mutual benefit partnership between Amazon and Netflix. We think
the bargaining power is low for AWS as a supplier because when the partnership stopped
Netflix could seek another option for the server. For USPS case, USPS postage rate
increase and they cancel the delivery on Saturday, these factors will be an issue for
Netflix’s price and time delivery. But we think USPS and AWS bargaining power is still
considered low to medium.
Meanwhile the bargaining power of content providers is considered high because
the main key in Netflix industry is the contents. There are some challenges regarding
content providers. In DVD rental segment we see that the content provider got revenue
stream from DVD sales, in the future companies can self-distribute their products and
maybe make it available for online streaming.
 Bargaining power of buyers is High.
There are many competitors that customer can choose beside Netflix, also other
substitute services or products. Beside of that, customer can easily switch their choice
because there are high cost or constraint that prevent customer to choose other company
or brand.
 Threat of substitute product is High.
We can see that the there are some products or services that can substitute such as
movie theaters, live streaming online video that have advantage in showing video in real
time, and also other substitute is illegal video download which is can threat the sales of
Netflix.
 Intensity of rivalry among existing competitors is High.
We can conclude that the intensity of rivalry among existing competitors is high,
because there are low entry barriers, and the presence of major players.

Netflix Core Competencies

 First mover advantage
Netflix have an advantage as a pioneer or first mover in this industry. They bring content
directly to the customers by using online rental and offered many benefit for the
customer, like low price packages, no due date, no late fees, etc. Netflix guaranteed that
all DVDs titles would be in stock and delivered quickly and directly to their customer’s
doorsteps via the USPS.
 Value added services
Netflix have a patented extensive personalized video recommendation system based on
user rentals, ratings, and reviews. Beside of that Netflix have extensive catalogue,
outstanding service, and near constant innovation.
 Cost leader
Netflix positioned itself as cost leader, proved by the products and services packages they
had. Netflix combined subscription package streaming and DVD-by-mail content. It
offers a uniquely compelling selection of movies for a low monthly price.

With the condition of the industry and competitors we described in Five Forces
framework, we see that it is a fragile business, so Netflix have to keep maintaining their core
competencies and always innovating. The customer in this industry are loyal to content and
 sensitive to price, therefore Netflix have to continue providing up to date selection of
contents and in a reasonably price.

2. What are the greatest external risks facing the company? What measures can or should
Netflix take to protect itself from these environmental threats?
Answer:
 Economical
Price can become sensitive matter for many people. Market competition is very tight,
price become one of the important consideration for people. Because every company in
the market offering the same product, Netflix have to consistent giving competitive price
and services to keep customer loyal.

 Technology
1. Hacker and piracy can be major threat for Netflix long-term business. Netflix have to
protect infrastructure and services from people or group of people who try to access
their services. Piracy can cut business revenue. People will not pay for video if they
can find freely in internet.
2. High Technology evolution. To keep stay in competitive, Netflix have to keep up to
date to provide streaming method for every target segment market. People not only
use Netflix services in game console, PC and video player. With the fast technology
changing, Netflix has to keep chasing the changing in people behavior.

 Law
Law play important role to keep Netflix and other content provider to survive in the
business. Netflix has to push Law enforcement in hacker crime and piracy activities. Not
only company can lose the business but customer also can be the victim of this activities.
Customer put their personal information such as email, credit card number and address in
the company server.
3. Evaluate the strengths, weaknesses, and strategies of the company’s primary competitors.
Based on a thorough competitor analysis, what is the expected strategic intent of Netflix’s
key rivals? Is the company prepared to respond to their potential competitive moves?
Answer:
SWOT of Netflix:
Strengths : a unique recommendation system; fast delivery; provide a lot of library
/movies; can be access instantly from Wii, PS3/Xbox 360, apple devices,
Roku and internet TV.
Weakness : DVD is not sustainable by the time , it can be damage or lost, cannot catch up
the process for making DVD to meet demand market, 28 days delay
negotiation with Warner Brothers, 20th Century Fox, and Universal.
Opportunity : VOD, New business development such as creating virtual built in tied with
programs, expand markets.
Threats : LIVE streaming online videos, low entry barriers to entry market, illegal
download, Blue Ray

SWOT of Blockbuster:
Strengths : The largest video rental chain, own 6,500 company with 62% located in
America, already having a partnership with Samsung Electronics America
collaborate with Samsung’s Next Generation with HD TV to rent just using
button with the high internet connection, provides VOD service partnership
with TiVo.
Weakness : High charges for monthly price and instant viewing more than one movies; no
instant access on Wii, PS3/Xbox 360,ipad, iPhone or iPod touch, Roku,
Internet TV
Opportunity : VOD, New business development such as creating virtual built in tied with
programs, expand markets.
Threats : LIVE streaming online videos, low entry barriers to entry market, illegal
download, Blue Ray
 SWOT of Redbox:
Strengths : Placing at automated Kiosks selected McDonald’s, supermarkets and
convenience stores; customer can using debit or credit card to rent movies;
can reserve movies using online; can pick up the movies at selected kiosk;
can return the movie in any kiosk; free membership
Weakness : Delay renting movie DVD’s after public release date.
Opportunity : VOD, New business development such as creating virtual built in tied with
programs, expand markets.
Threats : LIVE streaming online videos, low entry barriers to entry market, illegal
download, Blue Ray.

The company already respond to their potential moves. They already aware about the
trend market goes to digital era. They make an agreement with amazon.com, if there is any
customers who wants to buy those videos.

4. Review cooperative strategies that have been used successfully by Netflix and its competitors
in the past, then identify a set of goals that future partnership agreements should achieve to
maintain the company’s position of market leadership.
Answer:
To be able to sustain the competition in movie rental industry, what Netflix and its
competitors successfully did are:
- Successfully capture market needs when there is a shifting in the market behavior.
Since the era of technology is coming, Netflix was first mover who provide online movie
rental. More than that, era of technology has brought a shifting in market behavior.
People now prefer to watch movie online than borrowing it physically.
- Response attack from competitor with non direct attack, for example when Walmart
offered lower subscription price, instead of lowering their price, Netflix was opened
additional distribution centers to improve its service.
For future partnership, what should Netflix set are:
- Keep up to date with market shifting.
Since the trend is shifting, Netflix should be able to catch new opportunity. Since
technology is always changing, Netflix should be able to catch opportunity offered to the
industry, like increasing service for its streaming content segment.
- Improving service, technology infrastructure and cost efficiency
Since it is easy for customer to change service from Netflix to the other, Netflix should
be able to improve its service from customer service and also improving its infrastructure
for online streaming. From the other side, customer is really price concern, so Netflix
cannot increase the price significantly.
- Maintain long term relationship with supplier like movie content provider and also USPS
See the industry, it can be concluded that Netflix dependency to its suppliers are high.
For example when USPS have consideration to close its operation in weekend, it directly
affect Netflix operation service. And when suppliers have policy to publish their content
28 days after they published the DVD, what Netflix can do is just improving its service
and do marketing effort so it not lose its competitiveness.
- Consider and develop a strategy for international expansion
International expansion cost Netflix a lot and tons of challenge await. Netflix should
carefully define strategy to sustain in international market like how to negotiate with
foreign film studio, how to develop entry barrier and prevent wider piracy and illegal
download.