1.

Analyze the overall profitability of the industry in which Netflix is operating using Porter’s Five Forces
Model.

2. Conduct a strengths, weaknesses, opportunities, and threats (SWOT) analysis for Netflix, and provide
strategic suggestions based on that analysis.

3. Define Netflix’s competitive advantage. Why is Netflix so successful?

4. How would you recommend that Netflix overcome its challenges in the international market?

5. Moving forward, what future strategic initiatives might Hastings consider?

Porters 5 Forces

- Threat of New Entry (medium)

o Hulu (joint venture: Walt Disney, NBC, 21 st Century Fox)
 Offered streaming services to subscribers in US and Japan
 Monthly subscription fees $7.99 - $11.99
 2015: 9 million
o Amazon video
 Available in US, UK and Japan
 44 million users
 Second only to Netflix in market share in streaming industry
 Unlike competitors, offers users the option to rent or buy movies and TV shows
without purchasing a subscription
 Wide range of viewing platforms: Xbox and PlayStation
o Number of streaming service companies are growing; large and small enterprises are
entering this marketspace with nearly 100 firms in the USA and counting
o Streaming services are experiencing Economies of scale. Increased viewership is paying
off start-up costs exponentially. Technology and Supply chain logistics economies
continue to scale.
o Since 2005 Netflix has experienced lowered fulfilment costs and higher viewership.
Streaming Services are heavily dependent on technology. The presence of technology in
the industry means rapid and vast scalability for the economy. With the costs in the tech
industry dropping, it has become more accessible than ever to get on the internet. A
quickly growing supply chain and international expansion for the streaming service
industry is growing viewership, driving demand up and increasing efficiencies due to
economies of scale.
o Network effects are low, each streaming service offers different content and it’s not
often that they share or link content.
o Switching costs for media industry giants (News Corp. Etc.) are very low. As they have
existing content produced and paid for, all they need to ad is technology/platform
o Capital requirements are relatively low, streaming service requires is content (created or
licensed) servers to deliver the content, and a user interface to interact with the
consumer.

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 o Created content is expensive, but entrance costs into this industry remain low. Growth
costs are higher.
o Government policy makes international expansion more difficult,
o Threats of retaliation is low, as the market remains competitive and costs to consumers
remains low
- Threat of substitutes (high)
o The number of close substitutes continues to grow
o Magnitude of buyers switching costs are minimal, even beneficial
o Value proposition of substitutes offer the same basic requirements such as
entertainment and accessible high-resolution content. But a differentiated offer of
content
- Bargaining power of suppliers (medium)
o Before there were other big competitors, the bargaining power would have been high,
but now that there are many different options, Netflix does not have much power to be
able to raise prices
- Bargaining power of buyers (high)
o number of buyers is increasing with increased accessibility to the internet/technology as
well as average hours of time spent watching TV has increased globally (Statista, 2019)
o Quantities purchased are low compared to size of supplier. Although a few restrictive
measures put into place by Netflix and other, the ability to share a streaming service
subscription is incredibly high.
o Commodities offered to buyers are fairly differentiated, different streaming services offer
different content, and the licensing for this content is strict. Therefore, buyers often buy
from multiple companies.
o Magnitude of switching costs are nearly none, switching from streaming services could
even offer a benefit of new content and maybe a lower price.
o Possibility buyer backward integrates is extremely low. Although the threat of piracy still
remains predominant in the streaming service industry.
o Buyer’s cost sensitivity is high: streaming services offered an extremely low-cost
alternative to cable subscriptions. And this fragmented market struggles for buyer’s
attention

SWOT Analysis

- Strengths
o January 2016: 74 million subscribers worldwide
o 2015: 3500 employees and 6.78 billion in revenue
o Largest market share in Internet streaming and video on demand (VOD)
o Provided award winning original content, acting as developer of popular TV programs
like Orange is the New Black and House of Cards
o Adapts with the change in industry, from mail order DVD to internet streaming and VOD
o Netflix has developed an ecosystem for use on various internet connected devices,
including televisions, computers and mobile devices

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 o They were first movers in the market, and are market leaders because of that
o Wide range of content in 20 languages
- Weaknesses
o Declining growth is US market (50% drop in profit)
o No revenue generated from advertising services
 Hastings: “No advertising coming onto Netflix. Period.”
o Only had service available in 20 languages (despite being in over 190 countries)
 Disadvantage when competing with domestic content providers present in each
country
o High subscription prices
o Low profit margins due to the cost of international expansion and currency fluctuation
o Dependence on content licensing costs and relationships with distributors
o Potential dependencies on regulations and laws in different countries
o Low bargaining power of supplier
o Failure to collaborate with local partners
o High cost due to licensing
- Opportunities
o Expansion into international market (growth opportunities)
 Target to expand into 200 countries and establish itself as a global force by 2016
 Prior to expansion strategy, subscriber growth rate was 2.4 mil per year, jumped
to average of 7 mil per year following entry into streaming markets for Canada,
Europe, and Latin America
o Partnerships and joint ventures with content providers in domestic markets
o Entry into regional language content
o Still more international expansion opportunity in places like China
o Scale and popularity will help potentially lower their content licensing fees and can
potentially increase their average revenue per user per month
o Huge potential to earn revenue from ads
o Young generation relies heavily on internet as opposed to traditional television
- Threats
o Competitors: Hulu, Amazon Prime, Disney +, YouTube
o Black market pirating sites
o Rising content costs, limited access to content due to stiff competition with cable TV’s
and conflict with content owners
o Competition and pricing wars between streaming services
o Increasing its own originally produced content would increase financial commitment and
risk
o Legal issues with local authorities and content providers because of licensing and
violation off regulations
o Customers are different in every country
o Many countries have underdeveloped infrastructure
o Price rise in subscription price can cause the customer to switch to competitors

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 Competitive Advantage

- Business model
o Revenue primarily generated through subscription system
 Subscribers paid flat fee monthly ($7.99 US)
 Selection on new releases in content delivery system, faster and more
convenient for the consumer
- Developing Exclusive content
o Provided original content, acting as developer of popular TV programs like Orange is the
New Black and House of Cards
o 2013: House of Cards was released making it the first content available exclusively on
the streaming service
o Ventured into securing licensing of feature films (diversified exclusive content beyond TV
shows)
- Huge content catalogue availability to consumers
- Adapting according to the expansion
- Aggressive spending on marketing to raise brand awareness
- Stretching hands on acquiring new content by collaborating with entertainment providers
- Proprietary software technology Netflix developed was a large part of the strategy
- Netflix made it easy for consumers to “binge watch” by uploading full seasons of shows at once,
instead of 1 episode at a time like cable television
- Specifically tailored their platform based on customer interests and viewing history
- Mindful of the market for kids consuming media on mobile devices, they added movies and tv
shows that target kids under 12 on their “just for kids” side of the platform
- Netflix has an aggressive presence in internet streaming services and is second to none in the
domestic market as well as few other countries. Netflix also have a enormous global consumer
base and strong brand name along with it that gives it an edge over the competition and also
attracts content providers to sign exclusive partnership deal and also gives opportunity to
produce more exclusive content. Netflix has been successful mainly because of its business
model laid down by Reed Hastings. With its full incorporation and utilization of the Internet was
critical against its competition. Also, award winning and most watched exclusive television series
and movies attracted more and more viewers. Netflix changed how and what people watched
before it and disrupted the TV industry. Being the first to bring all these changes and innovation
in the industry Netflix has become a force to be reckoned with.

Challenges

- Content
o Regional markets content
o Content in limited languages
o People are reluctant to pay and find local competitor more affordable
- Price arbitrage

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 o Expensive price point in certain markets
o Netflix has made the choice to not chop down its price significantly in developing
markets
o This makes it relatively more expensive compared to competitors, many of which have
lower price points
- Government censorship
o Regulatory restrictions, global licensing deals and cultural factors are an issue which
requires a lot of time and money to move way forward
o Government in some countries have very strict regulations on the content broadcasted
in their countries that raised a huge risk for Netflix with most of its content being
censored it would be difficult to compete in that part of the world. the only way I see to
manage this is to create content suitable for the audience there and falls under the
regulations set by the government.
- High competition
o With expansion into international market Netflix now must compete with the local
content providers who already have enormous local content and are familiar with the
trend and acceptance of the local viewers. To manage this risk Netflix can partner up
with local content providers to get their exclusive rights and with there help create more
content
o Incumbent pay television operators and established VOD vice providers in local markets
o Successful in Canada
 High percent of penetration (45%)
 Shomi and CraveTV has lower market share o India already had 4 major service
providers
o Netflix faced underdeveloped infrastructure
 Poor network quality
- Fall in financial strength
o Due to heavy investment in global expansion Netflix faces decrease in the financial
strength as it has reported losses in its international sector most of which were due to
high licencing cost and investment in production of local content. one way to reduce the
fall is to provide annual subscriptions on a reduced price and will also be helpful in
creating loyal customers
o Profitability in certain market depended on internet availability of the Internet in certain
countries
o Only 31% of households in developing countries has access to the internet
o Significant cost was fees paid for global licensing deals
- Local Adaptation
o Expansion strategy came under criticism
 Outpacing its ability to provide area-specific, modified content to international
subscribers and develop market penetration strategies that were specific to host
country
o Sidebottom (Analyst at FutureSource Consultancy) – “people are more reluctant to pay
for monthly subscription in France and Germany “
 Set up a different revenue model for these countries (like Amazon Video)

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  offer users the option to rent or buy movies and TV shows without purchasing a
subscription
o Only had service available in 20 languages
 Increase the number of languages available
o Countries preferred domestic content providers
 Explore partnerships and joint ventures with content providers in domestic
markets (expensive – spending on international content creation was $5 billion
for 2016)

Future Strategic Initiatives

- Create additional revenue streams through advertising

- Create cheap and only mobile subscription in low-income countries like India where almost
everyone has a smartphone and can have cheaper Netflix subscriptions exclusively for the
smartphones
- Collaborate with other streaming services to create crossover shows and movies to attract more
viewers
- Provide annual subscription at lower cost to attract and retain the potential customer
- Restrict the different users using the same account to avoid sharing of subscription
- Promote Local creators to get cheaper and unique ideas for the exclusive content
- Enhance offline streaming technology for areas that do not have consistent internet access
- Focus on enhancing the experience in existing markets, and slow down the expensive rapid
international expansion
- Provide customers the ability to suggest movies or tv shows that they would like to have on the
platform
- Partner with live television programs to start showing live events such as sports or reality tv
shows, as some streaming platforms have started doing
- Bring back free trials
- Provide the ability for viewers to buy a subscription that allows them to view media from other
countries Netflix platforms, to curb the trend of pirating movies and shows that aren’t offered on
local Netflix

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