Netflix Business Model and Strategy in Renting Movies and TV Episodes
According to the five-force analysis of the movie rental marketplace, the competitive forces are not strong. Netflix is being in a position of a market leader that lacks a strong competitive force – that is because it has a unique business model, compared to its nearest competitors – Blockbuster and Movie Gallery (Thompson 277), which uses physical stores to rent out its content, while Netflix uses the mail order-based model. The remaining four forces that influence the movie rental industry include:
- Substitutes: (moderate threat) – Cable companies offer Video on Demand (VOD) that threatens the movie rental business of companies like Netflix and Blockbuster. However, the threat remains moderate because it is expensive than what Netflix charges for its orders
- Buyers’ bargaining power:(low threat) – the rental business serves one customer at a time; as a result, it does not face a threat from one unified consumer approach
- Suppliers’ bargaining power: (low threat) – studios that provide the content for the rental industry was already facing a decline in genuine DVD sales before the rental companies influenced consumer demand; as a result, the suppliers do not have a great say on how the rental companies can procure for their content
- Threat of new entrants: (moderate threat) – the rental industry has evolved into a technology-based industry. However, major tech companies, like Google, have the capital-base to introduce more affordable rental services (see Appendix A: Five-force analysis of the movie rental marketplace)
Several forces are driving change in the movie rental industry. They include (1) convenience, (2) lifestyle changes, (3) the economy, (4) the available options, and (5) costs and efficiency changes. The combination of these forces is favorable for the industry. As long as the companies that have a lower market share fail to offer their customers affordable prices for premium content, the competitive intensity will remain low. However, the evolution of technological strategies will lead to an increase in the competitive intensity in the long-term.
According to the strategic group map (see Appendix B: Strategic group map of the movie rental industry), Netflix has the best position. Its lack of a large collection of physical inventory enables it to save on costs. However, it also faces competition from Blockbuster because it has a variety of offerings – for example, video games. On the other hand, although Netflix model requires the users to have access to high-speed Internet, it has the potential of attracting more customers as Internet costs reduce in the long-term.
The factors that will determine a company’s success in the industry in the next 3-5 years include the cost of products and the media that the companies use to deliver their products. The cost is important because the company that can offer premium content at an affordable price will attract the largest number of customers; hence, sustaining its financial performance. On the other hand, the media (that is, adoption of technology) that the companies use will determine the convenience the customer enjoys; thus, leading to loyalty.
According to its CEO, Netflix’s business strategy is to create the “best Internet movie service and to deliver a growing sub-scriber base and earnings per share every year” (Thompson 282). The strategy best fits the broad differentiation generic strategy. As a result, the company strives to achieve a competitive advantage by offering the best product or service, which, in turn, attracts customers.
According to Netflix’s SWOT analysis, (see Appendix C) the company has more strengths and attractive opportunities. The company has a potential to grow bigger and realize more financial returns because, there is increased Internet use globally – which, in turn, will lead to a demand for online-based services that provide the convenience previously enjoyed by physical visits to entertainment outlets. However, the entrance of new modes of movie consumption threatens the attractiveness of its situation. Cable companies are increasingly offering premium content, which threatens Netflix’s customer base.
According to the exhibits(2), (3) and (4) (Thompson), Netflix has enjoyed a growth in revenues and customers’ subscriptions between 2000 and 2007. Furthermore, the company has realized decreasing debt-to-equity-ratios in the same period. From 1.38 in 2000, the ratio decreased to 0.955 in 2007. On the other hand, the company’s profit margin ratio decreased from 1.63 in 2000 to 0.056 in 2007. The ratios indicate that the company has enjoyed sustained progress in its financial performance.
According to a weighted competitive strength assessment of Netflix and Blockbuster (see Appendix D), Netflix has an overall operative advantage compared to Blockbuster. The main advantage is Netflix’s ability to deliver its products in a short time. In addition, the company manages to limit its cost because of a small amount of personnel. However, Blockbuster has an advantage of better customer service because of the physical contact that its stores can offer customers. Subsequently, Netflix’s ability to limit costs will continue to give it a competitive advantage over Blockbuster.
As a result, Netflix and Blockbuster’s management have two issues that they have to prioritize. They include:
- Expand the titles’ selection
- Increase the selection of products
- Make the products more affordable
- Reduce the time of delivery
Accordingly, I would recommend Reed Hastings (Netflix CEO) to increase the number of titles that they offer. Although 120,000 titles (Thompson) seem considerable, they do not cover the wide array of content that customers would like to enjoy over time. In addition, the company should introduce more products (for example, games) in order to cater for the diverse entertainment tastes of its customer base.
Finally, I would advise James Keyes (Blockbuster CEO) to reduce the costs of acquiring products from their company and consider introducing an online-based, instantaneous service. Customers are always on a look out for the products that have the best quality but come at an affordable price; in addition, the use of technology has increased the demand for products that a customer can acquire at the press of a button (that is, instant gratification).
Thompson, Arthur A. “Netflix’s Business Model and Strategy in Renting Movies and TV Episodes.” Essentials Of Strategic Management: The Quest For Competitive Advantage. New York, NY: McGraw-Hill Higher Education, 2013. 277-294. Print.
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