Netflix-Case Study-- When a Pioneer Has to Reinvent Itself

Running Head: NETFLIX: CHANGING STRATEGIES AND THE PORTER FIVE FORCES OF ANALYSIS 1

Netflix: Changing Strategies and the Porter Five Forces of Analysis

James Rothaar

MBA 8800

Wilmington University

August 23, 2014

NETFLIX: CHANGING STRATEGIES AND THE PORTER FIVE FORCES OF ANALYSIS

Netflix: Changing Strategies and the Porter Five Forces of Analysis

Introduction

Cofounders Marc Randolph and Reed Hastings started Netflix in 1997. The firm, which

is located in Gatos, California, began its subscription-based service in 1999. The revolutionary

company forever changed the business model of the home-entertainment industry delivering

programs directly to the homes of consumers via mail and then video streaming online. Netflix

has more than 10 million subscribers and more than 100,000 programs, ranging from TV shows

to films to special programming. Reed Hastings is the CEO of the company. (Netflix n.d.)

Strategy Reformation

Being among the pioneers in an industry that is heavily influenced by advancements in

technology could be a challenging proposition, as competitive forces are formulating and

evolving at the speed of reality. Netflix established its effectiveness in a market prior to the

industry operating at optimal efficiency. Mailing DVDs to subscribers was the early focus of the

industry. However, when online streaming also became popular, two modes of delivering the

same products became available. A firm had to determine whether it wanted to deliver products

by mail, online streaming, or both. Netflix wanted to be a major player in both markets,

announced that it was splitting its original model into two businesses models, and, in the process

irked customers and investors alike.

However, after the company split up its original business platform and morphed it into

two separate business models, consumers felt that the company was charging them twice for a

similar service. While each business model actually was unique, the perception of consumers

toward Netflix put the firm in a difficult position. It created a public-relations dilemma to go

along with its new business models (The New York Times, 2011).

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Threat of New Entry

The threat of new entrants into this business sector is low to medium due to the high-cost

of acquiring the rights to distribute programs produced by the various entertainment companies,

which range from major film and TV studios to midsize production studios to videogame

suppliers. It would take billions to obtain sufficient programming to compete directly with

Netflix. Additionally, the financial commitment required for state-of-the-art information

technology and regional distribution centers would be substantial as well. A niche or a specialty

program producer may be able to compete on certain types of programming. However, doing so

across-the-board would be at this mature stage of the industry could be a real money-pit for a

newcomer entering the business (Cable News Network, 2011).

Bargaining Power of Suppliers

The bargaining power of program suppliers would be high, as the only way to compete

directly with a firm the stature Netflix would be for a company to have the same or similar

programs that are available through Netflix. If any of mainstream program suppliers, such as a

Disney, or an NBC-Universal, opted not to allow a competitor to offer their programming, that

firm would be at a measureable disadvantage trying to go head-to-head with Netflix. Since the

pipeline of high-quality programming is limited, having relevant programs is a key issue that

leverages the bargaining power of program suppliers in the home-entertainment industry

(Forbes, 2012).

Bargaining Power of Buyers

The bargaining power of buyers, as a competitive threat, is low, as no single subscriber

(i.e., customer) rents enough products to directly influence the prices charged by Netflix.

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Individual subscribers have little power to negotiate terms and conditions of sale. The bargaining

power of buyers does not exceed the terms and conditions of their membership. While this does

not circumvent subscribers from tapping another service provider to buy the same programs or

canceling their subscriptions, the bargaining power of buyers is not significant (The New York

Times, 2011).

Competitive Rivalry

The competitive rivalry for Netflix is medium to high, as the key variables that

differentiate competitors are quality of programs available, quantity of programs available,

associated costs, and timeliness of delivery. All competitors pretty much tap in to the same mix

of programs and convenience of delivery to attract new subscribers and to retain existing

patronage. It is relatively easy for households to either switch their subscriptions from one source

to another or to have a subscription to more than one service. Additionally, the differentiation

from one competitor’s product-line to another is minimal (Forbes, 2012).

Threat of Substitution

The threat of substitution via alternative product is low, as the cost to buy an individual

DVD versus renting it or having it streamed online is significantly higher. A buyer’s demand for

purchasing a DVD is not practical for casual-interest consumers. The practicality of owning

physical DVDs versus having online access to those on an as-needed basis is considered. What

could be better than having a real product that takes up no space except for computer memory?

Why drive to a store when you can instead click and save time and money (Cable News

Network, 2011)?

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Recommendations

Perhaps Netflix should phase out its by-mail service from its current offerings. Taking on

an extensive DVD to fill orders by mail could require the firm to maintain a cost-prohibitive

inventory. Netflix may want to restructure and re-price its current subscription packages.

Separate fees for each service is workable, but if a subscriber wants to utilize both the mail and

the online streaming services, a discounted price point, such as $10.99 for both services, instead

of charging full price for each service. It may be more palatable to consumers.

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Figure 1. Michael Porter’s “Five Forces” Model for Netflix. This figure illustrates Porter’s “Five

Forces” as these apply to Netflix.

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References

Wingfield, Nick and Stelter, Bryan. (October 24, 2011). How Netflix Lost 800,000 Members and

Goodwill. The New York Times. Retrieved from

http://www.nytimes.com/2011/10/25/technology/netflix-lost-800000-members-with-price-rise-

and-split-plan.html?pagewanted=all&_r=0

Gross, Douglas. (September 20, 2011). Customers Fume Over Netflix Changes. Cable News Network.

Retrieved from http://www.cnn.com/2011/09/20/tech/web/netflix-reaction/

Hardtung, Adam. (January 29, 2013). Netflix: The Turnaround Story of 2012. Forbes.com. Retrieved

from http://www.forbes.com/sites/adamhartung/2013/01/29/netflix-the-turnaround-story-of-

2012/

Hastings, Reed. (September 18, 2011). An Explanation and Some Reflection. Netflix U.S. and Canada

Blog. Retrieved from http://blog.netflix.com/2011/09/explanation-and-some-reflections.html

Porter, M. E. (1979). The Five Competitive Forces that Shape Strategy. Harvard Business Review.

Retrieved from http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/ar/1

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APPENDIX A.

Competitors of Netflix

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APPENDIX A (page 2) Insight on Netflix and Its Top 3 Competitors

References

Paramesh, Santhosh. (June 5, 2013) The Beginning of the Movies Rental and Streaming Wars. ISanthosh.com.

Retrieved from http://isanthosh.com/netflix-the-beginning-of-the-movies-rental-and-streaming-war/

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APPENDIX B

Key Issues:

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APPENDIX B (page 2)

“The Netflix monopoly is starting to erode. Given the news coming out of both Amazon and Hulu recently, competition is about to get even more fierce.”

References

Protalinkski, Emil. (June 4, 2013) Netflix accounted for dominant 89% of TV show streaming in

Q1 2013, but lost share to Hulu and Amazon Prime. TheNextWeb.com. Retrieved

http://thenextweb.com/insider/2013/06/04/npd-netflix-accounted-for-dominant-89-of-tv-

show-streaming-in-q1-2013-but-lost-share-to-hulu-and-amazon-prime/

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