Case StudyBUS 550 The Contemporary FirmAaron ContrerasCSUCI

www.netflix.com

AgendaCompany HistoryCompany FinancialsFive Influencing ForcesCineMatchNetflix’s Quantum TheoryChallengesConclusion

Who is NetflixNetflix is a internet TV company

providing online streaming content as well as DVD/Blu Ray rentals direct to home

CEO Reed HastingsMain headquarters located in Los

Gatos, California2,022 Employees at end of 2013

Company Timeline

1997 - NetFlix.com founded to offer online movie rentals

1999 - Launches subscription and selling service

1999 – Secures $30M in investment capital from Group Arnault

2000 - Launches personalized movie recommendation service CineMatch

2002 - IPO with ~850,000 members2006 – Announces Netflix Prize $1M for 10%

improvement in recommendation accuracy

www.netflix.com

Company Timeline, cont.

2007 – Netflix introduces streaming2008 – Partners with consumer electronic

companies to incorporate Netflix streaming on their devices

2010 – Launches in Canada2011 – Launches in Latin America and

Caribbean2011 – Announces Qwikster a separation of

online streaming services and DVD rentals2013 – Original programing is started with

“House of Cards”

www.netflix.com

Company Financials• Company is traded under NFLX:NYSE currently valued $322.08

(4/26/14)• Had $4.3B in Revenues in 2013• Spent over $3.04B in content in 2013• As of Q1 2014 48M worldwide subscribers• Announcement of Qwikster results in a 60% devaluation of Netflix

stock

Announcement of Qwikster

www.yahoo.finance.com

Netflix evolved a progressive view on culture and talent management• Personal Management

– Hire the right people • Have them use their logic• If they hire the wrong person they part ways quickly

• Performance Reviews– Elimination of Formal Performance Reviews

• Implemented peer reviews

• Team Rapport– Strategy is understood by the team

• Company Culture– Knowledgeable employees

• Understand the drivers of the business

• Human Resource– Innovative approach

• Vacation and Absences are not tracked

Five Competitive Forces on Netflix

Rivalry of competitor

s- Amazon

Prime- Hulu Plus- Redbox

Threat of Substitute Products

- Pirated On-line Content- Gaming

Bargaining Power of Suppliers

- Film industry- Original Content

Developers

Threat of new entrants

- Cost of entry is low

Bargaining Power of new

buyers- Services for competitors is

relatively similar

Is Netflix threaten by new entrants

Supply side Economies of Scale◦ Cost relatively equal, lack of net neutrality may make it easier for

smaller firms• Demand-side benefits of Scale

Netflix large content library and extensive deals allows them to leverage deals across the industry

Customer Switching Cost◦ Relatively Low

Collaborative Filtering and Profiles increases consumer switching cost

Capital Requirements◦ Large content libraries and original content drives up capital

investment Incumbency Advantages

◦ Collaborative Filtering – Netflix has more history of collecting this data on viewers

Unequal access to distribution channels◦ Not highly impactful

Restrictive government policy◦ Changes in policy on net neutrality could increase or decrease entrants

Power of suppliers Netflix has leverage content from suppliers that

otherwise would not provide profit By Expanding their offering in the tail end of

demand increase Netflix profitability Netflix also obtains independent films which are not

picked up by large film companies. Licensing and windows play a large role in content

availability

Rivalry of Competitors Netflix

◦ Offers Original Content◦ Subscriptions - $119.88/yr10

◦ Highly Personalized via CineMatch, Collaborative Filtering and Profiles Amazon Prime

◦ Offers Original Content◦ Subscription - $99/yr10

◦ Some content available to purchase

Hulu Plus◦ Subscription - $95.88/yr10

◦ Original Content◦ Ad supported ◦ Personalized via Recommendation Algorithms◦ Associated with Networks

Video On-Demand (VOD)◦ Offers Original Content◦ Cost is variable

www.netflix.com

www.amazon.com

www.hulu.com

www.comcast.com

www.timewarner.com

Threat of Substitute ProductsNetflix is on the benefiting side of

substitution◦ On-line streaming is the substitute

product for in home DVD/Blu Rays as these devices become commodities

Increased access to content through Piracy could be an influence for Netflix

Increase in gaming communities could detract viewers of traditional format into more interactive content

Recommendations – CineMatch DVD recommendations delivered based on

ratings◦ Initially launched as part of the DVD delivery service

Basic Principle◦ Captured likes and dislikes of categories – Romance,

Action, Foreign, etc.◦ Based on viewers ratings it would suggest movies◦ Linked to distribution center and availability◦ Claimed a 60% accuracy on selected options from

recommendations◦ Netflix Prize ($1M) was for the first to obtain a 10%

increase in accuracy◦ Final algorithm was not implemented

Collaborative Filtering Netflix’s Quantum TheoryCurrent algorithms process petabytes of

informationThis has led to over 76,000 alt-genres

◦ Alt-genres are compilations of several larger genres sliced into more specific targeted audiences and tastes

Micro-tagging is done by individuals trained on Netflix’s Quantum Theory document (34 pages) on how to micro-tag for consistency ◦ Includes for all content measuring such things as

“social acceptability” of lead characters Ending Type Romance

A reverse engineered version of Netflix’s alt-genres categories

http://www.theatlantic.com/technology/archive/2014/01/how-netflix-reverse-engineered-hollywood/282679/

Profiles have enhanced the ability to personalize content

Allowing profiles allows for more specific viewing which allow for less mash up of preferences

Urge you to develop different profiles for different timeframes ◦ Daytime viewing◦ Weekend viewing

Linking these profiles to Facebook® allows for further personalization as increased viewing experiences also fostering a expanding network

www.netflix.com

Netflix faces a big challenge against it’s future profitability and expansion

Obvious position for Netflix is net neutrality

Netflix’s monitors and publishes the ISP providers with the best primetime delivery

Netflix entered into a peering deal with Comcast for an undisclosed amount

Potential impact to customer satisfaction

ConclusionsNetflix knows your viewing habits

better than you doCompetitors are developing with

slightly different business models◦Firms will need to rely on original content

and licensing agreements to edge out the competitors

Without net neutrality larger streaming firms may need a long term strategy on profitability impact due to peering fees

Questions1. What business decision resulted in a 60% stock

devaluation in Netflix’s history?a. Amazon Prime Launchb. Qwikster Annoucementc. Blockbuster On-line Launch

2. What are potential substitutes for Netflix services/products?

a. Amazon Primeb. Hulu Plusc. Gamingd. Pirated Content

3. How can peering with ISP’s affect Netflix customer service experiences?

a. Slow internet speedsb. Increase cost of subscriptionsc. Increase streaming performance

References1. www.netflix.com2. Netflix broke the rules and won according to stanford business school research.

(2008, Apr 16). Business Wire. Retrieved from http://search.proquest.com/docview/444648479?accountid=10043

3. Mccord, P. (2014, Jan 20). How netflix reinvented HR. Businessline. Retrieved from http://search.proquest.com/docview/1490574625?accountid=10043

4. Seitz, P. (2013, Mar 13). Netflix feature will test limits of facebook sharing. Investor's Business Daily. Retrieved from http://search.proquest.com/docview/1324599727?accountid=10043

5. Shalvey, K. (2013, Apr 12). Netflix files to disclose key data via social media some investors may object follows up fast on SEC report saying facebook, twitter 'perfectly suitable'. Investor's Business Daily. Retrieved from http://search.proquest.com/docview/1325836202?accountid=10043

6. The Pragmatic Theory solution to the Netflix Grand Prize, Martin Piotte, Martin Chabbert, August 2009

7. http://www.businessinsider.com/amazon-prime-versus-netflix-versus-hulu-plus-2014-4

8. Netflix Case Study: David Becomes Goliath, www.gallaugher.com, Copyright 1997-2008, John M. Gallaugher, Ph.D.

9. The Five Competitive Forces that Shape Strategy, Michael E. Porter, Harvard Business Review

10. How Netflix Reverse Engineered Hollywood, The Atlantic, Alexis C. Madrigal, Jan 02 2014, http://www.theatlantic.com/technology/archive/2014/01/how-netflix-reverse-engineered-hollywood/282679/