report prepared for: netflix...group assignment postgraduate diploma in business apmg 8119: digital...

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REPORT PREPARED FOR: NETFLIX

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COMPANY BUSINESS MODEL ANALYSIS

GROUP ASSIGNMENT

POSTGRADUATE DIPLOMA IN BUSINESS

APMG 8119: DIGITAL ENTERPRISE

ASSOCIATE PROFESSOR DR. NITIN SETH

! | P a g e 1NETFLIX

PALLAVI GROVER 1474651YASHIKA DEORA 1462695NEELANSHI SHARMA 1460507

SIMON J 1467248

EXECUTIVE SUMMARY

E-business is the method of the future, and gradually Kiwis are adopting it. This

report focuses on an exploratory study of Netflix business model with a digital

enterprise context and its business activities. Moreover, its mostly concentrate on the

nature of the organization and the business exercises in e-commerce. This report will

analyse the efficiency of Netflix working and proceeds with a overview of the

company's revenue area and cost structure furthermore also the ways to deal with

value creation from the point of view of the organisation and for its customers.

Ultimately, the report finishes up with outlook on possible changes to enhance the

organization's value creation. There are some key issues that can be a case to

propose the organization to concentrate more on the activity of the site and focus on

significance of online networking.


TABLE OF CONTENTS

EXECUTIVE SUMMARY 2 ............................................................................................

TABLE OF CONTENTS 3 ...............................................................................................

BUSINESS BACKGROUND 4 .......................................................................................

INDUSTRY OVERVIEW 5 ..............................................................................................

REVENUE ANALYSIS 6 .................................................................................................

COST ANALYSIS 9 .........................................................................................................

VALUE CREATION 12 ....................................................................................................

CONCLUSION 14 ............................................................................................................

REFERENCES 15 ............................................................................................................

APPENDICIES………………………………………………………………………16


BUSINESS BACKGROUND

Netflix is the world’s most popular subscription based Internet TV streaming

company using top innovation to give exceptionally custom fitted on-request

streaming media services to more than 40 million clients in more than 40 regions

around the world getting a charge out of more than 125 million hours of TV

programme and movies every day. Netflix website became operational in August

1997.Netflix offered its IPO on May 2002, offering 5.5 million shares of basic stock.

By 2005 Netflix shipped 1 million DVDs out daily.

Netflix depends on the content it delivers to differentiate it from other programs in the

industry provided by its rivals. The major cost associated with Netflix is the cost of

the content. According to the latest figures the cost of licensing and production is

around $ 10 billion per year. But the revenue has only risen from around $ 5 billion to

$ 6 billion year on year. But shareholders and investors are unfazed by the deficit

since Netflix is adding subscribers in a good pace and also is expanding rapidly in

many parts of the world.

Later it was launched with wider platforms like the Xbox 360, Blu-beam plate players,

TV set top boxes and Apple PCs, hence inserting the openness idea as a key

variable of its development technique bringing about client base upgrade addition of

2 million individuals in 2010.

STAKEHOLDERS

Netflix tries to take into account everybody who has an overabundance to broadband

web access. It engages mostly grownups who are excessively occupied, making it

impossible to move out and search for alluring banner. Netflix also focuses on people

those are movie buffs and individuals who want the most value for their money.


INDUSTRY OVERVIEW

The greatest danger to Netflix is Amazon, its biggest competitor. According to

Nielsen, in the fourth quarter of 2014 (the latest data available), here’s the

breakdown of Netflix, Amazon, and Hulu Plus streaming services in American

households:

BUSINESS MODEL Netflix business model canvas is made of these standard segments

• VALUE PROPOSITIONS • CUSTOMER SEGMENTS • CHANNELS • CUSTOMER RELATIONSHIPS • REVENUE STREAMS • KEY RESOURCES: • KEY ACTIVITIES: • KEY PARTNERS: • COST STRUCTURE

Streaming Service Market Share (American Households)

Netflix 36%

Amazon 13%

Hulu Plus 6.5%


The image below will give the detailed parameters falling under each segment.

Revenue Analysis

Netflix is one of the leading providers of streaming media which delivers TV shows

and movies over the internet. Its subscribers can watch videos on any internet

connected devices such as PCs, Macs, Smartphone, Game consoles, etc. Also in

United States, Netflix offers the delivery of the DVDs to the subscribers at their

address. Netflix generates revenues through the monthly membership fees for its

content streaming services and DVD-by-mail services.

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Netflix Revenue Model


Convenience

Netflix offers three types of streaming membership plans that differ by the quality of

the content offered and the number of screens that can access the content

concurrently.

• The standard definition plan

• The high definition plan

• The ultra-high definition plan

Content acquisition is an important part of Netflix business. Netflix obtain content

from distributors, studio and other suppliers through revenue sharing agreements,

direct purchases, and license agreements. For content delivery, they utilize its own

content delivery network known as Open Connect and third party content delivery

networks.

Netflix also has three operating segments:

1) International Streaming

2) Domestic Streaming

3) Domestic DVD Streaming- Refers to the DVD my mail services


As per the statistics, Netflix delivered a disappointing subscriber numbers as part of

its Q2 2016 earnings, which showed that the company had only added 0.16 million

subscribers in the U.S. in the three months ending June 30’16. That’s far below the

0.9 million which the company added during the same quarter a year ago, and even

below the company’s conservative April guidance of 0.5 million for the quarter.

The company generated a total of $2.1 billion of revenue across all of its businesses

during the three months ending June 30’16, compared to $1.64 billion during the

same quarter a year ago. The company’s net income was $41 million, compared to

$26 million for Q2 of 2015. This equals earnings per share of $0.09 compared to

$0.06 a year ago.

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Netflix Revenue Growth

There are a number of risks involved with the concerned revenue component. Netflix

is completely dependent on its content streaming and the subscribers for the

revenue generation. However there are some weaknesses of the company that

could affect the total revenue of the company.


They are ;

1) Netflix has a big window of time since when the movie is launched to when it

is been adopted by the Netflix library. Customers have to wait for 28 days to

access the content unlike its competitors which affects the revenue of the

company as a whole.

2) Contractual restrictions on streaming content by the content providers limits

the expansion of the company

There are also some opportunities associated with the revenue component.

1) The component has a scope of more expansion in the international market.

2) Netflix has opportunity of growth in various internet streaming services which

has been untapped by them.

In a nutshell, Netflix is one of the best companies in streaming media which

has been growing at a rapid scale since it first started. It has some revenue

components which if evaluated with its risks and opportunities could help

maintain the success graph of the company as a whole.

COST ANALYSIS

Netflix spent $607 million, $472 million, and $270 million on marketing, technology

and development, and general and administrative expenses respectively. Here are

the Netflix’s key costs and operating expenses areas:

Cost of Revenue:

This is referred to the expense of getting content. In the streaming segment of both

domestic and international, content expenses include amortizations of the streaming

content library and the licensing and acquisition of the streaming content expenses.

Both domestic and international segments of streaming includes the streaming

delivery expenses along with customer service and payment processing fees which

is also included in cost of revenue.


Along with Streaming delivery expenses, equipment costs related to OpenConnect

(Netflix’s content delivery network) and all third-party costs that is associated with

delivering the streaming content are included as well.Delivery expenses for the

domestic DVD segment consist of the postage costs to mail DVDs to and from the

members and the packaging and label costs for the mailers;

Streaming Delivery: One of the major cost incurred by Netflix is streaming cost. It

costs 6 cent for Netflix to deliver a movie which uses 1.8GB of data and lasts around

2 hours. 3GB data is used to watch the HD movies and it would cost 9 cent for one

HD movie. This cost varies according to the data used by each movie/video.

Content: An important part of Netflix business is content acquisition. Netflix gets its

content from distributors, studios, and other suppliers through direct purchases,

revenue sharing agreements, and license agreements. For content delivery, Netflix

makes use of its own content delivery network (known as Open Connect) and third

party content delivery networks. For the delivery of DVDs in the US, Netflix has a

network of shipping centers for delivery and returns of DVDs.

- The company has incurred cost for $700 million in 2011and $1.2 billion in 2012 for

third party licence.

- In 2014, Netflix’s cost incurred on programming was higher than that of than

HBO, Amazon and Hulu.


- According to The Wall Street Journal report in 2015, out of the Major Three,

Netflix had planned on designating the most funds toward acquiring content –

more than what Hulu and Amazon had projected on spending, combined.

Marketing: In Netflix’s streaming segment which includes both domestic and international, the expenses of advertising along with payments to affiliates and

device partners are the primary expenses. Advertising expenses include

promotional activities such as television and online advertising.

Technology and development: These comprise of expenses incurred in

making improvements to the administration offerings, including testing,

maintaining, and changing/modifying the user interface, recommendations,

merchandising, and streaming delivery technology.

Property: Netflix don't own properties and they prefer to rent/lease the

properties for the essential use. They have a lease agreement for global

distribution centre and once the lease agreement is over will be a tremendous

cost for Netflix.


LocationEstimated

Square Footage

Lease Expiration

DatePrimary Use

Los Gatos, California

250,000 March 2018 Global streaming corporate office, general and administrative, marketing and technology and development

Beverly Hills, California

79,000 August 2018 Global content acquisition, marketing and general and administrative

Santa Clara, California

23,000 October 2016 Global streaming customer service center

Columbus, Ohio

90,000 August 2016 Domestic DVD receiving and storage center, processing and shipping center for the Columbus area

Fremont, California

57,000 March 2019 Domestic DVD corporate office, general and administrative and technology and development

Financial Risk

The revenue and expenses of Netflix is highly co-related with the Euro, The

Canadian Dollar, Brazilian Real and The British pound. So there will be a negative

impact on the revenue and net income of the company which is communicated in US

dollar because of the changes that will come in the conversion rate.

Value Creation Current Approach:

For the purpose of Value creation one has to be able to understand the meaning of

leverage to its fullest. Netflix has managed to leverage the competitive advantages of

different industries for its own benefit. The current value creation for the company

comes through licencing rights of content from media houses and by its ability of

convenience and control it offers to its subscribers over the purchased content

(Mikhalkina, 2014)


Netflix makes available different content from diverse background to a diverse

audience with differing taste. This makes for highly desirable entertainment content

for the subscriber. Value is created by giving the customers complete control over

the content, in terms of the time of the day they want to watch, in terms of the genre

they prefer on a particular day, and the number of series or movies they wish to

watch.

Internal organizational perspective:

From the internal perspective value is created my collating as much data as possible

of the customers and the content that is being provided. The company needs to be

able to provide the latest content to its subscribers. The value is in negotiating the

terms and conditions for the licensing agreements of the content being provided.

It has to make sure it gets to know the pulse of its customers and want they are

intending to watch. Netflix will have to make sure it gets the right price for providing

the right content to its audience (Popper, 2016)

Netflix has to make sure it signs the contract for the maximum possible time from the

content providers for the latest movies and series, and then be able to stream the

same over a longer period of time under different genres to keep it relevant for the

consumers, all at the same time drawing in more revenue from the same content.

External Customer Perspective:

Entertainment on demand is the unique customer proposition that Netflix offers. The

time available for different people is not the same as everyone, and the time when

people feel like watching something varies and unlike conventional TV Netflix does

not dictate the time and date when a customer should watch a particular movie of a

particular genre.

It gives the ownership to make such decision of choice over to the customer thus

making Netflix more desirable than conventional TV. From the customers’ point of

view this creates enormous value since he can customize his schedule according to

his convenience.


Value Creation in next 5 to 10 years.

The Value creation is going to lie in the ability to depend less on licencing and

producing in house. This will bring down licencing liabilities of the firm and reduce

the control production houses can exert over Netflix. By promoting in house movies

and series the firm will be better able to leverage on the economics of content and

be able to increase the profit.

This along with increasing its customer base over different locations and ensuring

more viewership for the same locally produced content will provide more cash

inflows and decrease capital expenditure. So the main value creation proposition for

the firm over next 5 to 10 years is going to be creating more in house content and

expanding to more locations (Statista, 2016)

Conclusion

Netflix was built to take advantage of and leverage on the advantages of the

entertainment industry for the customers. This as such is a brilliant way of generating

cash by offering control of the content over to the subscribers. So far as we

discussed this model has been highly effective in the ways it provides service to the

clients.

In the near future a lot will depend on its ability to cut down expenditure by producing

its own series and movies and not being dependent on production houses. Also with

the reach of broadband internet increasing day by day it gives more incentives for

the firm to expand globally and take monetary advantage by providing localized

content over a wider audience to increase profit.


REFERENCES

Mikhalkina, T. (2014). Netflix Business Model. London: Cass Business School.

Popper, B. (2016, January 19). netflix-q4-2015-earnings. Retrieved from theverge: http://www.theverge.com/2016/1/19/10790282/netflix-q4-2015-earnings

Statista. (2016, July). quarterly-number-of-netflix-streaming-subscribers-worldwide. Retrieved from statista: https://www.statista.com/statistics/250934/quarterly-number-of-netflix-streaming-subscribers-worldwide/

Williams.T. (2016) Netflix’s weak subscriber growth is just a blip. Retrieved from:

http://www.marketwatch.com/story/netflix-is-improving-earnings-revenue-at-the-cost-

of-subscribers-2016-07-19

Rosenfeld. E.(2016) Netflix beats on earnings, but plunges after weak guidance,

Retrieved from:

http://www.cnbc.com/2016/04/18/netflix-reports-first-quarter-2016-results.html

Anson, J., Boffa, M., & Helble, M. C. (2014). A Short-Run Analysis of Exchange Rates and International Trade with an Application to Australia, New Zealand, and Japan.

Chao, C. N., & Zhao, S. (2013). Emergence of Movie Stream Challenges Traditional DVD Movie Rental--An Empirical Study with a User Focus. International Journal of Business Administration, 4(3), 22.

Chicago

Sharma, A. M. O. L. (2013). Amazon mines its data trove to bet on TV’s next hit. The Wall Street Journal, 1.

Finlay, S. C., Johnson, M., & Behles, C. (2014). Streaming Availability and Library Circulation: An Exploratory Study. LIBRES: Library and Information Science Research Electronic Journal, 24(1), 1.

http://www.marketwatch.com/story/netflix-is-improving-earnings-revenue-at-the-cost-of-subscribers-2016-07-19http://www.cnbc.com/2016/04/18/netflix-reports-first-quarter-2016-results.html

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