Team 4

BrandonErinnMatt

Kunal

NETFLIX

Video Rental Industry Analysis

Rental Revenue flat over last two years Competitors continue to shift as new

companies innovate and enter the market.  

Recession Impact: ◦ DVD Purchases ◦ DVD Rentals

Customers can easily switch rental suppliers

Technology reshaping industry Piracy: An Industry-Wide Concern

Business and Economics Characteristics

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Shifting Market LeadersMom & Pop Rental

Blockbuster dominated industry in 1990’s

Emerging industry – many local and regional competitors

Slow to change: 2007 Bankruptcy

On-line store & Mail Delivery

Kiosk - $1 Rental

VOD?

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Share of Rental Turns (2009)

Video stores

Online services

Kiosks

Source: NPD Group

Physical distribution: DVD or Blu-ray disc ◦ In-store rental ◦ On-line selection and mail delivery, ◦ Kiosk rental

Digital distribution (VOD)

Distribution Model - Market Segments

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36%45%

19%

Market is significant but declining rapidly Higher cost:

◦ Operation costs for retail outlets.◦ High # of employees

Movie Gallery depended on In-store rental◦ Bankruptcy in 2007

Blockbuster closing some stores.

In-Store Rental

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On-line and mail order delivery ◦ Introduced by Netflix in 1997 ◦ Adopted by Blockbuster in 2004.

Lower cost than In-store Access to large number titles

◦ Netflix over 100,000 titles available Subscription Plans: Consistent Revenue

Source of revenue

On-line Selection and Mail Delivery

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Low Cost Rental: Redbox $1 per night Fewer employees than In-store Located outside retail locations (i.e.

Walgreens). Redbox will have 22,000 Kiosks by end of

2009 Blockbuster rolling out 3,000 by end of 2009

Kiosk Rental

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Enabled by technology advances in internet bandwidth internet devices.

Lowest cost delivery method. Customer has immediate access to large list

of titles. Slow to develop

◦ Depends on technology advances◦ Customers not comfortable

Opens market to consumers of the world. 

Video On Demand (VOD)

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Convenience:◦ Large selection ◦ Fast and easy access◦ Selection and Recommendation Software

Cost◦ Cost favors Mail Delivery over In-Store rental

Mail:$9/month unlimited vs. In-Store $4/rental.

◦ Kiosk Rental gaining market share with $1 nightly rental cost

◦ VOD expected to continue cost reduction pressures.

Forces Driving Change

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Technology◦ Companies are positioning themselves to take

advantage of new technologies. Blu-Ray Broadband access

◦ Partnering with TIVO, Xbox, and Samsung Internet TV 

◦ Redbox and Blockbuster investing in memory card download technology

◦ Internet and Wireless broadband technology is enabling non-traditional competitors into the market. 

Forces Driving Change (Continued)

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Bargaining power of providers ◦ Redbox struggling to purchase movies from the

studios Bargaining power of the consumer  

◦ Consumer can quickly change their rental supplier.  Business changes executed by existing

competitors◦ Blockbuster diversifying into the kiosk delivery

method Threat of new companies entering the rental

market◦ Significant threat for VOD segment: Amazon and

Apple

Strength of Competitive Forces 

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Blockbuster diversifying but operating costs high.

Netflix has strong mail delivery position and is well positioned for VOD business.

Redbox's kiosk approach has made them a major player but no plan for VOD.

Apple, Amazon and other VOD providers are in a position to take significant market share from the traditional rental suppliers.

Competitive Positions of Companies

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Blockbuster◦ Closing additional retail locations◦ Entering kiosk delivery method. 

Redbox◦ Partner with more retail locations to subsidize

rental cost ◦ No VOD plan

Netflix:◦ Continue mail delivery segment◦ Strengthen VOD offering

Apple◦ Expand their success with iTunes further into

the movie rental market. 

Expected Competitive Moves

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• Manage costs to compete with declining rental costs.

• Provide convenience to the consumer that distinguishes themselves from competitors.

• Utilize technology advances.• Grow revenue by expanding monthly service

plans

Key Success Factors

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High risk in the rental industry but also high rewards.

VOD has high growth potential. May reshape market leaders.

Piracy is an additional risk that will need to be considered.

Industry Attractiveness

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Netflix Analysis

Netflix vs. Blockbuster Blockbuster performance from 06’-08’

◦ Very minimal growth◦ Gross profit has been dropping since 2006

Netflix performance from 06’-08’◦ Have been very profitable ◦ Revenue has been skyrocketing ◦ COGS, Gross profit, and net income have all made

drastic increases

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Netflix and the Economic Crisis Netflix seems to be immune from the

financial crisis Their financial numbers show no real drop

off unlike other movie rental stores◦ People still want to be entertained even during

tough times ◦ Netflix’s prices are low and no late fees are

accumulated which makes it easier for customers to afford

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Netflix’s Management Good to Great

◦ Getting the right people on the bus They expect performance to resemble what

the company and customers expect Forbes magazine

◦ In this article they discuss how Netflix tries not to create a problem of hiring the wrong people, and then laying them off because they weren’t cutting it

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Values Values are what drives the entire company Netflix works to find employees whose

values coincide with the company◦ Keep it simple◦ Empowerment

Values are not just nice sounding statements◦ Central to recruitment◦ Performance Mgt◦ Development

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Competition Recent up rises have become a problem for

Netflix Examples include Video on Demand,

YouTube and iTunes just to name a few Critics are beginning to say that Netflix

needs to overhaul their business model. Netflix needs to think about a few questions

◦ Are they safe or under siege?◦ Do they need an overhaul or just hedge it up?

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Netflix assets Current, fixed and intangible Netflix’s intangible assets are what gives

them a distinctive competency Intangible assets consist of

◦ brand name and image, goodwill, training Intellectual properties are also very

important intangible assets◦ They help keep competition at bay ◦ Gives them a competitive advantage

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No such thing as perfect All businesses have their own struggles to

deal with The majority of Netflix’s issues are dealing

with costumer complaints◦ Scratched DVD’s◦ Memberships being suspended

No matter what a company does there will always be unsatisfied customers

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Long-term objectives Netflix offers potential customers a free 2

week trial offer They are offering this to establish some sort

of brand image Netflix is doing a good job of creating an

appealing image, but they are starting to struggle with loyalty and retaining customers

They need to work towards a continuous improvement of customer satisfaction

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SWOT Analysis Strengths:

◦ Strong brand name and company image◦ Movies by mail or straight to PC/TV◦ Largest online library of DVD titles to rent (over 100,000 by mail;

17,000 VOD)◦ Cheap monthly plans

Weaknesses:◦ Must have an Internet capable device in order to stream movies

to TV (Xbox 360, PS3, TiVo, Internet-connected Blu-Ray players, Internet-connected HD TVs, Blu-Ray Home Theater Systems)

◦ PCs must meet certain system requirements in order to stream movies

◦ Online only◦ Customer service is spread too thin

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SWOT Analysis, cont.

Opportunities:◦ Venture globally to provide online rentals to Europe

and China, to name a few◦ Add video games to the rental choices◦ Provide more satisfying customer service

Threats:◦ Blockbuster, Inc. – online rentals, plus purchases, and

kiosks◦ Movie Gallery, Inc. – online movie purchases◦ Redbox Automated Retail, LLC – kiosks at convenient

and well-known stores (Wal-Mart, T&C/Stripes, ◦ Apple iTunes – online rentals and purchases

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Strengths Weaknesses

Opportunities

Netflix could use their strong brand name and image to market overseas and globally expand their company.

Because Netflix has so many subscribers who rent DVDs, they could appeal to another area of interest and offer game rentals for game consoles as well.

Netflix could implement a better customer service program in order to better assist customers who are dissatisfied with the service they are receiving.

Threats

If Netflix continues to compete with Blockbuster, Movie Gallery, and Redbox without making any changes, they are going to find themselves in a red ocean.

Although Netflix does not have an overhead cost due to stores, they are missing out on a big part of the population who rent movies on the same night they want to watch them and don’t have Internet access hooked up to their TVs.

Netflix is also not reaching out to those who don’t have Internet access at all.

SWOT/TOWS Analysis:

Core capabilities:◦ Providing the consumers with a convenient and

easy way to rent movies or their favorite TV show without ever having to set foot outside of their homes.

◦ Providing unlimited movie streaming (VOD) access

◦ Cheapest prices when broken down into cost per night -- $0.30 per night on lowest plan; $0.56 per night on highest plan (this does not include extra Blu-Ray charges)

◦ Keeping overall operating costs low, therefore producing greater profit margin compared to competition

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Key success factors:◦ Provide ease and convenience to rent DVDs◦ People turn to entertainment industry in time of

recession◦ Able to maintain low costs while keeping up with

the lowering prices of DVD rentals

Cost position:◦ Largest profit margin out of competition, but costs

are being undercut due to the latest implementation of Redbox and Blockbuster kiosks.However, still have lower costs than Blockbuster because Blockbuster has overhead costs from their stores that Netflix doesn’t have.

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Netflix Strategy

Netflix Strategy

Netflix’s Core Competitive Strategy:

Easy to use and intuitive website Personalized movie recommendations

based on more than two billion ratings from our subscribers

Relentless focus on continuously improving the customer experience

Proven competence in making unlimited subscription a profitable business model

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Netflix Strategy Netflix Growth Strategy:

◦Leverage our online DVD rental leadership to grow both subscribers and net income.

◦Make the best product – and the best consumer experience even better.

◦Lead the expansion of Internet delivery of content by offering our subscribers both mail delivery and a continuously improving Internet delivery option.

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Strategy Adjustments and Options

Adding Physical Locations and Products Buildings/Kiosks

Capture both target markets Alternative to shipping

Video/Computer Games Increasing DVD database

◦Blu-ray◦Genres◦Quantity of a New Releases

Keep up with technology◦VOD…in HD◦Don’t forget about sound ◦Make a contract with International AirlinesNETFLIX

Strategy Adjustments and Options How can Netflix gain so much Capital to

finance all these adjustments?

◦ Reinvest any excess profits back into company. Increase Marketing Finance Adjustments to strategies

◦ If New strategy is a success, we should see Netflix turn into a Blue Ocean.

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Netflix Financially Capable

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Netflix Financially Capable

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