Posted at 10.28.2018
Netflix is the world's greatest online movie rental service with over 6. 3 million members and a collection of more than 75, 000 titles. They are known for both their excellent customer service and their convenient and user-friendly interface on the award-winning website. Though Netflix has received many criticisms, it has continually grown and thrived in the movie rental market. New technology has enabled Netflix to provide high quality streaming videos directly to their subscribers' PCs. This service has been rolled out in the first half a year of 2007, cost-free, to Netflix's current subscribers. To be able to maintain steadily its superior position in the in home filmed-entertainment, Netflix must enter the Video On Demand (VOD) market immediately.
By entering the VOD market through offering streaming videos, Netflix will be able to differentiate itself from its competitors, and reduce the probability of price competition. Supplying a movie streaming service instead of a movie downloading service will further aid it in differentiating itself. For the short run, Netflix must incorporate the service of streaming movies to check its DVD rental service. Over time, following the popularity of streaming movies has grown and the technicalities of the service are fixed, Netflix can separate the DVD rental and streaming movies services, offering two different sets of plans. Pursuing this strategy is essential to Netflix's future, because as new innovations in technology recognition, the DVD-rental subset of the house movie market will shrink, while the downloading and streaming of movies will eventually come to dominate nearly all the forex market. Therefore, the correct implementation of Netflix's entry into the VOD market, will serve as a bridge strategy, aiding Netflix in its evolution from a DVD rental service to a distributor of digital entertainment.
Reed Hastings and Marc Randolph founded Netflix in 1997. DVDs were a comparatively new technology, with significantly less than one thousand titles offered by enough time, but Hastings and Randolph believed it had potential to replace the VHS format. The business started operating in April 1998, offering 7-day rentals for approximately $6. Netflix, along with Magic Disc, DVD Express, and Reel. com, were the first few companies to rent DVDs by mail. Netflix differentiated itself by spending heavily in promotions. It created partnerships with companies selling the most vital complementary good, a DVD player. It offered free rentals with the purchase of DVD players from Toshiba and Pioneer and computers with DVD drives from HP and Apple. However, Netflix was in direct competition with Amazon. com in selling DVDs so they came to a compromise in December
1998: Netflix would stop selling DVDs in exchange to be heavily promoted on Amazon's website.
Netflix started out to partner with online movie information providers and promoted more features on its website to attract more customers. In September 1999, it started out the Marquee Program, offering 4 DVDs rentals per month with no late fees or due dates for a monthly subscription fee. In February 2000, it introduced CineMatch, an application that evaluates the rental patterns of customers, identifying which movies customers of similar tastes would enjoy. Both programs were highly popular and soon Netflix didn't rent out individual DVDs, relying fully on the Marquee Program.
Continuing its aggressive marketing and networking campaign, Netflix signed a deal with major DVD produc- ers, such as Warner Home Video and Columbia Tri-Star. In trade for cheaper prices on large quantities of DVDs, the movie studios received a portion of the rental receipts. As the success of Netflix grabbed the attention of the media, rivals started to respond. In the summertime of 2002, Blockbuster started its unlimited rentals and no late cost subscription plan and bought out a web based DVD rental company. Wal-Mart and Columbia House also tried to amass large volumes of DVD titles to compete with Netflix. However, Netflix already had a solid foothold on the market, fending off these major competitors. In re- sponse, it announced the opening of more distribution facilities. Five years following its debut, Netflix finally started to produce profits.
On January 16, 2007 Netflix issued a press release regarding a "New Feature Will Be Included in Subscribers' Monthly Membership at no Extra Charge. " For every dollar a user will pay for their subscription, they will be able to view 1 hour of streaming video from a selection of about 1, 000 movies and TV series on the PCs. Netflix also announced that they plan to expand the technology to reach "every Internet-connected screen, from mobile phones to PCs to plasma screens".
Netflix entered the marketplace for DVD rentals at a time when there have been few other rivals on the market, permitting them to establish their brand name and image for providing a unique service. They were the first to offer DVD rental by mail and this allowed them to give you a greater variety of DVDs to consumers as compared to their competitors at that time, as DVDs were relatively new to the market. Combined with its successful business model, Netflix's early entry has allowed it to keep a high relative market share in the online DVD rental industry.
From the start, Netflix understood what irritated many video rental store customers: late fees. Usually after renting and watching a movie from a store such as Blockbuster, the client must rush to return the movie on the subsequent day (before midnight) or pay a late payment comparable to the price tag on the rental. Although Blockbuster does get around 18% of its total income from late fees, it leaves the client annoyed, frustrated, and unsatisfied. On the other hand, Netflix lets the customer keep the DVD before customer wants to see the next one in their queue, allowing the fredom to return the movie at one's convenience.
From the beginning of its entry in to the market, Netflix understood the importance of making partner- ships with the movie industry, the electronics industry, and retailers. Netflix's name was spread widely through promotions with complementary products, such as DVD players and movie websites. When it saw Amazon. com as a competitor, it stopped selling DVDs to cease all tensions in exchange to be promoted on the website. Additionally, quality leadership has enabled Netflix to remain afloat despite the advent of powerful opponents like Wal-Mart. Not merely was Reed Hastings in a position to fend off Wal-Mart's attempt to bankrupt Netflix, he was able to convince Wal-Mart to encourage customers to change to Netflix following the Wal-Mart service fell through. By staying strong but cooperative, Netflix ended up profiting from many threats.
Netflix's website boasts many features. Netflix's CineMatch implements an award-winning algorithm that can predict with surprisingly regular accuracy what movies someone would like given their previous rental history, planned future rentals, and ratings of movies they've seen in the past. Furthermore, they're constantly looking to improve the CineMatch program: Netflix offers a prize of $1 million for a much better algorithm. Netflix's large subscription base has allowed a tiny kind of network externality to consider shape. More Netflix subscribers means more people rate movies, write reviews for movies, and recommend movies one to the other. This also helps fine-tune the accuracy of the CineMatch program.
Netflix gets the largest and most diverse assortment of DVDs out of any competitor. They have more than
75, 000 titles, including foreign films and independent films that are usually not carried by other distributors such as Blockbuster Video and Wal-Mart. Foreign films such as those from India's "Bollywood" are particularly successful at attracting customer attention. This selection of movies taps into the underserved population of consumers who are solely with Netflix because the unique titles Netflix provides cannot be found for rent elsewhere in america.
Like most brick-and-mortar rental businesses, Netflix often has trouble providing enough copies of new, popular movies. Because of this, a main cause of customer dissatisfaction is Netflix's inability to completely satisfy the original rush for a fresh movie. However, the business knows it might be unprofitable over time to buy more copies merely to serve the rush when a movie first becomes available, because the copies will not be rented with nearly as much frequency soon after the rush. Customers have caught to the reality Netflix only purchases a limited quantity of new releases immediately, opting to hold back a couple weeks to buy the
bulk of its supply at lower costs. While this might save Netflix money, it also offers the tendency to operate a vehicle away current and potential clients. Finally, Netflix doesn't have a direct connection to any movie studios so that it must purchase its entire media through the buyer market.
One disadvantage of Netflix's rent-by-mail business model is the fact that customers have to wait (often for a number of days) for the next movie on their queue to reach in their mailbox. Oftentimes, by the time the subscriber receives the DVD, he or she may no longer maintain the mood to see that one movie. Likewise, a Netflix subscriber may feel like watching a movie on the night where all the DVDs that are part with their plan are currently on route to or from a Netflix distribution center. In such a case, the customer will likely leave the house and rent a movie from a brick-and-mortar retailer, or simply order a movie from a service such as Pay-Per-View or popular.
Netflix is able to expand right now. Previously, sending movies to customers through the mail was a novelty in the rental industry. Now, delivering movies straight to computers of customers is likely to be the next revolution in how consumers view movies in their homes. Luckily for Netflix, this service is merely available as a per-viewing basis. Netflix can seize this opportunity if it's successful in successfully providing streaming content to a person on a time usage basis rather than a per-viewing basis. Furthermore, active management may enable Netflix to absorb current providers of this service, such as Movielink, in ways much like how it absorbed Wal-Mart's DVD division.
The clearest threat to Netflix is Blockbuster and other established rental businesses. Beyond this, customer satisfaction is the one facet of this business that can make or break a company. If Netflix were to lose its wholesome, reliable image, it could not have the ability to retain enough of the marketplace to survive. Also, companies like Apple can potentially harm Netflix if they're able to provide services through one's computer that can be easily ported to one's TV. Netflix is less suitable for compete with hardware innovations such as Apple TV since it has little to no experience in this area, though such innovations may eventually be complementary rather than competitive. Moreover, there's always the threat of entry by another firm, especially in to the VOD industry, a closely related industry, which Netflix is going to enter.
By offering streaming movies through its website, Netflix is entering the Video on Demand (VOD) industry. This industry, along with DVD rentals (both from online providers such as Netflix, and cable services such as On Demand and Pay-Per-View), is part of the larger industry of "watching movies in the house. " However, since Netflix is already positioned in this market, with its online DVD rentals, we will examine the smaller
portion of the marketplace that is streaming online movies. This business is too closely related to the movie downloading service to be considered as another market.
The Video on Demand industry takes a significant degree of capital, so potential entrants face the large sunk costs of acquiring licenses to the movies they would like to provide. Moreover, it is too expensive for a company considering this market to merely test the waters. An established video rental retailer already has experience in marketing movies to people, giving them an experience advantage over potential entrants. Netflix, for example, invested over $40 million to launch its "Watch Now" streaming video service, shocking many shareholders. These shareholders' reactions only highlight the risk involved with such sunk costs. Netflix's "Watch Now" feature will be fully integrated using its normal online DVD rental website. A company minus the technological benefit of a site with movie-recommendation algorithms like Netflix's CineMatch program is at a substantial disadvantage. Moreover, Netflix's website alreay has reams of user reviews and input, a new firm would struggle to match for a long time. The technology to provide high-quality downloads is also a barrier to entry, but this barrier is small because such technology is available for licensing from third parties. In the forex market, product differentiation takes the form of varying quality in the downloaded movies, yet it should be noted that all organizations will at least have to give you quality that is very near DVD quality to be able to ensure that discerning customers continue steadily to use their service. Besides quality, differentiation exists in the sort of service provided by a corporation: streaming movies, long term downloads, or limited time downloads. In sum, this can be an industry where entry is problematic for all but the most experienced companies with already established online movie rental/sale experience. These firms are more likely to thrive in this market due to their experience, reputation, and recognizable brand names.
The movie download industry, like the online DVD industry, is not very concentrated, so the few market leaders that share the market may take part in rivalrous price competition. A key exemplory case of this is Netflix's and Blockbuster's recent price war, which lasted until both resolved to stay on a higher price through tacit collusion. A number of services are being offered in the online movie industry. Amazon Unbox sells movies that one may download and keep on one's harddrive for you to two days. Netflix's "Watch Now" feature ties in its streaming movie service with its online DVD rental service. Current Netflix customers are certain to get this service free of charge, that may cost less than Amazon Unbox. As the product is not easy to differentiate, the competition focuses more on the assistance provided with the merchandise than the purchase price. An existing variety of movies is vital in the forex market because consumers will frown upon not finding a movie they want to see. The entry barriers mentioned in the last section will prevent small and undifferentiated firms from entering the market, practically ensuring that the prices will never be competitive. With a low concentration of companies and emerging differentiation, this industry won't be especially rivalrous.
Netflix and its own competition buy their movies from the movie studios that create the films. The major studios have marginal supplier power in the web movie download market because they're the exclusive way to obtain big name movies that customers desire. These highly popular movies have practically no substitutes in the rental market. However, buyer concentration in this new market is relatively high, so suppliers tend to want to sell their product to all of the companies in the market to maximize their revenue. This reduces competition for supply and for that reason prevents supplier power from being high. In this specific market, studios may be concerned with "cannibalizing their own product". By making inexpensive movie downloading open to customers, they may lose sales on the greater profitable hard case DVD sales. Therefore, large studios may be more willing to withhold licensing agreements to movie download providers such as Netflix, thus strengthening their own supplier power. Overall, the suppliers to this market have only enough power to slightly control prices, however, not enough power to influence the evolution of the marketplace as a whole because they must sell their product to survive.
The main substitutes to streaming movies are brick-and-mortar rental stores, online rentals, pay per view TV and theatres. Brick-and-mortar rental stores supply the same service with possibly a much better collection of movies when compared with movies designed for download by Netflix, nevertheless they do not supply the instant gratification of downloading or streaming them every time a customer desires. Furthermore, the streaming movies service provided by Netflix is more cost effective than these other substitutes because Netflix plans to allot its users a total amount of stream time. For instance, if a person decides after 20 minutes of watching a movie that he does not want to watch it anymore, switching to some other movie incurs no extra cost. Substitutes such as buying per download or traditional renting do not offer this convenience. Because of this, they are weak substitutes to streaming videos.
Buyer power is very low in this market because one customer's decision to choose the service or not won't affect the overall market whatsoever. Similarly, one customer's dissatisfaction won't influence a substantial amount of some other clients. The source of dissatisfaction would have to be concerning an inferior product or service to incite such a widespread response. Clearly, this isn't something an unbiased customer can control. You will discover substitutes for movie rentals, but they are weak substitutes. Buyers can rent movies from local brick-and-mortar businesses, but this isn't nearly as convenient as the instant-gratification downloading of movies. In the broader aspect, a customer always gets the option to not spend their leisure time watching movies, no matter what the source, so the price of rental services cannot climb much higher than they currently are. Overall, individual customers do not hold bargaining power over the price of products in this market; however, the prices themselves are regulated by the substitutes and preferences of customers all together.
Technology is the primary complement to streaming videos proposed by Netflix. The essential complement required is high bandwidth. According to Netflix, a regular bandwidth of 3 megabits per second is required to watch streaming videos online at DVD quality. This bandwidth has already been within over 47% of US households, this means over 50 million households have broadband service available. As the required infrastructure has already been well developed, Netflix has usage of a big customer base. This figure is projected to grow to 55% by the finish of 2007, which makes it a reliable complement. Apart from bandwidth, another possible complement is a product comparable to AppleTV that allows users to watch streaming videos on their big-screen televisions. Currently, users with S-Video capability can hook up their desktops with their televisions but this will not supply the simple and elegant solution the common Netflix customer wants. With easy methods to view streaming videos on the tv screen, physical media (CDs, DVDs, etc. ) would be significantly less functional in the movie rental industry.
In our analysis below we will examine Netflix's current business design to find that their business can suc- cessfully incorporate such VOD offering. Netflix's choice of providing streaming content instead of downloadable movies allows it to differentiate its service from others in the market, thus aiding Netflix in its strategic positioning. You will find both advantages and disadvantages in tying in this new service with Netflix's current subscription plans instead of offering the services separately, however the two can complement one another at this early stage in Netflix's entry. These proposed strategies will place Netflix in a solid position in the newly developing market of VOD, and can act as a bridge to allow Netflix to leave the DVD rental industry as physical media becomes obsolete.
The question arises, however, concerning how streaming videos and DVD rentals can both fit within Netflix's business definition. There exist scale economies associated with the offering or bundling both of the assistance, as Netflix's good relations with the movie studios will help permit it to negotiate better prices for its streaming movies. Much of Netflix's existing infrastructure, including its award-winning website cited to be one of Netflix's keys to success, will also apply to streaming movies. The exact same page which allows one to add a movie with their queue will have a "Watch Now" button allowing the user to start streaming the movie immediately. Moreover, a substantial proportion of customers who rent movies online will be open to watching streaming movies, as both are ways of watching movies at home. Streaming videos may be used as a way to dig through movies they are thinking about to view on DVD. Since both of these somewhat different services have an identical consumer base and share benefits in cost structure, they can both be successfully integrated into the same business model. On the downside, however, it ought to be noted that many of the elements that allowed Netflix to achieve renting out DVDs via mail, will not carry over to the digital distribution market. For example,
superior logistics in mailing out DVDs and processing receieved DVDs will not aid Netflix in addressing bandwidth problems. The business enterprise model will have to undergo some changes if Netflix decides to offer a stand-alone streaming plan in the foreseeable future (see Tying-in DVD Rentals and Streaming Movies below).
The Online Video on Demand industry has consisted of services such as Amazon Unbox and Movielink which allow users to download a movie for a fixed cost of about $3 and have 24 to 48 hours to see it. Recently, Starz launched Vongo, which allows users to download and watch movies for an unlimited amount monthly, but are only allowed to choose from a catalog that is mostly representative of movies currently airing on one or more of Starz's cable tv channels. Therefore, Netflix's immediate entry in to the VOD market will mark the arrival of 1 of the first monthly payment-based content providers that will allow viewers to watch their movies via streaming video files, similar to the format that is popularized on websites such as YouTube and Google Video with higher quality.
Perhaps the greatest advantage to streaming video is the fact that it offers a much greater "instant gratification" incentive than downloadable VOD movies, as you can find the former ready to go within a couple minutes with a modest connection speed, whereas a complete movie download will most likely take about a half hour or more. A disadvantage of Netflix's business model has been the waiting times from the turn-around between DVDs. Netflix's competition have been quick to use their infrastructure to exploit this disadvantage. Blockbuster frequently gives monthly in-store movie rental benefits to its online subscribers like a "speedier gratification" bonus, where the customer can drive to the store and rent a DVD for free to view for the night while the DVDs previously requested online remain in transit. Now, Netflix can take the lead again in offering the speediest way to watch a movie in one's home.
Netflix's "Watch Now" will be available at no additional expense to all or any subscribes within the first 50 % of 2007; there is no plan offering only the streaming download service without DVD rentals. The bundling of these two services is a necessary component of Netflix's strategy. By doing so, Netflix will differentiate its service from the services made available from its rivals and use these complementary goods to bolster each other (as stated above running a business Definition). Netflix simply needs to consider this new bundled feature as just another method of delivering their product.
Movie studios who supply films to Netflix are afraid that "Watch Now" feature will contribute to cannibalization of their own DVD sales market. They are also concerned with the piracy of streaming and downloaded videos. Because of the studios' unusual supplier power in this specific matter, the catalog of movies that can be streamed with Netflix is a lot smaller than the size of their total DVD catalog. If Netflix offered another streaming plan, it could have a library of no more than 1, 000 films and television set series to provide to its subscribers, so that it is difficult to satisfy a variety of consumers. Selection of selection
has been one of Netflix's keys to success, so spinning off a half-hearted standalone service may potentially harm its brand. Tying both services together allows consumers to notice that Netflix is expanding its features since it provides it at no upsurge in price. It is providing existing subscribers a greater value and giving potential subscribers more incentive to try Netflix's services.
By offering the new product as a tie-in, consumers are presented with a unique service they can only get from Netflix. Individuals are given the opportunity to visit a movie precisely when they want to, but can still order a DVD they feel like watching later. Thus giving consumers the possibility to see more movies for a relatively less expensive than only using rental services or only temporary download services. The threat of price competition is reduced because the bundle of services makes Netflix appear to be less of a direct threat to download-only VOD services. The only real firms in a position to replicate Netflix's bundling structure are people that have a recognised DVD rental infrastructure.
However, Blockbuster is such a firm capable of imitating Netflix's bundling model, especially as it has recently entered negotiations to acquire Movielink, a movie downloading service that offers both downloadable purchases and short-term downloads. Blockbuster's involvement in Movielink suggests that it will more specifically try to integrate movie download rentals and sales into its online subscription plans, instead of streaming content. Should Blockbuster acquire Movielink, it'll be able to give a similar subscription plan to that being provided by Netflix. This apparently small difference reduces the threat of price competition since it will show consumers with a dilemma of "preference, " rather than an evident choice of choosing the cheaper of two seemingly identical services.
At this early stage in Netflix's attempts in the VOD industry, it's important that Netflix fits in its VOD offerings using its existing, time-tested DVD rental service. This ensures Netflix offers a distinctive and differen- tiated good, without risking Netflix's brand because of the insufficient selection in the movies being offered, potential issues that may arise due to Netflix's insufficient experience on the market, and the relatively new and untested technologies being put to use to offer these services.
Over time, Netflix's bundling of DVD rentals with streaming movies will allow them to work out any kinks they may have with the ability to distribute movies digitally, while continuing to develop a sizable customer base of subscribers. Traditionally, Netflix has relied over a combination of word-of-mouth ideas using their company existing subscribers and an aggressive marketing campaign. Should they continue to market their services effectively, their subscriber base will grow steadily, and Netflix can collect more customized user data and become even more proficient at having the ability to "personalize [their] library to each subscriber by leveraging [their] database of user preferences". Netflix's compilation of the data and their subsequent knowledge of their customer base will serve a essential part in aiding their positioning in the coming future.
However, the future of the DVD rental industry is very unclear as newer types of media are developed. There are many factors that could hurt the industry that Netflix and other DVD rental outlets have been watching. It really is predicted that DVD and its successor formats (Blu-Ray and HD-DVD) will be
more prevalent than digitally distributed movies in the short term. Yet as complementary technologies grow that permits streaming of hi-def movies directly to HDTV, VOD will continue to gain popularity and can eventually unseat DVD and other physical forms of media as the dominant format for watching rented movies at home.
Technology, however, is not the only real barrier to the inevitable prevalence of VOD. As mentioned, the studios are wary of allowing the legal digital distribution of films to occur on a major scale, as they rely on DVD sales for a large part of their revenues. Moreover, if the studios start reducing the window of amount of time in which a movie is exclusively available on DVD after its major theatrical run or allow movies to be distributed in the house in other formats before they can be distributed on DVD, Netflix and other DVD rental companies will be adversely affected. They'll no longer have a significant advantage in allowing consumers to view new releases first through their services and more substitutes emerge for viewing those new releases (Pay-Per View, popular, etc. ). The fate of the DVD rental industry largely is determined by factors beyond the hands of Netflix and its own competitors.
In order to prepare for the demise of the DVD industry, Netflix must make its streaming services available under a separate subscription plan of its. This point will likely come at a time when the penetration of technology allowing for viewing streaming content on high-end TVs is substantially high. The technology already exists in a few ways; the Apple TV is used to wirelessly connect to one's computer and retrieve movies downloaded from the iTunes store onto the computer, then play those movies on one's television. However, it'll be time before this expensive technology is adopted by the mainstream population to this extent that the digital distribution of movies onto those TVs will return large profits. Additionally it is at the moment that Netflix's experience with streaming under the prior tie-in structure will aid it in completely changing its business design toward eventually learning to be a digital distributor of filmed entertainment as opposed to a DVD rental outlet. The one important factor it'll maintain from its rent-DVDs-by-mail days would be the aforementioned "personalized library" open to its subscriber. Netflix will continue steadily to take advantage of the advantages associated using its superior understanding of its customer base through their databases, which they have acquired over the years and will continue to develop. Clearly, Netflix's competition will be seeking to do the same. As mentioned before, Blockbuster's acquisition of Movielink only serves to signal that it is also pursuing a similar strategy in looking to survive beyond the death of physical media. Yet, Netflix has historically been more adept at understanding its consumers and delivering simpler to use content, so that it will contain the right tools to see a growing relative market share as this new market starts to adopt shape. Since Netflix has been able to market itself successfully even to the less tech-savvy consumers, this should not pose much of a challenge for Netflix, and can give it a likely advantage over other businesses in the foreseeable future of the emerging market.
The importance of Netflix's position in the VOD market in the future only serves to highlight that it is essential for Netflix to enter this market immediately, although at first only through the tie-in structure described in the section above. If Netflix hesitates in its entry or does not gain sufficient experience in the forex market today, it'll only see diminishing market shares, especially as DVD and its own successor formats begin to reduce popularity and only purely digitally transmitted media.
Netflix's business design has allowed it to thrive in the DVD rental market, but the development of technologies complementary to Video on Demand services are heralding the outdating of DVDs and its own successor formats in the distant future. Netflix can prepare to eventually make a full transition from the DVD rental market to the VOD market by entering the streaming movie market today. By implementing its present entry in limited form, namely by offering streaming videos exclusively as a tie-in to its DVD service, Netflix will be able to differentiate itself from its competitors, and reduce the likelihood of hurting its brand name due to any potential shortcomings using their new service. Meanwhile, its streaming service will act as a complement to its DVD rentals for several years to come. Ultimately, the knowledge Netflix gains while offering this bundle of services, combined with Netflix's reputation for providing user-friendly interfaces, will put Netflix in an excellent position to evolve into one of the major players in the VOD market within the last days of physical media. Taking good thing about the opportunity to enter the VOD market now could be necessary to Netflix's future growth and survival.