c cc !"#$ Netflix¶s competitive environment is becoming hostile; a strategy for entering the video-on-demand (VOD) market must be selected in order to achieve growth targets. This strategy must address issues related to user connectivity, content limitations and initial target market. It is recommended^ that Netflix develop, and integrate, a VOD platform for its core offering. Netflix¶s current subscriber base is built on early adopters; these individuals, with free VOD access, will support and help market the VOD platform. Partnerships must be established to expand connectivity options ^ to overcome a key barrier. Strengthening relationships with studios and TV networks is a primary focusin order to obtain digital distribution rights. As a content risk management measure, Red Envelop Entertainment willcontinue to aggressively pursue high quality content for acquisition. Several alternatives ^ were evaluatedand ranked against key decision criteria. Customer satisfaction (quality of the experience)is the most important element to Netflix¶s business. Netflix has one channel for customers, their website. With high customer acquisition costs, a positive experience is necessary to reduce churn rates. High customer satisfaction will increase revenue growthby adding and retaining subscribers. As a public company,Netflix faces scrutiny by the investor community and growth targets must be achieved. Value innovation has the ability to differentiate Netflix from the competition. This is evident by the success of the recommendation system. A new strategy must add value for subscribers while reducing costs for Netflix. Leveraging Netflix¶s biggest success, the recommendation system, will provide manybenefits for the company and its customers. The movie rental market is highly commoditized and competition is fierce ^ . Netflix, a child of the dot-com era, has been able to differentiate itself through innovation related to service, versus product. This differentiation has resulted in outstanding growth ^ .Growth rates are declining to more sustainable levels but measures can be taken to reduce the rate of decline and possibly reverse the trend. Having the most attractive pricing structure, largest movie selection and the most convenient delivery channel will lead to success. Netflix¶s most valuable asset is its proprietary recommendation system which becomes more valuable with each rental; this asset is a product of pure innovation which has set Netflix apart fromthe industry. The evolution of home entertainment, from Betamax to VHS to DVD and now Blu-ray, reflects the need to stay ahead of the curve, and the need for innovation. A new value curve was created with the Netflix model and its proprietary recommendation system makes imitation extremely difficult;however, stagnation results in a company¶s demise. Competitive advantages are lost whena value curve converges with that of the industry. An industry transition from DVD¶s to Bluray¶s is inevitable and would be costly. VOD is regarded as the future of home entertainment, although technological barriers are evident, these barriers will be overcome given the three laws of technology ^ . Initial investment costs in VOD will be substantial but are critical to continued growth. The internet provides an opportunity for global expansion but Netflix¶s current business model is logistically complex. Many of Netflix¶s weaknesses are related to the current business model.By capitalizing on opportunities ^ Netflix can eliminate many weaknesses, increase strengths and reduce threat levels. Netflix has a strong innovative culture which must be leveraged to enhance value for customers. Certain areas of the implementation ^ deserve particular attention. To increase customer satisfaction a problem resolution platform must be integrated with the website;this will be of particular importance when the VOD platform is ready for market. The VOD platform should be offered to existing subscribers free of charge and a new pricing package should be developed for VOD access only. There will be many challenges to obtaining digital distribution rights and a lawyer specializing in this area must be hired. Netflix should expand its content to include TV shows,and eventually, HD content and rentals options for new releases. To do this Ted Sarandos (CCO) must expand his team.Canada the UK and Australia should be the first three targets for global expansion due to the similarities in culture. Netflix must continue to build its inventory of digital content in order to expand its reach across global boarders. Distribution centers, a major cost center, will eventually be closed throughout the US and the VOD platform will be Netflix¶s sole business model; this will result in substantial long-term cost savings.
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Short-term growth Current customers The targets could be will not gain any recommendation achieved but value from this system will benefit negotiations with strategy; Netflix¶s cable providers cable providers will value curve will eliminating increase converge with that Netflix¶s main complexity, of the industry. differentiator; their particularly with competitive global expansion. advantage. /01 "%#$ Netflix will gain The internet is Long term costs will Expanding the the full benefit of global, once the decrease as the offering will result & increased infrastructure is in mail order business in more customer place Netflix will be is phased out & the customers, movie satisfaction which able to access most VOD platform selection & will grow with global markets becomes the brand. increased video content ensuring short & Value for customers accuracy for the expansion. long term growth will be tremendous recommendation targets are in both the short & system. achieved. long term. 201 ü
" ' This will not have This will help Netflix Although Netflix will More customers #$ a major impact on achieve growth have full control will drive existing targets & provide a over product, increased customers or their platform for global service & delivery recommendation level of expansion. there will be no accuracy but satisfaction. additional value for adoption rates will existing customers. suffer with a stand-alone VOD platform. 341 å "( This will not have Adapting to market A lack of innovation Leverage of their $$ a major impact on changes & & added value will greatest assets is ' existing technological have a deteriorating not apparent, the customers or their advances is critical effect on the status-quo ) ' level of for survival & business. continues. satisfaction. growth. 501
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Hauppauge Microsoft, Sony & Nintendo Smart phone manufacturers LG Studios & TV networks
Development & manufacturing of TV set top boxes for sale through Netflix & other retail outlets. Development & manufacturing of a Bluetooth solution for wireless streaming. Development & manufacturing of optimal computer (PC & MAC) adapters for TV for sale through retail channels, Netflix or free of charge with a one-year subscription. Incorporate access to Netflix through video game consoles (Xbox, PlayStation & Wii). Develop applications for download which will facilitate streaming. The IPhone is scheduled to be released in June of 2007. Incorporate access to Netflix through all of LG¶s HDTV¶s and Blu-ray players. Relationships with both studios and TV networks must be strong to obtain the digital distribution rights for quality content.
%&'&5) &&, Wal-Mart & Best Buy Major retailers are stocking and selling DVD¶s. Blockbuster Dominant industry player with a large network of stores; in talks to purchase MovieLink from major studios. Google Entered the online video segment through the acquisition of YouTube. TV Networks CBS & ABC have started streaming content through their websites Digital file ownership Many sites are offering this service which allows customers to pay & download content to multiple devices. Set-top box MovieBeam ± acquired by MovieGallery ± offers streaming straight to your TV. companies Stand-alone VOD Vongo (Starz subscription cable channel) & CinemaNow (Lionsgate, Microsoft & Cisco) ± able to rent or burn videos online. Cable and Satellite Have started to offer VOD service with both a paid offering & a free offering. Companies ( %&'&/ 8*,*+-.&. Year
(222
6000
600(
600(
6005
600/
6009
6003
Revenue
4854
35894
74255
150818
270410
500611
682213
996660
Revenue (% growth)
730%
639%
107%
103%
79%
85%
36%
46%
107
292
456
857
1487
2610
4179
6316
-
173%
56%
88%
74%
76%
60%
51%
Subscriptions Subscriptions (% growth)
1
Willy Shih, Stephen Kaufman, David Spinola, (Harvard Business School ± 04/27/2009)
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c cc %&&'&96 +*8.,+- (: ;+ Formulated by Gordon Moore of Intel in the early 1970s: The processing power of a microchip doubles every 18 months. Corollary: computers become faster - ' " 6: ;+ Proposed by George Gilder, prolific author & prophet of the new technology age: " New developments seem to confirm that bandwidth availability will continue to expand at a rate that supports Gilder¶s Law. 5: 7 ;+ Attributed to Robert Metcalfe, originator of Ethernet & founder of 3COM: The value of a network is proportional to the square of the number of nodes; * . %&'&3).8 . Ô Leader in online DVD movie rental market Ô Strong brand recognition Ô Tremendous growth Ô Proprietary recommendation system Ô Subscription based service Ô No late fees Ô 44 distribution centers across the US Ô 70,000 different titles (selection) Ô Reduced overhead expenses Ô Economies of scale Ô User friendly website Ô Strong customer service culture Ô Relationships with studios Ô Employees & company culture 11 Ô VOD service (company funds have been allocated for investment in infrastructure) Ô Content acquisition through Red Envelop Entertainment Ô Strengthen relationship with studios & develop relationships with TV networks Ô Domestic & international expansion Ô Partnerships & alliances
8$ Ô No physical stores for customers Ô Inventory management across distribution centers - forecasting demand Ô Dependency on USPS Ô Bottlenecks resulting from returns by mail Ô Time lag from order to delivery Ô Subscription service not economical for occasional movie watchers Ô Public company with full disclosure Ô Target market limited to individuals with internet access & a DVD player
Ô Network of traditional ³brick & mortar´ movie rental stores Ô Increased competition in various segments (VOD, DVD retail & rental outlets, pay-perview, cable & satellite companies) Ô Piracy or peer-to-peer movie sharing over the internet Ô Next generation technologies Ô Digital distribution rights Ô High churn rate
2
Jim Pinto http://www.jimpinto.com/writings/3laws.html
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c cc %&'&4). *, Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Task
Start
End
Responsibility
2007
2008
1 - Announce plans for VOD platform
Jan-07
Jan-07
R. Hastings
2 - Develop & integrate problem resolution platform
Jan-07
Jun-07
IT
2.1 - Develop & integrate VOD platform
Jan-07
Dec-07
IT
2.2 - Hire lawyer specializing in digital distribution rights
Jan-07
Dec-05
HR
2.3 - Source & build partnerships to enable connectivity
Jan-07
Dec-07
Operations
2.4 - Aggressively acquire digital content for distribution
Jan-07
Dec-05
T. Sarandos
2.5 - Pre-launch advertising blitz
Oct-07
Dec-07
Marketing
3 - Roll out VOD platform
Jan-08
Jan-08
All bus. units
3.1 - Post-launch advertising campaign (free trial offer)
Oct-05
Dec-05
Marketing
7
8
%&'&<)+, *, 1
2
3
4
5
6
Task
Start
End
Responsibility
1 - Acquire digital content (current & new markets)
Jan-09
Dec-24
Content unit
1.1 - Build employee base for new target markets
Jan-11
May-11
HR
1.2 - Expand VOD platform to Canada, UK & Australia
Jun-11
Dec-13
All bus. units
1.3 - Reduce DVD inventories
Jan-14
Dec-16
Operations
1.4 - Close distribution centers & sell DVD inventories
Jan-17
Dec-18
Operations
2 - Expand VOD platform to Europe, Asia & India
Jun-18
Dec-19
All bus. units
3 - Expand to all other markets
Jan-20
Dec-24
All bus. units
2009 - 2024 (1 period = 2 years)
