This was written in March 2020.
Summary
Netflix is a streaming entertainment service company that offers subscription-based videos ranging from movies, television episodes, to children programs. Founded in 1997 by Marc Randolph and Wilmot Reed Hastings Jr., Netflix started its business model as DVD direct mailing in replacing VHS tapes. The company constantly shifts its business model due to external competitors’ threats. Netflix started off selling physical DVDs to Marquee Plan where Netflix tried to place a pricing strategic plan to compete against other DVDs rentals. At the beginning of 2000s, Netflix met its biggest competitor at that time — Blockbusters. It has over 7,700 stores, and $4.96 billion revenue in 2000, while Netflix is expecting losses of $57 million. Same year, Hastings proposed an equity alliance of selling 49% stake and taking “Blockbuster.com” to Blockbuster. This deal is supposed to make Netflix the online back-end support system for Blockbuster, yet, Blockbuster management declined the offer. Since then, Netflix went on almost a decade pricing and RnD war with Blockbuster to drive each other out of the market. From Blockbuster $19.99 per month v.s. Netflix $22 per month to Blockbuster $17.99 per month v.s. Netflix $14.99 per month, the pricing competition doesn’t end here. In 2006, Blockbuster launched the new service of hybrid mail and in-store rental model. This prompted Netflix to focus on developing product advantage. In 2007, Netflix introduced a streaming service that allows subscribers to access one thousand videos through their computers. However, acquiring streaming content posed a challenge for Netflix since content providers had long-term contracts with cable channels like CNN, ESPN, and HBO. Luckily, content providers also recognize how Netflix can generate more revenue for old shows, and attracts more viewership for shows. The Redbox kiosks that were developed by Mitch Lowe became a threat to physical rental stores that eventually alongside with Netflix diverting the customers originally from Blockbuster caused bankruptcy of Blockbuster in 2010. Since then, Netflix has been focusing on creating original content and expanding its international viewership. By 2020, Netflix market cap is $155.82 billion with annual profit of 1.21 billion in 2018. The major products and services it is producing are: Month Subscription Plans to Netflix Website, Recommended system on Videos. Their major competitors are: Amazon Prime Video, Hulu, YouTube Red, HBO Now, Sling TV, and Disney Plus.
Strategic Challenge
Today, Netflix is facing three main challenges: competition with other video providers, content originality strategy, and government regulations .
From Image 1 in Appendices, Netflix is responsible for 85% of paid-subscription digital video content compared to Amazon Prime, hulu, YouTube, iTunes. It is still the leading worldwide content provider with over 167 million in 2019 in 2020 by Statista. However, there are more emerging supplementary services that are replacing original viewer’s time spent on Netflix. For example, Gen Z’s favorite TikTok has replaced their time spent on Netflix. IGTV gives consumers easy access to video through mobile social media. The unpaid video content on YouTube.
However, none of these can compare to the competitive product positioning of Disney Plus which is launched in November 2019. It has directly affected revenues and subscriptions towards Netflix. Starting off from its price advantage of $6.99 per month over Netflix $8.99 per month, Disney Plus has absolute advantage in content originality. The second challenge, the most substantial one, Netflix is facing is creating original programming. Disney Plus has franchises over Marvel, Star Wars, Pixar, National Geographic, and The Simpsons. On the other hand, Netflix only has a third of their videos being original with heavy reliance on licensed shows (reference from Image 2). There is an appearing threat for Netflix in licensing the classic shows such as the Office, and Friends.
The last challenge, also an opportunity, is Netflix’s main mission statement in expanding its subscribers internationally. From Image 3, from 2017 -2018, there is a drastic increase in the global new subscribers. Also Image 4, the net revenues in 2018 clearly shows an expansion in the European market. However, the government regulations in the most populated country, China and India, is a hurdle that Netflix needs to overcome or else the international growth rate will stagnate in the forthcoming years. Although there is ongoing licensing partnership with iQiyi, it is hard for Netflix to neglect the censorship with American television shows.
Strategic Growth Opportunities
1. Differentiating Value Propositions (Image 5) in video content and marketing strategy
- Focus on Quality content over Quantity production
Cost distribution concentrated on blockbuster film/production, instead of diverging into lower-cost & quality shows
- Continue on Originality (Narcos, Stranger things, Orange is the new Black)
Remove its reliance on franchised shows like Friends (set a cost cap, and forfeit licensing when the cap for the deal is over)
- Maintain its competitive pricing
Comparing to DisneyPlus $6.99, customers are very price sensitive, cannot recreate mistake that BlockBuster did in 2005
PROS (Strength)
- Avoidance on limited copyrights on classic franchised shows
- Growing independence on original programming and acquiring of talents
- Revenue for sponsors in original series
CONS (Weakness)
- Less marketing strength once classic shows aren’t part of Netflix program
- Growing operating costs on quality and original content
- Greater debt to maintain competitive pricing
2. Partnering(Image 5) with key TV network and tech companies
- Partner with more telecom providers (globally)
- Create pricing strategy by offering bundle packages
- Partner internationally with electronics companies
- Internal electronics service (Sony, LG, Apple) for built-in deliver movies devices
PROS (Strength)
- Create long-term alliance with other key partners to keep competitor out of market
- Deal-making with more partners to attract new customers from those brands
CONS (Weakness)
- Possible competition with Disney Plus, Apple Plus, or Hulu in getting partnerships
- Cost in the deal-making process
3.Establishing long-term customer relationship (Image 5)
- Avoid advertisement to keep customer
- Design customer loyalty program in pricing strategy to retain subscribers
- A new cheaper price package deal for customer who has subscription for 3 plus year
PROS (Strength)
- Retain the customer in the brand and create long-term loyalty relationship with them
- Keep quality content with no ads
CONS (Weakness)
- Afford greater operating cost due to no ads
- Reduce short-term revenue from new customer loyalty program
4. Targeting Niche Customer Segments (Image 5)
- Expand global audience base
- More marketing in Asia and Europe on Netflix subscription. Work with local celebrities and promoters in facilitating brand image worldwide
- Producing regional-cultural specific programs
- Producing korean television shows like Crash-Landing (a growing-demand and viewership in 2020), niche marketing in original Spanish series like La casa de paper(Money Heist)
PROS (Strength)
- Netflix has the biggest global customer base
- The exponential growth allows Netflix to have more leverage against investors in expanding globally
CONS (Weakness)
- The government regulations mentioned in Challenges
- Increase operating cost in acquiring global human capital/talent in producing regional programs
5. Advancing Recommendation System
- Incubating the most advanced personalized recommendation system
- Data Scientists & Software Engineers in data mining and machine learning to create more accurate and personalized recommendation list
PROS (Strength)
- More collection on user’s data to create more valuable recommended-algorithm
CONS (Weakness)
- The operating cost of enhancing the recommendation system
Recommendation for Opportunities
Among the five strategic growth opportunities, the first strategy of “Differentiating Value Propositions in video content and marketing strategy” is the essence to success of Netflix in foreseeing future. Evaluating from the SWOT (Image 6) analysis of Netflix, the major strengths of Netflix is its high brand image, large platform of producers, and massive global consumers. Weaknesses of dependence on the content producers, franchise of classic shows, and dependence on internet service providers. The strategy of focusing on quality over quantity with more original contents gives Netflix more independence and power in decision-making. Thus, the policy of going for original content gives Netflix freedom in marketing(strategy 2& 3) and program settings (targeting niche customer segments). It is now or never for Netflix. With the rising biggest original content creator Disney Plus, constant change in customer’s taste, extreme competitive market in video programming and acquiring talents, Netflix must strategically allocate its money and human capital to the most appealing & critical traits in their service to differentiate and position Netflix into an unique market that can not be imitated.
Appendices
Image 1: Source: Statista, 2020
Image 2(left) 7Park,2020
Image 3(right) Source: Statista, 2020
Image 4 : Netflix Growing European Audience
Image 5 Business Strategy Hub, 2020
Image 6 Rancord Society, 2019
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