Netflix Case Analysis
Netflix has been successful introducing a new business model for the DVD rent industry. The new model is base completely online, changing the way that price of the service has been settled before. The new business model is bases new pricing system in which customer neither pay late return fees, nor shipping fees.
This business model have been so successful that other big player such as Blockbuster, and Wal-Mart start to copy the business model, which is a real threat for Netflix due to the competitive nature of its new rivals.
2. COMPANY’S CURRENT STRATEGY
“To have a global entertainment distribution company that provides a unique channel for film producers and studios…. As Starbucks is for coffee, Netflix will be for movies.”
“To provide a premier, filmed-entertainment subscription service to a large and growing subscriber base.”
Netflix expect to generate $1 billion in revenue by 2006.
Netflix expects five percent of all U.S. households to become Netflix members by 2006, resulting in five million members.
2.4. Corporate level strategy
Low diversification: The online video retailer unit has more than 95% of revenue (see income Statement) To gain competitive advantage through related liked strategy, Netflix announce a partnership with TiVo.
2.5. Business level strategies
Netflix target market is broad: people, who have access to internet, own at least one DVD player, and are willing to rent DVDs online initially in USA.
The advantage the company offer to customer is based on differentiation: wide selection of movies, fast delivery, neither late fees, nor shipping fees.
3. EVALUATION OF CURRENT STRATEGY PERFORMANCE
3.1. Competitive performance
The trend in sales and market share indicate that the company is growing according to its projections: in its first three year acquired 670,000 subscribers and 2.6 million subscribers at the end of 2004. Also, by august 2004, Netflix captured 12.5% of the movie rental business, and 30% of independent film rental market. Netflix has been effective retaining customers: In 2005, customer defection drop from 5% to 4.7% during the first and second quarter. The company has a good reputation wide selection of movies according to the commentaries of customers in online discussions.
3.2. Financial performance
The company is experiencing an increasing net income trend after net loss during the first four years of operation. In 2004, net profit was 21,019 thousand of dollars. EPS has increase from 10₵/share in 2003 to 32₵/share in 2004. The stock price experienced a 78% fall by the end of 2004 and the first quarter of 2005, but started to recovery during 2005.
4. EXTERNAL ANALYSIS
4.1. General External Environment
Among the six dimension of the external environment, the technological is the most relevant due to the changing nature of the online distribution of entertainment industry, which bring new opportunities and threats. The penetration and new capabilities of internet create attractive opportunities for new entrants in the online DVD rent business. New technological developments such as VOD, which allows users to order movies through cable service, are a real threat for Netflix business model. However, TiVo, a new technological development, create opportunities for business expansion. New developments on web sites with movie recommendation algorithms such as CineMatch provide competitive advantage.
4.2. Industry Situation Analysis
4.2.1. Industry structure, directions and trends
The total size of the US video rental industry is $24.4 billion in 2003, including sales and rental of both DVD and video cassettes. In the first six month of 2004, Netflix estimate a record of $11.3 billion in video retail industry. Nonetheless, the trend of the industry is increase in DVD sales and decrease in rentals of both...
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