Netflix Case

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Davor Rameša k0956979
Netflix case
Executive summary
What is Netflix’s strategy in the on-line movie rental market? What are Netflix’s sources of competitive advantage? Identify the competences key to the success of Netflix’s strategy and explain why. Netflix was a late entrant to the movie rental market and it was a first mover in the on – line movie rental market. Netflix’s strategy in the movie rental market is differentiation from traditional movie rental stores. Instead of attracting customers to a retail location, Netflix offered home delivery of DVDs through the mail. Why only DVDs? In 1998, most available movies were in VHS cassette format but Netflix concentrated on using only DVDs because its marketing strategy was to develop cross promotional programs with the manufacturers and sellers of DVD players, providing a source of content for the customers. Also, there was no competition in that niche market and DVDs were small and light which made them perfect for mail delivery. Netflix had several sources of competitive advantage. For starters, Netflix’s website included a search engine that allowed customers to easily sort through its selection by title, actor, etc. Using these search engine customers could easily and quickly find a movie that they would like instead of looking on shelves of a retail store. Netflix was using the US Postal Service to deliver DVDs directly to a customer’s home. It was more convenient for customers. They used similar pricing to that offered by traditional video stores in the beginning but what gave them the competitive advantage was moving to a subscription prepaid service. And, soon afterwards they offered unlimited rentals to customers because they were targeting another group of customers – ones that wanted the convenience of watching a movie at any time and change them unlimited during a month. Netflix’s engineers developed a proprietary recommendation system. They have done so because mostly the new movies were being rented and they wanted to balance customers demand. How did this system work? Upon signing into a new account for the first time, customers took a survey to identify their favorite movie genres, as well as rate specific movie titles. This survey gave enough data to Netflix’s engineers to build a base and understand better customer’s preferences. Also, Netflix’s size and growth rate generated a positive ”network effect” from its large customer - generated rating system. Because it had the largest collection of movie ratings in the world, customers recognized that they were more likely to have their tastes and preferences accurately reflected from Netflix’s site. The key to success in Netflix’s strategy was hiring Ted Sarandos as chief content office to manage content acquisition. He managed (due to his relationships) to negotiate direct revenue – sharing agreements with nearly all the majors studios. So Netflix was able to improve its relationships with its suppliers. The benefit was not just lower acquisition costs but the promotion of lesser known movies. So, customers had the benefit of large variety of movies. Also, using the proprietary recommendation system and the national inventory Netflix was able to replicate almost perfect inventory. This gave them a serious competitive advantage, since retail stores needed three or five times the copies of a movie to satisfy the same customer demand. Assess Netflix’s performance? Use multiple performance measures (strategic and financial). Table below shows (in 000$) Netflix’s performance using 2 financial ratios in year 1998 and 2006. (source : Netflix 2006 10-k) As we can see from the table, in year 1998 Netflix had poor performance. We can see that it was losing 16.84 thousands of dollars to subscription (sales= revenue of subscription). Net profit margin was not any better a -18.940$ . We can see that their operating profit margin was 0.69 thousands of dollars and...
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