Netflix: Buy or Sell?
I. Porter’s Five Forces
Rivalry Among Existing Firms. In terms of the video rental industry, Netflix now has very few competitors. Blockbuster was the main one, but has since lost steam. Outside of DVD rentals however, the competition is much more intense. Netflix directly competes with cable companies like Charter, On-Demand channels, and even Tivo. Online streaming companies such as Hulu are also major competitors. Barriers to Entry. The difficulty in entering the video industry is made more difficult by the contracts and distribution rights of the content you wish to have access too. However, the DVD rental is becoming less of a focus for Netflix. Streaming is the primary focus here. Streaming is via the Internet, meaning the capital costs are lower therefore decreasing entry costs. There are certainly more streaming competitors on the horizon for Netflix. Threat of Substitute Products. This is probably the strongest force Netflix has to battle. On-Demand, Tivo, pay-per-view, and others are all easily accessible substitutes for both streaming and DVD rentals. DVDs are slowly being phased out of home entertainment systems due to technological advancements. This is something Netflix is currently addressing. Determinants of Buyer Power. If Netflix prices rise too high, buyers can quickly and easily cancel their subscriptions and switch to a competitor. Switching is at little cost to them since the subscriptions are paid monthly and not annually. If Netflix can continually beat competitor prices, they will maintain a large share of their customer base. Determinants of Supplier Power. Netflix must obtain the rights to the content it rents and streams to customers. These networks and studios are in direct control of the price that Netflix must pay for the content. In addition, customers want a fast turnaround time regarding when episodes air on television and movies are released. Studios and networks are in control of this...
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