Netflix Update

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Netflix’s Business Model and Strategy

Matthew Rotz, Darrin Borgschatz, Melissa Kochanowski & Jessica Whitney Management 499
Allan Bernard and Kelly Rogosheske

Executive Summary
This paper will include information based on the performance of one of the largest subscription services for renting DVDs by mail and downloading over the internet, Netflix. The paper will take a closer look at the competitive forces found in the movie rental marketplace and how they have impacted the financial performance of Netflix over the years. The paper will also discuss the business strategy used by Netflix regarding its operations and rate the operating and financial performance based on the data found in the Netflix cases provided by the text and 10-k report. The paper will include financial ratios to better assess their financial performance. The paper will also compare Netflix's competitive strengths and weaknesses against a few of its biggest rivals such as Blockbuster and other cable providers. Lastly, the paper will include recommendations to Netflix top management in order to improve their performance and strengthen their position in the marketplace.

Characteristics of the Video Rental Industry
Traditional brick and mortar video store competitors are in a sharp decline. Movie Gallery, which includes Hollywood Video and Game Crazy, filed for bankruptcy in February 2010, and closed all stores in May 2010 (Thompson). Video on-demand, streaming, DVD by mail, and walk-up kiosks are the present and future.

Netflix is currently the big player in DVD rentals and streaming. There are a host of competitors including Amazon Prime, Hulu, Redbox, and satellite and cable television on-demand services. There are many options for consumers, who may or may not be loyal to one service over another. As Netflix grows its customer base, it faces the uncertainty of content costs.

There has been a clear shift from physical rentals to online streaming (Trefis Team). As more rivals enter this business, there will be increased competition to bid on exclusive contracts with content providers, driving up costs and putting pressure on Netflix (Trefis Team). Diversification Analysis

Netflix began operations by renting DVDs by mail to customers. Customers would go online, select the movies and television programs they wanted to view, add them to a “queue”, and a DVD would arrive by mail in one or two business days. The customer would send back the DVD, Netflix would process the return, and the next DVD on the queue is sent. This process, of course, still exists, but Netflix has diversified its content delivery by introducing streaming to customers.

The company has changed the way it delivers content for those desiring streaming, which is a booming business. It offers thousands of licensed movies and televisions episodes that customers can view anytime and anywhere. The company has also developed original content. Series such as Lilyhammer and House of Cards are available to customers of the service. Netflix made a huge investment in House of Cards, paying more than $100 million for 26 episodes and attracting high profile director David Fincher and actor Kevin Spacey to star in the series (Rosenbaum). The foray into original programming can be viewed as related diversification. The company is in business to provide entertainment content to subscribers, and this is an expansion of that model. Driving Forces

Netflix has become a dot-com success story. Netflix has built software to help manage its complicated rental system. Using the Internet has extended the geographical area to where it is accessible anywhere in the United States. You can search and rent movies no matter what time it is, you don’t have to worry about the store closing. It doesn’t matter if there is a store near you or not. They had to have to newest technology available to outsmart their competition. How Netflix did this was by making a wish list for viewers to see and...
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