Case Analysis by Ken Akerman
Strategic Issues in the Case
Founded in 1999, Netflix is an online DVD rental service whose strategy and market success were predicted on providing an expansive selection of DVDs, an easy way to choose movies, and fast, free delivery via postal mail. The company’s strategic intent was to be the world’s largest and most influential movie supplier. The goal of the company was to make it a lot easier for customers to select and rent movies and to eliminate the hassles involved in picking up and returning them. Its strategy incorporates customer convenience and a wide selection of entertainment selections. Netflix provides extensive information to its customers to help them make good selections and identify films that they may like to rent in the company’s vast library.
Netflix’s growth strategy comprised three primary strategic issues. First, Netflix continued to pursue its reputation for innovation and to maintain the high quality level of service that its customers expected. Second, Netflix intended to use its preeminent position in the industry to lead the transition to high-definition DVD’s and eventually to digital downloading of movies on the Internet. Third, Netflix focused on rapidly expanding its subscriber base to maintain its market leadership and to realize economies of scale that will drive down costs.
Netflix’s strategy was to create a blue ocean of uncontested market space within the video rental industry, an industry dominated by Blockbuster for over 20 years. Blockbuster was the world’s market leader in the videocassette, DVD, and video game rental business, earning about a 40 percent share of the $13 billion industry. Blockbuster generated most of its revenue from rentals at its company-owned and franchised brick-and-mortar stores throughout the United States and internationally. As of 2004 it still rented and sold videocassettes but revenue from rentals and sales of tapes for VCRs was falling sharply as increasing numbers of households were converting from VCRs to DVD players. In that year Blockbuster earned more than half of its revenue from DVD rentals with the remainder of its revenue generated from DVD sales and the rental and sales of video games and videocassettes. In 2002 Blockbuster had announced a strategic vision of becoming the complete source for movies and games in both the rental and sales markets. However, from 1999 to 2005 Blockbuster was a troubled company, with stagnant sales revenue and reported net losses in six of those seven years. Blockbuster’s parent company, Viacom, split off Blockbuster in October 2004 as a result of its poor financial performance.
The online rental industry is growing as more people obtain broadband Internet access at home and become more accustomed to ordering products online. Two other companies that were competing with Netflix to provide videos or DVDs online are Movielink and GreenCine. Movielink, a joint venture of five major movie studios, was the leading broadband video-on-demand (VOD) service. It did not require a subscription or membership and charged per rental, beginning at $1.99 or higher per movie. Movielink thus provides formidable competition in the area of digital movie downloading. This competitive strength is further enhanced with Movielink’s partnership with telecommunications giant Verizon to launch a co-branded movie downloading service for Verizon Online’s consumer broadband subscribers. GreenCine was an online DVD rental company that also offered its subscribers the option to download movies via two different formats. GreenCine had a smaller inventory than NetFlix and only one distribution center, so most of its customers would have to wait two or three days to receive their orders in contrast to the one-day delivery that most NetFlix customers could expect. GreenCine differentiated itself by offering a more off-center...