Competition and Strategy
January 31, 2006
This case represents an analysis of the DVD rental business and specifically how Netflix positioned itself in the market and the direction of the industry as a whole. Several tools were utilized to help analyze Netflix. Case facts were considered in addition to possible future strategy in relation to market position.
Netflix was founded in 1997 by Reed Hastings who is the current CEO of the company. Mr. Hastings has experience with the birthing of a startup company in his venture with Pure Software, which he founded in 1991. Mr. Hastings background in the software industry would prove to be an asset for his new venture, Netflix. Netflix was formed to address a niche market for delivering DVD's directly to the customer via mail service.
Reed Hastings had a clear vision; "Our Vision is to change the way people access and view the movies they love". This Vision was born out of the recognition of the perception that people that rent DVD's wanted easier and more convenient access. One of the drawbacks of renting through storefront method was that you had to drive to the store and rent the movie. Another drawback was the movie had to be returned within a certain time period and if not, late fees would apply. Reed Hastings saw an opportunity to build a business model that would revolutionize the rental process.
The business model was simple in concept but heavy in technology. The business model was that Netflix would offer to customers, convenient access to the movies they love. Customers who signup for a subscription are able to create their own wish list. For a set fee, customers could rent the DVD's they wanted and keep them as long as they wanted. No due dates and no late fees. Depending on the level of subscription service, customers select the number of movies they are allowed under their level. They receive the movies via US mail service and return them when they want with a postage paid return envelope.
Netflix had impeccable timing for entering the market when they did. Around 1997 the consumer demand for DVD players increased substantially due to the downward price trend of the players. DVD player models that once listed for $600 or $700 in 1997 are now being sold for $150 to $250. Because of this significant shift in price, there was a positive shift for the demand of movies on DVD. Blockbuster still maintained a hefty share of the market as Netflix began to compete. Netflix started slicing at market share by providing a different avenue for people to rent movies. The convenience factor and no late fees were among the key components of what attracted a large customer base. Netflix had the same number of subscribers in three years that took AOL 6 years to get at that same level of 1M subscribers. Growth rate has slowly chipped away at rival's market share.
Netflix has had phenomenal growth but the growth rate is only one of the reasons why they are a player in this competitive industry. Netflix has a state-of-the-art inventory system that helps with forward and reverse logistics. Not only do they need the information systems for getting the DVD's out to customers they also need to be able to account for the reverse flow of rentals back into the system. The database keeps track of who gets what and when and determines the closest distribution hub to the customer. The Netflix infrastructure is, for now, outpacing competition.
Blockbuster had revenues exceeding $5.5 billion (80%, or $4.4bil from the US). It had more than 8,500 stores worldwide with more than 2,600 outside the US (and approx 5900 in the US). Blockbuster's market share exceeded 65%. Blockbuster wanted to be "the complete source" for movies and games, rental and retail. It also began to market the pay-per-view service DIRECTV, offering 44 movies/day to...