Examining Netflix’s Business Model

Analyze Netflix’s business model?

How does Netflix change the video distribution industry?

Business Model

Business Model describes how a company produces, delivers and sells a service or product to create value for its customers, shareholders and other stakeholders. Netflix a pioneer in the online DVD subscription services operates in the in-home entertainment video market. “In-home distribution channels include home video rental and retail outlets, cable and satellite television, pay-per-view, VOD (video-on-demand), internet streaming and broadcast television. ” (Source:- Netflix Annual Report – 2005 – Section Industry Overview)

Netflix started operations in 1997 and relied on the DVD format as the medium of in-home entertainment, although this format of viewing was restricted to a small population of affluent, technology-savvy customer base. Over a period of time DVD became accepted as the choice and its penetration into every household rose exponentially.

Netflix’s business model revolves around its home-grown proprietary software Cinematch which powers its website and a comprehensive information system to manage operations. The comprehensive information system allows it to manage and integrate business across order processing, customer service and fulfilment operations. This leads to maximum utilization of library and operate with a decreased number of customer reps. It had 100 customer reps to handle 115,000 customers in the early days, now it has 43 to handle 3.2 million customers.

From a business perspective management, organizational and technical elements are aligned towards customer focussed innovations. Warehouse workers get free Netflix subscriptions and DVD players. Corporate Employees are kept happy with perks so that they are eager to solve tough engineering problems to improve user experience.

Netflix and the video distribution industry

Netflix changed the video distribution from a store based rental channel to an online subscription based distribution channel. The web-site enables “subscription account signup and management, personalized movie merchandising, inventory optimization and customer support” (Source:- Netflix Annual Report – 2009). Coupled with features such as social networking (Friends) and queue management (Profiles) it compares each subscriber’s movie preferences derived from the individual’s past ratings and rental patterns with preferences of other users contained in the database and comes up with personalized movie recommendations unique to each subscriber. The company leveraged on the power of Internet and technology to achieve two purposes –

(a) Enhance customer experience by providing them a web-based portal tailored to individual preferences. It comes up with a customer specific recommendation list based on the individual’s ratings of past viewings. Customer’s can set up their queues and receive delivery through mail. There is no return deadline; no charges and the DVD’s can be mailed back through pre-paid envelopes.

(b) Enhance operational efficiency – Traditional Video rental retail outlets would have to compromise on the number of titles available in each of its stores because of space constraints. Netflix has an advantage in being able to offer a much wider range of titles since the stock is piled in its warehouses. One of its core business strengths is its vast catalogue of not so popular and old time movies and TV show content which is cost effective to procure and profitable to sell, but is not available in conventional retail stores. Cinematch also avoids suggesting out-of-stock movies and ensures maximum utilization of inventory. An effective and comprehensive Information system enables it to distribute DVD’s from the nearest warehouse through US Mail. There are 100 shipping points across the United States which enables the company to provide delivery in one business days for 97% of its customers.

Advantages and Disadvantages to potential customers

Advantages –

Personalized DVD rental services and movies through internet streaming.

The recommendation software is quite accurate and is built on the customer’s historic choices and ratings. Coupled with the social networking feature (Friends) it avoids the customer to go through the hassles of selecting and ending up with something he does not like.

Availability of a wide range of not so popular and old titles which are not available in a conventional DVD rental stores.

Disadvantages –

The recommendation software purposefully omits out-of-stock titles and hence influences the choice of the customer.

It is intentionally slowing down delivery to high volume customers which are not so profitable. Instead it gives a preference to the low volume members. Hence preferential treatment is given to the more profitable low volume customers.

Ability to fight competition and sustain its own markets

(Source: Annual Report 2009. From Sec Filings of 2010 Subscribers have increased to 20,010(in thousands), Revenues have increased to $2,162 Million and Net Income has increased to $161 Million)

Netflix has continued to increase its subscription base, revenues and net income over the years. The following analysis is based on how information systems can address Porter’s competitive forces model – “Traditional Competitors, New Market Entrants, Substitute Products and Services, Customers and Suppliers”

Low-cost Leadership – Netflix uses its information systems to ensure maximum utilization of inventory and avoiding recommending out-of-stock titles. The information system integrates order processing and customer service and this has given it a cost advantage with increase in scale of operations, driving down per-unit cost and Netflix has been able to price its service offering at levels difficult for competition to meet.

Product Differentiation – Netflix’s personalized web based movie selection services and technological innovations in the movie recommendation algorithm are a huge entry barrier for new entrants. Although the software and technology is not hard to replicate Netflix has the advantage of a database of over half a billion movie ratings and takes in more than a million new ones every day.

Focus on market niche – Unlike competitors like Amazon, Netflix has built its information systems targeted to the in-home entertainment industry. It has engaged with partners to expand the number of devices which can support streaming videos from Netflix.

Strengthen Customer and Supplier Intimacy – Almost 60% of the movies customer’s put in their queue comes from Netflix’s recommendation system and ensures customers run a lesser risk of wasting time on a movie that they will not enjoy. This increases the switching costs for the customer. Although the case study does not state anything explicitly, the annual reports of 2010 indicate that Netflix obtains “content through streaming content license agreements, DVD direct purchases and DVD and streaming revenue sharing agreements with studios, distributors and other suppliers” and our assumption is that supplier’s would benefit from Netflix’s recommendation software which could boost up sales of their not so popular titles. All new titles do not end up becoming blockbusters and the less popular ones could get recommended to customers with specific preferences based on Cinematch algorithm.

Competitive strengths of Netflix include an iconic brand, personalized merchandising, growing scale without substantial increase in cost and an information system catering to convenience, selection and fast delivery.

Principal competitors are –

DVD rental outlets and kiosk services, such as Blockbuster, Movie Gallery and Redbox (Source: Netflix Annual Reports 2010)

Video package providers with pay-per-view and VOD content including cable providers, such as Time Warner and Comcast; direct broadcast satellite providers, such as DIRECTV and Echostar; and telecommunication providers such as AT&T and Verizon (Source: Netflix Annual Reports 2010)

Online DVD subscription rental web sites, such as Blockbuster Online (Source: Netflix Annual Reports 2010)

Entertainment video retail stores, such as Best Buy, Wal-Mart and Amazon.com (Source: Netflix Annual Reports 2010)

Internet movie and TV content providers, such as Apple’s iTunes, Amazon.com, Hulu.com and Google’s YouTube. (Source: Netflix Annual Reports 2010)

Popularity of alternative entertainment mediums which can be distributed using a similar business model like Netflix (Example – Gaming CD and DVDs)

Threats –

Currently the time for distribution in DVD format is shorter than release to other mediums (VOD, premium TV etc) after a theatrical release of a movie. This gives a competitive advantage to the DVD market. However this competitive advantage may go if the distribution to these multiple formats happens simultaneously.

The proprietary technology and information systems are also based on a certain historic scale of operations which has increased substantially and this could lead to systemic disruptions and negatively impact operations.

The DVD format would probably give way to Internet movie and TV content providers and Netflix would be left stranded with its warehouse and sophisticated mail handling systems.

However the one thing which will continue to survive is CINEMATCH and its database of billions of movie ratings which will give a competitive edge to Netflix when it decides to switch over to other formats of movie distribution.

AOL, Yahoo to Charge for Email

Question:

Yahoo and AOL are relying on some durable economic laws to support there new email product. What are these?

What are the new opportunities that they can exploit by Certified mail product?

Durable economy:

Assumption:

1. Net Neutrality Legislation will not be approved by the congress.

2. Certified mails also have an opt-out feature that allows recipients to unsubscribe.

A sustainable or durable economy requires the development of programs, policies, and implementable initiatives that encourage activities that will empower communities and conservation of resources; promote environmental justice; preserve ways-of-life; and promote by example and through discourse the ideas of ecological and participatory democracy and its real world implications.

The basic principal of economy is to distribute the scare resource to most needy ones. In reference to this caselet, the spam mails are using the network bandwidth preventing the internet users to do there legitimate work. The real value produced by information providers comes in locating, filtering and communicating what is useful to the consumer. The certified email service allows email service providers to deliver only the legitimate emails to end users. As the legitimacy and the background of the email originators are already verified by the service providers like GoodMail, this will help in reducing the spam detection cost for AOL and Yahoo. Also, spam and Phishing is bigger threat to web based mail users. To keep the user experience, companies spending huge amount of money to reduce the spam. The fundamental factors that determine the profitability is industry structure and sustainable competitive advantage. By offering these service AOL and Yahoo can out perform there competition.

‘There ain’t no such thing as a free lunch’ .The economic theory, and also the lay opinion, that whatever goods and services are provided, they must be paid for by someone. The information production and delivery systems requires significant amount of investment in Hardware, Software, network systems. To sustain this business, they need to recover the cost and make profit. The free mail based service cost the mail service providers close to $10-$12 per user. By charging the business to deliver there message to it’s users, they can recover this cost. Yahoo, AOL mail users will also benefit from this as the information sent to there inbox is useful to them and also they will have an option to unsubscribe these certified mails if they wish too. The business will be willing to pay these charges for sending the mails as this toll will allow them maximize there ROI.

Opportunities for AOL and Yahoo:

Customer care in a service-based industry and priority email delivery

In the information age, service based industry rely heavily on email based communication. Companies want to make sure that, there product information, quires and customer concerns are addressed in stipulated time. The internet traffic is growing year by year and which creating the bandwidth issues. Yahoo and AOL can start the priority email service (similar to the Fedx, USPS, US post which charges for faster delivery) where they can provide the guarantee of delivering mails and to user inbox in stipulated time by charging the legitimate fees. They can work with ISPS to prioritize there mail traffic by sharing the revenue they earn. Eg. Distributed Document Processing services.

Govt agencies wanting to reach out to mass public to explain there policies.

Yahoo and AOL can offer products to government agencies where they can deliver there communication directly to user’s inbox.

On line Advertising

By collecting information about their interests, what particulars mail users want ( based on the responses to the certified mails),Yahoo and AOL can customize adds that can be displayed alongside user’s mail box page.

Reduce the spam and provide security to there users.

Phishing and online identity theft are the fastest-growing threats to the email users. By using certified email service Yahoo and AOL can fight the spam’s better which will help in en-reaching the user experience. This will attract more users.