Netflix Case Analysis

Netflix Case Analysis

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.

Introduction

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.

The Vision

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.

Business Model

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.

Enter Netflix

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

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 subscribers. Blockbuster also acquired Film Caddy in 2002, to get into the online DVD rental market.

Wal-Mart

Wal-Mart was an even larger new entrant. As the world's largest retailer, with $244.5 billion in sales (in the fiscal year ending Jan 31, 2003), more than 1.3 million associates worldwide through more than 3200 facilities in the US & 1100 abroad.

Wal-Mart developed a rental program almost identical to that of Netflix, through walmart.com. Even the envelopes and movie selections were similar to Netflix's. However, it was estimated to only accumulate 1/5 the number of subscribers as Netflix by the end of the first year. In addition, it only had 7 distribution centers compared to Netflix's 15. Wal-Mart did plan to open more centers at other facilities in the future. Wal-Mart was still debugging its online software, where Netflix had already spent years debugging its software.

Movie Gallery

Movie Gallery started in southern Alabama and Florida. It grew through the acquisition of various mom-and-pop video stores and then video chains throughout the Southeast. It continued expanding through this aggressive approach until it reached 1678 stores in 42 states and five Canadian provinces. It did not have an online program, but it was not expected to be far away.

Walt Disney's Movies On Demand

Movies on demand eliminated having to wait at least one day to receive the movie. Walt Disney was offering one such service, called MovieBeam. There was a monthly equipment service fee of $6.99 and a viewing fee of $3.99 ($2.49 for older titles). The customer had 24 hours of unlimited viewing.

MovieLink's Downloadable Movies

This service allowed customers to download movies directly to their PCs. There were no late fees or return times, and MovieLink did not require a subscription or membership. Each movie was independently priced by the content