Netflix Case Analysis

Netflix Case Analysis

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Netflix Case Analysis

I’m providing key aspects of the broader macro and industry environment that Netflix might need to understand better, given its current strategic position based on the case research done by Kemerer and Dunn (2017).

Strategic Positioning

Variety-Based Positioning

Netflix service is divided into two: Traditional DVD mail delivery (control production costs and reduce investment) (p.1) and online streaming, e.g., home-made drama, e.g., House of Cards, won three Emmy Awards (p.5). By April 2017, it had 99 million subscribers worldwide, and by March 2017, it had 50.9 million subscribers in the United States (Exhibit 3 p.9). Netflix is investing heavily in streaming content creation. In 2017 it spent $6 billion, which resulted in a $3.4 billion long-term debt (p.5).

Macro Environment-PESTEL

Political Factors

The uncertainty of government regulatory principle that ISPs should enable access to all content and applicants regardless of the source without favoring or blocking particular products or websites is posing a risk to any decision-making in the digital delivery market (p.7). Additionally, due to political restrictions, Netflix cannot offer content from or to all countries.

Economic Factors

There are more robust streaming services in the industry offered by different competing companies, which may reduce the company’s profitability (p.5). Netflix’s traditional DVD mail delivery is experiencing additional costs due to an increase in mailing rates (p.6). The industry has competitive prices in TV services, which may affect Netflix’s subscriber base (Exhibit 3, p.9).

Social Factors

The company has an increase in online streaming popularity among young people since they are using smartphones (rather than TV) most of the time, along with the rapid pace of modern life, which may kill the traditional DVD mail delivery business (p.5).

Technological Factors

A specific system to save data and lower-resolution versions of streaming files allows subscribers to stream the content; this may kill the traditional DVD mail delivery business (p.3). Additionally, high-speed broadband services that have enabled network access and improved accessibility of streaming services may kill the traditional DVD mail delivery business (p.6).

Legal Factors

“Netflix tax” would possibly hamper the growth of streaming service companies, including Netflix (p.7).

Industry Environment- Porter’s Five Forces, KSF

Threat of New Entrants

It is hard to renew licensing as the content owner dictates the terms leaving Netflix with less inventory (p.4). Also, the industry requires massive capital investment for streaming content, and acquisition of new shows is expensive, and in 2017 Netflix had a budget of $6 billion (p.5). Additionally, some supplier contracts are exclusive, which made Netflix not to get sufficient returns (p.5).

Bargaining Power of Buyer

The variety of choices is available, which may reduce Netflix’s subscriber base (Exhibit 3, p.9). Also, sales and revenue depend on the subscribers; this may result in revenue fluctuations (p.4, Exhibit 1 p.8 & Exhibit 2 p.8). Moreover, there is low switching cost; hence subscribers can cancel the subscription anytime (Exhibit 3, p.9).

Bargaining Power of Supplier

Netflix is obtaining a license to distribute the content from fellow competitor affiliates, which may affect the company’s competitiveness, e.g., acquire new show, licensed content from Hulu (p. 4). Also, online distributors face a higher degree of influence from suppliers compared with traditional broadcasting, e.g., rely on PlayStation to carry Netflix app and rely on cable companies (p. 5).

Threat of Substitutes

Traditional media content providers (e.g., VCR) and other products can provide similar rental DVD services and online streaming (p. 2). Also, Netflix has to update its content library by adding TV shows and movies, which may lead to an increase in long-term debts (p. 5).

Rivalry among Existing Firms

Competing firms are offering affordable prices proving difficult for Netflix to retain customers (p.5 & Exhibit 3, p. 9).

Conclusion

Netflix should better understand its macro and industry environment to have a competitive advantage, make informed investment decisions, and boost profitability.

Recommendations

Netflix has to reduce its rising prices to gain back its competitive advantage. Also, it has to diversify its user base by focusing on traditional DVD mail delivery apart from online streaming to accommodate the older generation. Additionally, it should offer bundled discounts to subscribers who are seeking both streaming availability and DVD rentals to increase subscriber base. Lastly, it should create its content to avoid additional costs of buying new shows from content suppliers.

References

Kemerer, C. F., & Dunn B. K. (2017). NETFLIX INC.: THE DISTRIBUTOR FACES DISRUPTION. Ivy Publishing. Ontario, Canada.

Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard business review, 86(1), 25-40.

Yüksel, I. (2012). Developing a multi-criteria decision making model for PESTEL analysis. International Journal of Business and Management, 7(24), 52.