Netflix Case Study Report: Brief History

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The company was started by Reed Hastings and Marc Randolph in Scotts Valley, California, in 1997. Netflix was just a rental service arranging its entertaining offers into the website (McFadden, 2020). The latter made Netflix the best choice for customers who did not have a video rental store in their neighborhood. Starting from 2007, Netflix decided to bundle streaming service with a common DVD-by-mail approach, encouraging its use by subscribers to reduce postage and shipment costs. As a result, in 2011, Netflix announced a separate streaming service under the name of Netflix. Inc. In 2010-2015 the company led an aggressive expansion to increase subscriber base. Today, Netflix is available in 190 countries, having more than 190 million subscribers by July 2020 (Moody, 2020). The video streaming giant started to invest heavily in original content that saw them receiving Academy Awards.

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Industry Analysis

Netflix is one of the leaders in the video streaming market. In general, the entertainment video market is fast-changing and currently propelled by high-speed Internet access, research-reach companies competing for viewers, and a wide range of devices available on the market. The industry is represented by such options: VOD (video-on-demand); and subscription-based video streaming providers (Netflix, Hulu, Amazon Prime). Leading streaming services can be compared according to the net promoter score (NPS). Netflix is the first on the list having 64 points due to its approach to personalization and positive customer experience (Sinitskaia, 2020). The next one is Hulu, appreciated by consumers for efficient customer support contact centers.

Strategic Group Map

The first variable is the subscriber base/subscription price ratio; thus, the company with the largest membership and lowest price will be on the top. The second variable is the number of original shows available on the service. It presents the most productive providers on the horizontal axis. As shown in the figure below, Amazon Prime Video is the main competitor for Netflix regarding pricing and membership. Netflix has an edge in terms of original content creation.

Strategic Group Map.
Figure 1. Strategic Group Map.

Porter’s Five Forces Model

Although Netflix is still dominant in the Internet streaming market, powerful rivals such as Amazon Prime, Hulu, and HBO NOW jeopardize its current position and intensify competition. Despite extremely high investments needed to enter the market, big multinational players such as Disney, Apple, Britbox, and HBO launch or have been recently started their own streaming services. It means that the entry barriers are relatively low for established representatives of the entertainment industry.

The power of suppliers can be generally considered a moderate threat. On the one hand, the latter enjoy high bargaining power, heavily influencing license pricing (Sakal et al., 2019). On the other hand, Netflix successfully diminishes the cinema’s role by demanding a two times smaller release window before becoming available for streaming (Martin Scorsese’s The Irishman). However, some of the most-watched content may be lost by the company to its main rivals. For instance, HBO acquired a license for the sitcom Friends.

In general, the power of subscribers continues to rise due to increasing numbers of providers and easy switching between them. Competitors offer a similar subscription model and free trials, which decrease consumer retention. The cluster is also not price-sensitive; hence, viewers focus their attention mainly on the content quality. The threat of a substitute is low for Netflix, as traditional TV broadcast is declining worldwide.

PESTEL Analysis

Political and Legal Trends

Net neutrality regulations may hit the US streaming services if the demands of giant AT&Ts would be satisfied. It can lead to higher prices of on-demand streaming services. Moreover, the EU legally aligned video streamers to traditional TV distributors. Thus, the former should devote at least 30% of their content to local video entertainment production (Gallagher, 2018). Today, technology brands also face issues regarding data collection practices, anticompetitive behavior, and new tax laws.

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Economic Issues

The gradual development of the global economy resulted in people around the world spending more on services such as YouTube and Netflix. Even the Covid-19 lockdown has more positives than negatives for the media heavyweight. Netflix reported a 15,77 million rise in membership in the first quarter of 2020, two times more than expected (Owens et al., 2020). Nevertheless, the long-lasting pandemic may contribute to unemployment growth that will see people cutting down their expenses.

Sociocultural Trends

People tend to watch more content on the move or at home using different devices. Customers of cable and satellite providers switch to online streaming services because they perceive it as a superior price-quality combination. According to Spangler (2020b), approximately 80% of US customers enjoy at least one subscription option. Nevertheless, it also accelerated subscription fatigue that sees consumers cancel or switch services following free-trial or discounts expiring.

Environmental and Technological

The gradual improvement of streaming speed is beneficial for Netflix. Watching videos in 4k resolution becomes more popular, which is a challenge for service providers. The 4k signal should be effectively compressed to ease the strain on the broadband services of their customers. Another issue is an automatic translation of films and shows. Data servers also have a carbon footprint; thus, the company must pay a part of the environmental bill.

Mission and Strategy

The mission of Netflix is to “entertain the world” on a worldwide scale. The company strives to address consumers’ preferences and simultaneously expand the number of subscribers. Thus, its main objectives and goals align with this mission. Netflix focused on membership growth, diversification of its services, and maintaining a competitive advantage by expanding its own content. Netflix’s current business model has features of the platform, cutting-out-the-middleman, and unlimited subscription business models. Its main business areas include domestic DVD, international streaming, and domestic streaming segments. The generic strategies applied by the provider include cost leadership and differentiation. The company is focused on in-house production of video content, effective new content acquisition produced by third parties. To grow its membership, Netflix conducts aggressive marketing and advertising campaigns in countries it had already entered.

SWOT Analysis

The SWOT matrix reveals the main strengths, opportunities, threats, and weaknesses that influence Netflix’s performance in a highly competitive industry. Its main strengths is brand popularity around the world and original content that attract and retain subscribers. The main weakness is relative dependence on the content produced by third parties (usually high costs on licensing). Existing fierce competition and wealthy new entrants are the main threats resulting in content and membership loss. For this reason, a partnership with local and independent studios may be an excellent opportunity to decrease costs and differentiate the current programming.

Table 1. The SWOT Matrix.

Strengths:
  • Massive consumer base (popularity)
  • Competitive pricing
  • Original content
  • Excellent recommendation technology
  • First-mover advantage
Opportunities:
  • In-house original programming (smaller studios, exclusive content)
  • Expanded distribution (Disney, Nyse).
  • Further international expansion (China)
  • Partnerships
Weaknesses:
  • Cost of original content
  • Licensing
  • Cloud-based storage (provided by Amazon)
  • Difficult to raise subscription prices
Threats:
  • Existing fierce competition
  • New entrants
  • Costs of licensing and its renewal
  • Loss of content producers
  • Excessive investment in original content production

Financial Data Analysis 2018-2019

Using income statements from 2018 and 2019 annual reports, it can be seen that net income has increased by 36%, EPS has increased by 34%, and revenue has improved by 22%. It indicates the strong ongoing growth of Netflix that is accelerated compared to the average results over the past three years. P/E ratio dropped to 80.66, which means investors are willing to pay $80.66 or every dollar of Netflix’s earnings (Netflix, Inc., 2019). It is quite a high result that identifies positive growth expectations for the future. The price-to-sells ratio (P/S) of the streaming provider also dropped to 7.47 in 2019. It determines that investors are willing to pay $7.47 for every dollar of the company’s sales.

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Table 2. Financial Ratios 2018-2019.

Year Revenues Net Income EPS P/E P/S
2018 15,794,341 1,211,242 $2.68 118.55 9.09
2019 20,156,447 1,866,916 $4.13 80.66 7.47

Nevertheless, Netflix’s balance sheet includes $6.8 billion of long-term and $4.4 billion of current content liabilities. The existing assets in 2019 account for $6.179B, whereas incremental revenue reached only $4.4 billion (Netflix, Inc., 2020). The negative free cash flow indicates that the company has excessive operating expenses. It was caused by an unsustainable strategy that should be addressed as soon as possible in terms of Netflix.

Problem Statement

Netflix’s original content strategy still has not proved to be successful in addressing the licensed content issue. The provider planned to invest more than $17.3 billion on original programming, which is two billion more than a year before (Spangler, 2020). In 2019, Netflix’s revenue was close to 20 billion, and it had 167 million subscribers (Collins, 2020). On the contrary, the incremental revenue was low, cash flow was negative, and the company had $14.8 billion in debt. It means that the cost per new subscriber was $110 in cash flow.

Excessive investment in original content helped to gain a comparative advantage and increase the number of subscriptions. However, it was done at a too high cost, and the current strategy failed. As mentioned earlier, the company gradually loses the rights to stream popular and familiar titles such as Friends, The Office, and Grey’s Anatomy (Trainer, 2019). Despite the focus on original content, 63% of views account for licensed films and shows. The current strategy should be revised or updated to assure positive cash flows and avoid customer churn.

Strategic Alternatives and Recommendation

The first alternative is an advertiser-driven business model that is already successfully represented by YouTube. Although Alphabet is not responsible for the majority of content, it offers a platform for advertisers that makes tremendous returns. The current content strategy can be preserved if Netflix starts generating positive cash flows on advertising. The second alternative is to reduce original content investment to the most successful projects and focus instead on popular shows made by third parties. The new contracts with producers may require additional expenditures but will retain 40% of customers and generate positive cash flow. Another alternative is to cut investment on original content and simultaneously target smaller studios. The streaming content provider should avoid major film companies and collaborate with smaller studios on exclusive projects. This approach helps to increase negotiation power, reduce overhead and bargaining power of major suppliers.

I recommend the last alternative that resembles the content-driven model used by Disney. The so-called tentpole franchises differentiate the offer, reduce production costs, and reserve money to license or purchase the content made by third parties. The local and smaller studios are able to film cheaper high-quality products that can be further promoted by Netflix. In general, this approach will enrich the list of TV shows, address local viewers’ tastes, maintain competitive advantage, and save money.

Conclusion

To conclude, Netflix is still the leading representative of the video streaming industry. It is not a secret that Netflix differentiates and adds value with its own shows in a highly competitive video streaming market. The current content strategy fails to address the license loss issue and contributes to excessive expenditures. The strategy redirection towards lower original content investment and partnership with smaller studios is a great opportunity. The motion pictures and series made in collaboration with local producers should attract local viewers.

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References

Collins, J. (2020). Netflix’s business model does not work. Web.

Gallagher, K. (2018). The EU is moving to regulate streaming libraries. Business Insider. Web.

McFadden, C. (2020). The fascinating history of Netflix. Interesting Engineering. Web.

Netflix, Inc. (2019). Form 10-K. Web.

Netflix, Inc. (2020). Form 10-K. Web.

Owens, J. C. (2020). Netflix pulled off a showstopper early in the pandemic, but will the sequel deserve the price? Market Watch. Web.

Romm, T. (2017) Facebook, Google, and others are in a lose-lose position with an upcoming congressional net neutrality hearing. Recode. Web.

Sakal, D. V., Rebić, P., Zrilić, A., Gracin, A., Bubalo, D., & Borovac, J.(2019). Analysis of Netflix Inc. (Report) Student Investitor. Web.

Sinitskaia, K. (2020). Most recommended video streaming companies by NPS. Experience Benchmarks. Web.

Spangler, T. (2020). Netflix projected to spend more than $17 billion on content in 2020. Variety. Web.

Spangler, T. (2020). Streaming-video subscriptions have risen during COVID-19 – but so has ‘subscription fatigue,’ study finds. Variety. Web.

Trainer, D. (2019). Netflix’s original content strategy is failing. Forbes. Web.

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BusinessEssay. "Netflix Case Study Report: Brief History." September 19, 2022. https://business-essay.com/netflix-case-study-report-brief-history/.