Netflix Company’s Digital Business: Pros and Cons

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Executive Summary

Netflix is a representation of how digital business can provide a company with a competitive edge. In the past ten years, Netflix has gradually become a typical worldwide representative of paid over-the-top (OTT) businesses. In mainstream countries and regions, Netflix has always been the most popular Subscription Video on Demand (SVOD) service provider. Through the digital business model, Netflix has succeeded in doing what other companies could not do, that is, successfully achieving a deep leap from the technology field to the media content field.

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Introduction

Due to the rapid changes in the market and the rise of emerging digital technologies, the disruptive nature of digitalization may quickly destroy existing enterprises and rapidly reshape the market. After disrupting the traditional video rental business, Netflix continued to reposition DVDs through the mail (core), launched an online streaming service (new), and continued to launch new services such as creating and distributing original content (Patchunka, 2018). Netflix is, therefore, the case company to learn the digital business, advantages, disadvantages, the models they use, as well as challenges they face. The report is divided into four major sections. The first section will provide an overview of the digital business of Netflix. The second part will critically evaluate new and emerging digital business models in the context of key business issues such as cyber security and ethics using Netflix as a case study. It will be followed by an evaluation of the impact of new collaborative relationships and strategic alliances through digital technology for Netflix. Lastly, there will be a discussion on how e-commerce principles could be used by Netflix

Overview of Netflix’s Digital Business

Definition of Digital Business

A digital business serves to create a new profit structure by fusing technology with an existing business model. By connecting information on various people and things, a digital business realizes new services and business models with a high competitive advantage (Bican and Brem, 2020). This is one of the reasons why digital businesses are considered disruptive businesses.

Advantages of Digital Business

Digital transformation (focus on creating new products and services with a completely new value proposition) is aimed primarily not at new technologies, but at external consumers. According to Bican and Brem (2020), digital business is aimed at researching user experience, and interaction scenarios and finding new models for the formation of innovative products and services. In this case, fundamentally new ways of forming value are created, which are changing the market and displacing traditional consumption patterns (Paiola and Gebauer, 2020). Digital business changes the very model of doing business, transforming the corporate culture, and changing the experience of consumption and perception of products and services. Digital transformation will require a transformation of the entire organization. This is a complex multi-stage and multi-level project with significant risks. An example of digital transformation is Netflix. The company’s original business model included physical sales and DVD movie rentals, but a year after its founding, it focused only on distribution, using the DVD-by-mail business model (Wirtz, 2020). Then, in 2007, Netflix expanded its business by introducing a streaming service, and in 2013 began producing its films and series (Wirtz, 2020). By adopting a digital model, Netflix has not only expanded its market but also created services that are more convenient for the customers.

Disadvantages of Digital Business

The key disadvantage of digital business is that it is difficult to implement especially if the company has a large-scale system because they hinder migration to another system. In such companies, it will likely be difficult to promote digital transformation. It is not possible to change all business flows at once, especially when a large-scale system is included in the part related to the core of the business (Correani et al., 2020). Therefore, it is necessary to start by unifying the data format and improving work efficiency easily and then proceed in several steps. Moreover, if there are many departments related to business, it will take more time to make adjustments because cooperation between departments must be considered.

Application to using digital business with advantages and disadvantages

Netflix is an example of a company that has grown from e-business to digital business. Originally, Netflix provided a more convenient service by managing its inventory system and using the technology of mailing DVDs, but in the end, it was only providing an experience that was not much different from other rental stores (Mohammed, 2018). However, it has transformed into a system that allows users to stream videos on demand, dramatically changing the way people around the world enjoy movies and television media. It can be said that building a Netflix service that allows users to enjoy movies and TV programs anytime and anywhere would not have been possible without the current Internet penetration rate.

Digital Business Models in Digital Business

Defining new, emerging digital business models

In recent years, people’s consumption has dramatically shifted to online, and digital business revenue streams and acquisition channels have become more important. With the development of the digital economy, people have become more closely associated with digital products and services, and companies have been required to add value and superiority to their businesses in the new digital domain (Accenture, 2019). Digital business is more than just enabling online sales. According to Accenture (2019), the competitiveness of digital business is created by a unique combination of digital and hardware technologies, ensuring its competitiveness by providing services that no other company can offer.

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Discussion on new, emerging digital business models

Unprecedented business models using new digital technologies are being created all over the world. With the times, the method of developing business models has changed and the number of new entrants is increasing. In such a situation, for existing companies to continue to generate profits, it may be necessary to radically reform the entire business (Towse, 2020). Therefore, what is required is to promote digital transformation. To stay competitive, traditional practices cannot compete with innovative new entrants. Promoting digital transformation is inevitable to maintain a competitive advantage.

Until now, the mainstream of business transactions was in which the purchaser paid the product’s price to the seller and the ownership of the goods was transferred. It is a one-time transaction that is completed in one process. However, in recent years, there is an increasing number of forms called subscriptions that are familiar to general consumers with services that allow unlimited listening and viewing of videos and music for a fixed payment (Towse, 2020). This is a transaction in which the operator and the user first conclude a service contract and pay the usage fee at a fixed amount or for the amount used (pay-as-you-go). While the former is a transaction that assumes purchase and ownership, the latter is a transaction that focuses on user experience and value co-creation based on the long-term relationship between the business operator and the user. The easiest way to introduce this subscription business is the fixed-rate continuous sales model, in which the user subscribes to a service and pays a fixed fee for a pre-defined period such as every month before new charges are levied.

Most successful subscriptions are those related to the digital business. There is no need to send the actual product to the other party’s home or office, and increasing the number of users does not mean that the effort on the part of the company will increase significantly. Such a business model is suitable for subscriptions (Kübler, Seifert, and Kandziora, 2020). On the other hand, subscriptions can be difficult for expensive items and consumables.

One of the reasons that make subscriptions successful is that the Internet has become widespread all over the world, where almost every person everyone has a smartphone (Kübler, Seifert, and Kandziora, 2020). With the diversification of payment methods such as credit cards, it has become considerably easier to carry out billing through dedicated membership programs. Another reason is the change in people’s consciousness. Consumers are no longer obsessed with ownership if services are available at the right price, as represented by the popularity of share businesses.

How Netflix is using new, emerging business models

Netflix is one of the major companies that use a subscription business model. Netflix is a pioneer in the industry of DVD rental. The reason why the Netflix business model was successful is that it built a business model with high barriers to entry. The three revolutionary and strategic services that have led to business success are unique algorithms, sophisticated delivery systems that enable next-day delivery, and the introduction of subscription-based plans with no late fees (Still, 2015). The subscription service, which was far from the business customs of the time, was strange enough to be called a grand experiment. However, this subscription service was the catalyst for Netflix to make a serious leap forward. The key to the development of the service is the easiness to cancel the subscription provided by Netflix (Whitney, 2021). Many companies are afraid of leaving their customers, and the reality is that it is hard to come up with the idea of providing “easy-to-stop” subscription services before they can reach the market. Meanwhile, Netflix has accelerated customer growth by offering an easy-to-cancel system (Whitney, 2021). By lowering the psychological hurdles of consumers and acquiring customers earlier than the competition began, the reason for withdrawal can be obtained as data, which is a shortcut to strengthening services.

The Impact of New Collaborative Relationships and Strategic Alliances

Definition of new collaborative relationship and definition of strategic alliance/s

Many market players seek to grow by acquiring other companies. Two options are possible here: the companies are merged into one new and cease to exist in the same form, or the assets of two different companies are merged, and the firms themselves after the procedure are not liquidated (He et al., 2020). There is also the option of joining, in this case, all the legal entities to be merged stop their business and leave its development to a new company, which initiated the reorganization. All these processes are denoted by a short abbreviation – M&A (mergers and acquisitions – mergers and acquisitions).

Mergers and partnerships of companies in the digital agency market and in particular in the web development market have become a frequent occurrence today. Large companies seek to develop a competitive strategy and join forces with other market players to gain access to promising segments and customers (van Tonder et al., 2020). Small studios are looking for additional resources for growth and development. For them, entering into an alliance or merging with another company can be a factor of explosive growth. Strategic alliances provide companies the means to access new markets, expand geographic coverage, acquire advanced technologies and acquire skills and core competencies relatively quickly (Siachou, Vrontis, and Trichina, 2021). Strategic alliances have become a key source of competitive advantage for firms and have enabled them to cope with the growing organizational and technological complexities that have emerged in the global marketplace

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Advantages and disadvantages of new collaborative relationships and strategic alliances through digital technology

The active use of strategic alliances of transnational companies in the consumer sector is associated primarily with profound changes in the external environment. Factors external to the company, such as demand, competition, supply, government policy, changes in technology, and globalization processes, largely determine the changes in the competitive position of companies and their prospects in the market (Chebo and Wubatie, 2020). The pace of global business is accelerating, digital technologies are driving profound changes in the production, supply, and consumption of goods and services, and customers are constantly becoming more demanding and sophisticated.

Strategic alliances are essential tools both to increase the competitiveness of companies through economies of scale of production and to increase marketing influence, a more active and large-scale presence in promising markets. Alliances have become a fact of life for businesses, an important part of current operations, as well as future strategy (Drewniak and Karaszewski, 2020). There are many ways to create a competitive advantage, which depend much on managing the alliance. Some firms create a dedicated unit to manage alliances, while others prefer to spread responsibility for alliances across all units. In addition, the competitive advantage of a strategic alliance also depends on its organizational and strategic conditions.

Strategic alliances can serve as effective ways to gain competitive advantage, quickly introduce new technologies, enter new markets, bypass existing constraints and overcome barriers to innovation, and improve customer interactions. However, strategic alliances are not simple to create, develop and maintain (Drewniak and Karaszewski, 2020). Strategic alliance projects often fail due to tactical mistakes made by management. A correct understanding of the features of the external environment, taking into account the specifics of the digital economy, combined with perseverance and energy is necessary to create a successful strategic alliance.

Application of new collaborative relationships and strategic alliances in Netflix

The success of Netflix is majorly attributed to its strategic alliance with international companies and media studios. Netflix stands out among other organizations that have professional in-house programs focused on promoting open-source and commercializing tools. The company has provided many useful tools and applications to the open-source community, from machine learning and orchestration applications to utilities running on that platform. In addition, many have been tested and enhanced to scale. Netflix has also received contributions to help it operate its platform efficiently, and its open-source efforts have ensured various partnerships. By working with data analytics companies Netflix has developed an effective data management system where the performance of any product is forecasted with high precision. Netflix also collaborates with content creators and studios.

E-Commerce Principles and Application at Netflix

Define e-commerce

Electronic commerce is a general term for transactions that take place electronically. This includes not only online shopping, but also transactions through dedicated lines such as EDI, online auctions, and e-trade (Yang et al., 2020). E-commerce is a convenient way for consumers to buy goods and services anytime, anywhere as long as they are online.

Discuss what are e-commerce principles

According to Tolstoy et al., (2020), the key principles guiding e-commerce relate to those factors that make a given website effective in attracting more customers. An EC site, that is, a shopping site, is necessary when selling goods and services. Opening a store on a large mall-type EC site such as Rakuten or Amazon can reduce the initial cost, but it also puts a burden on sales and points, and above all, it is difficult for the company to brand its own. With the iteration of current e-commerce website development technology, the interactive design of e-commerce websites has been greatly improved, and it can be considered that the current new shopping mall platforms exhibit interactive effects.

The first principle is response time, which measures the time it takes for the customer to complete a given activity. Because the response speed of e-commerce website development is similar to communicating with people, if there is no response for a long time, users will naturally not be retained (Ehikioya and Guillemot, 2020). Customers can only understand the shape, characteristics, price, and usage methods of the products on the e-commerce website through the pictures and descriptions of the products. Therefore, the feeling of the product is not as specific as shopping in a traditional store, unless the product has been used before.

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The second feature is security. Regardless of whether it is a customer or a business, security will be the top priority in online transactions to prevent viruses or information leakage (Ehikioya and Guillemot, 2020). Therefore, the construction of business websites must consider security solutions, such as firewalls, security certification, security protocols, virus protection, and other security measures. In e-commerce, a large amount of data information is needed. To ensure the smooth progress of e-commerce transactions, relevant personnel should ensure the reliability of the e-commerce website structure. During the transaction process, it is necessary to ensure that the data is complete and recoverable to ensure the quality of e-commerce transactions.

The third feature is scalability. To ensure the normal development of corporate business activities, business websites must be scalable. The scale of the number of visitors must be considered. If the customer cannot respond and deal with it quickly during the peak period of customer visits, it will cause system congestion (Ehikioya and Guillemot, 2020). Thus, for a business website, an expandable system is a stable system. If the website owner can expand the functions of the website and add new services conveniently and flexibly according to the needs of business development and technological update, they can further enhance the image and benefits of the website and the enterprise.

Apply e-commerce principles to your chosen organization

Netflix can adopt the principles identified above to ensure that its website is effective. For example, the company should pay attention to the rationality of layout design and images. Under normal circumstances, the layout design of an excellent e-commerce website should strictly follow the principles of decoration, balance, and order. Whether the layout and graphics are reasonable is directly related to the viewer’s first impression of the page.

In addition, Netflix should pay attention to the clarity of homepage navigation and the simplicity of content. In the process of e-commerce website design, the rationality of homepage navigation should be ensured, and the image of the company should be added to the navigation design as much as possible, and on this basis, website visitors can deepen the recognition and impression of the company.

Conclusion

The paper has demonstrated the power of digital business is changing the way companies offer services. Through digital transformation, Netflix has expanded its market internationally and is one of the best-performing companies in the world. On the verge of collapsing, Netflix made a crucial choice to completely shift to a subscription-type business after losing income due to the late payment of rental DVDs. The first step toward digital transformation is to think about the business value that the company brings to society, the ideal image that one should have to provide it, and the problems that one needs to solve. Therefore, Netflix serves as a perfect model of a successful digital business.

References

Accenture (2019) Reinventing business with digital. Web.

Bican, P. M., and Brem, A. (2020) Digital Business Model, Digital Transformation, Digital Entrepreneurship: Is There A Sustainable “Digital”? Sustainability, 12(13), 5239.

Chebo, A. K., and Wubatie, Y. F. (2020), ‘Commercialisation of technology through technology entrepreneurship: the role of strategic flexibility and strategic alliance’, Technology Analysis & Strategic Management, p. 1-12.

Correani, et al., (2020) Implementing a digital strategy: learning from the experience of three digital transformation projects, California Management Review, 62(4), p. 37-56.

Drewniak, R., and Karaszewski, R. (2020) Diffusion of knowledge in strategic alliance: empirical evidence, International Entrepreneurship and Management Journal, 16(2), p. 387-416.

Ehikioya, S. A., and Guillemot, E. (2020) A critical assessment of the design issues in e‐commerce systems development, Engineering Reports, 2(4), e12154.

He et al., (2020) Strategic alliance research in the era of digital transformation: perspectives on future research. British Journal of Management, 31(3), p. 589-617.

Kübler, R., Seifert, R., and Kandziora, M. (2020) Content valuation strategies for digital subscription platforms’, Journal of Cultural Economics, 1-32.

Mohammed, S. (2018) How did Netflix build its sustainable competitive advantage? -business strategy and the key success factors. Web.

Paiola, M., and Gebauer, H. (2020) ‘Internet of things technologies, digital servitization and business model innovation in BtoB manufacturing firms’, Industrial Marketing Management, 89, p.245-264.

Patchunka, C. (2018) Netflix killed the cable TV star: cable TV is definitionally disadvantaged for use of artificial intelligence. Federal Communications Law Journal, 71, 275.

Siachou, E., Vrontis, D., and Trichina, E. (2021) ‘Can traditional organizations be digitally transformed by themselves? the moderating role of absorptive capacity and strategic interdependence’, Journal of Business Research, 124, p. 408-421.

Still, J. (2015) Netflix’s Sense8 being renewed is a victory for unconventional dramas and underrepresented communities. Web.

Whitney, L. (20121) How to cancel or change your Netflix subscription. Web.

Tolstoy, D., et al. (2020), ‘The development of international e-commerce in retail SMEs: an effectuation perspective’, Journal of World Business, 101165.

Towse, R. (2020) ‘Dealing with digital: the economic organisation of streamed music’, Media, Culture & Society, 42(7-8), 1461-1478.

van Tonder, C., et al. (2020) ‘A framework for digital transformation and business model innovation’. Management: Journal of Contemporary Management Issues, 25(2), p.111-132.

Wirtz, B. W. (2020), ‘Business models and value creation in the movie market’, In Media Management (pp. 127-137). Springer, Cham.

Yang, L., Li, Y., Wang, J., and Sherratt, R. S. (2020) Sentiment analysis for E-commerce product reviews in Chinese based on sentiment lexicon and deep learning. IEEE Access, 8, 23522-23530.

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BusinessEssay. "Netflix Company's Digital Business: Pros and Cons." June 20, 2022. https://business-essay.com/netflix-companys-digital-business-pros-and-cons/.