Abstract

This paper examines the current statues and trends within the video streaming on demand industry and specifically the well-being and performance of Netflix Inc. Along with examining Netflix Inc this paper looks at the overall competitive market and discusses key elements within the industry and Netflix Inc’s primary competitors. By analyzing both the internal and external environment as well as the overall industry this paper looks to present adequate recommendations for Netflix Inc moving forward within the industry.   

Executive Summary

Netflix Inc. is the primary leader in the home video entertainment market. With its first mover advantage in both the home delivery model and video on demand Netflix has positioned itself to be the industry leader. Through constant improvement and innovation Netflix has maintained its competitive advantage and continues to be the hallmark of excellence within the industry. In this analysis I examined the overall industry as well as the different competitors and threats present to Netflix. Currently Netflix is in a period of unprecedented competition and pressure from both government and industry forces.

Financial Analysis

Netflix has been outperforming its
prior year statements consistently over the past several years. Over the course
of the past 3 years Netflix has generated more income and has produced an
increase in earnings per share. Between 2016 and 2017 Netflix’s net income has
increased a total of 100.02%. In addition, Netflix is currently trading at
$190.12 as of December 16, 2017. This is a substantial difference from the
earnings per share (eps) of Netflix from 2016 which had a basic eps of .44 compared
to 2017 which it is at .87 basic eps. These two-metrics lead to the conclusion
that Netflix is performing well within the industry, and will see continued
success and growth for the coming years.

However, since 2016 Netflix has had a
decrease in total revenue from $8,830(m) in 2016 to $8,406(m) (Nasdaq) in 2017,
which is a difference of $424,000 (-0.048%). This may lead some potential
investors to worry about the financial health of the firm however those who
have concerns likely have not taken the firm’s consistent quarterly gains into
account. This decrease may be due in part to the accounting report not
considering seasonal subscribers during the holiday period as well as a delay
in reporting metrics from international markets. The overall financial health
of the firm can be best seen in Table 1 regarding the balance sheet. Since 2016
Netflix has reported a 22.04% increase in total balance sheet, meaning the
company has increased total assets and market value by almost a quarter of its
previous years value.

Netflix
has maintained its positions as the industry leader for a variety of reasons.
By being both the first major DVD mail delivery and video on demand streaming service,
Netflix has capitalized on its industry advantage. Competitors entering the
market have had to work hard to differentiate and move away from being labeled
as a cheap alternative to the premium Netflix service. When compared to its
primary competitor, Hulu, Netflix has consistently outperformed the firm in
almost every segment. While Hulu is not an individual publicly traded company,
each of its primary owners – 21^st Century Fox, the Walt Disney
Company, and NBCUniversal – have allowed the company to license and utilize the
resources each of these independent firms possess. Regardless of these
exclusive assets, Netflix continues to outperform its competition, as seen in
Table 2.

Internal Analysis

Primary Activities: Netflix
has three reportable segments: Domestic Streaming, International Streaming, and
Domestic DVD. The domestic streaming revenues is entirely from monthly
membership fees for streaming content services to members in the United States.
The international streaming service revenues consist solely of membership fees from
consumers outside the United States. The domestic DVD derives its revenues from
membership fees for services only for DVD-by-mail members within the United
States.

• Inbound Logistics. Netflix is responsible for receiving
  the newest movies and storing physical copies. Because the company does not
  work face-to-face with customers it is important that inbound channels be
  reliable and efficient. Netflix’s primary inbound activities are broken down
  into three main segments: video streaming, DVD distributions, and original
  content production.

Video Streaming:
Netflix’s video streaming service has evolved considerably since the
introduction of the service. Netflix originally utilized large data centers
spread throughout the country to store and distribute the content to
subscribers.  However, now Netflix uses
the Amazon Web Service public cloud system. This new system allows Netflix to
manage the storage and processing requirement of its subscribers with more fluidity
to best adjust to market demands. This content is stored across hundreds of
individual machines and server rooms.

DVD
Distribution: Netflix operates 58 warehouses
nationwide which serve roughly 10.6 million subscribers. The returned discs are
sorted and inspected manually. Employees at each of these warehouses open the
returned disc envelopes, pull the disc from its sleeve and inspect the disc for
cracks or scratches, clean the disc, inspect the sleeve, and finally insert the
disc back into its sleeve. The disc is then filed into the appropriate bin –
either accepted discs or damaged/misplaced discs.  After the manual sorting process is complete
the bins are taken to a machine scanner. After this process is completed discs
are readied to be shipped to new consumers when the title is requested.

Original
Content Production: Netflix has arranged
several multi-year deals with media production companies. Each of these deals
involve dozens of studios and production companies who are responsible for
creating and producing original content. To begin production of any original
show or movie, Netflix’s team of production managers and studio executives
review and agree to purchase the licensing and distribution rights of a
specific title, leaving the content creators to produce the product with the
backing of Netflix’s assets. Once into production the individual studios create
the series or movie, and finally Netflix is the sole outlet for video
distribution.         

• Operations. Netflix must ensure that all customers are satisfied and happy
  with the titles and content they are receiving as well as the quality of the
  service they expect to receive. Currently Netflix’s most vital and costly
  operating procedure is maintaining the infrastructure needed to handle the
  large amount of data needed to deliver across the internet to provide seamless
  streaming of high quality videos to its subscribers. Through partnerships with
  Amazon, Netflix has adopted a cloud computing framework to facilitate its
  distribution of streaming content. However, Netflix still maintains a
  production department which has distributed ownership to its engineering team,
  with each team responsible for coding, testing, and resolving any issues on
  their own work. Through these engineering teams, Netflix has developed tools
  necessary to monitor and provide insight to detect, diagnose, and resolve
  technical and customer problems.
• Outbound Logistics. Each of Netflix’s distribution
  centers are responsible of receiving packaged and finished products (DVDs/
  Blue-Rays). These distribution centers must meet the customers’ needs in a
  timely manner. Netflix employs a FIFO inventory storage system using an electronic
  organization system to know where different DVD titles are located around the
  country (Borrelli). Once titles are received and sorted, they are repackaged,
  scanned, and labelled. At this point the titles are ready to ship to new
  consumers. Through the utilization of this method much of the Netflix’s library
  of content is consistently moving in and out of the distribution centers.
• Marketing & Sales. Netflix efficiently employs all available mediums and methods to increase
  market awareness and sales. To acquire the greatest level of market saturation
  and maintain sales growth, Netflix has priced its service competitively across
  the industry.

Pricing:
Netflix utilizes a monthly membership subscription for both its streaming and
DVD delivery service.

DVD/Blue-Ray Rental:
Netflix offered 3 plans for their DVD/Blue-ray rental service:

Starter:
The first plan offered for disc rentals, this plan is priced at $5 monthly subscription
or $6 for Blue-ray rental. This plan allows for a total of 2 discs to be rented
out per month and only one disc to be rented at a single time.

Standard:
The second plan offered for disc rentals, this plan is priced at $8 for monthly
DVD rentals and $10 for Blue-Ray rentals. This plan allows for unlimited
monthly rentals however it is limited to one disc to be rented at a single
time.

Premier:
The final plan offered for disc rentals, this plan is priced at $12 for monthly
DVD rentals and $15 for monthly Blue-ray rentals. This plan allows for
unlimited monthly rentals and is the only plan which allows for two discs to be
rented out at a single time.

Video Streaming: Netflix currently offers several plans for its
video streaming service. Netflix bases its price structure around the number of
screens one account is authorized to use at one time. 

Basic Plan–
The most basic plan offered by Netflix allows for one screen to be used and is
priced at $7.99 per month.

Standard Plan–
The most popular plan offered, it allows for up to two screens to be viewed simultaneously
and is priced at $10.99.

Premium Plan–
The most expensive plan offered, this plan allows for up to four screens to be
viewed simultaneously and is priced at $13.99.

Promotion:
Currently Netflix runs a variety of promotional campaigns as a part of its
promotional mix. Netflix’s primary promotional tool is its 1-month free trial
program which it uses throughout its promotional and advertising campaigns. In
addition, Netflix utilizes social media influencers as well as other media
platforms such as podcasts to spread promotional codes to prospective consumers
to entice them to try the service for a limited time. This is intended to hook
the participants with the hope of them becoming a lifelong subscriber.

Adverting:
Netflix advertises through a variety of
mediums. Through their free trial system Netflix aims to acquire new members
and maintain their membership through their extensive catalog of content. The
most successful advertising system for Netflix has been their consumers own
desire to share expresses and discuss content with fellow Netflix users. Much of
Netflix’s advertising expenses consist primarily of payments made to company
partners which include device partners, mobile platforms and ISP’s, and
promotional activity such as digital and television advertising.

• Service: The service provided by Netflix relies entirely on the consumer’s
  interaction with either a website, app, or other device platform’s ability to
  access and reliably run the program. To better manage customer expectations,
  Netflix has created different tools which it uses to work to resolve customer
  issues and ensure adequate levels of customer satisfaction.

Through
its video streaming and distribution service Netflix place’s a high level of
importance on its customer service department as well as employee training
program for both warehouse and corporate employees. In addition, Netflix places
importance on ensuring that customers consistently return. To accomplish this
goal, Netflix has implemented an automated system which notifies members
whenever new or relevant content is added. These tailored messages ensure that
members are always attracted back to the service. Because of the lack of
face-to-face interaction with customers, Netflix must focus heavily on its
customer service program.

 (B) Support Activities

• Firm Infrastructure. Founder and CEO Reed Hastings has shaped Netflix to have a
  laid-back corporate culture which allows employees to work at their own pace.
  Netflix includes a variety of perks to motivate their employees such as
  allowing employees to structure their own compensation packages, no dress code,
  and having unlimited vacation days for salaried employees. These perks are
  intended to motivate employees to do their best work and innovate while on the
  job. Through the creation of this ideal workplace, Netflix employees are
  granted an environment to succeed and if employees fail to reach requirements,
  Netflix offers large severance packages.
• Human Resource Management: Netflix currently employs approximately 4,700 total employees.
  About 3,500 were full time with the remaining 1,200 categorized as temporary
  employees. Netflix employs a five-tenet principle in its hiring process created
  by Reed Hastings and Patty McCord, former Chief Talent Officer from 1998-2012
  (McCord).

Hire,
Reward, and Tolerate Only Fully Formed Adults:
This first tenet focuses on only hiring individuals who rely on logic and
common sense. The company focus its hiring efforts only on individuals which
demonstrate adult-like behavior, which means the ability to talk openly about
issues with managers, colleagues, and subordinates as well as the ability to
work on a case-by-case basis.

Tell
the Truth About Performance: Netflix has removed any
form of formal review process and has instead asked managers and employees to
have conversations regarding each other’s performance as part of their everyday
work. Netflix believes that traditional corporate performance reviews are led
by fear of litigation because if an employee is removed there must be evidence
of a history of poor performance to validate the decision.

Managers
Own the Job of Creating Great Teams: Netflix
has taken a unique approach to its philosophy that mangers should follow when
creating teams as well as its compensation philosophy for new hires. Managers
are encouraged to form teams following their own ideals of what is needed for
the team rather than what is available for them currently. This management
philosophy required a change in Netflix’s compensation philosophy. New hires
and employees were given the option to choose how much of their compensation
would be in the form of equity, rather than the traditional stock option on top
of a competitive salary. This flexibility directly relates to the other tenant
of hiring adults, as Netflix believes that employees can weigh the risk and
benefits of these options.

Leaders
Own the Job of Creating the Company Culture: Through
the development of different companies within different industries, company
cultures shift from industry to industry. In a large tech driven company such
as Netflix corporate leadership is responsible for molding the culture
throughout the company as well as being aware of the subcultures that may
require unique individual management techniques.

Good
Talent Managers Think Like Businesspeople and Innovators First, and Like HR
People Last: 
This point focuses on the ability for HR personnel to work within the
business departments rather than as a supplement to the overall company.
Netflix focuses its HR personnel to be integrated into each department while
also working to innovate the HR policy and structure to continually best fit
the company’s objective and culture.

• Technology Development. Netflix’s basic operating procedures revolve around its DVD mail
  delivery system and its video streaming infrastructure. Each of the company’s
  main activities utilize different procedures and technology to accomplish its
  main objective: provide consumers with their entertainment seamlessly and
  quickly.

DVD
Delivery: To maintain inventory, Netflix utilizes a
J.I.T (Just In time) inventory system that utilizes machines to scan returned
and inspected DVDs. Netflix originally used primarily human capital to sort and
package its DVD inventory, however today only the sorting and inspection is
done manually with the inventory scanning and product packaging being fully
automatic. Netflix uses proprietary machinery to accomplish its sorting and
packaging requirement.

Video
Streaming: Netflix is responsible for streaming
to up to 50.85 million subscribers in the United States alone. To be able to
manage this massive amount of content demand, Netflix utilizes Amazon’s Web
Service cloud computing service to store and distribute all its digital
content. By moving its streaming infrastructure to the Amazon service Netflix
has allows its development teams to focus entirely on the user interface and
features available to the customers. To accomplish these new user improvements
Netflix has developed several proprietary software systems used for the
development of its user interface such as Titus and Fenzo.

• Procurement. Netflix procurement process focuses mostly on licensing content
  and producing original content. Regarding licensing content, Netflix must reach
  agreements with movie production companies for both older and newer releases.
  Netflix must reach agreements with the dozens of video streaming device
  manufacturers such as Microsoft, Apple and Roku for members to access all the
  content. Each of these manufacturers must be compatible with the current
  software and programming language used by Netflix as well as maintain constant
  updates for each device. When working on updating or expanding their client
  relationships, Netflix must consider the limitations of each of the devices in
  which its service is present.

External Analysis

General Environment: Netflix
operates within the jurisdiction of the Federal Communications Commission (FCC).
Currently, Netflix must abide by the regulatory ruling outlined within the Net Neutrality
communications protocol. Net Neutrality outlines and “Open Internet” scheme to
the entirety of the internet.  This
communications protocol prohibits ISPs (Internet Service Providers) from
“throttling” or manipulating the speed of internet users to specific website or
online services. The protocol allows all internet users to have equal access to
any site. In recent news, the FCC is currently going through the process of
voting to repeal Net Neutrality. The current chair of the FCC, Ajit Pai, plans
to repeal Net Neutrality and reclassify internet service providers as
“information services” which would allow unrestricted domain to limit internet
access to all users within the United States. Without the protection of Net
Neutrality, ISPs can charge a premium to access specific sites with a more
reliable and quicker connection called “fast lanes”. Until this vote is
finalized Netflix provides its service equally on almost all streaming devices
except mobile devices.

Competitive Market

The
competitive market of the industry consists of a highly specialized and limited
group of sellers providing and attempting to acquire a constantly diminishing
population of potential consumers. This forms a marginally competitive market where
providers are vying for competitive advantage. One of the main causes of this
level of competition is due to the highly homogenous nature of the service.
Each of the providers that compete against Netflix provide a similar service of
comparable quality. However, one of the main factors that impact the
competitive ability of the firms is the specific service content each have acquired
through licensing deals.

Each of these firms have acquired different licensing deals and content from a variety of providers which are exclusive to each streaming service providers. According to Hub Research (Figure1), 14% of all respondents of a survey conducted said they are subscribed to all three-streaming service which they categorized (Hulu, Amazon, and Netflix). This is more than a double the number which responded the same in 2016 at 6% (Minsker). In addition, 45% of Netflix users said they added Hulu and 33% said they added Amazon Prime Video for a greater content selection. Because of these content gaps among providers, each consumer looks to fill them with competing firms. This causes each of the sellers to be close approximations or near perfect substitutes for one another.

In addition to the homogenous nature of the industry each of these firms capitalized early adoption and were able to circumvent barriers which presented themselves when entering the market. Previously one of the major barriers to enter the industry was the infrastructure needed to maintain the massive number of services needed to house and stream all the content. With recent technological advances, however, both content providers and creators can enter the industry with increased ease. Moreover, many consumers feel it necessary to be subscribed to certain services because there exists a “Network effect” surrounding the unique content created and the impact some of this content has on social media and pop culture. In this regard Netflix holds a steep competitive advantage through its catalog of well-regarded and critically acclaimed Netflix original content which have had a unique impact on the public lexicon and culture.

The 5-forces model

Effect of Threat of Entry:  The home video
entertainment industry is segmented between consumer groups and therefore product
differentiation is minimal. Competitors are only capable of differentiating
themselves through select means such as the device that the content is
delivered to. The video on demand market is a collection of distributors in
which the market share is measured by their distribution effectiveness. This is
an important aspect when measuring the threat of entry. Netflix currently
operates within an ever-increasing competitive base spanning several different
segments. Each of these competitors utilize different business models that implement
different technologies to satisfy market demand. Currently there are no
government barriers to entry which allows for virtually no bureaucratic issues
when attempting to enter the industry.

Effect of Supplier Power: Supplier
power is weak because industry incumbents need to establish and maintain
relationships with a select number of suppliers to compete in the industry.
Most of the suppliers in the industry are traditional film production companies
such as Universal, Warner Bros, and Sony Pictures. Supplier power is also under
threat from the ability of forward integration of industry incumbents to
establish their own customer base and distribution channels as well as in-house
production capabilities.

Effect of Rivalry: Rivalry
in this industry is strong because of the sheer number of competitors within
the industry. Each of these competitors normally specialize in one channel of
distribution to acquire specialized licenses with film studios and production
companies. Within this industry, competitors are incentivized to stay because
of the moderately high exit barrier. The exit barriers are due to the use of
long-term assets and inventories to maintain the catalog of content needed to
satisfy consumer demand. Because of the need to maintain this catalog, capacity
within this industry is updated through small measured increments which can
lead to lower fixed costs. As new technologies begin to disseminate into the
industry, variable costs will drop which will boost fixed costs and in turn make
rivalry increasingly fiercer and less favorable.

Effects of Buyer Power: Buyers
within this industry have little power and are of little or no threat to
industry members. Because of the lack of product differentiation and almost no
switching costs, consumers can access titles however they choose. Firms within
this industry must differentiate their product to capture different consumer
segments based on each segments preference for how they consume their media.

Effect of Substitutes: Consumers
are unlikely to seek out substitutes because they are interested in watching TV
programming and movies as their main form of entertainment. Consumer do have
options of whether they decide to consume this form of media with substitutes
such as existing electronic entertainment options such as live sports and video
games. However, due to the increased use of electronic media devices, video on
demand services seem to be situated in an ideal position with limited
substitutes.

Identification of the firm’s strategy and its competitors’ strategies

Recommendation

Content
Providers: Since entering the industry, Netflix has
remained committed to being the largest and most varied selection of titles of
any firm within the industry. Increasing the number of online media
partnerships would be beneficial for both parties involved. The continued
expansion of its media catalog should be a primary focus for Netflix moving
forward. Maintaining its position of possessing the most varied and exclusive
collection sets Netflix apart from the rest of the industry.

International
Growth: With the increasing level of competition
and therefore market and industry saturation, it is in the best interest of
Netflix to pursue international expansion. It is recommended for Netflix to
expand primarily in Europe where there is the greatest potential to garner a
large audience. This recommendation should be considered for a long-term
movement into the international streaming segment. Along with expanding their
catalog of content, Netflix must consider region-specific content when
expanding internationally.

Recommended Strategy

• Increase content partnerships
  domestically to generate greater consumer value for their service. Partnering
  with more exclusive content creators as well as generating unique and original
  content will better differentiate the Netflix platform from its competitors.
• Expand international operations
  to include and stream as much of the Netflix catalog as possible to the largest
  amount of countries possible. 

The strategy that
may have the best market penetration and lead to the largest amount of company
growth is to increase the amount of content partnerships and exclusive
original/limited content. By differentiating its product to possess content
only available via Netflix, the company will distinguish itself from its
competitors and provide a product that is exclusively unique and inimitable
from its competitors both domestically and internationally. By focusing on
streaming, Netflix will lower its operating costs because it will not need to
focus on DVD/Blue-Ray distribution across different distribution channels in
the different operating nations as well as lower licensing costs to third-party
producers.

Table 1.  Change in Financials

Table 2.  Common Size Statements of
Case firm and closest competitor for 2017

Figure 1

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