1 Trace the history of Netflix’s expansion
a. Describe the key events/decisions the company has made to date (at the time of the case – 2011).
1) Netflix was founded during the Internet Boom in 1997 at a time where lack of infrastructure (among other variables) made mailing DVDs via the postal service more practical than streaming online. Flat fee of $20/month.
2) In 2002 (five years after their founding), Netflix gained so much traction that it had to establish regional hubs to keep up with demand for DVDs. This same year they had their IPO and raised $82 million in capital.
3) 2007: Netflix begins streaming, now that technology had caught up (monthly fee reduced to $10/month). They also continue to growth despite the housing crisis.
4) 2011: Netflix decides to completely separate its DVD mailing business from its streaming business while increasing prices. This is met with great frustration and dissatisfaction from customers.
b. Compare Netflix’s history to Blockbuster’s and the role that disruptive technologies has played in the video rental sector.
1) Although Netflix is entirely associated with streaming and Blockbuster is entirely associated with physical rentals, Blockbuster dipped its feet into the streaming service first when it partnered with Enron. Blockbuster, however, was too ambitious as streaming was not yet practical in 2000. Enron was also a disastrous partner to work with. On top of this, streaming was more expensive than physical rentals, which was unappealing and unpreferable at the time given the abundance of Blockbuster stores.
2) Several years later, once technology caught up to the requirements for streaming, Blockbuster re-entered the streaming market with more luck, but suffered from the same pricing scheme (paying per movie) that caused their first failure. People also didn’t have big enough screens to watch their content.
3) In 2007, while Blockbuster’s streaming service was rather lackluster, Netflix launched their own service which charged only a flat, monthly rate of $10. Shortly after, Netflix solved the screen issue by partnering with companies to bring their platform to smart devices.
4) Before Blockbuster could emulate Netflix’s forward-thinking strategy, they suffered immense losses in the 2008 economic crisis and shortly after filed for bankruptcy.
2 What key issues is Netflix facing in the case? Consider, in particular, Netflix’s increasing competition and substitute products available to consumers (e.g., Redbox, Hulu, illegal file sharing, on demand (cable), network sites). Think about competitive. players in terms of advantages and disadvantages (as compared to Netflix)
Netflix’s primary issues are diverging cost structures of a conflicting core competency (i.e. DVDs vs. streaming) and poor PR. Streaming movies online is very different from mailing physical disks. And by 2011, many users were content going to iTunes, Amazon, Hulu, etc. and paying full rental price there instead of waiting for a lower resolution DVD to be shipped to them. Not only had streaming become preferable to consumers, but they had become accustomed to instant gratification. Reed Hastings, the CEO of Netflix, knew that mailing DVDs was rapidly approaching obsolescence, but that didn’t mean it cost any less. He also knew that Netflix would always be a flat rate, so if he was to compete with other rental services, he had to distinguish Netflix once they exited the DVD rental business. He even says “go to Amazon or iTunes [if we don’t have your content]” (Page 2). Based on this, Hastings knew that Netflix would be something different than an online rental business, but still competitive. However, this forward-thinking strategic decision was communicated very poorly to customers which elicited outrage. To add insult to injury, rates for customers wanting both services doubled.
3 What decisions or options are available to Hastings?
In order to resolve the rapidly differing cost structures of mailing and streaming content, Hastings’s options were: 1) maintain the status quo to keep customers content, 2) eliminate the DVD business entirely, 3) separate the services but maintain the same price, or 4) separate the services and raise prices in order to keep up with the growing obsolescence and cost of mailing DVDs.
4 Were they good decisions? Why?
I believe that decision #4, the decision Hastings ended up making, was the best decision. Eliminating DVDs altogether would have alienated so many customers that the company likely would not have recovered. By splitting the services and raising rates, Netflix was able to focus on streaming (and eventually original content), which has made Netflix so successful today. I would liken it to Apple changing the charging port on the iPhone 5 in 2012. Although it was met with initial dissatisfaction, it was a forward thinking move that virtually all consumers today would agree was beneficial.
5 What could they have done differently?
I believe Netflix made a very strategic move that prepared them well for the future of content delivery. That being said, when you know that customers will push back, you need to defend your stance and make the transition as smooth as possible. The content of the apology letter Hastings sent should have been communicated from the very beginning. It would not have changed Netflix’s strategy, but it would have retained many customers that felt angry and betrayed by Netflix.
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