STRCB/581 Competency 2

Competency 2 Assessment (Revised)

Xxx xxx

University of Phoenix

Professor Miller

Netflix Strategic Analysis

Netflix is a leading global streaming service that offers a wide variety of movies, TV shows, and original content to subscribers. It operates on a subscription-based model, providing unlimited streaming for a monthly fee. With a massive user base and a presence in over 190 countries, Netflix has revolutionized the entertainment industry and disrupted traditional media distribution channels. The company has invested heavily in original content production and international expansion, driving its rapid growth and establishing itself as a dominant player in the streaming market. Netflix's success is attributed to its user-friendly platform, diverse content library, and ability to adapt to evolving consumer preferences. (Netflix, About Us, 2023). As much as Netflix has become a household name in the streaming business, it’s not without its overall struggles, which include financial wellbeing, growth, and overall brand credibility.

Netflix’s Current Financial Plan

Netflix has been a company in distress for over a decade now. As the market of at-home DVD rentals to streaming has evolved into an almost all-inclusive movie-by-demand model, consumers have looked for ways to get the media they want as fast as they can get it. Netflix has worked to adapt to the changing environment and was nearly lost before the 2019 COVID-19 pandemic prisoned millions of media-seeking families to their homes looking for entertainment. While Netflix’s overall revenue and subscribers climbed immensely during this time, they were already positioned to receive new subscribers.

The new strategy for Netflix is to become and remain a cash-flow-positive corporation which will include buybacks which it hasn’t been able to do since 2011. The long-term strategy of reinvestment will include billions of dollars on new content specifically designed to entice new subscribers. (Sherman, A. 2021)

(2) Chart indicating Netflix’s poor financial standing as of 2011

Identifying the Struggles of Netflix

Netflix makes a large majority of their decision based on previous experience, as most major corporations do. The struggles that Netflix has been dealing with, however, are the lack of adaptation and financial security that are related to subscriber management, competition, margin goals, and lastly, overall net revenue that were all in the positive and absent of current market conditions or subscriber habits, and relevant competition. As a result, Netflix shares are down 63% year to date as they haven’t been able to navigate the modern entertainment streaming domain. (Brown, J. 2023)

Netflix revenue growth was recently measured at 9.8% and is forecasted for the next quarter at 9.8%. Subscriber growth is even more lethargic, coming in at just 6.7%, and forecasted to be at 5% the next quarter. While this growth may sound good, its dramatically down from previous years and is a sign of a struggle. When reviewing the next chart, you will see the company had previously tallied 7 consecutive quarters of 20+% of quarterly growth, but there’s a fundamental difference in a company growing in the low 20% percent range and in the high-single-digit range, and that’s reflected in the near 70% decline in the stock since it’s last peak in November.

Netflix corporate has committed to reaccelerate growth, but this is a hefty promise to stakeholders as competition has grown significantly in the past two years as choices for streaming platforms now include Disney Plus, WarnerMedia’s HBO Max, NBC Universal’s Peacock, ViacomCBS’s Paramount Plus, Apple TV Plus, and Discovery Plus. (Maas, J. 2022) This change in competition could mean that single-digit growth could be the new normal going forward for Netflix, adding to stakeholder concerns about growth promises that are hard to make.

After revenue and subscriber growth, the operating margin is the company’s most important factor. Last year Netflix forecasted that the operating margin would be at 21%, but then early forecast models indicated it would be much closer to 19 or 20%. Management was hoping that the margin would grow by about 3% as it leverages new content, however, from the chart below, we can tell that their struggles continue as they are already trending down from 20.86 and creeping towards 19%.

The next struggle Netflix is having is content spending. There is a balance between spending money to create new content and then enjoying that snowball of new subscribers, retention, revenue, and margin, however, Netflix content spending has tripled and grown from 5 billion to 18 billion from 2015 to 2021 without achieving matching results to remain competitive in the new market and only growing at about the same pace as its subscriber base. While that might sound justified, it actually shows that Netflix hasn't found a way to make its content spending more efficient during that time, which encompasses nearly its entire history of original programming. That's a problem for Netflix and one it's likely to attack as it focuses on improving its business to drive growth and profitability. (Motley Fool, 2023)

Lastly, with all efforts to increase subscribers, create content and widen margin, Netflix hasn’t been able to substantially show any remarkable positive impacts to their balance sheet. While total assets have grown to 48.5B, this is impressive, but the investment to get them there comes with debt. Their invested capital is at 35B, over 22B in just 3 years, and their net debt is at 9.2B, just slightly down from 9.2B in 2019. Their shares number has only recently seen improvement but is still at 445,347, just slightly above 438,807 from 2019. The company balance sheet below goes into greater detail. (Yahoo Finance, 2023)

Netflix also has a cashflow problem that they have identified but still haven’t overcome, as seen in their operational performance report.

Netflix income statement shows that even though they are still in a revenue-producing state, it comes at a direct cost to manage this as well as produce new and original content. (Stoll, J. 2023)

3 Strategies to Increase Netflix Brand Credibility

(1) Netflix's credibility is closely tied to the quality and diversity of its content offerings. By controlling the investment based on market data and specific viewer trends for original content in high-quality original programming genres and formats, Netflix can demonstrate its continued commitment to delivering exceptional entertainment experiences. They can do this while making sure that they get a full return on investment (ROI) so that they are not just throwing money at the problem but strategically targeting their most advantageous growth market. This includes producing critically acclaimed shows, movies, and documentaries that appeal to a broad range of audiences. Additionally, diversifying content offerings to cater to different cultures, languages, and regions will help establish Netflix as a global platform with a deep understanding of its viewers' preferences and needs. This will differentiate itself from all of the other streaming platforms and put Netflix back on top. This strategy should begin immediately with focus groups, feedback from current subscribers, partnership with movie houses or other platforms to leverage viewers, and the willingness to scrap projects with a low forecasted success rate.

(2) Building trust and credibility requires open and transparent communication with subscribers, industry partners, and the public. Netflix can immediately implement the strategy of fostering transparency by providing clear and accurate information about its services, pricing, content acquisition, and production processes. This can be achieved through regular updates, behind-the-scenes content, and interactive features that engage users and demystify the company's operations. Moreover, addressing any concerns or issues promptly and openly and actively seeking feedback from customers can reinforce Netflix's commitment to transparency and customer satisfaction. Viewers want their voices to be heard, yet the impression of “the bigger the organization, the less my voice will be heard” still resonates. Netflix could revolutionize the customer feedback world with live interactions with producers and programmers and could even create content surveys and have viewers vote on the content that they like the best and or what they want to see, and Netflix could produce content based on those results.

(3) As a streaming service that collects and analyzes tremendous amounts of user data, Netflix must prioritize data privacy and security to enhance its brand credibility. Implementing robust data protection measures, including encryption, secure storage, and strict access controls, can safeguard user information and provide peace of mind to subscribers. Netflix should also be proactive in complying with applicable privacy regulations and clearly communicate its data handling practices and privacy policies to users. By demonstrating a strong commitment to protecting user privacy, Netflix can instill confidence in its subscribers and mitigate concerns related to data breaches or misuse. This is especially important to mobile users of Netflix, who often have to worry about spam messages or automatic email or phone tagging, which is often found in streaming platforms. Netflix should work exceptionally hard to repair this as it has a reputation for spammers or phishing companies to infest its users. (Newman, L. 2017)

By managing the primary issues identified as continuing to create original content, and being more selective and reactive to their customer base, along with improving customer feedback channels and offering real preference options for its users, this transparency will allow subscribers and growth to occur organically rather than relying exclusively on the model of spending money to make money. And lastly, by improving security measures for its mobile users and reducing spam or phishing problems, Netflix can show its users that it cares about their privacy and streaming experience, and they can rely on this more than their competitors. Thus, giving another advantage and promoting new subscribers and retention of their current members.

A chart has been created below to detail in a graphic how these strategies will be implemented over the next 2 years. Each strategy includes the action required to achieve the strategy goal, the target of the strategy, the person(s) or group(s) responsible to oversee the strategy, the inter-measurements to ensure the strategy timeline is measured and staying on track, and then the completion indicator.

Summary of Netflix Financials and New Sustainable Plan

Analyzing and optimizing costs is crucial for any company. Netflix should regularly review its expenses and identify areas where cost reductions or efficiencies have be achieved without negatively impacting the quality of its service while still creating content, managing transparency, and receiving customer feedback.

Given Netflix's success as a content provider, it's important to continue investing in high-quality and diverse content to attract and retain subscribers. However, it's crucial to strike a balance between investing in original programming and acquiring licensed content to manage costs effectively. Original content production similar to what Amazon has found success in would boost new memberships and, most importantly, retain the current customer base. Retaining existing subscribers is just as important as acquiring new ones. Netflix should continue its focus on understanding and meeting customer needs, continuously improving its recommendation algorithms, and offering personalized content suggestions. Enhancing customer satisfaction can help reduce churn rates and increase customer loyalty.

In addition to the new strategies, Netflix's global expansion has been a key driver of its growth. Continued efforts to penetrate new international markets can provide additional growth opportunities. It will be important to consider the unique challenges and preferences of each market and adapt the content library and pricing strategies accordingly. If a US market program entered a market where English was not the primary language spoken, then this may create a barrier. Cultural considerations in programming must also be considered.

Netflix should continue to invest in technological advancements to improve its platform, enhance the user experience, and stay ahead of competitors. This could involve investments in personalization algorithms, user interface enhancements, and streaming technology to maintain a competitive edge. Lastly, Netflix should develop a robust long-term financial plan that accounts for potential risks, such as changing market conditions, competition, and regulatory challenges. With these steps in place, Netflix can accept its current troubles and forecast a more realistic plan for long-term brand credibility and financial success.

References

Sherman, Alex. “Netflix Will Consider Buybacks as It Returns to Positive Cash Flow after 2021.” CNBC, 20 Jan. 2021, www.cnbc.com/2021/01/19/netflix-says-cash-flow-positive-after-2021-no-more-external-financing.html#:~:text=Netflix%20will%20consider%20buybacks%20as%20it%20returns%20to,which%20it%20hasn%E2%80%99t%20done%20since%202011.%20More%20item

“Netflix, Inc. (NFLX) Income Statement.” Yahoo! Finance, 26 June 2023, finance.yahoo.com/quote/NFLX/financials.

About Netflix - Homepage, about.netflix.com/. Accessed 26 June 2023.

Masango, Aya. “5 Ways Netflix Can Improve to Remain the Best Streaming Service.” MUO, 2 Sept. 2021, www.makeuseof.com/ways-netflix-can-improve/#:~:text=1%20Bring%20Back%20Free%20Trials.%20Everybody%20loves%20free,this%20feature%20may%20not%20be%20very...%20More%20.

“Silicon Alley Insider.” Business Insider, www.businessinsider.com/silicon-alley-insider. Accessed 26 June 2023.

Maas, Jennifer. “Netflix Acknowledges Streaming Rivals Are ‘Affecting Our Marginal Growth.’” Variety, 21 Jan. 2022, variety.com/2022/tv/news/netflix-streaming-competition-hurting-growth-1235158890/.

Bowman, Jeremy. “3 Charts That Explain Netflix’s Demise.” The Motley Fool, 21 Apr. 2022, www.fool.com/investing/2022/04/21/3-charts-that-explain-netflixs-demise/.

Newman, Lily Hay. “The Devious Netflix Phish That Just Won’t Die.” Wired, 7 Nov. 2017, www.wired.com/story/netflix-phishing-scam/.

(Masango, Aya, 2021) This includes stress-testing financial models and supporting their financial plan of a healthy cash flow to fund future investments and maintain financial stability.

Stoll, Julia. “Netflix: Number of Subscribers Worldwide 2023.” Statista, 20 Apr. 2023, www.statista.com/statistics/250934/quarterly-number-of-netflix-streaming-subscribers-worldwide/#:~:text=Netflix%20had%20around%20232.5%20million%20paid%20subscribers%20worldwide,77%20million%20of%20Netflix%E2%80%99s%20total%20global%20subscriber%20base.