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FinalProject.docxIntroduction
Netflix - Superior Performance Evaluation and Recommendation
Netflix is an internet entertainment business and was created in 1997 by Reed Hastings and Marc Randolph. The original purpose was to provide online DVD rentals but through the AFI framework, you will see how they emerged as one-third of all downstream Internet traffic in the United States during peak hours[footnoteRef:1]. They started as a razor-razorblades service with free sign up and pay as you go per movie, but then emerged into one of the industries first subscription based services in 1999. In 2002, they rolled out their IPO on the NASDAQ, with 600,000 shares priced at $1 per share. Netflix revolutionized the industry in 2007 when they introduced their streaming service. By 2010 they had partnered with many major streaming platforms and from 2011 on they focused on globalization and the creation of their own original content[footnoteRef:2]. As of today, they are a worldwide company with 2 Oscars, 37 Emmy’s, and 4 Golden Globe awards. [1: Rothaermel, Frank T. Strategic Management. , 2017. Print. ] [2: “About Netflix.” Netflix, media.netflix.com/en/about-netflix. ]
Today, Netflix currently has 4,800 employees, 433.95 million shares outstanding priced at $325.22 and their revenue trailing the past twelve months is market at $11.69 billion. Furthermore, their gross profit margin is 34.49% while the industry average is at 47.47%. The industry they are in is the CATV Systems which is the second most profitable industry currently making it cutthroat. They have some ground to make up here. Their current beta is 1.48 (compared to an industry average 0.92 which means Netflix is more volatile). They are more volatile because they have a larger and more frequent fluctuation in their stock prices. Furthermore, Netflix’s P/E ratio of 260.18, with a current net income of $558,929[footnoteRef:3]. Finally, Reed Hastings is still their CEO. [3: “NFLX : Summary for Netflix, Inc.” Yahoo! Finance, Yahoo!, 4 Mar. 2018, finance.yahoo.com/quote/NFLX?p=NFLX.]
We chose Netflix as our company because they are the admitted leader in their industry (by far many analysts would say). They have changed the way our generation enjoys entertainment and continue to revolutionize new methods as well. Their creation of original content without commercials has employed a customer base of 118 million streaming subscribers globally. Their international expansion has been an investors dream the past 7 years. Their current headquarters is out of Los Gatos, California. They have recently revolutionized the entertainment industry with their elimination of classic theatrical releases for their movies. First, their own original movie ‘Bright’ was released directly to all customers without having to visit a theatre first. The distribution and creation of the movie was based on algorithms (which Netflix loves and has perfected). Even though the movie has scored poorly with critics (a low 26% on Rotten Tomatoes) the movie has amassed a large viewer population that has helped its success. So much so that it has already been greenlit for a sequel[footnoteRef:4]. Lastly, Netflix purchased a movie called ‘Cloverfield Paradox’ that was originally intended for a theatrical release. They even implemented a new marketing scheme of a surprise release. During the Super Bowl, two commercials were played to notify viewers of this surprise release. As soon as the game finished, Netflix released the movie and attained a massive viewing. The movie was streamed 5 million times in its first week[footnoteRef:5]. The actual performance of the movie was not as high as expected, but this all comes to show just how much of a revolutionizer Netflix is. They are willing to take expensive and risky chances to continue to propel themselves as the innovators of their industry. [4: Rodriguez, Ashley. “Netflix Explains Why a Badly Reviewed Movie like ‘Bright’ Can Still Win.” Quartz, Quartz, 24 Jan. 2018, qz.com/1188058/netflix-explains-why-badly-reviewed-bright-killed-with-viewers/.] [5: Spangler, Todd. “Netflix's 'Cloverfield Paradox' Pulled in 5 Million Viewers in 7 Days After Surprise Release.” Variety, 15 Feb. 2018, variety.com/2018/digital/news/netflix-cloverfield-paradox-altered-carbon-ratings-1202700414/.]
Now what does this have to do with Netflix’s current standing in the industry? It shows how they are the original innovators and continue to try to prove that. Currently their biggest threat is the emergence of new entrants into this market as Playstation Vue and SlingTV have shown. In order to keep their head afloat, they need to continue doing what they have done so well for so many years - innovate.
Analysis
The greatest strength of Netflix is its customer base of over 118 million streaming subscribers globally, making it the largest streaming service in the world. While this clearly helps with gaining revenue, the customer data collected is crucial for sustaining Netflix’s competitive advantage. Learning the habits and preferences of 118 million customers allows Netflix to recommend the correct content to the correct consumer, creating a satisfying experience and increasing brand loyalty. This focus on innovation and development is another strength of Netflix, as they are constantly working to improve their website and streaming options, like working with cellular providers to allow people to stream and download content to their mobile device. They also are investing in creating their own original content, including critically acclaimed shows like “Narcos”, “House of Cards”, and “Stranger Things”. This is a huge plus for Netflix as it allows them to be more vertically integrated as well as mitigate costs of providing the content as well as eliminating the hassle of licensing through third party’s. Original content creation is vital for competing against other streaming services like Hulu, Playstation Vue, and Amazon. While Amazon does own and create some original content, Netflix dominates in both quantity and quality.
It is becoming more crucial that Netflix expands upon creating original content as its reliance on third-party content is a major weakness. Some of its current major suppliers are starting to become competitors which is especially problematic for Netflix because the amount of content they can offer to customers will be reduced when suppliers create their own streaming service and cancel providing for Netflix. The current antitrust trial on the AT&T merger with Time Warner will impact Netflix significantly as the decision could open the door for more suppliers to become competitors. Many customers keep their subscription to Netflix because of the continued releasing of new and famous television shows, and might cancel their monthly subscription if these shows get blocked on Netflix in favor of a new competitor. The current cost of licensing third-party content is significantly higher than the cost of streaming it to the consumer, which leads to another weakness of reduced free cash flow.
To increase cash flow Netflix has an opportunity to gain revenue by allowing advertisements. This would risk losing some customers that subscribe to Netflix for the reason that there are no advertisements, but the potential earnings significantly outweigh the possible loss in subscription revenue. More opportunities for Netflix to grow come with the increased use of the internet around the world. An increased focus on providing streaming options to countries and cities where English is spoken as a second language can reach an untapped market and increase Netflix’s global customer base. There is a shift towards uploading content to the internet which drives more consumers to Netflix to find what they are searching for and allows for a much larger library of content. This will help serve niche segments of consumers by providing documentaries and cinematic films as well as more international movies and shows, further expanding their customer base around the world.
While Netflix is in a strong position, they have to prepare against a multitude of threats. The ongoing antitrust trial on the Time Warner and AT&T merger will set a precedent that decides how strong the threat of new competitors is for Netflix. This is especially threatening because the new competitors that could emerge would be current suppliers of content for Netflix, damaging their library and pulling customers away. Another legal and political threat is the possible repeal of Net Neutrality. A repeal of Net Neutrality would mean that internet service providers can single out Netflix and slow down the streaming rate or even block it for consumers unless they pay more or buy a particular internet package. This could drastically reduce their customer base as people might not want to pay the additional increased fee to stream Netflix or get frustrated with the slow connectivity. Existing competitors like Hulu, Playstation Vue, and Amazon are continually a threat as they develop and improve their streaming services and libraries. Amazon is especially threatening because of its size, both in capital and customer data.
Formulation (Analysis and Recommendations)
Formulation
Netflix has definitely set itself aside as a cost leader while still being more valuable than any other paid streaming service. It has the most monthly subscribers and is among the lowest monthly subscription streaming site to date. It innovated the way entertainment series are televised and consumed by allowing serial programs to be binged watched on demand, all while keeping its monthly subscription prices low (9.99). Only Hulu compares, charging about the same amount but coming in a distance second with it’s monthly subscription base reaching 17 million, compared to Netflix’s 118 million. Netflix also differentiates itself from Hulu in that is does not have any advertisements contained in its programming.
Sustaining a Competitive Advantage
Netflix set the standard and undeniably has emerged as the industry leader, now focus needs to be drawn to the sustainment of its powerful position. Disney is attempting to acquire 20 Century Fox’s media portion of its businesses currently and Hulu, Netflix’s closest competitor. Expect Disney to use its brand power and vastly popular archive of children’s content to directly compete against Netflix when the company distributes content next years on its own streaming platform. But would this be a wise move by Disney considering the reach Netflix has built up within its mass consumer base. To insulate itself from a void of valuable Disney content Netflix should make an attempt to partner with Disney on production and licensing. The move can be lucrative for both enterprises as Disney can capitalize on Netflix’s consumer base and Netflix can capitalize off Disney’s brand, production and expertise when it comes to providing and creating content for children. Another key caveat to be aware of is that one third of Hulu is owned by Comcast. Another strategic partnership that can be exploited.
Internet Service Provider(Net-Neutrality)
Globalization, Content, and Marketing
The where and how questions pertaining to competition can be answered within three different competitive dimensions: First there is the obvious answer to the question whether Netflix should go global, and what would be the assumed easy answer of “of course”, given how movie content can transcend cultural barriers. Another worthy note is the economies of scale that come from budgeting invested in content that becomes popular across international market segments. Good content is universal and good content is what Netflix’s needs to bank on. About $8 billion has been invested into creation of Netflix originals and new content, with investments focused on recruiting talented screen writers and blockbuster actors and actresses. Additionally, Netflix should allow writers to have their creative freedom void of micro and macro management, facilitating efficient productions processes and saving on management cost.
Content is crucial to Netflix’s sustaining a competitive advantage and supports a strategy of leveraging the power of its consumer base-built on content-to obtain the licensing rights to valuable content and protect against a distributor exploiting the repeal of net-neutrality and consequently have Netflix pull its valuable content off their distribution channel. Moreover, good content translates to marketing dollars saved through the organic marketing of word-of-mouth.
Implementation
In order to attain heightened growth through innovation, while simultaneously combating these various threats and weaknesses, Netflix must strategically implement an efficient system of integrating these various business initiatives in a manner that is synergistic across all channels. To allow for this maximized efficiency of business operations, we must organize the culture, structure and leadership of Netflix in a style that facilitates and reflects these innovative efforts.
Given Netflix’s pre existing global offices that range in locations from Amsterdam to Tokyo to Såo Paulo, there already exists the necessary in-company diversity of culture that can provide various globalized perspectives and ideas. By continuing to recruit top screenwriters, actors and actresses to partake in content creation, an associated “buzz” will always exist upon the release of these new projects thanks to the credibility of their work. All while incentivizing these top talents with high degrees of creative flexibility to explore ideas that may have otherwise been more difficult to pursue under the more rigid currently existing movie/tv production companies. By instilling and implementing a greater degree of collaboration and cohesiveness between the company and the entertainment industries, the easier it will be continue this innovative trend of unorthodox content creation that simultaneously cuts the costs that arise from attaining content from outside sources.
Currently, Netflix is able to acquire top talent due to the enormous amount of capital that Netflix has at its disposable for reinvesting into new content. This can be displayed through projects like The Get Down, a hip-hop tv drama, which cost Netflix roughly 120 Million to produce the 12-episode first season. This expenditure, put into perspective, is 20 million greater than the cost of HBO’s acclaimed Game of Thrones in its most recent season. Costs included hiring a prestigious team that ensured the quality and accuracy of this historical drama including individuals like Nas (rapper), Baz Luhrmann (Writer/director/producer), Stephen Guirgis (Pulitzer-winning playwright), and many more. However, the obviously exorbitant costs could have been mitigated to a degree had there not been various issues in the production process with some show-runner and writer switches. Despite some of these issues, we expect that with the frequency of these original content projects increasing, the logistics behind these projects will become easier to organize and inefficiencies will eventually be minimized. In the meantime, the company’s devotion to creating high quality content regardless of costs is what continues to keep Netflix as the frontrunner within the streaming industry.
The company’s devotion to creating superior content is displayed and reflected through the high consumer reviews on a large portion of their original content. The sheer quantity of original content that they have been producing on its own is very impressive as well. The CFO claims that Netflix should have roughly 700+ original shows within this year, which includes roughly 80 non-English productions. To truly implement this culture of globalization within its content as well, Netflix will need to truly integrate these global programs across all of its global subscribers. Some shows are exclusive to certain countries and cannot be accessed if outside of it. However, by continuing to place importance on these foreign content initiatives, over time Netflix will have and continue to build an enormous amount of original content produced and created by people across the world.
The more globalized they become the more data they will be able to collect regarding consumer preferences from across the globe, which in turn will help them in their future content creation endeavors. By in a sense “cross-selling” content across different global markets, Netflix will create further value all while spending no additional money given the content had already been produced and paid for in the past.
Conclusion: (The basic idea is that we want Netflix to focus on content creation by exploiting there core competency of determining what people want to watch through algorithm recommendations and the analysis of user data. Also want to focus on joint ventures with producers to help make production process more efficient and help build other core competency-The ability to make great original content.)
