paper

Table of Contents

Executive Summary……………………………………………………………………………….3

Section One: Prepare an e-Commerce in Action: The Business Model of the Company…......3-11

The Vision………………………………………………………………………………3-4

Business Model……………………………………………………………………………4

Financial Analysis………………………………………………………………………4-5

Strategic Analysis…………………………………………………………...…………5-11

Business Strategy………………………………………………………………..5-6

Competition……………………………………………………………………..6-8

Technology………………………………………….…………………………8-10

Social & Legal Challenges…………………………………………………...10-11

Section Two: The Positioning of the Company to the Challenges Ahead…………………...11-13

References……………………………………………………………………………………14-16

Appendix………………………………………………...……………………………………….17

Executive Summary

Throughout this paper, we will be moving forward and looking at what the future entails for the entertainment TV company, Netflix. We will start by looking at the company’s vision, their current and possible future business model, their finances, and their strategic business decisions. In order to better analyze their strategic business decisions, we have looked at relevant factors such as their business strategies, competition, technology, and social & legal challenges. Diving into all these external and internal factors will help Netflix better prepare for the challenges we expect them to face, which will be discussed in section two. By the end of this paper we hope the reader has a better grasp on how Netflix operates and plans to continue its successful online marketing to overcome challenges and stay relevant over the course of the next few years.

Section One: Prepare an e-Commerce in Action: The Business Model of the Company

The Vision

Netflix envisions that online streaming services will know what viewers want to watch, even before they themselves do by 2025 (“What Television,” 2014). Through the company’s personalization technology, viewers won’t have to spend so much time browsing through television channels and endless lists of shows on-demand (“What Television,” 2014). Instead, Netflix’s recommendation system will suggest one or two offerings that will fit with the viewers likes and interests of genres (“What Television,” 2014). In terms of variety of shows, Netflix releases niche media content that would be for small audiences. However, when Netflix’s personalization engine is perfected, it will become easier to discover these types of genres for the small audience (“What Television,” 2014). For production, Netflix sees a future for filmmakers to have the freedom to not be restricted to time and not have to tease viewers with a cliffhanger at each episode (“What Television,” 2014). Netflix envision continuous binge-worthy content that can go right into the next episode (“What Television,” 2014). In addition, Netflix believes that commercials will die, and advertisers will have to find new ways to deliver targeted advertisements (“What Television,” 2014). Netflix has demonstrated that companies can be successful without advertisers through subscription services and ad-free content has become popular and important for viewers (“What Television,” 2014). Another factor that will be competitive among other online streaming services such as Amazon, Apple, Hulu, TV providers etc. is being the brand that viewers will watch on their TVs. Netflix is certain that by 2025, every household will own a smart TV and that companies will compete to get viewers’ attention (“What Television,” 2014).

Business Model

Netflix is a membership-based business model. This means is that Netflix’s main source of income is through the membership fees that people pay each month in order to receive the content they provide, or the DVD’s that they rent out. They receive most of their funding through equity and debt. It’s estimated that Netflix raised approximately $200 million dollars through equity financing, and $1.8 million dollars through debt financing (Bhatt 2018). With that being said, a content provider such as Netflix has a ton of costs they need to pay before arriving at their bottom line. These costs include permitting costs that allow Netflix to provide these shows, creation costs, for when they developed Netflix Originals in 2013, promoting costs in order to compete with other content providers such as Hulu and Amazon, and innovation and improvement costs. Costs are especially expensive because Netflix partners with ISP’s in order to make sure that with the number of the viewers they have, the they want to optimize the Open Connect Appliance arrangements so that no one’s speed is slowed. These are just a few of the costs that Netflix has to pay for. We will now dive deeper into the numbers and their financial statements to get a more accurate idea of how large these can amount to.

Financial Analysis

Looking at Netflix’s SEC filings with Edgar, one of the first measurements everyone wants to look at is their bottom line, their net income. This factor skyrocketed this past fiscal year (12/31/2017). They reported a net income of a $186,678 (in thousands) in 2016, and then a 200% growth rate to 2017, reporting $558,929. Knowing this information, we want to take a look at their revenues, and their operating income/margin to see where this change is occuring. (Are they just retaining more of their revenues by decreasing costs, or are they making more revenues?). Their revenues had a 32% growth rate from 2016 to 2017, ending at $11,692,713, compared to a 30% growth rate the year prior. After subtracting cost of goods sold, and wages and other operating expenses we arrive at operating income. This showed a 128% growth rate from 2016 to 2017, ending at $838,679. This is a 7% operating margin compared to the years prior’s 4%. Clearly, 2017 was a good year for Netflix, and after reading the statement from their management team, we can see what caused this positive spike. “The increase in consolidated revenues was primarily driven by the growth in the average number of paid streaming memberships globally, the majority of which was growth in our international memberships” (Netflix 2017). This is great news for the company because this means there is still untouched target markets internally for them, and they can still reach new consumer bases to continue to grow financially. Overall, Netflix is a young company and it is great that it has such high growth rates for using such an innovative business model in the 2000’s. We would keep an eye on their licensing and creation costs in the future, as well as their interest expenses, but overall knowing what they are working on, we would invest in Netflix if we were a current stock investor in the NASDAQ.

Strategic Analysis

Business Strategy. Netflix’s business strategies have allowed the company to dominate the online video streaming market. This is a major accomplishment considering that Netflix was first established as a DVD rental company. Hastings, the CEO of Netflix, took his bad experience of paying fines for overdue DVD rentals and created a business model where users paid one flat fee per month . Hastings saw an opportunity where if a business is giving the customer a product or service that satisfies their wants, they will continue to pay for it (“How Netflix,” 2017). These past few years, Netflix has slowly increases their monthly subscription payments but has not seen many cancellations. Why? This is because Netflix adds high-valued content that is exclusive to Netflix viewers and makes recommendations that is very good at predicting the viewers’ queues (“How Netflix,” 2017). Netflix spent about $5 Billion on content acquisition in 2016 (“Netflix business,” 2016). 10 percent went to original content and is expected to rise in the coming years (“Netflix business,” 2016). Netflix also has invested in Real Estate to build its own studios because currently they are leasing production studios in California (“Netflix business,” 2016). Also, despite the expensive licensing contract, Netflix received the rights to release Disney and Marvel content and are in the works to create a partnership to product original content (“Netflix business,” 2016). Netflix’s spot-on recommendations is successful because of their powerful algorithms and data analytics that follows viewers’ string of media content they watch and track how the viewer got to watching a certain TV show or movie. In addition, Netflix pays close attention to the type of genres and content viewers pay to see and how many hours they spend binge-watching a TV show or movie (“Netflix business,” 2016). Therefore, the user data Netflix collects guides the company to create the type of original content viewers are looking for (“Netflix business,” 2016).

Netflix has also created partnerships with big brand companies such as Apple where Apple TV has Netflix built into the box (“6 Strategies”). Hence, Netflix can reach Apple’s large customer base, while Apple can also provide media content conveniently to their customers (“6 Strategies”). Similarly, cable companies like Comcast Corporation saw an opportunity to incorporate Netflix into their cable boxes because still many households pay for cable and have Netflix as another source of media content (“How Netflix,” 2017). Instead of resisting Netflix, Comcast Corporation embraced the company and has seen big success with the partnership.

Competition. Netflix has been in the forefront as a successful leader in the online video streaming business. When the company transitioned into online streaming from DVD rentals through a subscription service, they became a business model other companies seek to gain steady revenue. Despite their accomplishments of having over 125 million memberships, Netflix face its competitors and retain their current subscribers. One major competitor is Amazon Prime, which is Amazon’s online video streaming service. Within a Amazon’s Prime membership, members can stream online videos without any additional cost. Amazon Prime’s original content alongside with a media library of thousands of movies and TV shows are only exclusive to Prime members. Additionally, Prime members can watch and download their shows and movies anytime and anywhere through a variety of devices such as Amazon’s app, tablet, desktop, and smart TVs.

Another major competitor for Netflix is Hulu, an online video streaming company that offers a subscription service starting at $7.99 per month for limited commercials and $11.99 per month for no commercials. Hulu also has plan with live TV starting at $39.99 per month as well as add-ons for HBO, Showtime, and Cinemax. Hulu offers Hulu Originals, current episodes, classic entertainment, and family movies. Hulu’s plans options and having a similar business model as Netflix displays how subscription models are easy to replicate. An advantage Netflix does have is offering no commercials and ad-free content while Hulu incorporates advertisements that might deter people for spending money on a subscription with commercials.

HBO is yet another competitor that Netflix has to contend against. Like Netflix and Hulu, HBO Now is a subscription service where members pay $14.99 per month and have access to unlimited HBO TV shows and movies. Also, HBO offers exclusive original content and award-winning movies that is updated daily. HBO was the former content king but was taken by Netflix because they deliver over 1000 hours of original content in 2017 versus HBO where they have around 600 hours of original content (“Who are Netflix’s,” 2018). In addition, Netflix has over 110 million viewers while HBO Now has 3.5 million viewers (“Who are Netflix’s,” 2018).

Not only does Netflix have to compete against subscription services like Amazon, Hulu, and HBO, but they also contend with major video content providers like YouTube. YouTube allows viewers to subscribe to different channels such as music, YouTube movies, TV shows, Live, etc. for a certain price. For example, if a viewer wants to watch a season of a TV show, he or she will pay a one-time payment to view the whole season. In addition, YouTube’s viewership is over 1 billion hours of videos daily on its network worldwide (“Netflix’s biggest competition,” 2017). Hastings admires YouTube and their company envies YouTube (“Netflix’s biggest competition,” 2017). Even though YouTube is essentially “free” and has more viewership than Netflix, they do not provide all access to their paid content which may deter certain people to go to a subscription model. In the end, despite the pros and cons from Amazon, Hulu, HBO, and YouTube, all of these companies are trying to capture the same target audience as Netflix. All of Netflix’s competitors could surpass Netflix at any given moment which makes it crucial for Netflix to know what their competitors are doing and how to stay on top.

One competitor that Netflix considers their real competition is not a company but rather more elemental is sleep (“Netflix’s Biggest,” 2017). At one of Netflix’s regularly-scheduled Q1 meetings, CEO Reed Hastings explained why sleep is their truest competitor, “When you watch a show from Netflix and you get addicted to it, you stay up late at night. You really – we’re competing with sleep, on the margin. And so, it’s a very large pool of time” (“Netflix’s Biggest,” 2017). Hastings believes that because the market is so vast, they are competing for people’s eyes and every waking moment they have throughout the day (“Netflix’s Biggest,”2017). People’s greatest limitation is the need to sleep and Netflix wants people to stay up late and stream media content. Netflix has already met some of their goal by creating original content that encourages subscribers to stay up by releasing a whole season all at once and increase their original content daily. Subscribers are eager to binge-watch the whole season despite having to work the next day or need to do errands. In addition, in 2017 Netflix was experimenting ways to re-scan already-produced programming to appear better on smartphones (“Netflix’s biggest competition,” (2017). Their goal of re-scanning is to have the faces bigger and more visually appealing (“Netflix’s biggest competition,” 2017). With Netflix’s app and having the ability to bring the media content anytime, anywhere, makes it easy for members to find the time to stream video and eventually accomplish Netflix’s goal.

Technology. Netflix spends a significant amount of money on technology and development expenses. The company focuses on developing the best suggestions and referral algorithms. Statistics show that 80 percent of the TV shows people watch on Netflix are from their “top-secret” recommendation system (“This is how Netflix’s,” 2017). Netflix has built algorithms and machine learning to recommend viewers shows and movies that they may not have initially chosen (“This is how Netflix’s,” 2017). Netflix is able to break subscribers preconceived notions of a TV show by a model they created called the three-legged stool, “The three legs of this stool would be Netflix members; taggers who understand everything about the content; and our machine learning algorithms that take all of the data and put things together,” (“This is how Netflix’s, 2017). The vice president of product innovation, Todd Yellin, suggests that Netflix tracks what members watch, what they watch before and after, what they watched a year ago, and what time of day members watch (“This is how Netflix’s, 2017). Netflix hires freelancers and in-house staff to tag their media library in which they use algorithms to identify ‘taste communities’ for the subscribers using tags and user behavior data (“This is how Netflix’s, 2017). Lastly, from Netflix’s elaborate algorithms, the results come from implicit and explicit data (“This is how Netflix’s, 2017). Implicit data is behavioral data through binge-watching while explicit data is through reviews and providing thumbs up or down after the show or movie is ended (“This is how Netflix’s, 2017).

In addition to developing intricate algorithms to provide recommendations to subscribers, Netflix is finding better quality streaming and unclogging the Internet. By re-coding their media library, they can save up to 20 percent of data which is significant because Netflix usage accounts for a third of all data consumed (“Inside Netflix’s Plan,” 2015). Through an experiment of placing two TVs side-by-side with their existing service and a new bandwidth saving technology, the video algorithms team realized they are looking at this all wrong (Inside Netflix’s Plan,” 2015). Before, Netflix was preparing their video files based on bandwidth available to consumers (Inside Netflix’s Plan,” 2015). Some consumers had bandwidth, slow DSL connections, or fast fiber speeds (“Inside Netflix’s Plan,” 2015). But, Netflix’s team realized that each movie and TV show is different, “You shouldn’t allocate the same amount of bits for ‘My Little Pony,’ as for ‘The Avengers,” (“Inside Netflix’s Plan,” 2015). With their conclusion, Netflix decided that each title should get its own set of rules by giving each title its own encoding settings (“Inside Netflix’s Plan,” 2015). This way, subscribers can watch media content in high-quality resolution and still save on data because of their encoding settings despite the subscriber’s bandwidth connection (“Inside Netflix’s Plan,” 2015). Netflix’s investment to free up internet traffic could be important for phone and cable companies and the internet overall because of their intent to be ‘good stewards’ of the internet (“Inside Netflix’s Plan,” 2015). Netflix’s development of re-coding is also a plus because now that they are expanding globally such as places in India, Africa, and the Middle East, Netflix has to deal with slower wired internet speeds and mobile-first approach (“Inside Netflix’s Plan,” 2015).

Netflix devotes their efforts to high-quality technology to ensure they provide their members receive recommendations that fit their interests as well as content that they were not expected to watch and enjoy. Netflix wants to ensure their consumers that they are always on their minds and in return receive high customer satisfaction (“The Significance,” 2016). Netflix is not able to provide algorithms and high-quality streaming that large investments from the company. Netflix must make sure that the delivery process, postage, and packaging process is just as important as investing in convenient payment systems to make it easy for new subscribers to sign up (“The Significance,” 2016). As a result, in Appendix A, displays their continuous efforts to invest in technology and development. Netflix’s contribution profit dollars slowly declined from 2014 to 2016 but estimates show that will increase in 2017 and 2018. In addition, Netflix’s technology and development expenses increase each year because of online video streaming optimization and them pushing to create even more advanced algorithms (“The Significance,” 2016). Despite the increased expenses, these actions of improvements could lead to more subscribers nationally and internationally and increase operational leverage (“The Significance,” 2016).

Social & Legal Challenges. Netflix is an international online streaming company. Netflix has recently expanded to Europe which includes but not limited to Germany, France, Britain, Scandinavia and the Netherlands to name to a few (“Netflix faces Hurdles,” 2014). Even though people assume as companies expand, they expect growth and profits. However, Netflix faces digital distribution obstacles due to different laws overseas. For example, in France, Netflix is unable to offer their most popular in-house production such as “House of Cards” because France’s Canal Plus television service already has the rights (“Netflix face Hurdles,” 2014). Another example is in Germany, their satellite TV operator, Sky Deutschland, offers many of the popular American series such as the “Game of Thrones” (“Netflix face Hurdles,” 2014). Netflix may have to consider film production in European countries, but this could also lead to high operating expenses in hopes that more people will sign-up for their subscription service.

In addition, obstacles in Europe, Netflix has yet received approval in China to allow online video streaming within the country. China has strict laws on foreign movies and TV shows that have made it difficult to receive support from the Chinese government, “Chinese administrators require all foreign movies and shows to be registered and inspected before they can air online, and Beijing’s censors are known to block the kinds of sexual, violent or political story lines central to some of Netflix’s biggest hits” (“The biggest challenge,” 2016). The Chinese government also requires any online video streaming service to get an approved license from Beijing which is rare to receive (“The biggest challenge,” 2016). Similarly, censorship is important to countries like Israel that certain movies and TV shows are “walled off” and blocked due to the type of content is displayed in the show or movie (“The biggest challenge,” 2016).

The obstacles to let countries release Netflix’s American content is just one challenge they are facing to expand globally. Another challenge Netflix is facing is receiving global licensing from studios. Netflix has received resistance from studios to release media content because regional sales staff do not want to feel marginalized through global expansion “Global Licensing,” 2015). Continuously resentment from studios could cause limited media content which will make it more difficult for Netflix to have a substantial media library that viewers are willing to pay the subscription service. Some other challenges Netflix need to continue to keep in mind is buffering and broadband challenges. With Netflix trying to expand globally, they are dealing with some low-income countries that have lower bandwidths and slower speeds that may cause the quality of the media content to lessen (“How Netflix,” 2017). Also, Netflix must consider data caps and using too much data that may disrupt mobile providers (“How Netflix,” 2017). Netflix is partnering with video encoders to experiment ways to use half a megabit to receive high-quality picture content on a smartphone size screen (“How Netflix,” 2017).

Section Two: The Positioning of the Company to the Challenges Ahead

Many investors and companies question the future of Netflix. Will Netflix survive due to increased competition from Amazon, Hulu, HBO, etc.? Will Netflix succeed in the international market and at the same time dominate the United States market? Can Netflix make enough to be a profitable company? Netflix faces many different challenges in terms of business strategy, competition, technology and social and legal challenges, which will shape the future of the company.

Netflix must focus its strategies on retaining its current customers and appealing to new members in order to stay successful. Firstly, Netflix must figure out pricing strategies. However, with the price of Netflix increasing, that will be difficult. With 100 million members, Netflix must obtain a variety of different content in order to satisfy the wide range of tastes. Just in the last year, Netflix has spent $5 billion on new content (Evans, 2017). Users will want more and more content, and newer content will cost more. Therefore the trend of rising prices Of Netflix’s subscription will continue.

While Netflix may sit on the top of the online streaming world, its competitors are quickly climbing up the ladder. Of these, Amazon may be Netflix’s biggest competitor. According to Joseph Philleo from Quora, the long-term competition from Amazon may hurt Netflix because Amazon has more to offer through their subscription (“Will Netflix,” 2018). He believes that if customers had to choose between the two providers, they would choose Amazon over Netflix. Philleo also discusses that Netflix is considered a “premium” streaming product and that Netflix will develop competition from social media platforms rolling out video and dramatic improvement sin content creation tools (“Will Netflix,” 2018). In addition, Netflix’s continued domination will be determined by future growth in globalization (“Will Netflix,” 2018). Due to variation of laws in different countries, Netflix must overcome cultural challenges that can either make it or break it for the company.

Netflix must keep up with new technology in order to stay relevant in the online streaming marketplace. Netflix prides itself on its personalization and special features that its competitors cannot provide. In 2015, Netflix upgraded its user interface to make the website more user friendly. For example, Netflix changed their rating system from stars to a system that tells users how likely it is that they would like a certain show or movie. This falls in place with their theme of personalization. However, some users still preferred the star rating system. As suggested by Business Insider, Netflix could benefit from connecting to internet services like Rotten Tomatoes or IMDB for rating even though they have their own algorithm (“5 small changes”, 2017). The current Netflix website also automatically plays trailers of new and upcoming shows, usually advertising its Netflix original. This feature could be annoying to many users who wish to skip the trailers and have more control over their homepage. Therefore, Netflix should allow users to control whether or not to play the trailer to improve its user interface.

Netflix has the potential to dominate the world with online video streaming content and in some ways, it already has. Yet, what would solidify they are the top company? One idea is something that recently happened where Netflix released its first “Choose-Your-Own-Adventure” storytelling format from their original series “Stretch Armstrong and the Flex Fighters” (“The Future of Netflix,” 2018). The story is about three heroes and they have to track down villains that escaped and are creating chaos in the city. The twist is if you watch the series on a computer or certain devices, the viewer is able to choose the direction of the action which will lead to multiple storylines and endings (“The Future of Netflix,” 2018). Netflix has created an interactive series where viewers are not just sitting and relaxing but it is actively engaging where the viewer is essentially making their own content. This interactive experience would be a big plus with children because they are more willing to try something new and gaming is hugely popular with the younger audience. In addition, Netflix has been known to offer more teen and adult content which will give Netflix a competitive edge for children. Netflix should continue to explore options to include interactive media content as part of their library because as more people engage with the interactive experience, this would mean more time spent on Netflix, more online streaming, and more people willing to pay for the subscription service.

Netflix can reach its full potential by continuing to expand globally. Netflix needs to create and find family-oriented media content that could be approved by the Chinese government. Keeping in mind production and operation expenses, Netflix would have to create content that is suitable for children in China and present it to the government displaying how they can meet the needs of the censorship and still provide interesting content worth releasing. Currently, Netflix has made a licensing agreement with iQiyi, Baidu’s video streaming service (“Netflix Enters China,” 2017). The platform has over 500 million monthly viewers who uses the free service and 20 million paid subscribers for its VIP service (“Netflix Enters China,” 2017). Netflix is trying to grow its viewer fan base through iQiyi while iQiyi can benefit from Netflix’s original content (“Netflix Enters China,” 2017). Netflix is using this opportunity to showcase their original content and to get their brand out there in China (“Netflix Enters China,” 2017). This could also lead to other licensing opportunities for actual products of TV shows of Netflix because they are adding more original content throughout the year (“Netflix Enters China,” 2017). In the long term, Netflix needs to be a company that can stand alone and generate revenue from subscribers to offset the cost of production.

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Appendix A