Capstone

Strategy in Practice Assignment #2

Chapter 4

EVALUATING A COMPANY’S RESOURCES,

CAPABILITIES, AND COMPETITIVENESS

Please read these excerpts derived from the Netflix corporate Web site; then, fully respond to the questions that follow.

Netflix is the world’s leading Internet television network with over 53 million members in nearly 50 countries enjoying more than two billion hours of TV shows and movies per month, including original series, documentaries and feature films. Members can watch as much as they want, anytime, anywhere, on nearly any Internet-connected screen. Members can play, pause, and resume watching, all without commercials or commitments.

Netflix’s Long Term View:

Internet TV is replacing linear TV, Apps are replacing channels, and screens are proliferating.

As Internet TV grows from millions to billions, Netflix is leading the way around the world.

Linear TV is popular, but ripe for replacement.

People love TV content and still watch over a billion hours a day of linear TV.

But people don’t love the linear TV experience, where channels present programs at particular times on non-portable screens with complicated remote controls. Consumers have to navigate through a grid, or use DVRs which add an on-demand layer at the cost of storage and complexity. Finding good things to watch isn't easy or enjoyable. While hugely popular, the linear TV channel model is ripe for replacement.

The evolution to Internet TV apps has begun.

The world’s leading linear TV networks, such as HBO and ESPN, are moving into Internet TV. The ESPN app runs on many Internet platforms and is specifically designed to showcase sports, both real-time and catch up. HBO’s app makes its films and series more accessible than on HBO’s linear channel. The other major linear networks are not far behind.

Internet TV is better than linear TV in ways consumers care about. While Internet TV is only a small percentage of video viewing today, it will grow to replace linear TV because:

1. The Internet is getting faster, more reliable and more available;

2. Smart TV sales are increasing and eventually every TV will have Wi-Fi and apps;

3. Smart TV adapters are getting better and cheaper;

4. Tablet and smartphone viewing is increasing;

5. Internet TV apps get frequent improvement updates;

6. Streaming is the leading source for Ultra HD 4k video;

7. TV Everywhere provides an economic transition for existing networks; and

8. New entrants like Netflix are innovating rapidly and driving improvements.

Eventually, as linear TV is viewed less, the spectrum it now uses on cable, fiber, and over-the-air will be reallocated to expand Internet data transmission.  Satellite TV subscribers will be fewer and more rural.  The value of high-speed Internet will increase.   

This transformation is occurring at different speeds in different nations. In the UK, for example, the BBC is already programming for its iPlayer app as well as its linear channels, highlighting the large and growing viewership on iPlayer. In most countries, the conversion to Ultra HD video is being led by Internet video because Internet services can efficiently serve just the homes with Ultra HD televisions, while linear would have to convert entire markets channel by channel.

The Netflix Focus:

Netflix is an increasingly global Internet TV network offering movies and TV series commercial-free, with unlimited viewing on any Internet-connected screen for an affordable no-commitment monthly fee.

We don’t and can’t compete on breadth of entertainment with Comcast, Sky, Amazon, Apple, Microsoft, Sony, or Google. For us to be hugely successful we have to be a focused passion brand. Starbucks, not 7-Eleven. Southwest, not United. HBO, not Dish.

We don’t do pay-per-view or ad-supported content. Those are fine business models that other firms do well. We are about flat fee unlimited viewing commercial-free.

We are not a generic “video” company that streams all types of video such as news, user-generated, sports, music video, or reality. We are a movie and TV series network.

We are a relief from the complexity and frustration that embody most MVPD [multi-channel video program] distributor relationships with their customers. We strive to be extremely straightforward. There is no better example of this than our no-hassle online cancellation. Members can leave when they want and come back when they want.

We are about the freedom of on-demand and the fun of indulgent viewing. We are about the flexibility of any screen any time. We are about fantastic content that is only available on Netflix.

Winning moments of truth

We strive to win more of our members’ “moments of truth”. Those decision points are, say, at 7:15 pm when a member wants to relax, enjoy a shared experience with friends and family, or is bored. They could play a video game, surf the web, read a magazine, channel surf their MVPD/DVR system, buy a pay-per-view movie, put on a DVD, use a piracy service, turn on Hulu, or they could launch Netflix. We want our members to choose Netflix in these moments of truth.

We win those moments of truth when members expect Netflix to be more pleasurable than their other options, based upon their prior experiences. The pleasure comes from easy choosing, total control over when to play/pause/resume a video, and content that suits the taste and mood of everyone in the household.

We’ll invest over $400M on technology development to continue to improve our service and our app on the very broad range of platforms we support. We put a lot of that emphasis on some core competencies: streaming delivery, sign-up, billing and customer service across more than 1,000 devices being used in nearly 50 countries. Here we strive for operational excellence. Members want Netflix to just work -- flawlessly. On this front, we’re well ahead but have plenty of room to improve. We continue to invest heavily to ensure that our service is always available, our streaming never rebuffers, and our audio-video quality is pristine.

Another area of focus is personalized recommendations and merchandising, which drives what content we feature on a member’s initial screen. For Netflix, the member’s opening screen is the personalized ranking of what we think will be most relevant content for that specific member selected from our diverse catalog. By analyzing terabytes of data from every recent click, view, repeat view, early abandon, page views and other data, we are able to generate a personalized display with the content most likely to please. Our aim is to keep inventing and tuning algorithms to generate higher satisfaction, viewing, and retention.

There are numerous other areas we also are improving, such as how smoothly our scrolling works on an iPad, or how well our kids section works on a PS4.

Competition

We compete very broadly for a share of members’ time and spending, against linear networks, pay-per-view content, DVD watching, other Internet networks, video games, web browsing, magazine reading, video piracy, and much more. Over the coming years, most of these forms of entertainment will improve.

Linear networks have mostly exclusive content against each other, and this is increasingly true for Internet networks. Piracy and pay-per-view are the only two competitors that offer a nearly full set of TV show and movie content.

We call competitors for entertainment time and spending “competitors-for-time”. We call the narrower set of firms that do bid against us for content “competitors-for-content”.

Netflix margin structure and growth

Our domestic margin structure is mostly set top down. For any given future period, we estimate revenue, and decide what we want to spend, and how much margin we want in that period. Competitive pressures in bidding for content would lead us to have slightly less content than we would otherwise, rather than overspending. The same is true for our marketing budget. The output variable is membership growth that those spending choices influence.

The primary forces propelling our growth are our own service, content and marketing improvements, and the improvement of Internet networks and devices. The primary forces impeding our growth are market saturation and the broad set of competitors-for-time all improving their offerings.

Conclusion

If we could look into the future at the ways that people access entertainment, we would no doubt see a very different image than we see today - stunning video quality, a proliferation of screens, yet-unimagined natural user interface, and an unbelievable range of choice.

But if we were to turn instead and look at the person watching that screen, we’d observe a number of similarities across generations. We'd see someone who is taking a moment to escape into a story - to simply relax and enjoy one of life's real pleasures with their friends and family.

People love TV shows & movies. We love being the best possible place to enjoy them. Ours is an amazing opportunity to grow, innovate and lead for several decades. We will face strong competition along the way, and we embrace the challenge.

Netflix Disclaimer:

This document contains certain forward-looking statements within the meaning of the federal securities laws, including statements regarding our outlook concerning the development of Internet TV and the decline of linear TV; the scope, timing and players involved in this transformation to Internet TV; our approach to being an Internet TV network or “app”, including improvements to our service features and content licensing, development and financing; our international expansion; the impact of competition; our relationship with ISPs; our margin structure; contribution margin; and sustainability of profits. The forward-looking statements in this document are subject to risks and uncertainties that could cause actual results and events to differ, including, without limitation: our ability to attract new members and retain existing members; our ability to compete effectively; maintenance and expansion of device platforms for instant streaming; fluctuations in consumer usage of our service; competition; and widespread consumer adoption of different modes of viewing in-home filmed entertainment.

ASSIGNMENT:

Perform a detailed SWOT analysis of Netflix. Please compose your SWOT analysis in continuous prose form (i.e. essay format).

Either following the SWOT analysis that you create, or embedded within it, please answer the following questions as thoroughly as possible. Remember to fully develop your written responses; leave nothing to assumption in the mind of the reader.

1. What are Netflix’s core competencies? How well do these competencies satisfy the four characteristics of VRIN?

2. How does Netflix create competitive advantage?

3. Who are Netflix’s rivals? How does Netflix measure up to its closest rivals? How do Netflix’s internal operations compare to those of this rival?

4. As a consumer, evaluate your personal Netflix, or Netflix-type experience. What changes could Netflix make to better serve its current customers and to attract new customers?

5. What recommendations would you make to ensure that Netflix sustains growth and financial success in the years ahead?