Management Information System
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ch04netflix.pptxChapter 4
Netflix in Two Acts: The Making of an E-Commerce Giant and the Uncertain Future of Atoms to Bits
Introduction to Netflix
Netflix started as a DVD rental business
Known for best-in-class service
Netflix rightly surmised that digital streaming is the future.
Firm was split into two.
Internet based streaming services.
Traditional DVD by mail services.
Transition from a DVD based service to Internet based video streaming business resulted in:
Drop in customer base.
Drastic fall of share prices.
To bring back profits, the firm:
Aggressively expanded the firm’s customer base, both domestically and internationally.
Sponsored the creation of critically acclaimed, original content.
Netflix: Going Public
By going public, Netflix had to disclose its financial position.
Resulted in two big competitors entering the market: Blockbuster and Walmart
Netflix maintained its lead in the market with:
Constant customer and revenue growth
Record profits
Rising stock price
Brand strength
Brands are built through customer experience.
Walmart and Blockbuster could create brand awareness but couldn’t translate that into an industry advantage.
Netflix remained segment leader as it had:
An early market entry
Effective execution
Scale from the Distribution Network and Selection
Netflix’s nationwide network of automated distribution centers collectively delivered DVDs overnight to a large percentage of the population.
Netflix’s advantage came from the scale of the firm’s selection.
Long tail: Large selection of content beneficial for Internet retailers.
Selection attracts customers.
The internet allows large-selection inventory efficiencies that offline firms can’t match.
The long tail
Products offered
Units sold
Most popular products
(offered by retailers)
The long tail (demand exists, but they are not popular enough for retailers to carry them)
Customer Base
Scale economies can be attained by leveraging the cost of an investment across increasing units of production.
Having a bigger customer base enables firms to:
Have better cost structure.
Have better profit prospects.
Offer better pricing.
Leveraging the Data Asset
User data can be leveraged to provide better customer experience and build brands.
Netflix uses a proprietary recommendation system called Cinematch, which uses software technology known as collaborative filtering.
Collaborative filtering: Classification of software that monitors trends among customers and uses this data to personalize an individual customer’s experience.
Data provided by Cinematch is a switching cost.
Churn rate: Rate at which customers leave a product or service.
Advantages of Cinematch:
Netflix could tailor recommendations based on availability of products and individual taste.
Studios found an audience for their back catalog of movies and television shows.
Atoms to Bits
In the case of Netflix, the shift from DVD-by-mail to the streaming business poses new challenges:
Content availability
Content acquisition costs
The legal and regulatory environment
Potential opportunities for revenue and expansion
Potential partners
Competitors and their motivation
The phrase represents the shift from physical products to digital products
Content Acquisition
First sale doctrine: Ruling that states that a firm can distribute physical copies of legally acquired copyright-protected products.
Allows firms to lend or rent products.
Applicable only to the atoms of the physical product and not to the bits needed in streaming.
Windowing: Content is available to a given distribution channel for a specified time window.
Under a different revenue model.
Film Release Windows
Theaters
Hospitality
DVD
VOD
Pay TV
Ad-Supported TV
Pay TV
DVD Street Date
3 months
4 months to perpetuity
5 months
10 months
28 months
8 years
Source: Reproduced by permission of Netflix, Inc. Copyright © 2009, Netflix, Inc. All rights reserved.
Original Content
Netflix is combating rivals with exclusive content by offering exclusive content of its own.
Acquiring or developing original content is an expensive proposition.
It can give a firm exclusive first-window streaming rights.
Streaming and the Data Asset
User data is used to:
Make accurate recommendations.
Improve user interface design.
Help the firm determine the appropriate cost for acquiring content.
Shape creative decisions in original program offerings.
Make better content investments.
Inform the original content investments that Netflix is making.
Create ultra-tailored audience promotions.
Availability of Netflix top 200
Netflix Top 200
(Top 100 TV Shows
+ Top 100 Movies)
Amazon.com
73
Redbox
12
Hulu Plus
27
Source: R. Hastings and D. Wells, “Letter to Shareholders,” Netflix Investor Relations Document, January 23, 2013.
Netflix Everywhere
Netflix initially wanted its content to be available on television.
Set top box was developed, but impractical.
Software platform was developed and made available to manufacturers.
Made it easier to build apps.
Allowed Netflix to be baked directly into consumer electronics products.
Risks Involved With Streaming
Streaming based business needs a robust and reliable infrastructure.
Internet service providers (ISP) are placing bandwidth caps: limitations imposed by the ISP on the total amount of data traffic that a single subscriber can consume.
