Netflix

Case Study
Table of Contents

1. Netflix Business Model Canvas (DVD-by-mail) ..................... 3

2. Netflix Business Model Canvas (VOD) ............................... 4
3. Differences of DVD and VOD Business Models ..................... 5
4. Netflix and Blockbuster Competition ................................. 6
5. Netflix Core Competencies ............................................. 7
6. Effects of VOD on Netflix’s Initial Business Model ................. 8
7. Netflix Partnership Prioritization .................................... 10
1. Netflix Business Model Canvas (DVD-by-mail)
2. Netflix Business Model Canvas (VOD)
 3. Differences of DVD and VOD Business Models
So, the success of Netflix lies in its vision to take huge risks and to look forward. Like in
initial days, the founders were not very much satisfied with their business model and
wanted to initiate some innovative services for their members. Once they observed in
2007 that their rental DVD business is not the future generic strategy for customers as
customers will be looking for some hassle-free products, that time they brought an idea
of streaming and even the internet was not so popular in people. Still, they started
digitalized services by taking the risk. So their risk-taking and innovative idea generation
capabilities took them in the list of one of the best organizations in all over the world.
 4. Netflix and Blockbuster Competition
According to the case and also based on my own knowledge, it is a
general fact that Netflix had and currently has much more competitive advantages than
Blockbuster. One of the major mistakes of Blockbuster was the inconvenience which
they caused to their customers by not allowing them to keep movies longer than 5 days.
Consequently, if a movie was returned late, an additional amount of money (late fee) had
to be paid. In contrast, Netflix managed to avoid that inconvenience by charging a
monthly subscription fee which included renting up to 5 DVDs at a time, no due date
and no limit on the number of DVDs that can be rented within the subscription.
However, the truth is that Netflix actually created a false sense of flexibility to their
customers in terms of pricing since late fees were already included in the subscription fee
itself. Still, the company’s pricing model was much more appealing compared to
Blockbuster’s one where customers had to pay each time they rented a movie.

The key differentiator between Netflix and Blockbuster was customer data. As
mentioned in the case, Netflix strongest advantage was the uniquely customized
experience of each and every customer thanks to Cinematch. Reed Hastings reveals that
one of the key strategies of Netflix was “to keep all the audiences happy because the
more someone uses Netflix, the more likely they are to stay with us”. Because of the
innovative recommendation engine Netflix was not only able to maximise its inventory
and avoid recommending out-of-stock films, but also more personalized the website was
each time a customer visited it. In this way new movies which might appeal to customers
were introduced to them and therefore the risk of renting films they would not enjoy
was reduced.

On the other hand side, Blockbuster was lacking exactly that - the customer data. Instead
the company should have taken Netflix not just as a competitor, but more importantly as
an example and should have focused on the customer own experience. They could have
made a similar system like Netflix which makes a comfortable environment for the
customers to purchase the product and keeps the products available in the store for
greater convenience. Moreover, the company should have developed its website and
started an online tracking system which informs the customers about every new
upcoming movie and the availability of the movie through emails or text messages. Thus,
Blockbuster could have better positioned itself against Netflix by developing its supply
chain, improving the company's reputation and reaching higher customers’ trust level.
 5. Netflix Core Competencies
Some of Netflix core competencies are innovation system (Cinematch
recommendation engine), long-tail selection and variety, convenience and price. Thanks
to the company’s innovative recommendation engine, customers were able to rate the
movies they have watched so that the system can understand their movie preferences and
next time they visit the website, their experience would be more customized. The
biggest advantage for customers was the fact that the more movies they rate, the more
accurate Netflix’s recommendations became. Because of Cinematch, customers had also
the opportunity to watch lesser-known movies. Most customers also saw Netflix as a
convenient service that quickly delivered movies they could keep as long as they wanted.
Not only were there no late fees, but also no due dates. Customers were able to rent as
many movies as they wanted just within the subscription fee without any limitations.
Another convenience was also that they could browse online over thousands of movie
titles from different genres and rent movies without having to leave their house. Unlike
its brick-and-mortar competitor Blockbuster, Netflix has limits of stocking inventory
which actually helped the company provide that large variety of movies.
 6. Effects of VOD on Netflix’s Initial Business Model
Opportunities Threats

offering live streaming online loss of competitive advantage

increase customer loyalty loss of market share

superior technology platform increase in VOD competitors

expand downloadable movie offerings price competition

Internationalization to more countries

VOD has currently occupied our lives to a big extend and therefore has been changing
consumer demand significantly. On-demand live streaming is becoming more and more
popular and no wonder that it will also become the new expected standard of
distribution. As I already mentioned above, it is quite evident that Netflix has a lot of key
areas of strength. Their unique and large number of DVD collections, as well as their
innovative rating system, has been appreciated a great deal by customers. However,
there is always room for improvement. Some of the opportunities which the rise of the
VOD market likely has for Netflix are the option of live streaming online. As Hastings
has said “Our focus is […] becoming a company like HBO that transforms the
entertainment industry” and this is an opportunity for them not only to take the first step
to future innovation, but also to become one of the biggest competitors to HBO. What is
more, as Netlfix already had a strong brand image in the market from past success, they
could increase customer loyalty. Product line expansion is an opportunity which may
also contribute to the customer loyalty but at the same time can attract new types of
customers by offering products such as video games, educational, institutional or even
expand to downloadable movies offerings. In order to keep growing, the company may
also internationalize to more countries and target more customers which may lead to
more pricing power.

On the other hand side, the rise of VOD may also have negative effects on Netflix
business model. One of the biggest threats for the company is the loss of competitive
advantage due to the increase in VOD competitors. Traditional cable companies and also
satellite providers provide on demand service, including number of “free” offerings.
Vongo, CinemaNow and other stand-alone sites already started in online
video business which may be a big price competition for Netflix.
 7. Netflix Partnership Prioritization
Content Providers

ADVANTAGES DISADVANTAGES

close to its core offering

competitive advantage by partnering with

main suppliers of content

market saturated with hardware and device

products

increase selection of titles

Hardware/device manufacturers

ADVANTAGES DISADVANTAGES
allows creating an entry barrier for device
company not in the technology industry
users
provides an alternative revenue stream by
large market of competitors
integrating non-competing partners

not Netflix exclusive devices

Taking into consideration the two tables above, I would say that Netflix should prioritize
partnerships with content providers and stick with the business strategy of delivering
videos/entertainment which is actually allowing the company stay even closer to its core
offering. It can gain a competitive advantage by partnering with their main suppliers of
content that will provide Netflix with access to new and exclusive content. Their current
market is already saturated with hardware and device products. Netflix should increase
the selection of titles and offer more current movies and T.V. shows than the
competitors.
Although being partner with hardware/device manufacturers allows
Netflix to create an entry barrier for device users against any
competition and at the same time provides the company with an
alternative revenue stream by integrating other non-competing partners, Netflix should
not partner with hardware/device manufactures. The company itself is in the video
rental market and not in the technology industry. The market has a huge number of
competitors which will offer no distinct competitive advantage. What is more, most of
the devices are not Netflix exclusive like Roku.