Netflix Competitive Advantage Analysis

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1. Introduction

Netflix, founded in 1997, is a young company which has capitalised on the ever-increasing appetite for on-demand entertainment. With $8.8bn in revenues for 2016, y-o-y growth of 30%, and over 109 million members globally, it is the market leader for in its field. (Netflix, 2017) Their product mix includes licenced content and original production offering a mix suitable to all subscribers.

2. Corporate Strategy

Netflix is a 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. (Long Term View, 2017)

3. Scope of the Firm:

3.1 Internet providers

Netflix, from its outset, utilised the internet as a medium to reach its subscribers. From its initial catalogue of content which was then dispatched through the postal service, to the current streamed content. (See Appendix 1) The dependence on Internet Service Providers (ISP’s) has impacted the delivery of its content in the past, now controlled under the Net Neutrality order. (See Appendix 2) However, Netflix and other service providers remain at the mercy of ISP’s if the order were to be removed through deregulation.

This downstream vertical boundary is likely to remain. The task of delivering internet service across a global network falls on a core group of providers. These have economies of scale, the ability to deliver all internet based services through one connection. They further diversify by delivering multiple other resources such as telephone and traditional TV services. The incentive simply does not exist to design, build and implement a solitary Netflix delivery system, a cost ineffective integration.  

3.2 Creating original content

Since Netflix’s infancy, their greatest expense has always involved the procurement of the latest material from studios. This vertical boundary left Netflix at the mercy of studios, continuously being subjected to increased licence costs, as a direct result of their success and growth. (See appendix 3) Further, some now see Netflix as a direct competitor, removing their right to their content, Disney integrating with ESPN and its streaming service. (Castillo, 2017) Netflix saw a movement higher in the vertical chain as a key to protecting their long-run success.

Content is the key to both attracting, and crucially, retaining subscribers. Utilising their deep funding pool, Netflix began developing original material in a bid to secure a greater control over the sources of its content. The payoffs are twofold: the shows can be licenced to create an additional revenue stream, and it will make Netflix a service which people feel they have a subscription with. If the original content is the only place to find shows such as House of Cards and other future projects, they retain subscribers.

“Ted Sarandos wants “to become HBO faster than HBO can become Netflix”

(Salmon, 2013)

This is a statement of intent by Sarandos, to survive they must adjust. As highlighted by the fallout between Disney and Netflix, the competition is increasing in the on-demand entertainment providers and Netflix. Competitors see the decline in traditional TV, seeing the future in the flexible viewing available through on-demand entertainment.

3.3 Analysis of their M&A history

The acquisition of Millarword, is the first in Netflix’s history. Millarworld will complement their strategic move into original content, with much of their work restricted to comics. Netflix sees this as an opportunity, like an untapped oil well, to transform the comics into TV Show and movie phenomenon’s. (See appendix 4)

Mark Millar – “[Netflix] would help us take Millarworld’s characters and turn them into global powerhouses”

(Wile, 2017)

Their vision is to mimic the success of past comic related productions and the significant returns associated. Marvel, an original creator of the likes of Spiderman and X-Men but had licenced these off, has returned over $12bn at box office in the last decade off its other characters. (Cain, 2017) Netflix hope to follow this success of developing the lesser known characters through to franchise behemoths.

4. Competitive advantage

Netflix generic strategy – “grow our streaming membership business globally within the parameters of our profit margin targets” – (Appendix 5)

The key to a competitive advantage is sustainability. Through Kay’s distinct capabilities, Netflix’s strengths and weaknesses become apparent. (See Appendix 6) Netflix’s reputation and the consistent delivery of high-quality, current content and the relative dominance over competitors, gives a competitive advantage at present. Is it sustainable however?

As mentioned previously, competitors are entering the market and investing heavily in content, some removing their content from Netflix to promote its service. (Castillo, 2017) The generic strategy of growth will only last while new markets are available. As shown in appendix 1, only China is remains unexploited. The US market is almost fully saturated, this is a sign of the long-term future of the global market. Netflix is relying on growth to cover the increasing content costs. (See appendix 3). Once saturated this strategy will become an inefficient at protecting market position and margins. They will either need to cut costs or increase the monthly subscription.

Weaknesses above and below on the vertical chain could also diminish their advantage. They are at the mercy of these providers; Netflix’s success only encourages increases in procurement costs from these third parties and pressure from ISP’s. Further deterioration in relationships could cause difficulties in the medium to long run.

5. Conclusion

Netflix has a defined corporate strategy, one which has the potential to guide the company to success over the long term. The decisions made to date have resulted in strong financial and subscriber growth. As highlighted within the report however, it faces increasing challenges with an ever-increasing number of competitors entering the market. Further acquisitions and development of original content can protect their advantage and make Netflix a must have in households throughout the world.

6. References

  • Cain, R. (2017, 07 10). The Marvel Cinematic Universe Just Topped $12 Billion In Worlwide Box Office. Retrieved from Forbes.com: https://www.forbes.com/sites/robcain/2017/07/10/the-marvel-cinematic-universe-has-now-topped-12-billion-in-total-worldwide-gross/#51476f077759
  • Castillo, M. (2017, 11 01). Disney will pull its movies from Netflix. Retrieved from CNBC.com: https://www.cnbc.com/2017/08/08/disney-will-pull-its-movies-from-netflix-and-start-its-own-streaming-services.html
  • Dunn, J. (2017, 04 12). Net Nutrality. Retrieved from businessinsider.com: http://uk.businessinsider.com/fcc-ajit-pai-net-neutrality-internet-association-google-facebook-netflix-2017-4?r=US&IR=T
  • Long Term View. (2017, 10 25). Retrieved from Netflix.com: https://ir.netflix.com/long-term-view.cfm
  • Lovett, J. (2017, 10 25). Millarworld-Netflix. Retrieved from comicbook.com: http://comicbook.com/comics/2017/08/07/millarworld-netflix/
  • Molla, S. O. (2016, 10 18). Netflix risky expedition. Retrieved from bloomberg.com: https://www.bloomberg.com/gadfly/articles/2016-10-18/netflix-gambles-u-s-profits-on-pricey-global-ambition
  • Netflix. (2015). Netflix Annual Report 2014. Los Gatos, California: Netflix.
  • Netflix. (2017). Netflix Annual Report 2016. Los Gatos, California: Netflix Inc.
  • Netflix Acquires Millarworld. (2017, 08 07). Retrieved from ir.netflix.com: https://media.netflix.com/en/press-releases/netflix-acquires-millarworld-1
  • Netflix, I. (2017, 01 18). Long term view. Retrieved from ir.netflix.com: https://ir.netflix.com/long-term-view.cfm
  • Salmon, F. (2013, 06 13). Why Netflix is producing original content. Retrieved from reuters.com: http://blogs.reuters.com/felix-salmon/2013/06/13/why-netflix-is-producing-original-content/
  • Wile, R. (2017, 08 07). Netflix buys Millarworld. Retrieved from time.com: http://time.com/money/4889565/netflix-buys-millarworld-mark-millar-kickass-kingsman/
  • Zappe, F. (2017, 01 10). Diffusion of Netflix. Retrieved from SlideShare.com: https://www.slideshare.net/FelixZappe/the-diffusion-of-netflix

7. Appendices

Appendix 1

Source: (Zappe, 2017)
Source: (Molla, 2016)

Appendix 2

The conflict arose through the high demand placed on the broadband infrastructure as Netflix increased in popularity. The perceived disproportional usage by Netflix subscribers relative to overall demands on traffic caused the ISP’s to slow the speed of Netflix related content. This directly impacted the quality of product delivered and the fight over Net Neutrality began. The current Net Neutrality order, introduced by the US government, states “your internet provider cannot slow down a Netflix, YouTube, or any other service and give other websites and apps preferential treatment, nor can it charge internet companies for faster access.” (Dunn, 2017)

Appendix 3

Source: (Netflix, 2017) (Netflix, 2015)

Appendix 4

Source: (Netflix Acquires Millarworld, 2017)

Appendix 5

Source: (Netflix, 2017)

Appendix 6

Kay’s Distinct Capabilities

Reputation

Netflix, through consistent advertising and marketing, has maintained its reputation of high-quality content. The use of an introductory offer, one free month’s subscription, gives subscribers the opportunity to experience what Netflix has to offer. Further, the professional accreditation received for the quality original content gives support to claims of a superior service.

Innovation

Netflix’s original competitive advantage through providing a streaming service has unfortunately been eroded through imitation. Amazon, Hulu and others have entered the market. There key advantage to retain subscribers is the recommendation algorithm which tailors the content suggestions based on past viewing history and associated content.

Architecture

Netflix has a distinct advantage over its rivals through the strong relationship with current subscribers. In mature markets as the US, Netflix has saturated the market. Crucially, it is not losing subscribers to competitors. Once Netflix maintains customer satisfaction, subscribers will be less willing to pay for two on-demand subscriptions restricting the growth of competitors.

The relationship with those above and below on the vertical chain and is an area of weakness. They are under the mercy of the creators and the prices they set for their content. They have no real bargaining power to try and gain the best price possible. Further, they are reliant on ISP’s to deliver the content and the Net Neutrality Order to keep the quality to Netflix’s desired standard.

 

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