The Foreseeable Financial Outlook on Netflix
Dorothy Dilger
Dr. Javier Fadul
Finance, MBA 645
March 30, 2014
I. Introduction
II. The History of Netflix
A. Discuss how Netflix’s pricing strategy induced the need for change
B. A transition that brings customer satisfaction
III. Netflix Today
A. Adding additional distribution centers to increase DVD delivery lead time
B. How agreements and partnerships helped Netflix to lower their costs
IV. Outside influences creates financial risk
A. Netflix and its competition
B. Relationships with major studios and electronic firms
V. How might financial trends hinder Netflix’s performance?
A. Netflix’s desire to improve streaming services
B. A rapid decrease in DVD subscriptions may cripple Netflix financially
VI. What does the future show for Netflix’s stock?
A. Volatile stock
B. Possible rising costs
C. Opportunities
Reed Hastings, co-founder of Netflix headquartered in Los Gatos, CA, began the company’s operations in 1997 after receiving an enormous late charge from a movie rental he returned long overdue. However, Hastings had the desire to be different than traditional movie outlets; whereas, customers had to drive to the location, pay a certain amount for each movie they rented, and were given a deadline in which to return the movie. Instead of using a method established by other video markets “to attract customers to a retail location, Netflix offered home delivery of DVDs through the mail” which eventually led to a booming business towards streaming forms of entertainment (Shih, Kaufman, & Spinola, 2009, p. 3). Direct and indirect competitors, along with outside obstacles, to a greater extent present a financial threat for Netflix. As a result, Netfl...
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... received from domestic DVD rentals. However, there is concern that rising costs in areas may potentially lead a reduction in earnings-per-share. For example, “internet services providers [are] one of the biggest potential threats to Netflix” at the moment, considering net neutrality (Kriete, 2013, p. 6). Net neutrality simply means wireless providers would charge Netflix more to provide better bandwidth to its subscribers which may cause Netflix to increase consumer prices. However, it could also affect how they compete with other streaming media providers; therefore, influence their bottom line. Accordingly, Netflix’s plan is to develop a working partnership with internet providers that can become a win-win situation for both. Otherwise, Netflix may take a chance in losing subscriber sales; thereby, severely decreasing its earnings per share of common stock.
The video rental industry began with brick and mortar store that rented VSH tape. Enhanced internet commerce and the advent of the DVD provided a opportunity for a new avenue for securing movie rentals. In 1998 Netflix headquartered in Los Gatos California began operations as a regional online movie rental company. While the firm demonstrated that a market for online rentals existed, it was not financially successfully. Netflix lost over $11 million in 1998 and as a result significantly changed the business model in 2000. The new strategy included focusing on becoming a nationally based subscription model and focusing on enhancing the subscribers experience on their website. The change in strategic focus has allowed Netflix to grow into the largest online entertainment subscriptions service in the United States with over 6.3 million subscribers (Netflix).
The leaders of the company knew that they needed to increase revenue in order to be able to provide more content for their streaming service (Wingfield, 2011). By splitting the two services DVD and streaming content apart, Netflix was able to use the profit the DVD service provided, to help fund the increased content the streaming side would need to provide in order to become successful in the future. The splitting of the two services also served to encourage the subscribers to choose one service or the other—and most of them chose the steaming service. Netflix was able to transition these subscribers to their streaming service before a competitor online provider could lure them away (Hartung, 2013). Netflix felt that the streaming service was the future of the company and therefore they needed to make the decisions that would align themselves for that future.
The success of an organization depends on multiple factors. While strategy, human resources and company culture form the key factors for the success of an organization, there are other important factors that are needed to take the organization’s success to the next level.
In this paper I will discuss how Blockbuster video became bankrupt to its competitor Netflix. In 2000, Reed Hastings, the founder of a fledgling company called Netflix, flew to Dallas to propose a partnership to Blockbuster CEO John Antioco and his team. The idea was that Netflix would run Blockbuster’s brand online and Antioco’s firm would promote Netflix in its stores. Hastings got laughed out of the room. We defiantly know what happened next.
Cord cutting is the use of streaming media services like Netflix, Hulu and Sling TV in lieu of traditional cable subscriptions. This trend away from traditional cable subscription presents a significant threat to important revenue streams. One of the key strategies for companies in the cable industry is to offset the costs of expensive services like cable with more profitable services like internet. With significant numbers of individuals ridding themselves of traditional cable subscriptions it will be increasingly difficult to maintain profitability while maintaining a similar level of service. Cable companies face significant threats from companies that offer internet based streaming media services like Netflix.
? Netflix provides a subscription-style e-commerce service. Over 95% of customers pay at least $17.99 a month which includes unlimited rentals with up to three titles at a time. A comparably low monthly fee, allows Netflix to lead market share of online DVD rentals while competing with traditional brick and mortar rental stores. Meanwhile, Netflix might keep the customers who try the service and happy with it continue paying the monthly fee. Therefore, Netflix has fewer problems in predicting revenues.
As the firm moves forward, top managers must pay attention to staying unique to sustain a competitive advantage. Netflix does not own their content, nor do they have any tangible assets. Netflix is a part of a broad range of network users. As technology continues to grow exponentially, Netflix will have to be readily adaptive to change and innovation. Technology never stops growing and evolving, therefore, Netflix’s business platform should never stop growing and evolving. At the same time, they must be careful to remain user friendly and customer centric by keeping the technology at a level where users will not have to obtain a certain set of technological skill sets.
Gamble, J., & Thompson A. A. (2013). Redbox's Strategy in the Movie Rental Industry. In Essentials of strategic management: The quest for competitive advantage (pp. 295-303). New York, NY: McGraw-Hill/Irwin.
Sometimes I really miss video stores; the experience of walking into a huge store filled with shelves of films, TV shows and video games was lost in the upheaval of modern technology taking the lead in entertainment. Now you can simply walk up to a Redbox and choose from a semi limited selection of films and games at a far lower price, but like video stores there is a late fee if your item is not returned on time. Though if you are looking for a larger catalogue there’s always Netflix who’s fully costumed to providing customers with an entirely at home service that takes late fees out of the equation. Netflix started business in 1997 as simply a service for online movie rentals. Two years later they extended their service to a subscription
In 2000, Netflix shifted their goal from DVD rental to steaming video. The company do this with Hastings stating and foreseeing that “DVD is not a hundred year format”. So Hastings introduced online content format so the costumer can watch the video and TV episode in their computer without additional cost. But this system have some problem with their movies stock. So, to increase their movies stock they collaborate with Movie Producer like 20th Century, Warner Brother or Sony Pictures.
The twenty year journey of Blockbuster has not been without bumps, valleys, road blocks, and detours. Blockbuster has come under legal fire from Netflix, a major online competitor, the Free Trade Commission for attempting a host...
Reed Hastings, co-founder of Netflix headquartered in Los Gatos, CA, began the company’s operations in 1997 after receiving an enormous late charge from a movie rental he returned long overdue. However, Hastings had the desire to be different than traditional movie outlets; whereas, customers had to drive to the location, pay a certain amount for each movie they rented, and were given a deadline in which to return the movie. Instead of using a method established by other video markets “to attract customers to a retail location, Netflix offered home delivery of DVDs through the mail” which eventually led to a booming business towards streaming forms of entertainment (Shih, Kaufman, & Spinola, 2009, p. 3). Today, Netflix exists along with several competitors; however, offers the most streaming content available for viewing, and continues to grow its subscriber base both domestically and globally. Although, direct and indirect competitors, acquisition costs, and several barriers present a financial threat for Netflix, the company has managed to grow with the acclamation of partnerships, expand to international territories, and vastly increase its price in shares of stock.
The idea inspired Reed Hastings and Marc Randolph, and then they founded Netflix in Scotts Valley, California in 1997 (Netflix, 2014). The company comes into play by developing a subscription-based streaming platform for movies and television shows. Unlike the traditional movie rental businesses such as Blockbuster and Redbox, Netflix’s innovation offers service via Internet, and it does not have any physical stores but instead delivers DVDs through postal mail in the U.S. Since then, Netflix has become the world’s leading internet television network with constant growth of customers to over 48 millions members in more than 40 countries in the North America, Europe, and the Latin America (Netflix, 2014). In this analysis, the main focus is examining the current market environment for Netflix. It identifies the type of market structure that Netflix is currently competing. The analysis also expands on the competitions, product differentiation, pricing strategy, and measuring the level of easy entry-and-exit.
1. What is the difference between a. and a. Briefly describe each of the four major challenges that Netflix faces. Which challenge is the easiest to address? Why do you need to be a member? The four challenges faced by Netflix are described below.
Netflix was established by Marc Randolph and Reed Hastings in 1997 in California. Initially, the company offered a DVD-by-mail service for a monthly, flat rate subscription fee. Videos were sen...