Netflix Case Study Notes

Netflix Case Study

How did Blockbuster create such a strong position in the traditional (brick and mortar) video rental industry?  How did they outperform rivals?  What are their competitive advantages?

• Accurate prediction of consumer demand and good market insight – that movie rentals were primarily

impulse decisions

• Prioritized new movie releases (around 100 copies per store and displayed prominently)
• Strategically expanded to increase coverage and penetration, focused on high visibility stores in heavily

trafficked retail areas

• Revenue share model, Blockbuster paid $5 per copy, rented it out 9 times ($45) then resold the disc fo

        $8, capturing 30% of the profit ($53*0.3 = $15)

Competitive advantages are high visibility locations, large collection of DVDs that centered on new releases, and the value gained from resale

Charged late fees – increased revenue and helped with inventory management

How did Netflix change the rules of the game?  What are Netflix’ competitive advantages? 

• Targeted early technology adopters – benefited from the rapid adoption rate of DVD players in the US, 5% household penetration rate in 99 vs 65% by 2004
• Moved to a prepaid subscription model, turned the longer delivery time into an advantage
• Unlimited movie rentals = great marketing / value proposition for customers
• Captured customers who were disgruntled with the traditional model due to late fees and high cost of paying for each DVD
• Developed a proprietary recommendation system to balance customer demand and bring down cost
• New inventory management system, recommendation rarely included new releases and increase utilization of Netflix’s library
• Netflix’s vast library increased customer trust that their tastes and preferences were accurately reflected in its recommendations – Network effect
• Lowered acquisitions costs by establishing a profit-sharing plan with studios
• With a national inventory system and abundant data, built an inventory that satisfied customer demand but was only 1/3 – 1/5 smaller in size vs a retail chain

Netflix’ strategy has undergone significant shifts as they tried to gain traction and build a strong competitive position. What do their strategic shifts indicate about how their assumptions about the industry kept evolving? Does their strategy need any additional shifts?

Built more distribution centers around the country to reduce delivery time and saw corresponding increases in subscribers

Netflix shifted more towards content acquisition, hoped to enhance its reputation as the highest quality source of independent films