Netflix

Netflix Case Study

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).

Netflix first grabbed the attention of many customers when, unlike the local video rental store, they eliminated due dates and late fees charged by traditional video rental stores. The Netflix model allows customers to pay a monthly subscription fee for which they receive as many movies as they want in a month. The subscribers order DVD’s via the firms website and delivered through the United States Postal Service. Subscribers keep the movie as long as they want and when finished return it to Netflix in a postage paid envelop.

Netflix’s derives a much of their competitive advantage from their ability to offer each subscriber convenience and a personalized experience. The firm’s CineMatch software gathers data from subscribers’ online profiles, movie rental history and a subscriber’s movie ratings to develop a personalize list of recommendations. The recommendations serve to create a customized video rental store for each subscriber. By offering suggestions from the over 75,000 titles the firm provides the subscriber with a significantly increased likelihood that they will find a title that is acceptable. Titles are then added to the firm’s patented dynamic queue system. Subscribers use the queue system to create and modify a prioritized list of movies they wish to see. Subscribers simply return a movie and are shipped the next title in their queue (Netflix SEC).

The CineMatch software also allows Netflix to maximize their library utilization. Increasing the demand for older or smaller market movies not only assists Netflix in better meeting subscriber demand but also decreases the payout of revenue sharing that often accompanies the most popular new releases. Netflix has revenue sharing contracts with most of the major movie studios. Under the agreements the firm pays a percentage of the subscription fees for a predetermined period of time in exchange for receiving the most popular titles at a considerably discount over the whole sale price (Netflix SEC).

Netflix inventory of approximately 75,000 is significantly larger than the average video rental store. The average video rental store has approximately 5,000 titles. Traditional video rental stores rarely stock sufficient copies of popular releases to meet demand. Customers unsuccessfully seeking a particular title may leave without making a selection. The large inventory of creates added customer value through the “library effect” (Laudon 356). The library effect involves appealing to the customer on the basis of the total number of products offered. Netflix has become know for it’s extensive collection of hard to find documentaries, Japanese aniem and independent films.

Providing rapid turnaround of DVD’s to subscribers is key to retaining customers in the online rental market and one of Netflix’s core competencies. Through the use of proprietary software, they simultaneously process returns and deliveries (Null). The software allows the 44 shipping centers to operate on an integrated basis and reduces the shelf time of inventory. While most orders are filled by the subscriber’s regional shipping center, the system allows titles that are locally unavailable to be shipped for more distant locations. On average only about 2% of the inventory in each shipping center remains at the end of the day. The majority of subscribers receive deliveries in one business day.

While the firm has a customer service center located in Hillsboro, Oregon, customers seeking assistance were until recently limited to email contact. A telephone number for customer services was added to the website in December of 2006 (Wikipedia). However, the phone number is not viewable to subscribers who are logged into there accounts. Given the firms customer focus, improving the ability for customers to resolve problems needs to be improved. Contact numbers should be readily available.

Online video rental as a percentage of the total movie rental market is very small with about $200 million in sales out of an $8 billion market. Given the room for expansion of this segment of the industry new entrants into the market are inevitable. The most significant threat to Netflix came in late 2004 with the entrance of Blockbuster Video into the online video rental market. Blockbuster the largest brick and mortar rental-chain combined lower prices, online rental and in-store returns. The entrance of Blockbuster did create initial downward pressures on prices and is likely to slow the growth of Netflix’s subscriber base. Amazon currently operates an online rental service in the United Kingdom and Germany and is expected to expand their operation into the US in the near future. Netflix