Reference no: EM132867510

Case StudyNetflix: Disrupting the TV industry Adapted from © Rothaermel 2021

In 2019, Netflix had 150 million subscribers worldwide, with 61 million in the United States.The revenues for the media services provider were $16 billion, and its market cap was more than $150 billion. Overthe past decade, Netflix'sstock appreciated some 2,600 percent, while the tech-heavy NASDAQ-100 index grew by "only" 310 percent in the same period. By continuing to innovate on many dimensions, Netflix was able to not only disrupt the TV industry, nut also gain and sustain a competitive advantage. How did Netflix get here?

Netflix started as an obscure online shop renting DVDs delivered through U.S. Mail. After being annoyed at having to pay more than $40 in late fees for a Blockbuster video, Reed Hastings started Netflix in 1997 to offer online rentals of DVDs. At the same time, the

commercial internet was in its infancy; Amazon had just made its IPO in the same year. Streaming content may have been only a distant dream in the era of dial-up internet, but Netflix got a head start by turning from the dwindling VHS format and dealing with DVDs, which were cheaper and easier to mail. An improved business model helped too. In 1999 Netflix rolled out a monthly subscription model, with unlimited rentals for a single monthly rate (and no late fees!). Rental DVDs were sent in distinctive red envelopes, with pre-printed return envelopes. New rentals would not be sent until the current rental was returned.

Even with an innovative business model, Netflix got off to a slow start. By 2000, it had only about 300,000 subscribers and was losing money. Hastings approached Blockbuster, at the time the largest brick-and-mortar video rental chain with almost 8,000 stores in the United States. He proposed selling Blockbuster 49 percent of Netflix and rebranding it as Blockbuster.com. Basically the idea was that Netflix would become the online presence for the huge national chain. The dot-com bubble had just burst, and Blockbuster turned Netflix down cold. Netflix, however, survived the dot-com bust and, by 2002, the company was profitable and went public. Blockbuster began online rentals in 2004, but by this time, Netflix already had a subscriber base of almost 4 million and a strong brand identity. Blockbuster lost 75 percent of its market value between 2003 and 2005. From there it went from bad to worse. In 2010, the once mighty Blockbuster filed for bankruptcy.

Netflix was at the forefront of the current wave of disruption in the TV industry as it began streaming content over the internet in 2007. And itstayed at the forefront. It adjusted quickly to the new options consumers had to receive content, making streaming available on a large number of devices including mobile phones, tablets, game consoles, and new devices dedicated to internet content streaming such as Roku, Kindle TV, Google Chromecast, and smart TVs. At the same time, more and more Americans were signing up for high-speed2 broadband internet connections, making streaming content a much more enjoyable experience. The market for internet-connected, large, high-definition flat screen TVs also began to take off. Within just two years, Netflix subscriptions(then priced at $7.99 per month) jumped to 12 million.

Old-line media executives continued to dismiss Netflix as a threat. In 2010, Time Warner CEO Jeff Bewkes snubbed Netflix, saying, "It's a little bit like, is the Albanian army going to take over the world? I don't think so." Even Reed Hastings called what Netflix provided "rerun TV." But behind their bravado, the broadcast networks were waking up to the Netflix threat. They stopped distributing content to Netflix and instead made it available through Hulu, an online streaming service jointly owned by Disney and NBCUniversal. In 2011, Hulu began offering original content that was not available on broadcast or cable television. With its lowest-cost structure, the networks saw Hulu's streaming model as a way to test new series ideas with minimal financial risk. In response, Netflix announced a move to create and stream original content online.

But not on the cheap. Since content streaming was Netflix's main business, it devoted significant resources to produce high-quality content. In 2013, Netflix released the political drama House of Cards, followed, among others, by the comedy drama Orange Is the New Black and The Crown, a biographical series about Queen Elizabeth II. Netflix followed up with the crime drama Ozark, the science fiction horror show Stranger Things, the teen drama 13 Reasons Why, and other original content. Some of these shows proved tremendous hits and have received many Emmys and Golden Globes.

In 2019, Netflix spent as much as $15 billion on content, more than any other Hollywood studio and media company. Although this sum is enormous, it is not surprising given that the3 cost of creating high-quality original content has skyrocketed. For instance, the hugely successful HBO series Game of Thrones cost some $10 million per one-hour content.

Although hugely successful, by 2019 Netflix found itself facing several forces threatening to undermine its ability to sustain a competitive advantage going forward. First, competition in the streaming media business had intensified significantly. Media content companies such as Disney, AT&T (owners of Time Warner, including HBO), and Comcast (owner of NBCUniversal) were forwardly integrating streaming, offering their own proprietary services. In the future, these media will be less inclined to continue licensing their content to Netflix.

Tech giants such as Apple and Amazon have increasingly pushed into the content business as well, offering their own fully integrated and proprietary solutions. But developing original content is price. In addition to HBO's $10 million per one-hour of content for Game of Thrones, Amazon spends more than $5 billion per year on acquiring content, while Apple TV has also spent billions to build up a library of content. All these companies compete for recurring revenues from tens of millions subscribers in the United States and potentially hundreds of millions overseas. Yet, since each of these proprietary services costs somewhere around $8 to $15 a month, the total number of services a subscriber will pay for is limited. Netflix, for example, now charges $13 a month for its basic streaming service, up from just $8 per month when it was introduced in 2007 (which equates to a more than 60 percent price increase).

Second, and perhaps more challenging, Netflix's growth in its domestic market has been declining. This implies that the U.S. market is maturing, and that Netflix's future growth must come from overseas. To achieve growth in non-U.S. markets, Netflix needs to develop original content targeted for different languages and cultures, such as its original film Roma (2018), a Spanish-language drama set in Mexico City that follows the life of a live-in housekeeper working for a middle-class family. Its director, Alfonso Cuarón, won an Academy Award for best director.

1. How did Netflix use innovation in its business strategy to gain and sustain a competitive advantage? What role did strategy, technology, and business models play?

2. Why is competition in internet streaming services heating up? Who is jumping into the fray, and why? How do these companies differ?