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NETFLIX CaseA Brief history of Netflix 1998-2010
In 1998 Reed Hastings and Marc Randolph had an idea to rent DVDs by mail. They tested the concept by mailing themselves a DVD. The DVD arrived intact, and the idea for Netflix was born. One year later, in 1999, Netflix.com, the first DVD rental and sales site, was launched. The Netflix subscription service was unique, offering members unlimited DVD rentals without due dates, late fees, or monthly rental limits. At the same time, Netflix introduced the first personalized movie recommendation system, using members' ratings on past titles to accurately predict future choices. Only one year later subscription rates of Netflix surpassed 1 million users. The growth of Netflix continued and in 2005 Netflix had 5 million users.
In 2007 Netflix was among the first to introduce a streaming service, allowing members to instantly watch series and films via an internet connection. The new Netflix website feature allowed subscribers to watch one thousand titles instantly on their computers. Blockbuster, Netflix's only competitor and market leader at that time, acquired similar capabilities by purchasing Movielink, a streaming service backed by Universal, Paramount, Sony Pictures, MGM, and Warner Brothers. In May 2008, Roku, a company incubated at Netflix's headquarters, launched a set-top box that allowed Netflix subscribers to watch streaming content on their televisions. Later that year, Microsoft and Netflix announced that the streaming software would be included in an upgrade to the Xbox 360. Over the next three years Netflix made deals to incorporate their software on over two hundred internet-connected devices. But acquiring streaming content was a challenge for Netflix. The film industry had long-term contracts in place with the cable subscription channels. In 2008, Netflix internal strategy department struck a deal with Starz to license content Starz had previously acquired. Content providers, however, soon recognized that Netflix offered them not only a good way to generate revenue from old content, but also the ability to generate interest for current shows. For example, by providing past seasons of "Breaking Bad" on Netflix, AMC (TV cable channel) was able to increase ratings of the current season. Moreover, "Breaking Bad" drew many more viewers on Netflix than when shown originally on AMC. One reason is that Netflix allowed binge watching (of all 62 episodes), without any advertising interruptions.
"The television business is based on managed dissatisfaction. you're watching a great television show you're really wrapped up in? you might get 50 minutes of watching a week and then 18,000 minutes of waiting until the next episode comes along. Id' rather make it all about the joy." - Ted Sarandos, Netflix Chief Content Officer
Recent developments 2010-2020
From 2010 onwards Netflix launched its service in Canada (2010), Latin America (2011) and the UK (2012). In 2013 the series 'House of Cards,' 'Hemlock Grove,' 'Arrested Development' and 'Orange Is the New Black' ushered in the first slate of original series programming. 'House of Cards' goes on to win three Primetime Emmy awards - the first for an internet streaming service. At the same time, the unique streaming features The Profiles and My List debuted on Netflix. However, competition got fierce in the second half of the decade and new features increasing customer experience were copied immediately. In 2015 HBO launched HBO Now as a stand-alone streaming service. In April 2016, Amazon announced that it would begin offering video as a standalone service. Amazon released its first original series "Alpha House" in 2013 and has since followed it by many more including the Emmy Award-winning series "Transparent" and "Man in the High Castle."
In the following years Netflix's growth accelerated. In 2015 membership surpasses 50 million and extends to Austria, Belgium, France, Germany, Luxembourg and Switzerland. Netflix begins streaming in 4K Ultra HD, as the first provider in the market. In 2016 Netflix's first original feature film ('Beasts of No Nation'), first non-English original series ('Club de Cuervos') and first Asian original ('Terrace House') debuted. By 2016, Netflix had 30 films or shows in production and planned to release 600 hours of original content, doubling its 2015 output. Netflix developed from an online streaming service to a global movie manufacturer. Membership extends to Australia, Cuba, Italy, Japan, Spain and New Zealand. In addition, audio descriptions for the visually impaired launch with the movie 'Daredevil.'
In 2016 Netflix expands to 130 new countries, bringing the service to members in more than 190 countries and 21 languages around the world. The Download feature is added for offline and on-the-go viewing. In 2017 Membership hits 100 million members globally. Netflix wins its first Academy Award, for 'The White Helmets.' The introduction of interactive storytelling and the Skip Intro button gives members more choices to tailor their viewing experience. In 2018 Netflix is the most-nominated studio at the Emmys, winning 23 for series including 'GLOW,' 'Godless' and 'Queer Eye.' On top, in 2019 Netflix wins four Academy Awards, for 'ROMA' and 'Period. End of Sentence,' and debuts its first original animated film with 'Klaus.' Due to the fabulous success of its own productions new production hubs open in London, Madrid, New York and Toronto.
In 2020 Netflix introduces new features. For example, the Top 10 lists debut, allowing members to see what's popular for the first time. Furthermore, Netflix is the most-nominated studio at the Academy Awards and Emmys in 2020. However, while Netflix clearly offers a valuable and constantly renewed collection of movies and series, capital-intensive competitors such as Amazon that copy features right away make advantages not sustainable. Overall, Netflix has reached 195 million subscribers and remains the clear number one in the market. (Amazon Prime: 142 million subscribers in 2020, HBO Now: almost 42 million subscribers in 2020;).
Current Challenges 2020 and beyond
Relevant content - Netflix plans to spend $6 billion on original and licensed content. The majority of this spending goes towards television shows and movies licensed from others. For example, Netflix has global licensing agreements for Fox's "Gotham," AMC's "Breaking Bad," and ABC's "How to Get Away with Murder." Within the next few years, Netflix aims for half of its content be original. "For a dollar spent and an hour viewed, you get more hours of viewing per dollar spent on original programming versus licensed content," noted Netflix's Ted Sarandos in 2015. As Netflix expands worldwide, it has invested in global originals such as: "The Crown," "Marseille," and "Narcos." Netflix is also making forays into unscripted (reality) television. Netflix has avoided sports and news content, but is pushing children's programming. About 20 of Netflix's 70 upcoming global originals are intended for children. As competitors like Amazon Prime invest more in content, Netflix will be competing not only for viewers, but also for talent. "It's a race, but there are going to be many winners," opined Hastings. "If you can build an iPhone app, you start a TV channel. We are going to have to see how that plays out."
Reliance on Amazon Webservices- Netflix relies upon Amazon Web Services to operate certain aspects of our service and any disruption of or interference with the use of the Amazon WebServices operation would impact Netflix operations and the business would be adversely impacted. Amazon Web Services ("AWS") provides a distributed computing infrastructure platform for business operations, or what is commonly referred to as a "cloud" computing service. Currently, Netflix runs the vast majority of their computing on AWS. The Netflix annual report states: "Given this, along with the fact that we cannot easily switch our AWS operations to another cloud provider, any disruption of or interference with our use of AWS would impact our operations and our business would be adversely impacted. While the retail side of Amazon competes with us, we do not believe that Amazon will use the AWS operation in such a manner as to gain competitive advantage against our service, although if it was to do so it could harm our business."
Piracy-based video offerings - Changes in competitive offerings for entertainment video, including the potential rapid adoption of piracy-based video offerings, could adversely impact the business. The market for entertainment video is intensely competitive and subject to rapid change. Through new and existing distribution channels, consumers have increasing options to access entertainment video. The various economic models underlying these channels include subscription, transactional, ad-supported and piracy-based models. All of these have the potential to capture meaningful segments of the entertainment video market. Piracy, in particular, threatens to damage Neflix's business, as its fundamental proposition to consumers is so compelling and difficult to compete against: virtually all content for free.
Questions
a) Please compare Netflix's competitive advantage in its early history (1998-2010) with its later development (2010-2020) by using Barney's VIRO framework. Based on your analysis what kind of competitive advantage did Netflix have in its early history and what kind in its later development? Please make sure that your analysis is explicitly based on relevant theoretical concepts and case information (one piece of evidence from the text per VRIO dimension is sufficient).
b) Netflix faces a variety of challenges in the future. Based on these challenges please briefly describe two competitive forces that Netflix has to consider in the future (according to Porter's 5 Forces framework). Is it sufficient to judge the attractiveness of the streaming industry based on two forces? Why or why not?