Question

Question 3: Netflix wants to stay ahead of their competitors (for example: Disney+, Amazon Prime Movies, Hulu, and New Zealand companies like LightBox, NEON, etc.). What strategy for growth and downsizing do you think Netflix could use to stay the dominant in the marketplace? Explain your choice. (10 marks – allow ~15 minutes)

Netflix Case: Netflix Uses Technology to Change How We Watch Videos

When Netflix was founded in 1997 in the United States, the movie rental giant Blockbuster had thousands of stores from coast to coast, filled with video cassettes ready for immediate rental to customers (Pride et al., 2018). Netflix had a different vision from this well-established, well-financed competitor. Looking at the recent development of DVD technology, Netflix saw an opportunity to change the way consumers rent movies. The entrepreneurial company built its marketing strategy around the convenience and low cost of renting DVDs by mail, for one low monthly subscription fee.

Instead of going to a local store to pick out a movie, subscribers logged onto the Netflix website to browse the DVD offerings and click to rent. Within a day or two, the DVD would arrive in the customer’s mailbox, complete with a self-mailer to return the DVD. And, unlike any other movie rental service, Netflix customers were invited to rate each movie on the Netflix website, after which they’d see recommendations tailored to their individual interests (Pride et al., 2018).

Fast-forward to the 21^st century. Video cassettes are all but obsolete, and Blockbuster, once the dominant brand in movie rentals, has only one remaining shop in the US as consumer demand has shifted to digital distribution for entertainment (Porter, 2019). In Australia, both Blockbuster and Video Ezy still had a brand presence in 2018 (Pride et al., 2018). Since then, Blockbuster’s last Australian shop closed in March 2019 (Porter, 2019), and Video Ezy exists in the form of vending machines (kiosks) after its shops closed (Rosenberg, 2018).

Both brands have been prompted to reassess their distribution channels. You may notice more DVD rental kiosks such as “Video Ezy Express” popping up in convenient locations, including outside supermarkets and shopping complexes, in a bid to improve brand reach and accessibility. DVD rental kiosks, like online services, are accessible around the clock and reduce many store costs, including wages.

In contrast, by completely eliminating the need for brick-and-mortar stores or kiosks, Netflix has minimised its costs and extended its reach to any place that has postal service and Internet access (Pride et al., 2018). The company still rents DVDs by mail (Monahan & Griggs, 2019), but it has also taken advantage of changes in technology to add video streaming on demand.

Now, customers can stream movies and television programmes to computers, television sets, videogame consoles, DVD players, Smartphones, and other web-enabled devices. One advantage to the company is that streaming a movie costs Netflix less per customer than paying the postage to deliver and return a DVD to that customer.

Netflix’s Use of Technology: From Data-Tracking to Streaming

Netflix made technology a core competency from the very beginning. Because the business has always been web-based, it can electronically monitor its customers’ online activity and analyse everything that customers view or click on.

With this data, Netflix can fine-tune the website, determine which movies are most popular among which market segments, prepare for peak periods of online activity, and refine the recommendations it makes based on each individual’s viewing history and interests. The company also uses its technical know-how to be sure that the website looks good on any size screen, from a tiny Smartphone to a large-screen television.

A few years ago, planning for a significant rise in demand for streaming entertainment, Netflix decided against investing in expanded systems for this purpose. Instead, it arranged for Amazon Web Services to provide the networking power for streaming (Pride et al., 2018).

By 2018, on a typical night in the US, Netflix streaming occupied up to 20,000 servers in Amazon data centres (Pride et al., 2018). Demand was so strong by that time, in fact, that Netflix streaming accounted for about one-third of all internet traffic to North American homes during the evening (Pride et al., 2018). This percentage is only expected to increase. The Australian market, however, may pose technological hurdles, as the National Broadband Network is still being rolled out and is not available in all areas, meaning that accessibility may not be as straightforward as it is in America (Department of Infrastructure, Transport, Regional Development and Communications, n.d.).

Although Blockbuster and Video Ezy are no longer a competitive threat in their traditional form, Netflix does face competition from Amazon’s own video streaming service, Amazon Prime Video, which headed to Australia and New Zealand’s shores in 2017 (Pride et al., 2018).

Other direct competitors include well-established Hulu, YouTube, Nine Entertainment, and

Fairfax media’s joint-venture Stan, and Foxtel’s movie-streaming service Presto. It also competes with other entertainment providers, including cable, satellite, and broadcast television. Foxtel, for example, has dramatically reduced its basic cable packages in an effort to retain its share of the market in face of increasing competition from on-demand services (Pride et al., 2018).

Netflix Offers Exclusive Programming to Customers

To differentiate itself from its competitors, Netflix commissioned exclusive programming such as House of Cards, Arrested Development, and Orange is the New Black. The cost to produce such programs runs to hundreds of millions of dollars (Pride et al., 2018). Between May–December 2019, Netflix added 179 original programmes to its American streaming service, or an average of 30 new shows a month, or about one show per day (Fruhlinger, 2019). Netflix plans to continue pouring money into exclusive content because of the payoff in positioning, positive publicity, and customer retention.

The way that Netflix releases its exclusive programming reflects its in-depth knowledge of customer behaviour. The company found through its data analysis that customers often indulge in ‘binge watching’ for a series they like, viewing episodes one after another in a short time.

Based on this research, in 2013 Netflix launched all 13 episodes of the inaugural season of House of Cards at one time, an industry first (Pride et al., 2018). Executives gathered at headquarters to monitor the introduction, cheering as thousands of customers streamed episode after episode. By the end of the first weekend, many customers had watched the entire series and shared their excitement via social media, encouraging others to subscribe and watch. When Netflix won multiple Emmy Awards for House of Cards, it was another first—the first time any Internet company had been honoured for the quality of its original programming.

One key measure of Netflix’s growth is the strong increase in the number of monthly subscribers. In 2015, Netflix had about 70 million subscribers worldwide, of which 26 million were located outside the US (Pride et al., 2018). In 2019, Netflix had 151 million paid subscribers worldwide (158 million if free trials are included) (Kafka, 2019).

Despite the brand only launching in Australia in March 2015, it already has close to 2 million subscribers in 2018 (Pride, 2018). By July 2019, Netflix had more than 11.6 million subscribers in Australia, up 18% from the year prior (Gruenwedel, 2019) Its closest direct competitor, Stan, had 2.6 million subscribes in early 2019 (Knox, 2019).

Netflix will not say how many subscribers that it has in New Zealand, but a recent survey of 1,000 people, commissioned by the Office of Film and Literature Classification and carried out by UMR Research, found that 72% of respondents subscribed to Netflix. Of the same respondent sample, 77% said they watched television shows and movies using a paid online service (Kenny, 2019).

Keys to Netflix’s successful launch include offering free-trials and access to stripped-back free versions, as well as continued investment in original programming. It appears that streaming is the new broadcasting, and that ‘on-demand’ spells the demise of scheduled entertainment.

Answer 1

Netflix Growth and downsizing Strategy:

• Retaining subscribers through partnerships: Netflix can grow its subscriber base through content distribution partnerships with telecom and pay-TV providers. In India, the streaming giant has partnered with Airtel, which offers a free three-month subscription to its users. Netflix has joined forces in the US with T-Mobile (TMUS) and Comcast as part of their bundling deals. In Europe, it has an agreement with Sky. I believe Netflix should pursue more of these partnerships as a way to expand its reach and offer customers easy access. Also, customers signing up through bundling offers have a lower churn rate. Maria Ferreras, VP of Netflix’s Business Development EMEA, said that these partnerships have helped Netflix take its subscriber numbers to the “next level.”
• Producing Market-specific content: Netflix has stepped up its game on the content front in India. The company has commissioned a host of new local-language films and original series for this market, as Indians reportedly consume 90% of their online content in local languages. This strategy of producing more market-specific content is working, as last fiscal year's revenue growth indicates.
• Netflix Differential Pricing strategy: Netflix is probably on track with this one. It seems to have taken a leaf from Apple’s new iPhone pricing strategy. In July, the company launched a smartphone-only package in India for 199 rupees per month. The price translates to approximately $3 per month, which is about 67% lower than its basic package in the US. India has the world’s second-largest smartphone base, where viewers want quality content at an affordable rate. Last week, Netflix announced an 11% price hike for its premium plan in Australia. The company didn’t change the basic and standard plans. News Corp Australia noted that less than one-third of Netflix’s Australian subscriber base chose the premium plan. Simultaneously, it is offering a discounted rate in broader price-sensitive markets like India.
• Market Penetration: is the main intensive growth strategy of Netflix Inc. in expanding its business operations and multinational market reach. This growth strategy involves selling more of the online company’s streaming services in the markets that the business already has. This growth strategy’s objective of growing revenues and market share depends on how Netflix’s generic strategy maintains competitive advantages to gain and retain more customers in current markets.
• Adding Revenue through Advertising: As Needham analyst Laura Martin said, Netflix could offer an ad-supported service. The company is opposed to advertising, but it can consider a tiered approach to include advertisements on its platform.

  Nomura’s Instinet estimates that Netflix could generate more than $1 billion in ad revenue each year if it launched an ad-supported plan.

• High Performance: Staff who are thus able not only to be part of a working environment, but who play a great game – with the aim of winning it. For Netflix, hiring qualified staff means hiring employees who put the interests of the company first and, as a natural consequence, become high performers.

  Through the ‘keeper test’, the Netflix HR Unit asks Managers which staff they would like to retain at all costs. Those who are not included are paid off. The reason? Hire the best or a “star” as they like to call it.This method encourages employees to perform at their best.

• Context, Not control: Focus on performance and not on rules, stay informal and address increasing complexity through self-discipline and self-assessment. Focus on the necessary rules, like ethical and legal rules and those that prevent major disasters. For Netflix, Managers adhere to the company’s ideals and objectives, they assign clear priorities and set the correct parameters. He or she sets the context and inspires and ensures everyone contributes to the strategies.