At this point in its life cycle, Netflix should have a cost advantage over its primary competitor, Blockbuster, in the video rental business, given its size. When Netflix started, this was not the case, but Blockbuster failed to leverage its pricing power to undercut Netflix, and the latter firm eventually prevailed with a superior business model.
However, Netflix may not have a cost advantage over companies that act as substitutes, such as media vendors Amazon and Wal-Mart. Compared with those firms, Netflix does not have a cost advantage because it lacks the economies of scale over those competitors. Those competitors are at present substitutes for Netflix, but there is the risk that they could become direct competitors. As such, Netflix may wish to become larger in order to improve its buying power in order to become a cost leader in the video industry.
SWOT Analysis
Netflix has among its strengths a large installed base of users, which represents a captive audience. This gives the company economies of scale in purchasing, including distribution services. Netflix also has a strong brand name, having established itself as a leader in online video rentals. In addition, Netflix has been able to build strong relationships with the media industry during the course of its operation, and this gives it access to virtually all important media properties. A key weakness for Netflix is its lack of international representation. This results in constrained growth opportunities. In addition, Netflix is reliant on the video rental business and has no diversification. This was a problem for the company that Netflix eventually displaced, Blockbuster, and could be a problem for Netflix as well given a technology shift.
International expansion represents a significant opportunity for Netflix, since this business model has thus far not been emulated internationally. In addition, there is opportunity for Netflix to grow by moving into shorter content, more suitable for smartphones and other portable devices. In addition, Netflix can also move into music or other media product lines in order to diversify itself. Technological change represents a major threat to Netflix, because it is a one-business company. In addition, Netflix could face competition from larger retailers, should they choose to emulate the Netflix...
Lastly, Netflix has a high degree of leverage at present. If it becomes overleveraged in its quest for growth, the company could have solvency issues in the future.
The SWOT analysis has a fairly close alignment with the financial analysis. Some of what the financial analysis hints at is a company that is seeing slowing growth (increase in debt, slowdown of activity). This corresponds with the constraints that have been noted with respect to U.S.-only operations and a single product line. As the company attains greater economies of scale, it should improve its margins and returns. One area that one might expect to see different from Netflix in its financials is a decline in operating and net margins. At this point, Netflix needs to make investments in building new business lines or other new elements of its business in order to ensure future growth. The growth of these margins indicates that perhaps Netflix is not making such investments, and thus may be vulnerable to threats such as competition or technological change.
Appendix a: Financial Ratios for Netflix 2008-2010
2010
2009
2008
Activity
Average collection period
N/a
N/a
N/a
Days of inventory
48.66
36.80
39.52
Inventory turnover ratio
7.50
9.92
9.24
Leverage
Debt-to-equity
69%
0%
Profitability
Gross profit margin
37%
35%
33%
Net profit margin
7%
7%
6%
Operating profit margin
13%
11%
9%
ROA
16%
17%
13%
ROE
55%
58%
24%
ROI
16%
17%
13%
Works Cited:
Harper, D. (2011). Financial statements: Introduction. Investopedia. Retrieved March 16, 2011 from http://www.investopedia.com/university/financialstatements/
Loth, R. (2011). Financial ratio tutorial. Investopedia. Retrieved March 16, 2011 from http://www.investopedia.com/university/ratios/
