Netflix strategy and competitive environment

Introduction
Netflix is a media distribution company. It started with DVD distribution via mail, but has evolved substantially over the course of its existence. Today, Netflix is focused on streaming video. Some of its content is licensed, and some of the content is produced in-house. Netflix originally focused on movies, but today television shows are probably the more common format. Netflix works on a subscription model, where users get unlimited access to content with a paid subscription. This paper will analyze the corporate and business-level strategies behind Netflix as the company exists today, and the state of the competitive market in which the company exists.
Business-Level Strategy
According to the textbook, business level strategy is an approach that a company uses to exploit core competencies to gain competitive advantage. There are several types of business-level strategies that a company can adopt: cost leadership, differentiation, focused cost leadership and focused differentiation. Netflix utilizes the differentiation strategy, because it targets the broad market and does so with a distinctive offering.
The current business-level strategy that Netflix utilizes was the result of a couple of different strategic choices that the company has made in recent years. The company started by using mail to deliver DVDs, but as technology for streaming video improved and allowed for the mass market to adopt video streaming, Netflix became an early mover into that market (SeekingAlpha, 2014). It has since developed a couple of core competencies around that – its ability to deliver streams to customers, and its installed base of subscribers. According to the company's recent announcements, it has around 130.1 million paid subscribers, including 85 million in international markets, which grew at 40% year over year (Trefis, 2018).
There are two other core competencies that Netflix is leveraging. The company began to produce its own content around 2014, and this has become a source of strength for Netflix. Its competitors also produce their own content, but Netflix produces more of it, and it produces content around the world, which has become a core part of its international expansion strategy (Hartung, 2016).
The third core competency is marketing. Netflix has been able to successfully become one of the world's leading brands, and its brand value is now estimated at $8.1 billion, making it the 66th most-valuable brand in the world according to Interbrand (2018). The success of the brand is testament to the quality of the marketing, and now we see Netflix shows becoming household names, actors having their careers springboarded by Netflix programming, and terms like "Netflix and chill" that showcase how the company and its products have entered daily discourse. It actually seems strange to think that they only have 45 million subscribers in America.
This business-level strategy has been incredibly effective for Netflix. First, there is an inherent logic to it. The company deals with streaming technology. Porter's five forces model points out that barriers to entry can help define the profitability of an industry, and high up front cost is one of the main barriers to entry. Netflix doesn't own all of the physical infrastructure it needs to deliver content, but it needs entire buildings of servers, storage, switches, routers, etc. Plus, it needs these all over the world. Then there's the up-front cost to produce content – remember that each piece of content is produced to contribute to an overall content library, rather than to be individually profitable. Major companies like Amazon compete with Netflix and find it difficult, so a start-up would find it almost impossible to enter this market. But these high costs can only be paid for with a massive subscriber base, so Netflix had to serve the mass market. It could not exist as a niche provider.
Netflix's core competencies also support its differentiated positioning. It is differentiated by being global and multilingual. It is differentiated by the massive amount of content that it has, and by its ability to stream that content with almost no hiccups or lag. The latter might be a prerequisite for entering the business, but Netflix was the first, and does it at scale, something that could be a challenge for competitors. Ultimately, however, it is the volume of content in Netflix' library that it converts to competitive advantage by way of differentiation – especially the Netflix-produced shows that nobody else has. When the company has a smash hit, like Stranger Things, that augments the brand differentiation considerably.
Corporate-Level Strategy
According to the textbook a corporate-level strategy is the "specific actions that a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets. Netflix has a low level of diversification, since it really only has the one business, the subscription-based streaming service. There is some degree of following the related diversification strategy, in that there is some vertical integration at Netflix. The company produces its own content, basically as a defense against losing the rights to third-party content. The company is continuing to invest heavily in this vertical integration, building new studios (Shaw, 2018), and setting aggressive growth goals for the production of international content, which it aims to more than double by 2020 (Hopewell & Lang, 2018).
What is interesting is that the text section of corporate-level strategy only really talks about differentiation, and even then assumes that the company has multiple businesses. The models presented do not fit Netflix particularly well. The reality is that Netflix is too young to worry about diversifying. The streaming video thing is only a few years old, and Netflix is still in the process of establishing itself as the global industry leader. That process could take several more years.
The only diversification that Netflix has done, really, is international, where the company has placed emphasis on international growth. As with all forms of differentiation, this has occurred out of necessity – the US market was seeing slower growth and increased competition. Going international, and doing so at pace and scale, has allowed Netflix to extend its competitive advantages to markets around the world. As such, this strategy has helped the company continue to increase revenues and profits at a rapid pace (Yahoo Finance, 2018).
The decision to only diversify internationally has been proven to be the right one for Netflix. First, adding new markets has allowed the company to continue its rapid pace of growth. International markets give it more markets with which to leverage existing content, but also new, fresh sources of content, some of which have proven to be popular in the domestic market as well (Hopewell & Lang, 2018).
Sometimes the decision to focus on what you do best is the right decision. It certainly is when there is double-digit growth still on the table. Diversification is something that introduces significant challenges, because you have to transfer competencies from one business to another. With geographic diversification, you retain your core competencies but transfer them from one market to another. If your competencies are enough to spur growth without trying to transfer them to another business, then you have to follow the path that offers the best prospects for growth. In the case of Netflix, that means a corporate-level strategy not to diversify outside of the vertical integration of developing its own content, and the geographic diversification of pursuing new markets.
Competitive Environment
Recent estimates show that Netflix has around 50% of the on-demand video market, and the #2 competitor is Amazon Prime, with 29% (Statista, 2017). Since that point, Amazon has apparently doubled the number of Prime subscribers and now sits at over 100 million (Spangler, 2018). With Amazon Prime, many subscribers may only take advantage of things like free shipping and therefore might never use the streaming service. But they can, should they so desire – one or two major hit shows would likely entice millions of subscribers who are passive to the video service to check it out. A third competitor, Hulu, is distant third, and this industry is fast becoming a two-horse race, though there is the threat of some other large Internet companies like YouTube, Facebook, Microsoft or Google entering the business, given their sizes and core competencies.
Amazon Prime and Netflix have the exact same market – the global mass market, and the same distribution pathway. Their products are not mutually exclusive to one another, however, and a consumer could have both. Both companies have massive resources – resource similarity does not vary much. Amazon has more money, but Netflix has plenty. Netflix is better at producing original content, especially internationally, but Amazon is capable of closing that gap.
In such a duopoly, competitive rivalry is likely to be high, in this case moderated only by the fact that many consumers can and do subscribe to both services. One competitive reaction that Netflix has taken is to focus on international markets, while maintaining strong content development in North America as well. This approach to content creation, as a competitive response, is an important tactic for Netflix. The company wants to put itself in a situation where if Amazon has a massive hit show, that Netflix-only consumers will not get FOMO because they have so many other shows to watch anyway - a substitute can easily be drawn from Netflix's massive content library. By contrast, while Amazon is building content, it is leveraging the popularity of Prime for things like free shipping and its base of online shoppers to compete against Netflix in streaming video.
There are huge first-mover incentives for these companies, especially in international markets, where they might be the first. Netflix has invested a lot of money into developing content in major foreign markets such as India, Brazil and Europe, in order to win share in the largest markets. There are still some major markets to be targeted, such as China and the Arab world. Amazon is highly likely to adopt this strategy itself, now that it is ramping up its installed base of Prime subscribers substantially. Amazon is enjoying first mover advantage in the international arena, but all told this is a fast-cycle market, and Amazon's response will be swift, and potentially disruptive.
In a fast cycle market, speed is critical. Both companies have massive amounts of money and human resources at their disposal, so responses should be fairly quick. Amazon's international move was a great strategy in this respect, because creating high quality television content takes a bit of time, more than, say building out faster networks or coding web applications. From the time a show is greenlit to the time Netflix knows if it will be a hit or not is well over a year. By moving internationally so early in the game, Netflix has now established the relationships and contacts critical to attracting the best producers, writers and directors in those countries. While doubtless Amazon can spend a lot of money to overcome this, Netflix will enjoy first mover advantage because relationships are critical in the entertainment business, and the reputation of Netflix for supporting international creative talent will stay with the company for a long time. That said, it should not be assumed that this is a source of sustained competitive advantage – the fast pace of the industry all but means that no competitive advantage is truly sustainable, other than brand loyalty.
If this market was a slow cycle market, the strategic choice for competition would not change. Ultimately, despite the fast pace of the market, both of these companies are investing in a long-term strategy, and that long-run strategy would be put into play regardless of the pace of change in the industry.
References
Hartung, A. (2016) Can Netflix double-pivot to be a media game changer? Forbes. Retrieved November 19, 2018 from https://www.forbes.com/sites/adamhartung/2016/04/21/can-netflix-double-pivot-to-be-a-media-game-changer/#29a8ec436402
Hopewell, J. & Lang, J. (2018) Netflix's Erik Barmack on ramping up international production, creating global TV. Variety. Retrieved November 19, 2018 from https://variety.com/2018/tv/global/netflix-erik-barmack-international-production-global-tv-1202976698/
Interbrand (2018) Best global brands 2018 rankings. Interbrand. Retrieved November 14, 2018 from https://www.interbrand.com/best-brands/best-global-brands/2018/ranking/
Seeking Alpha (2014) Netflix is no stranger to the pivot. Seeking Alpha. Retrieved November 18, 2018 from https://seekingalpha.com/article/2080063-netflix-is-no-stranger-to-the-pivot
Shaw, L. (2018) Netflix buying new production studio in New Mexico. Bloomberg. Retrieved November 19, 2018 from https://www.bnnbloomberg.ca/netflix-buying-new-production-studio-in-new-mexico-1.1149041'
Statista (2017) Share of consumers who have a subscription to an on-demand video service in the United States. Statista. Retrieved November 19, 2018 from https://www.statista.com/statistics/318778/subscription-based-video-streaming-services-usage-usa/
Trefis (2018) Netflix projects strong subscriber growth in Q4. Forbes. Retrieved November 19, 2018 from https://www.forbes.com/sites/greatspeculations/2018/10/18/netflix-projects-strong-subscriber-growth-in-q4/#3d0f70573a36
Yahoo Finance (2018) Netflix. Retrieved November 19, 2018 from https://ca.finance.yahoo.com/quote/NFLX/financials?p=NFLX