Netflix Strategy and Market

NETFLIX

Netflix: Questions and Answers

1. How strong are competitive forces confronting Netflix in the market for subscription video on demand? Do a five-forces analysis to support your answer

To a large extent, Porter’s five forces come in handy in efforts to not only assess, but also evaluate a business entity’s competitive position and strength (Isami, Mustafa, and Latkovikj, 2020). For this reason, they could successfully be deployed in the case of Netflix to assess the strength of the competitive forces that Netflix is confronted by.

To begin with, when it comes to threat of new entrants, the market that Netflix operates in happens to be largely profitable. This essentially means that it is likely to attract other players keen on claiming a piece of the pie. It would, however, be important to note that barriers to entry in this case happen to be rather significant in terms of the range of content that a new player would have to provide to qualify as a credible threat to Netflix.

Next, we have rivalry among existing players. Some of Netflix’s key competitors are inclusive of, but they are not limited to; Amazon Prime, Apple TV, Paramount, HBO Max, and Disney. In effect, Netflix’s competitors have the resources, reach and knowhow to make this an intensely competitive marketplace. For instance, Amazon Prime has been consistently adapting its streaming services and offer more titles so as to stay relevant in this competitive space.

Third, with regard to supplier power, this has largely got to do with the ability to vary terms and/or prices. In recent times, we have seen Netflix lose one of their most watched content, i.e. Friends, to the actual production company, i.e. HBO (which could be deemed as the supplier in this case) for the said content following the move by HBO to set up its very own video on demand service. This is just one way in which ‘suppliers’ could flex muscles in this space. Another frontier at this point in time is exclusivity window, i.e. the time it takes for content to transition to video on demand services following release – and after debut in cinemas. Companies like Netflix have been pushing for a shorter period of time with limited success.

Fourth, we have buyer power. Owing to the fact that players in this industry are always seeking new ways to appeal to the customer base, it is likely that buyer power will continue to be further enhanced. This is more so the case with regard to their demand for wider content scope and subscription cost reductions. It would also be prudent to note that in this case, subscribers have the ability to cancel subscriptions at any point in time, and most pay on a monthly basis – which translates to significant power in the hands of buyers.

Lastly, when it comes to threat of substitute products, it should be noted that at present, Netflix does not face significant threat of substitution. This is more so the case given that subscription video services are still the in-thing as the traditional broadcast TV model continues to decline.

2. What do you see as the key drivers impacting growth and key success factors for rivals competing in the market for subscription video on demand?

To a large extent there are three crucial drivers that ought to be taken into consideration on this front. These are inclusive of; innovativeness, ability to predict future trends, and ability to identify and respond to customer needs/demands. When it comes to innovation, this has got to do with how well firms in the market for subscription video on demand adapt the services they offer to ensure convenience for subscribers, while at the same time further enhancing customer experience. The ability to predict future trends is also crucial especially given that this is a market that is affected by technological advances and changes. For this reason, those companies that possess the ability to chart trends that will impact growth within the next one decade will be better placed to position themselves in this increasingly competitive market. Lastly, customer tastes and demands are not static. Thus, the motivations that influence their decision to subscribe could be influenced by a wide range of factors including, but not limited to; cost considerations and content scope and nature. Players in this realm ought to aware of these factors so as to ensure that they do not lose subscribers to competitors.

3. What does a SWOT analysis reveal about the overall attractiveness of Netflix's situation?

In seeking to assess the overall attractiveness of the company’s situation, there would be need to assess the opportunities that Netflix could consider exploring in the marketplace in an attempt to further enhance its revenues. To begin with, the company could consider exploring new markets. At present, the company happens to be a global brand (Wayne, 2017). This is more so the case given that there are multiple markets that it presently serves. However there are some untapped markets that remain largely explored by subscription video services. These are inclusive of populous emerging economies in the sub-Saharan Africa.

Next, it would also be prudent to note there remains a huge marketplace across the world for subscription video services offering localized content. As a matter of fact, as Wayne (2017) points out, the next largely unexplored frontier for experienced and resourceful players in media and related industries is digital multilingual content creation, development, and distribution. This is a frontier that Netflix ought to seriously consider.

4. How have Netflix's business strategy choices strengthened or weakened its competitive position in the streaming video on-demand industry? Discuss how the company's senior management has chosen to increase the horizontal or vertical scope of the firm.

Netflix’s executives have largely been successful in their implementation of vertical integration strategy. In basic terms, this happens to be a strategy whereby an enterprise seeks to secure the control or ownership of distributors, suppliers, etc. in an attempt to assert greater authority on the supply chain. One of the business strategy choices that Netflix has made in recent times, and that is indicative of vertical integration, relates to the company’s spending of a significant chunk of funds on original content over the last two years. Indeed, as the company points out in its 2020 annual statement, in the event that it is unable “to manage the growing complexity of our business, including improving, refining or revising our systems and operational practices related to our streaming operations and original content, our business may be adversely affected” (Netflix, 2020, p. 6). In this case, Netflix appears to have embraced the fact that many other media companies would be aggressive in their pursuit of a larger portion of the online streaming market. For this reason, such companies are likely to halt licensing arrangements with Netflix for TV shows and movies. Indeed, as has been highlighted elsewhere in this text, HBO has already set up its very own video on demand service. Considerations of this nature are likely to have been behind Netflix’s management decision to channel a significant portion of its spending budget to original content. This is an approach likely to ensure that the company is note edged out of the market following the move by some media and production enterprises to join the streaming bandwagon. Towards this end, the move by Netflix to embrace original content could, thus, be seen as an example of vertical integration.

Hadida, Lampel, Walls, and Joshi (2021) are also categorical that the move by Netflix executives to formulate and implement an upstream vertical integration approach has served the company well in as far as the further entrenchment of its competitive position is concerned. This is a move that, as the authors observe, is bound to be copied by other competitors of Netflix despite the fact that Netflix could be deemed the more aggressive player in this case – i.e. with other recent examples in this case being the “October 2018 acquisition of Albuquerque production studio ABQ and deal to set up a permanent UK production hub at Shepperton Studios from October 2019” (Hadida, Lampel, Walls, and Joshi, 2021. p. 214). Further, there would also be need to indicate that the no-ads experience that the company offers its subscribers could also have strengthened its competitive position even further. The growth in the popularity of ad-blocking plugins over the last decade is a clear indication that most persons would opt for an ad-free viewing experience if they had a choice.

5. Has Netflix's increase in scope also been a part of its international strategy? Is the international strategy best characterized as a multi-domestic strategy, global strategy, or transnational strategy? Which strategy for entering international markets should be selected for China?

Netflix’s increased scope could be considered part and parcel of international strategy. The company’s success in the US has been phenomenal since its establishment in the year 2007. As a matter of fact, it was its success in the US that set the stage for the company’s global expansion – with the company first expanding to Canada in the year 2010. As of today, the company serves clients in multiple locations across the world. To appeal to a more diverse clientele, Netflix has had to increase in scope. This is more so the case given that customer presentences and tastes vary across territories. It is important to note that the company has gone as far as propping up non-English language titles in an attempt to be more appealing to its diverse global clientele. Further, localized content is increasingly being considered a highly lucrative frontier. Netflix has also delved into content that happens to be country-specific.

To a large extent, Netflix’s international strategy could be considered a global strategy owing to the fact that the company has films as well as programs that could be deemed appealing to viewers in different territories across the world. However, to the extent that the company seeks to adapt its catalog to different jurisdictions, its international strategy could be considered a multi-domestic strategy. In seeking to enter china, the company ought to embrace a multi-domestic strategy. This is more so the case given that the country happens to have a unique culture which the company ought to be appreciative of to be able to compete with iQiyi (which would be its most potent competitor in the country) in an effective manner. A strategy of this nature would make it possible for Netflix to customize its services in a manner that is appealing to customers in that particular market.

6. What do the data in case Exhibits 1, 2 and 5 reveal about Netflix's financial and operating performance?

As per the presented financial statements, it is clear that Netflix’s revenues have been on an upward trend over the last one decade. Indeed, within the 8 year period between the year 2010 and 2018, the company’s revenues grew by a massive 630%. The company’s operating expenses has also experienced significant growth over the same period of time. To reign in the said expenses, the company could consider outsourcing some of its non-core divisions and/or functions. A look at the company’s long-term debt also indicates that it has tripled over the last three periods captured in the financial statements. The associated interest expense could put further strain upon the company’s revenues going forward.