Netflix Competitive Strategy: Five-Forces & SWOT Analysis

Introduction to Competitive Analysis

Porter's Five Forces are widely used to assess and evaluate a business entity's competitive position and strength (Isami, Mustafa, and Latkovikj, 2020). For this reason, they can be successfully deployed in the case of Netflix to assess the strength of the competitive forces the company faces in the subscription video-on-demand market.

Porter's Five Forces Analysis

Threat of new entrants: The market in which Netflix operates is largely profitable, which means it is likely to attract new players keen on claiming a share of the market. It is important to note, however, that barriers to entry are rather significant — particularly in terms of the breadth of content a new player would need to offer in order to qualify as a credible threat to Netflix.

Rivalry among existing competitors: Some of Netflix's key competitors include, but are not limited to, Amazon Prime, Apple TV, Paramount, HBO Max, and Disney. These competitors have the resources, reach, and expertise to make this an intensely competitive marketplace. For instance, Amazon Prime has consistently adapted its streaming services and expanded its title library in order to stay relevant in this space.

Supplier power: Supplier power largely concerns the ability of content owners to vary terms and/or prices. In recent times, Netflix lost one of its most-watched titles — Friends — to HBO, the actual production company, after HBO launched its own video-on-demand service. This illustrates one way in which suppliers can flex their muscles in this industry. Another contested frontier is the exclusivity window — the time it takes for content to become available on streaming platforms following theatrical release. Companies like Netflix have pushed for shorter windows with limited success.

Buyer power: Because players in this industry are constantly seeking new ways to appeal to their subscriber base, buyer power is likely to continue growing. Subscribers demand a wider content scope and lower subscription costs. Notably, subscribers can cancel at any time and most pay on a monthly basis, which places considerable power in the hands of buyers.

Threat of substitute products: At present, Netflix does not face a significant threat of substitution. Subscription video-on-demand services remain popular while the traditional broadcast television model continues to decline, limiting the appeal of readily available substitutes.

Key Growth Drivers and Success Factors

There are three crucial drivers that warrant consideration for rivals competing in the subscription video-on-demand market: innovativeness, the ability to predict future trends, and the ability to identify and respond to customer needs and demands.

Innovation concerns how effectively firms adapt their services to ensure convenience for subscribers while further enhancing the customer experience. The ability to predict future trends is also critical, especially given that this market is heavily influenced by technological change. Companies that can anticipate trends likely to affect growth over the next decade will be better positioned to compete. Finally, customer tastes and demands are not static. The motivations driving subscription decisions are influenced by a wide range of factors, including cost considerations and content scope. Players in this space must remain attuned to these factors in order to avoid losing subscribers to competitors.

Vertical Integration and Competitive Positioning

Netflix's executives have largely been successful in implementing a vertical integration strategy. In basic terms, this is a strategy whereby a company seeks to secure control or ownership of distributors, suppliers, and related entities in order to assert greater authority over the supply chain. One clear example of this approach is Netflix's significant spending on original content over recent years.

As the company noted in its 2020 annual report, if 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). Netflix appears to have recognized that many other media companies would aggressively pursue larger shares of the online streaming market and would likely halt their licensing arrangements with the platform for TV shows and movies. HBO's launch of its own video-on-demand service is a notable example. These considerations likely drove Netflix management's decision to channel a substantial portion of its budget into original content — an approach designed to ensure the company is not edged out of the market as media and production enterprises join the streaming space. This move can therefore be seen as an expression of vertical integration.

Hadida, Lampel, Walls, and Joshi (2021) affirm that Netflix's upstream vertical integration approach has served the company well in entrenching its competitive position. They note this strategy is likely to be copied by competitors, while also highlighting recent examples of Netflix's aggressive expansion, including 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). Furthermore, Netflix's ad-free viewing experience has also strengthened its competitive position. The growing popularity of ad-blocking tools over the past decade signals that most viewers would choose an ad-free experience if given the option.

References

Hadida, A. L., Lampel, J., Walls, W. D., & Joshi, A. (2021). Hollywood studio filmmaking in the age of Netflix: A tale of two institutional logics. Journal of Cultural Economics, 45, 213–238.

Isami, X., Mustafa, N., & Latkovikj, M. T. (2020). Linking Porter's generic strategies to firm performance. Future Business Journal, 6(3), 47–53.

Netflix. (2020). Form 10-K. https://s22.q4cdn.com/959853165/files/doc_financials/2020/ar/8f311d9b-787d-45db-a6ea-38335ede9d47.pdf

Wayne, M. L. (2017). Netflix, Amazon, and branded television content in subscription video-on-demand portals. Media, Culture & Society, 40(5), 79–85.