Netflix case study

CASE STUDY: NETFLIX

ADJUSTMENTS TO THE BUSINESS MODEL
1st : no penalty fee for late return. At first, they allowed the client to rent a certain number of movies per month. They changed later to an unlimited number and 3 movies at the same time.
2nd: implementation of the recommendation system (the subscribers could rate each movie and leave comments). Negotiation with big studios in order to reduce the unitary price per movie in exchange for a fee based on the number of rentals.
3rd: Improvements in the algorithm and recommendations system. Improvements in the delivery time through new distribution centers and a more efficient delivery from USPS. Promotion of independent movies acquiring distribution rights.
SWOT
STRENGTHS:
- First entering the movies rental online
- Brand awareness
- High customer satisfaction
- Big movies selection
- Personalized recommnedations to the customer
- Competitive prices
WEAKNESSES:
- Lack of control on the time of returning the movie
- Big physical inventory and many centers of distribution
- Risks of damage of DVDs
- Huge dependence of USPS
OPPORTUNITIES:
- Broaden the selection to tv series and other kind of entertainment
- Expand to new devices (TV, cell phones…)
- Sell the license of their recommendation system to TV cable providers
- Create a new independent online video business
THREATS:
- Competition from huge companies of the industry
- Fast technology changes
- Piracy and abuse of intellectual property rights

PROBLEMATIC:
What should Netflix do with the new VOD technology?

OPTIONS:
Option 1
Licensing arrangement through which the company would offer its proprietary recommendation system to cable providers
Pros: bypass the technology challenge of connecting computers with TV / Low resources investment to make the transition / Access to the cable customers / Access to the infrastructures of the cable providers.
Cons: Limitation and risk of partnering a competitor / Risks in contracts and relations with cable providers
Option 2
Integrate a streaming online video feature into their core offering.
Pros: increase penetration of the VOD market by continuing to grow its existing business / Diversification in the distribution channel / generate new consumption opportunities
Cons: High investment / Risks of entering new market with a different technology
Option 3
Online video business
Pros: Responds to the industry and the market trend / Allows personalization and bigger interaction with the customer / eliminates the logistic problems
Cons: High transactional and change costs / Risk of implanting a new technology / Exit of its actual core business

RECOMMENDATION:
To take Option 3: create an independent business model based on the online video.
Implementation:
1. Start with a hybrid model offering both services: DVD rent and VOD. Pick up a date to make the full transition (i.e.: 2012)
2. No more investment in physical DVDs: reallocate those resources to acquire online reproduction rights.
3. Promoting VOD technology to their current customers through the web page: the transition must be very easy for the customer.
4. Offer to the customer a huge variety of content (movies, series, videogames...). Being able to offer the VOD service in different platforms according to the customer´s needs (tablets, smartphones, laptop…).