Corporate Strategy Exam Project

Copenhagen Business School, Autumn 2014

Group 2

November 20, 2014

No. of characters (w. spaces): 31500

Students

Ingveldur Anna Sigurgeirsdóttir (160492-3952) Ioanna-Christina Petsa (140694-3840) Jing Jie Ang (100592-3693) Jing Petersen (020376-4138) Joshua Geron (040991-4055) Professor

Stig Hartmann

2

Table of Contents

1 Introduction......................................................................................... 4

2 Mission, Vision and Goals .................................................................... 4

3 External Analysis .................................................................................. 4

3.1 Industry Definition ............................................................................................. 4

3.2 PESTEL Analysis .................................................................................................. 5

3.2.1 Political and legal ......................................................................................... 5

3.2.2 Economic....................................................................................................... 5

3.2.3 Social ............................................................................................................. 5

3.2.4 Technological ................................................................................................ 6

3.2.5 Environmental .............................................................................................. 6

3.2.6 Summary of the PESTEL analysis .................................................................. 6

3.3 Megatrends, Inflexion Points and Weak Signals ............................................... 6

3.4 Porter’s Five Forces Analysis ............................................................................. 7

3.4.1 Threat of New Entrants: Moderate .............................................................. 7

3.4.2 Competitive Rivalry: Low .............................................................................. 7

3.4.3 Bargaining Power of Buyers: Low ................................................................. 7

3.4.4 Bargaining Power of Suppliers: High ............................................................ 7

3.4.5 Threat of Substitutes: Strong ........................................................................ 8

4 Internal Analysis .................................................................................. 8

4.1 Corporate Center ............................................................................................... 8

4.2 Resources and Competencies ............................................................................ 8

4.3 Value Chain Analysis .......................................................................................... 9

4.3.1 Primary activities .......................................................................................... 9

4.3.2 Secondary activities .................................................................................... 11

5 Recommendations ............................................................................. 12

5.1 Innovation Strategies....................................................................................... 12

5.1.1 Partnership with linear TV providers and ISPs ............................................ 12

5.1.2 Expansion of original content offerings ...................................................... 13

5.1.3 Development of superior viewing platform to win “moments of truth” .... 14

5.2 Globalization Strategy ..................................................................................... 14

6 Conclusion ......................................................................................... 15

7 Limitations ......................................................................................... 15

3

8 References ......................................................................................... 15

9 Appendices ........................................................................................ 19

9.1.1 Appendix A: Netflix streaming content obligations .................................... 19

9.1.2 Appendix B: Share of shows streamed ....................................................... 20

9.1.3 Appendix C: SWOT analysis ........................................................................ 20

9.1.4 Appendix D: Porter’s five forces visualization ............................................. 21

9.1.5 Appendix E: Organisational structure ......................................................... 22

1 Introduction Netflix is the world’s leading online streaming media company. By entering licensing

agreements with major film studios, Netflix is able to distribute movies and TV shows online. Based

on a low monthly price, subscribers can watch as much as they want from the content library, as far

as they have an Internet connected screen.

In 1997, Reed Hastings and Marc Randolph founded Netflix in California. The business

started with offering mail order DVD rentals and sales. In 2007, Netflix introduced streaming, which

allows members to watch TV shows and movies instantly. Based on Netflix’s rich and popular

content, such as “House of Cards”, and convenient access, this business area has turned into a

success – surpassing DVD rental revenue. Today, Netflix has over 50 million subscribers globally, with

30 million of them in the domestic market, USA. Furthermore, it has become one of the largest

online content distribution companies (Grant, 2004).

In today’s market, there are several risk factors that Netflix faces and needs to handle to be

competitive in the future, some of these risks are the high licensing costs for the content they host,

high reliability on other sources for streaming to customers devices and the need to constantly

improve and innovate their corporate strategies (Netflix Annual Report, 2013).

2 Mission, Vision and Goals Netflix has stated their mission is to grow the streaming subscription business domestically

and globally. Specifically, Netflix has stated their intention to “continuously improve the customer

experience, with a focus on expanding our streaming content, enhancing our user interface and

extending our streaming service to even more Internet-connected devices, while staying within the

parameters of our consolidated net income and operating segment contribution profit target”

(Netflix Annual Report, 2013).

Moreover, Netflix CEO Reed Hastings has publicly stated four goals that he considers

instrumental to achieving his vision for Netflix. These include becoming the best global

entertainment distribution service, licensing entertainment content around the world, creating

markets that are accessible to film-makers, and helping content creators around the world to find a

global audience (Forbes, 2011).

3 External Analysis

3.1 Industry Definition A broader industry for Netflix’s business is online content distribution. The first wave of this

industry started between 1997 and 2001 by a number of small firms. They did not turn into success,

5

as they were ahead of the time and the market was not ready. From 2001 to 2006, film studios tried

to distribute their content directly through the Internet, but they failed to establish a profitable

business model. From 2007 until today, the market went into the maturity stage (Cunningham &

Silver, 2013).

The market competitors in this industry are YouTube, Apple, Amazon, Netflix, Yahoo,

Facebook and Hulu. Netflix’s business is mainly Subscription Video on Demand (SVOD), where it

streams movies and TV shows to its subscribers. Its primary competitors in the domestic market are

Hulu and Amazon.

3.2 PESTEL Analysis 3.2.1 Political and legal

In terms of political and legal landscape, Netflix is affected by any change in copyright laws.

Such changes can make distribution of movies and TV shows to members problematic. Moreover,

problems can arise from current tax differentials between online service and brick-and-mortar DVD

sales as new regulations seek to reduce this gap (Netflix Annual Report, 2013).

A recent issue that represents a significant threat to the SVOD industry is that of net

neutrality. Net neutrality refers to laws that require Internet service providers (ISPs) to treat all data

on the Internet equally. In the absence of such a law, ISPs can intentionally slow down

communications for websites such as Netflix. In the US domestic market, Netflix has been forced to

pay Comcast significant fees so as to avoid Comcast intentionally slowing down the traffic of Netflix

(Lee, 2014). The potential for additional ISPs to impose such levies on Netflix therefore represents a

significant risk factor (Kriete, 2013).

Finally, changes in laws regarding personal data usage could affect Netflix’s ability to

leverage member data.

3.2.2 Economic The customer’s income is a crucial factor for the industry that Netflix operates in. Revenue is

highly sensitive to economic conditions as consumers may consider online streaming a luxury item.

Therefore, the improvement in economic conditions since the financial crisis could increase future

revenue. Importantly, the ability of Netflix to sustainably offer Netflix at a low monthly cost gives

Netflix a competitive advantage (Ball, 2013). Finally, Netflix’s revenue is affected by foreign

exchange volatility due to the need to repatriate earnings (Netflix Annual Report, 2013).

3.2.3 Social In terms of social landscape, demographic changes and changes of the way that people

consume traditional media versus digital media are challenging factors for Netflix to adjust the

content for all ages. Furthermore, increased access to electronic devices is affecting Netflix’s access

6

to each market while privacy is a significant issue that affects Netflix’s ability to leverage member

data. Indeed, disclosure of member data could have negative impact on its business and reputation.

Finally, the increasingly large amount of consumers resorting to online piracy represents a strong

threat to Netflix (Netflix Annual Report, 2013).

3.2.4 Technological Netflix’s ability to stay relevant in the online streaming market is highly affected by

developments in technology. In particular, Netflix must develop and maintain apps for the plethora

of new devices used by consumers to view media – such as smartphones, tablets and smart TVs.

Importantly, growth of internet-connected devices, including TVs, computers and mobile devices has

increased consumer’s acceptance of Internet delivery of entertainment video (Gallaugher, 2014).

3.2.5 Environmental The environmental factor is not a significant one for Netflix as most of its production

facilities happen online. It is furthermore a good sign for Netflix that the transition of Netflix from

physical DVD’s to online streaming is less wasteful for the environment (Netflix Annual Report,

2013).

3.2.6 Summary of the PESTEL analysis Economic and social are the most important factors for Netflix and can contribute to its

growth or can cause a lot of problems if neglected. As shown in the SWOT analysis in appendix C,

changing consumer consumption habits and changes in economic conditions have created both

opportunities and threats for Netflix.

3.3 Megatrends, Inflexion Points and Weak Signals A number of significant megatrends will affect the SVOD in the future. Firstly, changes in

population demographics create the need for Netflix to innovate in order to stay relevant. In

addition, the change to online distribution that occurred because of the development of the

technology promotes innovation and challenge Netflix to keep up with the changes in the future

(PWC, 2014). Moreover, the business models, which promote licensing, online services and open

innovation create new industries (Forbes, 2013).

As for inflexion points, Netflix created its own streaming service after taking down

Blockbuster since dealt with customer’s problems such as physical distribution of movies (McClead,

2013). Another inflexion point for Netflix is when they created their own original series that each

season released the same day. Netflix negotiates costly licenses with their partners and changes in

the industry because of technology create weak signals for Netflix (Kelleher, 2012).

7

3.4 Porter’s Five Forces Analysis 3.4.1 Threat of New Entrants: Moderate

Entry into the subscription video-on-demand (SVOD) is unregulated and requires low capital

costs relative to “brick and mortar” firms. As such, there are minimal economies of scale. Moreover,

there is minimal product differentiation within the industry as consumers are primarily concerned

with choosing a SVOD provider with popular titles and reasonable prices.

The primary barrier of entry consists of high content acquisition costs. Indeed, as shown in

appendix A, Netflix alone has approximately USD $7 billion in streaming content obligations. Given

the long-term and exclusive nature of content licenses, this presents a significant barrier of entry for

new entrants.

3.4.2 Competitive Rivalry: Low The SVOD industry represents an oligopoly with only a few players dominating the market.

Netflix is facing little rivalry in the market and has enjoyed a virtual monopoly in the SVOD market –

with 89% market share of shows streamed in Q1 2013 (Group, 2013). However, as shown in

appendix B, Netflix lost 4% market share from 2012 as a result of competition from Hulu and

Amazon. This trend may continue and decrease Netflix market share in the future as competition

rises in the industry.

3.4.3 Bargaining Power of Buyers: Low As the Netflix client base consists primarily of household users, there is virtually no

opportunity for individual buyers to negotiate pricing with Netflix. Netflix currently has more than 50

million subscribers in nearly 50 countries (Netflix, 2014). This goes to show that consumer has a very

low bargaining power in this industry. However, Netflix is constrained in its ability to set high prices

as it is virtually costless for households to switch between online streaming providers.

3.4.4 Bargaining Power of Suppliers: High Netflix acquires its online video content through licensing agreements with studios. Studios

who license streaming content are in full control of the terms and conditions with Netflix and have

the option to rescind availability of the content at will. Furthermore, firms in the SVOD industry are

highly dependent on their suppliers for online content and even with the contract, suppliers still

maintain the ownership over the end-product. Different suppliers have different content to offer,

hence, even though there are various big players in the content licensing industry, suppliers still

have a high bargaining power.

Indeed, given the strong push of competitors such as Hulu and Amazon to acquire

content rights, Netflix has minimal ability to negotiate low prices. Aside from content providers,

firms may outsource their server and content storage to other companies. For example, Netflix relies

8

upon Amazon Web Services for the vast majority of its computing. Given this, along with the fact

that they cannot easily switch their AWS operations to another cloud provider, any disruption of or

interference with their use of AWS would impact operations and business would be adversely

affected.

3.4.5 Threat of Substitutes: Strong The threat of substitutes is very strong in the SVOD industry. Indeed, consumers may select

from many entertainment formats including theatres, broadcast television, music, video gaming and

so on. Many of the contents are available on electronics such as smart phones and computers. These

devices that consumers are using are also substitutes to the SVOD provided. Hence, consumers who

are able to watch SVOD are also able to enjoy other forms of entertainment. For example, when

consumers want to relax after work, he can choose to surf the web, watch linear TV, listen to music,

play games or turn on Netflix. As such, consumers can respond to unfavourable Netflix pricing by

changing their entertainment habits.

4 Internal Analysis

4.1 Corporate Center Netflix has three operating segments: domestic streaming, international streaming and

domestic DVD. The domestic and international streaming segments derive revenues from monthly

membership fees for services consisting of online streaming. The domestic DVD segment derives

revenues from monthly membership fees for services consisting of DVD-by-mail though only

available within the United States (Netflix, 2013).

Netflix has adopted a functional organisational structure in which tasks and activities are

grouped by business function with a view of encouraging efficient use of managerial and technical

talent, minimising the need for an elaborate control system, and allowing rapid decision making

(Netflix, 2013).

As shown in appendix E, the structure is centralised, such that CEO Reed Hastings has direct

control over the six departments, each with individual managers. However, the organisational flow

beyond this point is not as structured (Netflix, 2013).

4.2 Resources and Competencies The VRIO model is an optimal solution for analysing Netflix’s resources and competencies;

the model consists of organizational value, rarity offered for the customers, inimitability and

organizational support.

The value that Netflix offers is a vast content library that contains around 100,000 movies

and series, which creates a big value and variable options to their customers. Furthermore, there is

9

no advertisement interrupting the customers while streaming the content (Netflix, 2013).

Rarity: In online streaming industry, several firms offer similar products such as Hulu and

Amazon. However, Netflix invested $400 million to produce its own show in order to reduce the

licensing cost; a backward integration is rare compared to their competitors. Note: film studios/

suppliers still have much bigger scale to produce movies (Bushey, 2014).

Inimitability: Netflix is expanding its business in the international market and is available in

over 40 countries. The way they cooperate with local institutions in different markets can be difficult

and costly for other firm’s to imitate (Dixon, 2013).

Organizational support: The activities providing rich content and excellent customer service

are supported by the organization. For example, CEO Reed Hastings offered $1 million prize to

winner who can improve Netflix’s ratings based recommendation program (Kleinman, 2013).

4.3 Value Chain Analysis 4.3.1 Primary activities

4.3.1.1 Inbound logistics

The streaming segment of Netflix involves licensing content from the creators and then

streaming this content to customers. As such, the ability for Netflix to provide members with

content they can watch instantly is dependent on content providers.

In particular, Netflix licences the rights to stream TV shows, movies, and original content to

members for unlimited viewing. These licences are for a fixed fee and specify licence windows that

generally range from six months to five years. Content providers include Paramount Pictures, Lions

Gate, MGM, Time Warner and DreamWorks (Times 2010, CNBC 2013, CNN 2013).

A major risk factor for Netflix is its limited bargaining power with major content providers.

Indeed, Netflix is in constant content-bidding wars with a number of competitors including Amazon,

Apple, Google and Outerwall (SumZero, 2014). As a result, the costs of its large content library are

rising quickly. Indeed, as shown in appendix A, streaming content obligations have increased from

$3.9 billion in 2011 to $7.3 billion in 2013 (Netflix, 2013).

In an effort to combat this, Netflix has increasingly sought to enter the content creation

industry by producing its own content and through major partnerships with major studios. In

particular, Netflix has exclusively distributed a political drama series entitled House of Cards

(Metacritic, 2014) and a comedy series entitled Orange is the New Black (Metacritic, 2014).

4.3.1.2 Operations

In order to allow streaming to function from a technical standpoint, Netflix uses two main

systems – a cloud architecture and a content delivery network (Bunker, 2012).

10

The cloud architecture is used to enable the user's device to be connected to a content

delivery network. The delivery network supplies the actual bits that make up the movie to the user's

device. Netflix does not run the content delivery network; it is outsourced using three content

delivery network providers.

When Netflix is opened on a device, the device registers itself with the cloud architecture.

This identifies the user - allowing Netflix to personalise content choices to the user's preference and

region. Once the device is registered with the cloud architecture, the user is able to select a movie or

TV show. Upon clicking play, the user is connected to the appropriate content delivery network

based on the movie selection and region.

The choice to use three content delivery suppliers is based on two factors. Firstly, due to the

large user base of Netflix, there is significant demand placed on the content delivery networks. As

such, the three networks act as a failsafe and boost capacity. Secondly, certain delivery networks

have superior coverage in certain parts of the world - allowing the user to watch the content

uninterrupted and with superior quality.

4.3.1.3 Outbound logistics

Content is made viewable to end users through the use of the Netflix website on a computer

or the Netflix app on smartphones and tablet devices. The content delivery networks deliver the bits

of the movie directly to the Netflix website/application.

4.3.1.4 Marketing and sales

Netflix’s marketing efforts represent a significant aspect of Netflix’s value chain. Indeed,

given that competitors offer very similar streaming services, Netflix is reliant on marketing to

maintain its market share. Netflix has a significant advertising budget, which includes online

advertisements, TV commercials, e-mails and billboards (Ringia, 2013). In an effort to promote

customer loyalty, Netflix makes use of word-of-mouth advertising and the social media. In particular,

it allows members to share recommendations on social media and providing free trials which

contributes to a high conversion rates to continuing customers (Ringia, 2013).

Furthermore, Netflix wants to create a strong brand and to acquire new customers so that

they can make more profit and establish its position as a market leader. They achieve this by

creating its own original series such House of Cards and Bad Samaritans, which surprises the

customers (Ringia, 2013). They also try to predict how the market is going to change and take

advantage of its competitors (Hartung, 2013). Moreover, information about online activity and

watching preferences are used to personalize marketing and the services that are providing to

customers (Ringia, 2013). Finally, Netflix does not practice price differentiation because it targets the

11

mass market and has a requirement that a response is given within 5 minutes of a customer placing

a call (Hartung, 2013). Marketing and sales therefore creates competitive advantage for Netflix as

can be seen by the company’s development in the last few years.

4.3.1.5 Service

Netflix offers free-trial memberships to non-users where interested customers can subscribe

to Netflix through the Internet and connect to any of their electronic devices (Netflix, 2014). Netflix

recommends videos and movies based on the past videos watched by the subscribers and offers

movies that are less demanded to satisfy the wants of every subscriber.

Netflix has a good customer service support in addition to the product offered. For example,

Netflix has a 24/7 call centre to help those who have technical difficulties. In addition to that, Netflix

also has a live chat online as well as help centre on their website (Netflix, 2014). All of this allows

Netflix to score one of the highest in customers’ satisfaction surveys among e-commerce firms

(Gallaugher, 2014).

4.3.2 Secondary activities

4.3.2.1 Infrastructure

Netflix does not own any real estate, and the company leases various properties for primary

uses such as marketing, technology and development, service centre, storage and administrations.

Netflix has licenses from studios, contents providers and other rights holders to stream content

online. The company has reliable computer systems and servers, and also implemented various

processes to prevent attacks from hackers.

Netflix is also using Amazon Web Services, a “cloud” computing service, to process and store

data. Netflix has also built Open Connect, a content delivery network, to deliver online content more

efficiently through cooperation with Internet Service Providers (Netflix Annual Report, 2013).

4.3.2.2 Human resources

Netflix has specific criteria for the employees – who must be creative and innovative, have

communication skills, and be passionate about their work so that they can take risks and tough

decisions (McCord, 2014). In addition, employees work in teams so they can develop the interaction

with their colleagues and carry out hard tasks (McCord, 2014). There are also department meetings

regularly so errors will be prevented and high performance will be achieved.

Furthermore, Netflix offers the “top of market compensation”, offering more than its

competitors but the reward of each employee is related to his performance (McCord, 2014). Due to

tough working conditions, Netflix provides more time for vacations and a lot of personal time to the

employees (McCord, 2014). Finally, Netflix encourages the development of its employees, which

12

include having mentors for each employee, and not abusing their power against other employees

(McCord, 2014).

4.3.2.3 Technological development

Netflix has a competitive advantage in their technological sector, as they have developed a

strong team that they call “The Simian Army” (Tseitlin, 2013). Furthermore, they have a strong

crowdsourcing team where they attract media attention by creating a “recommendation algorithm”

competence between organizations (Greenberg, 2009). The employees of Netflix are constantly

ready for anything that could happen, as the weakness of Netflix is high reliance on the Internet and

other servers (Tseitlin, 2013). The concept is that the army disables the production instances on

purpose so Netflix’s team can be prepared for when that happens for real. Furthermore, their goal is

that when there is a problem in their product, there will not be any impact on the customers

(Tseitlin, 2013).

4.3.2.4 Procurement

Netflix currently relies mainly on content providers for TV series and movies. As such, Netflix

negotiates with various studios and other content providers for a multi-year license. By having a

multi-year contract with suppliers, Netflix is able to ensure that content is always available for

subscribers.

5 Recommendations Before recommendations regarding Netflix’s future will be discussed, it is critical to describe

the current business model strategy found at Netflix. Even though Netflix still operates in the

physical DVD distribution segment, their focus has shifted to the online streaming segment (Netflix

Annual Report, 2013). Furthermore, they are expanding the selection breadth and focusing on

getting to know their customers better (Netflix, 2014).

5.1 Innovation Strategies 5.1.1 Partnership with linear TV providers and ISPs

Netflix can grow by penetrating into other markets, targeting consumers who are currently

not a subscriber of Netflix. As such, Netflix can collaborate with linear TV providers or Internet

Service Providers (ISPs). In countries such as Singapore ISPs provide a wide range of products,

including Internet, mobiles and TV (Starhub, 2014). By collaborating with conventional TV providers,

Netflix can penetrate the market and increase the uptake of the product by minimising the switching

cost of moving from linear TV to online streaming. Also, with the partnership, Netflix is able to save

13

on their cost of publicity. Indeed, Netflix has made a number of deals with small cable operators

such as the deal with TiVo to make Netflix available on TiVo set-top boxes (BusinessWeek, 2014).

Through the collaboration, subscribers of conventional TV are able to enjoy Netflix in

addition to the linear TV that they currently have. Netflix will then take a cut from the revenue

generated from subscribers of its partners. ISPs would gain a competitive advantage by offering

Netflix in addition to the things they are currently offering in the competitive market. Therefore, it is

likely that Netflix is able to negotiate an alliance with companies offering linear TV programmes.

When consumers subscribe to the package offered, they are able to enjoy both conventional

TV as well as the content offerings offered by Netflix. As such, consumers are able to compare the

pros and cons of both offerings. The linear TV has scheduled show times for the offerings they

provide to subscribers. Hence, we believe that Netflix would outshine the linear TV, due to the

flexibility and original contents offered to subscribers (Netflix, 2014). Therefore, through

partnership, it would change consumer preferences and their consumption habits over time -

thereby increasing Netflix’s subscriber base in the long run.

5.1.2 Expansion of original content offerings As discussed, Netflix has adopted a strategy of developing original content exclusively for

users of Netflix. In particular, the releases of “House of Cards” and “Orange Is The New Black” have

proven highly successful for Netflix. Indeed, Netflix’s stock climbed 445% in the year both shows

were launched (Zuckerman, 2013). Netflix should therefore aggressively expand their original

content offerings in the future.

It was indeed costly for Netflix to produce these shows – around $4 million production cost

for each episode in both series (Merritt, 2014). However, during the 2nd quarter this year, Netflix

have managed to attract 1.7 million new subscribers and their own show, “Orange is the New Black”

was the most watched series of all their selections. Furthermore, Netflix’s revenue jumped from

$29.5 million in the 2nd quarter (2013) to $71 million in the 2nd quarter (2014), a 140% increase in

revenue (Enright, 2014). Therefore, even though the international operations are not yet profitable,

it is obvious that making original content is the future for Netflix (Enright, 2014).

As the largest player in the SVOD market, Netflix has reached a state in which it is well

positioned to create original content economically. With each new series, Netflix understands what

members want, how to produce it, and how to promote it more effectively.

Moreover, Netflix has a significant advantage over linear TV competitors when it comes to

launching a series. Linear TV competitors must attract an audience for a given night at a given time.

In contrast, Netflix provides on-demand viewing and hence does not compete for scarce prime-time

14

slots. This advantage is enhanced by Netflix’s ability to personalise promotion of content to

members based on the users previous viewing habits.

5.1.3 Development of superior viewing platform to win “moments of truth” As discussed, one of Netflix’s core competencies is its superior viewing platform to that of

competitors. In particular, Netflix provides users with total control over when to play/pause/resume

a video, allows users to watch Netflix through a plethora of devices such as tablets and smart TVs,

and integrates a highly personalized recommendation algorithm.

Indeed, much of the success of Netflix can be attributed to its ability to win members’

“moments of truth”. That is, when a member is making a decision as to whether they want to watch

TV, play a game, listen to music and so on, Netflix wins the moment of truth due to its sophisticated

viewing platform.

In order to maintain this competitive advantage, it is imperative that Netflix invest in

maintaining and further developing its viewing platform – for example, by developing Netflix apps

for additional platforms.

5.2 Globalization Strategy In addition, we recommend Netflix to continue expanding globally. Netflix was launched in

Canada in 2010. Canada was the first country that Netflix launched outside of the US. Netflix then

entered Latin America and Caribbean in 2011, UK and Ireland in 2012 and Scandinavian countries

(Sweden, Norway, Finland, Denmark) in 2012 (Hamel, 2014). Netflix has indicated a preference to

expand as quickly as possible globally without sacrificing profitability (Netflix, 2013).

Therefore, Germany and France are two good options for Netflix to expand (Hamel, 2014).

Germany and France are the fourth and sixth largest market in the world respectively and both have

the required infrastructures for online streaming industry (Hamel, 2014). However, there are strict

laws that protect the film industry and Netflix will have to pay taxes in France in order to finance

French culture, which is obligated by the French government.

Netflix should expand globally only the online streaming business unit and not the DVD

segment due to the ongoing negative decline in demand for DVDs. The company has been very clear

that they are a “streaming company with a DVD business” (Dixon, 2013). The global expansion is not

easy but Netflix has a few advantages that can aid its expansion. In particular, Netflix attributes its

international success to its “superior app and service created by our global technology investment,

our process knowledge, our data from related markets, and our globally-known brand” (Netflix,

2013).

15

6 Conclusion Having analyzed Netflix’s environment, we found from the PESTEL analysis that the

economic and the social factors are the most important for Netflix’s development. Furthermore,

Porter’s five forces analysis reveals that the bargaining power of suppliers and the threat of

substitutes serve to limit industry profitability. Netflix thus must employ strategy that minimizes the

impact of these two factors on the firm’s earnings.

The recommendations provided seek to minimize these risk factors. Indeed, the risk of

substitutes is mitigated through the development of a superior viewing platform by increasing the

attractiveness of Netflix when a consumer is deciding what form of entertainment to consume (the

“moment of truth”). Moreover, the bargaining power of suppliers is reduced through the use of

strategic alliances with content providers. Indeed, reliance on suppliers is further minimized through

the creation of original content. Finally, by partnering with ISPs, net neutrality is less of a threat to

Netflix. By employing such strategies, Netflix is well positioned to remain profitable and penetrate

new markets.

7 Limitations Due to limitations in this research paper, not all concepts and models are discussed. The

models chosen to discuss are the most relevant to Netflix’s external and internal environment.

Netflix faces high competition in the market and therefore, strategic alliance was chosen over

organic development or acquisitions. Furthermore, the implementation of the strategic alliance was

not discussed due to length and limitations. For further research, it would be interesting to find out

how bargaining power could affect the future for Netflix and the extent to which net neutrality will

impact on Netflix’s success. It could also be interesting to find out whether Netflix can pursue the

organic development path or not.

8 References Ball, M. (2013). “Arrested Economics: Assessing NETFLIX's Original Content Business.” Ivey Business

Review. Retrieved November 4, 2014 from http://iveybusinessreview.ca/cms/3198/arrested-

economics-assessing-the-business-case-of-netflixs-original-content/

Bunker, A. (2012). "How Netflix works: The adaptive magic behind movie streaming from the cloud."

Retrieved October 22, 2014, from http://www.electricpig.co.uk/2012/03/02/how-netflix-works-the-

adaptive-magic-behind-movie-streaming-from-the-cloud/.

16

Bushey, R. (2014). “How The $400 Million Loan Netflix Just Took Out Will Help It Undercut

Hollywood.” Retrieved November 11, 2014 from http://www.businessinsider.com/why-netflix-

makes-its-own-shows-2014-2

CNBC. (2013). "Netflix Strikes Largest Original Content Deal Ever." Retrieved October 21, 2014, from

http://www.cnbc.com/id/100820301.

CNN. (2013). "Netflix, Time Warner strike new content deal." Retrieved October 21, 2014, from

http://money.cnn.com/2013/01/08/technology/netflix-time-warner/.

Dixon, C. (2013). “Netflix International Strategy: Facts, Strategy & Motivation.” Retrieved November

7, 2014 from http://www.nscreenmedia.com/netflix-international-strategy-facts-strategy-

motivation/

Enright, A. (2014). “For Netflix, Profit is the New Black.” Retrieved November 10, 2014 from

http://www.internetretailer.com/2014/07/21/netflix-profit-new-black

Forbes. (2013). “Six 'Megatrends' That Will Shape The Future Of Digital Media”. Retrieved November

6, 2014 from http://www.forbes.com/sites/johnvillasenor/2013/05/01/6-megatrends-that-will-

shape-the-future-of-digital-media/

Gallaugher, J. (2014). “Information Systems: A Manager’s Guide to Harnessing Technology.”

Retrieved October 26, 2014 from http://catalog.flatworldknowledge.com/bookhub/9?e=gallaugher-

ch02_s05#gallaugher-chpr

Grant, T. (2004). International Directory of Company Histories, 58, St. James Press: Detroit.

Greenberg, A. (2009). “The Netflix R&D Game”. Retrieved October 18, 2014, from

http://www.forbes.com/2009/09/21/netflix-research-prize-technology-million-dollars.html

Hamel, M. (2014). “Netflix bets on international expansion to keep growing.” Retrieved November 7,

2014 from http://www.cnbc.com/id/101487231#

17

Hartung, A. (2013). “Netflix - The Turnaround Story of 2012.” Retrieved October 22, 2014 from

http://www.forbes.com/sites/adamhartung/2013/01/29/netflix-the-turnaround-story-of-2012/

Kelleher, K. ( 2012). “Netflix must ponder its endgame strategy.” Retrieved November 6, 2014 from

http://pando.com/2012/10/24/netflix-must-ponder-its-endgame-strategy/

Kleinman, A. (2013). “How Netflix Gets Its Movie Suggestions So Right.” Retrieved November 11,

2014 from http://www.huffingtonpost.com/2013/08/07/netflix-movie-suggestions_n_3720218.html

Kriete, L. (2013). “2013 Netflix Strategic Report” Retrieved November 4, 2014 from

https://lpelin.expressions.syr.edu/trf483/2013/05/02/2013-netflix-strategic-report/

Lee, Timothy. (2014) “Comcast’s deal with Netflix makes network neutrality obsolete”. Retrieved

November 18, 2014 from http://www.washingtonpost.com/blogs/the-

switch/wp/2014/02/23/comcasts-deal-with-netflix-makes-network-neutrality-obsolete/

Market Line. (2014). Company Profile: Netflix Inc. Retrieved October 22, 2014 from

http://advantage.marketline.com.esc-web.lib.cbs.dk/Product?pid=0F65E223-CCF4-4CBF-A37F-

BA7C747C2040&view=SWOTAnalysis

McClead, R. (2013). “Inflection point approaching: will your firm be a casualty?”

Retrieved November 6, 2014 from http://blogs.lexisnexis.co.uk/futureoflaw/2013/09/inflection-

point-approaching-will-your-firm-be-a-casualty

McCord, P. (2014). “How Netflix Reinvented HR.” Retrieved October 22, 2014 from

http://hbr.org/2014/01/how-netflix-reinvented-hr/ar/1

Merrit, R. (2014). “How Netflix is Cashing in on Orange is the New Black.” Retrieved November 10,

2014 from http://www.equities.com/editors-desk/stocks/technology/orange-is-the-new-black-buys-

netflix-subscribers-respect

Metacritic (2014). "Critic reviews for House of Cards." Retrieved October 21, 2014, from

http://www.metacritic.com/tv/house-of-cards-2013.

18

Metacritic (2014). "Critic reviews for Orange is the New Black." Retrieved October 21, 2014, from

http://www.metacritic.com/tv/orange-is-the-new-black/critic-reviews.

Netflix. (2013). Netflix Annual Report. Retrieved November 7, 2014 from

http://ir.netflix.com/secfiling.cfm?filingID=1065280-14-6&CIK=1065280

Netflix. (2014). Netflix: A Company Profile. Retrieved October 25, 2014 from

http://ir.netflix.com/

Netflix. (2014). Netflix Help Center. Retrieved November 11, 2014 from

https://help.netflix.com/help

Netflix. (2014). Netflix: Long Term View. Retrieved November 7, 2014 from

http://ir.netflix.com/long-term-view.cfm

PWC. (2014). Global Annual Review. Retrieved November 6, 2014 from

http://www.pwc.com/gx/en/issues/megatrends/technological-breakthroughs-bob-moritz.jhtml

Ringia, E. (2013). “Marketing Plan.” Retrieved October 22, 2014 from

http://www.slideshare.net/evelyneringia/netflix-markeitn

Shaughnessy, H. (2011). Reed Hastings' Vision For Netflix: Mobile, Global. Forbes. Retrieved

November 7, 2014 from http://www.forbes.com/sites/haydnshaughnessy/2011/10/28/reed-

hastings-on-his-vision-for-netflix/

Starhub. (2014). Company Information. Retrieved November 11, 2014 from

http://www.starhub.com/about-us/company-information.html

SumZero. (2014). "Exploding Content Costs Are Going to Bury Netflix." Retrieved October 21, 2014

from https://sumzero.com/headlines/media/NFLX/224-exploding-content-costs-are-going-to-bury-

netflix.

19

Times, N. Y. (2010). "Netflix to Stream Films From Paramount, Lions Gate, MGM." Retrieved October

21, 2014, from http://mediadecoder.blogs.nytimes.com/2010/08/10/netflix-to-stream-films-from-

paramount-lionsgate-mgm/?_php=true&_type=blogs&_r=0.

Tseitlin, A. (2013). The Antifragile Organization. Communications of the ACM, 56(8), pp. 40-44. doi:

10.1145/2492007.2492022

Zuckerman, E. (2013). "Netflix's Original Content Strategy Is Paying Off." Retrieved November 6,

2014 from http://www.thewire.com/entertainment/2013/10/netflixs-original-content-strategy-

paying/70767/.

9 Appendices 9.1.1 Appendix A: Netflix streaming content obligations

Source: Netflix Annual Report 2013

2011 2012 2013

> 5 years $74.696 $78.483 $83.284

3-5 years $650.480 $540.346 $929.645

1-3 years $2.384.373 $2.715.294 $3.266.907

< 1 year $797.649 $2.299.562 $2.972.325

-

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

Bil

ion

s U

SD

Netflix Streaming Obligations

20

9.1.2 Appendix B: Share of shows streamed

Source: https://www.npd.com/wps/portal/npd/us/news/press-releases/the-npd-group-as-

tv-viewing-drives-subscription-video-on-demand-netflix-dominates-but-hulu-plus-and-amazon-gain/

9.1.3 Appendix C: SWOT analysis

93%

7% 1%

89%

10% 2%

Netflix Hulu Amazon

Share of shows streamed: TV programming

Q1 2012 Q1 2013

Strengths

•Brand name •Effective marketing •Production of original content •Value in customer's service •Largest content library available to audiences

Weaknesses

•Litigation impact on brand image •Lack of diversification •Expired contracts •Reliant on other companies to support the

streaming segment •Time difference between movie release date and

Netflix release date

Opportunities

•Growing demand for online streaming •Strategic partnerships •New content for specific segments •International expansion

Threats

•Increasing internet fraud •Supplier power •Limits on bandwidth usage from internet

providers if net neutrality regulations aren't passed •Increasing licencing costs

SWOT Analysis

21

9.1.4 Appendix D: Porter’s five forces visualization

22

9.1.5 Appendix E: Organisational structure

CEO

Reed Hastings

Chief Product Officer

Neil Hunt

General Counsel and Secretary

David Hyman

Chief Marketing Officer

Leslie Kilgore

Chief Talent Officer

Patty McCord

Chief Service and DVD Operations Officer

Andrew Rendich

Chief Content Officer

Ted Sarandos

Chief Financial Officer

David Wells