By Austyn Shepherd

The leading provider of on-demand Internet streaming media and flat rate DVD-by-mail in the United States

WHY STUDY? Examine how technology helps firms craft and

reinforce a competitive advantage. Look at how new technology continues to shift

this competitive landscape.

ABOUT• Netflix is an online subscription-based movie

and television show rental service that offers media to subscribers via Internet streaming and US mail (PURE PLAY)

• Largest service provider with 26 million subscribers worldwide

• Approximately 2 million DVD’s are shipped daily• 88% of subscribers watch streaming content

ABOUT• Offer more than 100,000 movie titles• Dependent on their growing number of

subscriptions in order to offer their unique selection

• Maintains strong ties with various entertainment video providers and major studios

• Proprietary technology

HISTORY• Founded in 1997 by Marc Randolph and Reed

Hastings• Worked together at Pure Software Company• Hastings thought of idea after being charged

$40 late fee for a movie rental

RANDOLPH

• Received his BA from Hamilton College

• VP of Corporate Marketing at Pure Software

• President & CEO of Netflix until 2002• Served as Director of the Board for

Netflix until 2004• Currently an advisor on several high-

tech boards

HASTINGS• Received his BA from Bowdoin

College in 1983• Received an MSCS in Artificial

Intelligence from Stanford in 1988• Founded Pure Software which he

sold in 1997• Current CEO of Netflix• Serves on the board of Microsoft

and Facebook

TIMELINE 1998 - Netflix website launched

Original version was a pay-per-rent model on a fee per use basis with late fees

1999 - Introduced monthly subscriptions 2000 – Launched personalized movie

recommendation system 2002 – Netflix went public 2007 – Introduces streaming option 2010 – Launches internationally (Canada, UK,

Ireland & Latin America)

CONCEPT

FEATURES• No Due Dates• No Late Fees• No Cancellation Fees• No Per Title Rental Fees• Free DVD Shipping & Handling

Both Receiving & Returning

SERVICES

*Blue-ray Discs available for an additional $2 per month

LOYALTY Consistently maintains 84% of existing

customers – low churn rate Ranks at the top of customer satisfaction

surveys - 94% recommend to others Achieved through:

Huge Selection (over 100,000 titles) Ease of use & convenience of site Fast Delivery (97% receive in one day) Fair price

GROWTH

LONG TAIL The “Tail” is the demand for less popular items

that are not offered by tradition shops 75% of DVD titles shipped are from back-

catalog titles, not new releases Long tail works because it is economically

viable to offer a huge selection

LONG TAIL Internet allows for large selection inventory

efficiencies that other firms cannot match When geographic constraints go away,

untapped markets open up Foreign films - Bollywood Independent films - Bable Documentaries – Daughters of Danang (PBS)

*Able to distribute movies that no other retailer would carry

BUSINESS MODEL

Netflix obtains DVD for a low initial cost Studios earn a percentage of the subscription

revenue for every disk sent out The content of movies available for streaming

are licensed directly from studios and distributors for a specific amount of time

TECHNOLOGY Netflix merchandising technology creates a

powerful method for catalog browsing Proprietary technology manages processing and

distribution of DVD’s from shipping centers Proprietary recommendation software offers a

quick and personalized way of finding content based on viewing preferences

Website provides information on each title such as factual data, trailers and editorial information

IMPROVEMENTS• October 2006, Netflix offered $1,000,000 prize to

whoever could devise a system that was 10% more accurate than the company’s current system, Cinematch, for recommending movies

• Netflix was able to incorporate many innovations offered by contest participants

• Team won contest in 2009• Saved company money, improved software and

generated significant publicity for Netflix globally

CINEMATCH

OPERATIONS 58 ultrahigh-tech distribution centers

Located strategically next to USPS DVD’s are hand inspected for cracks/scratches DVD’s are fed into custom-built sorters

Sends email confirmation of returned DVD Moves desired DVD’s directly to outbound pile to

be sent directly to other subscriber Turnaround DVD in 8 hours

OPERATIONS

EMPLOYEES• Known in the industry to pay higher salaries to

attract and keep the best talent• Employees choose how much of

compensation they want in cash vs. stock• Average performers are let go as they only

want to keep the top performers• Everyone tries to improve the firm processes

VALUE CHAIN

IPO• Netflix went public on May 29, 2002 selling 5.5

million shares at $15 per share• Data disclosures required by public companies

attached larger rivals to the firms market

COMPETITION• Movie Rental Stores

Blockbuster, Wal-Mart Local Rental Stores

• Move Rental Kiosks Red Box, Blockbuster

• Downloadable Movies Apple, YouTube, Hulu “On Demand” Networks

COMPETITION

BLOCKBUSTER

• Forced to drop late fees – Lost $400 million• Launched Blockbuster Total Access • Couldn’t sustain subscription rates

GOING DIGITAL Issues with the change in technology from

“atoms to bits” Streaming model is limited by:

Access to content Methods to get content to televisions Increase cost of licensing rates

Windowing – content is available to a given distribution channel for a specified window

WINDOWING

STREAMING

SWAT

QUESTIONS