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Case Analysis

02/01/2018

Case 15: Netflix Fights to Stay Ahead of a Rapidly Changing Market

Overview

As technology continues to evolve, businesses must stay innovative to keep their brand exciting and new to consumers. One company has managed to do this and keep their competitive advantage throughout technology advancements. Netflix, a DVD, and online streaming company sought out to take care of all home entertainment needs. CEO Reed Hasting came up with the idea of Netflix in 1997, after paying a $40 late fee for movie title Apollo 13. His vision was to create a rental mail order service. As Hasting idea began to surface he received a heads up that VHS would soon be converting to a DVD format. This was Hasting’s opportunity to make his vision come true. Hasting decided to take advantage of the opportunity and started Netflix, a rent by mail service that did not require a subscription. His meaning behind the name came from having the vision of evolution from DVD format to internet streaming. Although this was a great idea, as with any startup company, Hasting visionary idea flopped. He later relaunched the service in 1999 with an excellent marketing strategy, offering subscribers a 1-month subscription for free. Hasting’s strategy worked, finding that 80 percent of the customers renewed after the trial subscription was over.  In 2003 the company turned its first profit and reached 100 million subscribers within the same quarter. Netflix later reached new heights in 2007 by achieving more than 6.3 million customers and introducing streaming services to its customers. Having this type of impact caused the well-known video rental store Blockbuster to eventually close their doors. Netflix continued to exceed profits quarterly; by 2010 after launching in Canada, the company met and exceeded the goal that was set to happen in 2012 by Hasting. The company has subscribers in the U.S, Canada, Ireland, The United Kingdom and the Caribbean. Today, Netflix has over 117.6 million subscribers as of January 2018. About 55 million of those are U.S. subscribers (“Earnings-Subscribers,” 2018).

Statement of Problem

As Netflix has grown, the company has faced many issues that caused dissatisfaction amongst customers. When Netflix decided to change their business model to separate the two-platform sectors, it seemed like a great idea to Hasting. The DVD platform moved to Qwikster, a company who would solely focus on the DVD mail order service and Netflix would focus solely on the streaming services. Making this move caused a 60 percent price increase. This was an impulsive decision made by CEO Hasting as in the past focus groups were used to assist with decision making. Instead, he decided to utilize data that showed 75 percent of customers preferred streaming over the DVD mail services. This was a very insensitive move by Netflix. Customers would now have to pay two separate fees if they were to continue to stream and receive DVD mail order services. Because of this it caused a decline in Netflix’s subscription service because consumers were not given a substantial amount of time to adjust to the price increase who were accustomed to low subscribing fees. In addition to the Qwikster idea, the company also faced a class action lawsuit. The company was accused of keeping records of subscriber’s DVD and video streaming for two years after subscribing terminated their subscription. This violated a provision of the Video Protection Privacy Act.

The company faced a substantial amount of competition in the coming years from Redbox and other competitors. This new innovative company dispensed movies through a kiosk for $1. They partnered with several stores to place their kiosk inside and out for customers to purchase. Another perk to the kiosk was that consumers could return the DVD to any kiosk. Additionally, digital competitors were on the rise as well. Apple, Amazon, Hulu, YouTube and google play were now offering streaming services. The companies partnered with some of the top movie industry executives to offer their customer selective movies that would potentially give them an advantage with customers. Not only were these companies offering streaming services but now certain companies such as Amazon were now offering streaming services through other devices like Xbox, Roku, and Blu-Ray players.

 Lastly, the decline of their DVD rental sector has also been a challenge for the enterprise. As technology continues to evolve, DVD’s will be a thing of the past. Netflix will have to come up with a way to keep the DVD mail order thriving until this happens. For Netflix to last in the future, and keep their competitive advantage, Netflix must continuously come up with ways to stay innovative while keeping consumers happy.

Summary

To correct the issues Netflix faced during the service split, an apology was sent via e-mail from Hasting, however, did not explain the reasoning behind the price increase. The email also included the announcement of the two services being split. After experiencing the backlash of the customers, Netflix decided to drop Qwikster and combine the two under the same umbrella again. They decided to keep the price increase which ended well for the company who ended the quarter in 2012 with a profit increase of 11.9 percent despite the 1.7 percent decline in subscribers. As Netflix was confronted with the lawsuit, they decided to settle at 9 million dollars without having to admit the statement was true. Although new competition has made a strong competitive stance in the streaming industry, Netflix has still maintained its competitive advantage with its multi-platform services. To continue its surviving of coming years, Netflix must continue to stay ahead of its competitors such as Redbox, Hulu, Apple, Amazon and other companies that are tapping into the streaming market.

Action Plan

Netflix should improve their customer relations, by being transparent when changes occur within the company. Showing empathy goes a long way with customers when making changes. Business changes are necessary, however, handling them a certain way will make the move more acceptable to consumers. To maintain its competitive advantage, Netflix should conduct a focus group to consider real-time streaming or placing a DVD kiosk in select cities on a pilot run. This will allow Netflix to keep up with the competition of other services that are offered by its competitors. Implementing a pilot will allow the company to analyze and determine if this will be a good fit for the company. In addition to keeping a competitive advantage, Netflix should promote their DVD site more effectively. There has been little to no advertisement notifying customers that Netflix still offers the DVD mail service.

Update

Currently, Netflix has yet to adopt the real-time streaming services. According to fobes.com, Netflix is establishing its identity as an on-demand content provider rather than a live streaming player, and we expect this strategic focus to drive continued growth for Netflix in the long term. (“A-Closer-Look-at-Netflix-content-strategy,”2017). With a subscriber platform of nearly 118 million, it seems that Netflix isn’t hurting by not offering these services. However, the company has started a new Netflix original movies and series that has added additional profits for the company. This is something that most competitors have not done.

 

Questions to Discuss

1.         What role will Redbox play in the development of Netflix’s strategic plans?  How threatening is Redbox to Netflix’s future?

Redbox will play a very vital role in the development of Netflix’s strategic plan. Redbox is offering customers new releases at an inexpensive rate without having to wait for the mail to arrive. This alone is threatening to Netflix’s mail-order service which presents an opportunity to finetune. Netflix has done a great job thus far with their mail order service, however, to dominate over Redbox, the company must figure a way to deliver faster service and possibly at a lower rate to compete with Redbox.

 

2.     How will new competition from digital content providers force Netflix to alter its strategy?

New competition from other digital providers will force Netflix to eventually have to change their strategy due to competitive services that other companies are offering. For example, Hulu will soon begin offering live streaming services to its subscribers. This gives Hulu an advantage in the market for those who enjoy viewing shows in real time. If Netflix continues to stick to their online streaming, the company will eventually start seeing a bigger decline if they do not catch up to the new advances. 

 

3.      What new opportunities do you see in the movie streaming business, or the entertainment industry  

as a whole?

New opportunities that could be a benefit to the movie streaming business would be to offer real-time viewing to its audience. Consumers are daily letting cable go in hopes of still getting the cable experience at a cheaper rate. Additionally, offering premium channels such OWN, HBO, Cinemax, etc., is another way to grasp more consumers. Releasing theatre movies to stream the same day as DVD’s are release would be another opportunity for businesses. Offering these types of services will allow a company to expand and give the satisfaction to customers from one streaming company rather than having to catch streaming on Netflix, Real-time viewing on Hulu and premium channels on Direct TV Now.

 

4.      Do you think Netflix will remain the dominant force in both streaming and movie rentals? Why or

Why not?

 If Netflix continues as a multi-platform company, I do not believe they will remain to dominate in either service. Customers are now more focused on being able to get what they want and how they want it. If one company decides to package everything a consumer needs into one service package at an affordable price, Netflix will lose its dominance. As far as movie rentals, as technology continues to evolve, this alone will cease the dominant force that Netflix now has. Netflix will then have to terminate the mail order service and come up with a marketing strategy that will allow the company to dominate once again. What could keep Netflix afloat is continuing to foster relationships with the movie industry executives.

 

5.      What could Netflix have done differently to ensure Quikster’s success?

Netflix should have held the focus group as they had in the past to assist with decision making. A marketing analysis could have also been performed along with viewing the data from subscribers. They should have given the customers enough time of notice when announcing the change. This would have given customers a sense of importance to the company and in return would have been comfortable with the change. As Redbox was successfully able to avoid backlash from customers regarding the price increase, Netflix should have taken the same approach making the transition as smooth as possible and explaining why the increase needed to happen. I believe because the company made too many changes at once this also contributed to the uproar from customers. Having an effective marketing strategy would have discovered this and made necessary adjustments to roll the process out much cleaner with space in between each move.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References
Hartline, O. F. (2014). Marketing Strategy: Text and Cases, Sixth Edition. Mason, OH: South-Western Cengage Learning.
Molla, R. (2018, January 22). Retrieved from www.redcode.net: https://www.recode.net/2018/1/22/16920150/netflix-q4-2017-earnings-subscribers
Speculations, G. (2017, April 20). A Closer Look at Netflix’s Content Strategy. Retrieved from www.Forbes.com: https://www.forbes.com/sites/greatspeculations/2017/04/20/a-closer-look-at-netflixs-content-strategy/#57c886b21fc5