Case study analysis by Tricia Vega Netflix in Two Acts: The Making of an E-commerce Giant and the Uncertain Future of Atoms to Bits Case study analysis by Tricia Vega

History Netflix founded by Reed Hastings & Marc Rudolph in 1997 Hastings was fed up with paying high late fees for his rented movies DVD by mail with a monthly subscription Pre-paid envelopes for return

History Hastings understood the power of the internet early on: Netflix.com queue Cinematch technology 2007: Online streaming was added on the website with a “Watch Now” button Hastings focused on the future of streaming videos rather than DVDs Cinematch tech- more on that later

History: Competition Blockbuster: Wal-Mart: Amazon Hulu YouTube Traditional brick & mortar store added DVD by mail services to compete Lost $4 billion in revenue with the rise of Netflix Filed bankruptcy in Sept ’10, purchased by Dish Network April ‘11 Wal-Mart: Largest retailer of DVD sales (economy of scale) Bought streaming outfit VUDU for $100 mil Amazon Hulu YouTube Television shows being streamed online directly by the network

History: Competition Netflix’s triple advantage over competitors: Largest selection of titles Largest network of distribution centers Largest customer base *Economy of scale advantage* ** Netflix was also had the first-mover advantage**

History: Initial Success Netflix was the ranked #1 e-commerce site based on customer satisfaction from 2005-2011 Success built on HUGE selection of films (about 125,000 titles). Brick & mortar stores typically have only 3000 titles Obscure, older titles accounted for 75% of revenue

History: Initial Success Capitalized on “long-tail” selection, where a company can make a huge profit off of a near limitless selection. Netflix was able to do this because of warehouses and lack of costs associated with brick & mortar stores and streaming.

Systems & Operations Leading to Success Warehouses 58 strategically located distribution centers in US 2 day turnaround Centers handle 1.8 mil DVDs/day Costs $300 mil/yr to run Coordination with Cinematch to recommend titles that are available Netflix’s VP of Operations, “Anyone can replicate the Netflix operations if they wish. It’s not going to be easy. It’s going to take a lot of time and a lot of money.”

Systems & Operations Leading to Success

Systems & Operations Leading to Success Cinematch Netflix’s recommendation system “Collaborative Filtering”: software monitors trends among customers and uses this data to personalize a custom experience Ex: Pandora, book recommendations on Amazon This tech lead to a low turnover of customers, high amount of recommendations by users

Systems & Operations Leading to Success DVD Streaming: Develop their own set-top box vs partnering with other existing devices Accessible in over 200 devices Increases audience Roku: Netflix’s set-top box ($99) At its height, Netflix accounted for 30% of North America’s internet traffic!

The Downfall Begins Hastings always understood the world was moving from “atoms” to “bits”: The idea that many media products are sold in containers (atoms) eventually switch to bits. Physical inventory is eliminated. What other products have moved from atoms to bits?

The Downfall Begins July 2011: Profits, customer base, and stock price are at an all time high Wanting to maintain the first mover position, Hastings announces Netflix will split into to separate entities: 1) online streaming and 2) Qwikster, the DVD by mail segment Original monthly subscription of $10 was split into two separate $8 subscriptions Website was also split into two

The Downfall Customers were very unhappy with the change Hastings went from industry leader to laughing stock Netflix eventually dropped Qwikster, but held the price increase

The Downfall Within 3 months, Netflix lost 800,000 customers, stock price decreased from $304 to $75, and market value lost $12 billion

Since the downfall… The end of 2011 saw Netflix adding 610,000 subscribers in the US by the end, bringing the subscriber count to 24.4 million. Netflix continues to work towards making deals with studios to be their exclusive provider Netflix launched its own series, House of Cards Netflix had hopes of global expansion, but has since held off

Current Events On April 23, Netflix announced a stock price surged 25% This was attributed to the 2 million new subscribers during the first quarter of 2013 Netflix shares are now up 125% this year, making the company the best performing stock in the S&P 500 so far in 2013.

Current Events Netflix will be adding new original series to their line-up, hoping to eventually have 20+ shows However, Netflix is launching all of its new shows at once- is Hastings moving too fast once again?? Some suggest that Netflix should charge by the hour of usage, and not a flat monthly rate (to increase revenue). This may further anger viewers, however.

Current Events Netflix Introduces New Pricing Plan: Another Qwikster Disaster or the Right Move? Netflix is proposing a new pricing plan in order to tackle those people who are streaming without paying (ie using someone else’s password). The streaming subscription would rise from $7.99 a month for 2 simultaneous streams to $11.99 a month for 4 simultaneous streams Is it worth it to anger customers once again after the Qwikster debacle?

Recommendations Hastings should move slower Continue to be compatible with as many devices as possible, including new devices. Fight for position as the cost leader, maybe offer a yearly subscription plan like Amazon Avoid any moves that would further annoy customers

Multiple Choice Questions Netflix introduced Qwikster in: a) 2010 b) 2011 c) 2012 d) 2009 Netflix can be streamed on which device: a) Roku b) iPad c) Play Station d) all of the above Netflix is difficult for competitors to duplicate because: a) Most titles are exclusive to Netflix b) It is an economy of scale c) Netflix owns the rights to stream films online d) Netflix owns its own series