By: Dora E. Plancarte-Yslas BUS 550- Spring /26/11 Chapter 4- Netflix: The Making of an E-commerce Giant and the Uncertain Future of Atoms to Bits

What is Netflix? Online company that offers on-demand streaming of TV shows, concerts, documentaries, and movie and DVD rentals by mail Over 100,000 titles to chose from creating a near-limitless section (long tail) One flat rate service starting at $7.99 with no late fees and no shipping costs Online streaming 24/7 with no limits from Netflix ready devices How many people in this class have a subscription to Netflix?

Timeline 1997: Incorporated in DE 1998: launched 1999: Start of online subscriptions 2002: Completed IPO (initial public offering) 2003: Revenues up 78% > than 2002 and profit was $6.5 million 2006: Profit of $1 billion 2007: Internet streaming 2010: Streaming > DVD 2010: Expansion to Canada 2011: Over 20 million users

Development Business Problem: Reed Hastings got a $40 late fee from a video rental store. Business Solution: Created a DVD by mail service rental business with no late fees. Trial run in 2009 with a 1 month free trial. After 1 month, only 20% did not want to pay a subscription. How has the original Netflix interface improved?

Business Processes 58 ultrahigh-tech distribution centers located within driving distance of 119 USPS facilities Handle 1.8 million DVD per day 100% of DVDs are hand-inspected Turnaround time per DVD is 8 hrs. Reach 97% of customers in a 2- day window 43 phone reps 2,180 FT & 2,149 PT employees

Technology Features Queue Blogs Friends and Communities Reviews Social Media share feature Ready Devices Suggestions via Cinematch (Collaborative filtering) The Netflix Prize for $1 million (crowdsourcing)

Management Mistake? Founder and CEO Reed Hastings’ initial dream In 2002, Netflix offered 5,500,000 shares at $15.00 NFLX on Nasdaq Stayed private longer SEC filings exposed data and success Brought forth competition but now had $$$ to expand and innovate Redbox is still privately held Currently at $ per share. Do you think CEO Reed Hastings made a good decision by going public with Netflix?

Competition DVD Windowing is forever (Film release window) yet licensing creates restrictions, typically 28 days after DVD release date Low cost start up Pure play (no storefronts) Helped drive DVD brick-and mortar rental stores to bankruptcy Affecting the cable industry Netflix offers: largest selection, largest customer base, largest distribution centers, and the industry leading strength in brand and data assets Why have competitors not been as successful as Netflix?

New Business Model Blockbuster and Redbox: Rent a movie for a specified amount of time or late fees apply Netflix: Keep the movie as long as possible (no late fees) so less mail transactions are made since it costs 88 ¢ round-trip for a DVD by mail

Achievements #1 in customer satisfaction 9 times in a row by Foresee The best at satisfying customers by Nielsen and Fast Company Retail Innovator of the Year by the National Retail Federation CEO: 2010 Business Person of the Year Churn rate <3% 95% of subscribers have recommended Netflix 71% of new subscribers have been encouraged by an existing subscriber Do you think customer satisfaction has been the main reason for Netflix ’ s success?

Future Physical DVDs will be completely replaced by online streaming (atoms to bits) Postage: 1/3 of expenses even w/discounts Was named Netflix not DVDs-by-mail Blu-rays meaning double inventory Do you think Netflix will still be as profitable in the future if DVDs by mail become obsolete?

Takeaways Netflix’s business assets IPO “mistake” Netflix’s attractive business Why is Netflix successful? Durable brands: customer experience Physical retailers are limited E-Commerce reaches more users Atoms to bits concept Windowing and licensing limits Any questions?

Question A) Happy customers refer friends minimizing in subscriber acquisition costs. B) It costs more to acquire a new customer than to keep one. C) The longer a company has the customer, the less likely they are to leave. D) The longer a customer stays with the firm, the more profitable they company becomes. E) All of the above. Why do companies strive for a low churn rate if new customers are always available?

Works Cited 1.Gallaugher, J. (2011). Information Systems: A Manager’s Guide to Harnessing Technology 1.1, Flat World Knowledge Inc. 2.Netflix’s 10-K filings with the SEC for Yahoo Finance: NFLX 4.Virtual fun. Economist [serial online]. May 15, 2004;371(8375): Available from: Academic Search Premier, Ipswich, MA. Accessed April 24, innovation.com/wordpress/wp- content/uploads/2010/06/Adam-Hartung-Netflix- Opportunity.jpg 6. netflix-start_.html