1. 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

2. 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

3. 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

4. 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

5. 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**

6. History: Initial Success
Netflix was the ranked #1 e-commerce site based on customer satisfaction from
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

7. 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.

8. 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.”

9. Systems & Operations Leading to Success

10. 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

11. 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!

12. 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?

13. 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

14. 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

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

16. 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

17. 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.

18. 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.

19. 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?

20. 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

21. 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