Netflix Case Analysis

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Competition in the Movie Rental Industry [pic] This paper will analyze Arthur Thompson’s case study titled “Competition in the Movie Rental Industry in 2008: Netflix and Blockbuster Battle for Market Leadership. ” I will address trends affecting the movie rental industry, analyze the competitive industry environment, and discuss the use of both the SWOT and balanced scorecard to assess Netflix’s overall strategy. Trends Affecting The Movie Rental Industry

I chose the following areas as relevant in my analysis of the attractiveness of the industry: 1) Market Features( The movie rental industry was in a mature market stage prior to the utilization of the Internet as a distribution medium. Netflix utilized the Internet to gain market share by providing customers with direct movie download capability and direct shipments to their home. Netflix was a market leader and the first to realize the potential market that existed for Internet rentals. They made the product easier for the consumer to purchase by eliminating hassle and providing expedited delivery. ) Industry Profit Margins ( Netflix gross profit increased from . 8 million in 2000 to 419. 6 million in 2007. This indicates that Netflix was able to capitalize on existing trends affecting the movie rental industry and their market entry was successful. 3) Intensity of Competition ( Netflix was entering an industry that was operating as an oligopoly as Blockbuster controlled a major share of the market. Netflix was able to compete against Blockbuster by effectively using the Internet and 1-day delivery distribution channels as its core competitive advantage. ) Variations in Demand ( Movie demand is somewhat consistent. However, more customers seemed to like the idea of ordering DVD’s off the Internet. 5) Technology and Capital Requirements ( A large amount of capital is required to enter the movie rental industry and obtain any significant share of the market because of fees that must be paid to the various movie studios. Porter’s Five Forces The five forces driving industry competitiveness include the following (Thompson C-98): 1) Industry Competitors (+)( Rivalry among existing firms is the strongest force of Porter’s five forces (61).

Blockbuster and Netflix appeared to be in a chess match with one another as each company continually tried to outsmart the other’s move. Blockbuster entered the online DVD industry to compete against Netflix and ramped up focus on its video game rental revenues by offering unlimited monthly rental options. Blockbuster hoped that it had stronger brand image and could offer a wider selection. Blockbuster also tried to leverage their extensive investment in brick and mortar locations by offering customers unlimited rentals at a fixed cost per month.

Buyer demand for this industry seems to be growing slightly as evidenced by new subscribers, which could lead to increased competition between the two companies. As evidenced by Netflix financial statements, it appears Netflix has executed a winning strategy and best displayed the ability to compete in the movie rental industry. They have displayed increasing profitability since 2000 and have gained significantly more subscribers each year. Meanwhile, Blockbuster has displayed substantial net losses and appears to be attempting to find a working strategy in the evolving movie rental industry. ) Potential Entrants (-) ( The threat of entry into this market is low because there is a relatively low amount of existing potential market entrants. Furthermore, new entrants would face fierce competition from both Netflix and Blockbuster upon entry. Profit potential would be viewed as relatively low for new entrants and not worth the large amount of capital investment. Another obstacle to entry is the economies of scale that must be present to become profitable in this industry. The break-even point for Netflix subscribers was approximately 292,000.

However, it is important to note that a company could enter this industry by competing against the existing companies using a new medium; this is exactly how Netflix entered this mature industry. 3) Bargaining Power of Suppliers (+)( Netflix’s movie inventory is supplied by movie studios through direct purchases, revenue sharing agreements, and licensing (C-104). Studios appear to have a fair degree of bargaining power as they are selling a unique product not a commodity. Therefore, suppliers are seen as having a moderate threat.

If a studio produced a successful movie, the subscribers of Netflix will expect to have the ability to rent that particular title. Netflix may attempt to form collaborative partnerships with more successful studios that produce a lot of new release “hits. ” 4) Bargaining Power of Buyers (-)( Buyers are very limited in negotiating prices for the movie rental industry as prices are commonly fixed for certain services and rental options. Therefore, buyers are viewed as having a low threat. However, the customer may compare prices of other companies and switch if costs appear to be set too high. ) Threat of substitute products of services (+)( Netflix has a ceiling on the amount it can charge because of competition in its market. If Netflix charges too much customers will switch providers. Different providers have the ability to carry the same movie titles if agreements are made with other studios. It is difficult to substitute movies that customers would like to view with other movie titles. Switching costs appear to be low, as customers would merely need to let their subscription expire.

I view the threat of substitute products as a moderate threat. Netflix is a great example of how a company can evolve by utilizing new technology to fill a desired need. SWOT and Balanced Scorecard Approach Strengths( Netflix has a core competency of making movie rentals easy. Netflix makes the product easier to obtain than the competition by offering next day delivery and saving trips to the rental store. Netflix also makes choosing a movie to watch easy by recommending movies that its customers may like.

This is difficult for competition to copy as Netflix developed its own proprietary software. This resource is very valuable as it adds to Netflix’s core competency of making movie rentals easy for the customer. Weaknesses( A competitive shortfall of Netflix is Blockbuster’s ability to gain market share by heavily promoting video game rentals and attracting customers who rent both video games and DVD’s. Another shortfall of Netflix is that it lacks the ability for customers to go to a physical location.

Ordering movies off the Internet takes some planning in advance as it takes at least 1 day to ship. Opportunities ( Netflix can enter into video game rentals. This opportunity was exploited upon examining the company’s weaknesses. Their business model should be a compliment to video games as a medium since they are physically the same size as DVD’s and could be shipped using existing resources. Threats ( Streaming or downloadable movies may become obtainable at rates too low for Netflix to compete against.

A major drawback to viewing movies on the computer is that customers do not want to view the movies on a small screen. Apple has developed technology that allows users to play movies on their home TV’s and more and more TV’s are being used as computer monitors. Overall, Netflix’s competitive strategy and strategic goals appear to be well executed. Netflix displays good customer value, excellent business processes, and sound financial performance as evidenced by my SWOT analysis and balanced scorecard (See appendix). Appendix