Netflix Business Analysis

Written By:

Dee Inthamat Jeff Kopp Krystal Brown Megan Gravelyn Nathaniel Cater Zyhra Durakovic

THE BRAND: Reed Hastings first established Netflix in1997, in Los Gatos, California. Netflix

began with just thirty employees and only 925 video titles available to rent. Hastings took advantage of the emerging internet market and marketed Netflix toward the needs of the consumer with convenience never before seen in the video rental industry.

Today, Netflix is the current leader of online video rental services. The company has over twenty million members and now provides customers with access to more than 100,000 hard copy DVD titles. Twelve thousand of these titles are also available through instant online streaming. PRODUCT LINE:

Netflix maintains its current position by giving the consumers what they want. The company delivers DVD’s directly to the consumer’s home address by postal mail with a pre-paid return envelope. With nationwide shipping centers located in every major city, consumers can return DVD’s hassle free if they are unsatisfied with the quality of the hard copy, such as a scratch or damaged DVD. If consumers do not want to wait for mail delivery, Netflix also has the option to stream movies instantly from any Internet-enabled electronic device.

THE MANUFACTURER:Netflix is currently working on an agreement with five new business partners,

Funai, Panasonic, Sanyo, Sharp and Toshiba, to manufacture ‘Netflix ready’ electronic devices automatically programed to stream movies and TV shows via Internet connection. This isn’t Netflix’s first deal, they’ve had numerous partnerships with companies such as LG Electronics, Samsung, Sony, Microsoft, Nintendo, Visio, and Insignia used for executing similar tasks.

BRAND PRODUCT LINE IN REGARDS TO THE MANUFACTURER'S TOTAL BUSINESS:

Netflix provides rental distribution of DVD’s by mail-order through their website. As mentioned above, the company also offers instant streaming of movies and television programs via internet enabled PCs, TVs, and other miscellaneous devices.

STAGES OF THE PRODUCT LIFE CYCLE IN REGARDS TO THE BRAND:From its establishment in 1997, Netflix has held a unique marketing position as

the first business to offer home delivery DVD movie rentals to its customers. Consumers have responded positively to this, and as a result, Netflix has grown to over eight-million subscribers with a total net income of 115.86 million dollars in 2009. The company continues to appeal to many customers with its aspect of convenience. DVDs come directly to the customer’s doorstep, minimizing their effort. Genius. Netflix has also done a great job promoting their product throughout its entire life cycle. Early in its growth stage they ran extensive TV ads. The ads were very informational and focused around the vast selection of movies and convenient delivery. Now that Netflix is in its maturity phase of the product life cycle, their promoting has shifted more toward minimalistic online advertisements such as banner webs by Google AdSense.

TOTAL ANNUAL SALES VOLUME: Netflix’s total sales have been increasing since the company’s original inception in 1997. The company recorded 1,067.3 million dollars in revenue during the 2009 Fiscal year. Not to mention 2.8 million new subscribers, a 22.4% increase compared to 2008.

SALES VOLUME BY KEY DISTRIBUTION CHANNEL:Netflix generates revenue through one business division: online video services,

which accounts for 100% of the company’s total revenue.

Sales Volumes for Key Product Item within the Product Line: Netflix generates profit and revenue through a single division. One hundred percent of Netflix’s revenue is generated through their movie rental service. Netflix currently has over 20 million subscribers, making it the largest subscription service for streaming movies and television series through the internet, game systems, and sending DVDs by mail. Netflix’s unique business model provides them with advantages over competitors, including the traditional movie rental businesses. This allows them to bring in customers located all over the country without the need for actual brick-and-mortar locations. Although Netflix offers DVD delivery in addition to instant streaming, recent statistics show more customers gravitate towards streaming. Customers are choosing price over content. For $7.99 a month, customers can stream content instantly through an online library. For two dollars extra, Netflix subscribers can stream instantly and rent a single movie through the mail. Netflix also offers unlimited plans: Netflix Unlimited Plans (Unlimited DVDs each month with unlimited streaming)8 DVDs out at-a-time for $55.997 DVDs out at-a-time for $48.996 DVDs out at-a-time for $41.995 DVDs out at-a-time for $34.994 DVDs out at-a-time for $27.993 DVDs out at-a-time for $19.992 DVDs out at-a-time for $14.991 DVD out at-a-time for $9.99

Netflix Limited Plan1 DVD out at-a-time for $4.99- Limit 2 DVDs Net profit was $115.9 million in 2010, a 39.5% increase over 2009. The operating profit was $191.9 million, a 58% increase since 2008. Future sale volumes may be in jeopardy if stamp prices increase or Netflix’s partners demand higher commission during contract renewals, which could lead to an increase in subscription fees.

MARKET SHARE AND RANK:Netflix has more than fifty-five million discs and, on average, ships 1.9 million

DVD’s to customers each day. It has previously claimed to spend about $300 million a year on postage. On February 25, 2007, Netflix announced the billionth DVD delivery. Two years later, on April 2, 2009, the company announced that it had mailed its two billionth DVD, and has awarded the recipient with a complimentary lifetime membership.

Netflix topped the ForeSee Results’ Top 100 Online Retail Satisfaction Index with an American Customer Satisfaction Index score of 86, well above the industry average of 75. It has also proclaimed that is commands a 40% share of the total video market.

Current Brand Positioning: Netflix, a relatively new company, has harnessed the evolving world of new

marketing techniques and found a niche all its own. As a pioneer of sorts, Netflix has riveted the palate of consumer options for accessing entertainment media. Renting videos at Blockbuster now seems passé’, even ‘Stone Age’. The reason? Netflix found a void in the marketplace and developed a unique business model and method of supply. By creating an online database of movies and TV series, old and new, they have developed a choose-and-view platform with a no-need-to-leave-the-home advantage. Consumers have full market choice of entertainment media in the setting of ultimate convenience.

By providing customers with a great product and reliable customer service, Netflix Company has taken over the movie rental business and its name has become a generic reference, much as Xerox Corporation and the reference to ‘xerox’ as synonymous with ‘copy’. The brand is even used as a verb, as in, “I just netflixed that.”

Similar to the brand logo, white letters resting against a red backdrop, Netflix has become synonymous with the word ‘simple’. What could be easier then a service that allows you to rent up to nine movie titles, sends them straight to your house, and never charges you a single late fee? Netflix has continued to grow their business model as technology allows. In fact, there are currently over 200 means by which people are able to stream and watch Netflix live.

As long as the company continues to provide quality service, low prices, and consumer benefits, its position in the marketplace will remain dominant.

Current Marketing Brand Strategies:Netflix takes advantages of the many marketing platforms technology allows.

As a new company, offering a new service, Netflix initially faced an uphill battle generating familiarity in the marketplace. Not surprising perhaps, when offering a service that had never been utilized before and was initiated at a time when the average American household was still evolving in terms of available household technology and ‘Mom and Pop’ technology skills. The challenge of cultivating a brand image and getting the word out about a company is not a new concept. However, in a world overpopulated by advertisements and pleas to try a new product, it has become more difficult. Netflix’s growth is due to the many marketing avenues the company has pursued. Currently, Netflix uses marketing strategies such as: online portals, internet affiliates, retail

partnership, affinity marketing, cobranding, popup ads, free trail offers, radio and television commercials, package inserts, and word of mouth.

Online Portals:Yahoo, MSN, and AOL are examples of online portals, which Netflix utilized to

get the word out about their business and create buzz. Affiliate marketers:Online sites display Netflix logos on their sites, which when clicked, route

browsers directly to the main site. The purpose of affiliate marketing is to create traffic for Netflix through the use of another website, or an “affiliate”.

Retail Partnerships and Cobranding: Netflix extended their market reach by partnering with Best Buy. Netflix and

Best Buy announced their alliance as a way “to make the purchase and rentals of DVDs easier and more accessible.” They cobranded a DVD rental service only available through BestBuy.com, SamGoody.com, MediaPlay.com, Oncue.com, and Suncoast.com. Many Best Buy customers have become Netflix customers through this partnership.

Word of Mouth:Consumers are more likely to trust a friend or family member when they

recommend a service. If one hears about Netflix through a trusted peer and is interested enough to visit the website, Netflix entices these customers further by offering a free trial period.

Free Trial Period:Netflix offers all new customers a one-month free trial period, after which, they

are completely free to end their subscription. However, 90% join Netflix after the free trial period, a statistic that proves the success of Netflix marketing.

Television and Radio Commercials:Netflix markets their product on the television as well as the radio. Netflix

commercials advocate new services such as streaming content through the Nintendo Wii. The majority of Netflix commercials state the brand name and what they offer, “Netflix, rent as many movies as you want, one flat fee.”

Package Inserts:Netflix uses package inserts, which are small leaflets with the brand name and

key points they use to entice consumers.

Netflix’s aggressive marketing brand strategies are costly, however, they have proven effective as the Netflix consumer base is in a constant state of growth.

CURRENT BRAND MARKETING BUDGET AND HOW ALLOCATED:The majority of companies spend disproportionate amounts of money trying to

acquire new customers. Netflix is the largest advertiser on the internet. According to their 2010 fourth quarter financial report, Netflix’s total operating expenses for the whole year was $521,629. These operating expenses include technology and development, marketing, as well as general and administrative gain on disposal of DVDs. The current marketing expenses for December 2010 are $62,849. The chart indicates that Neflix lowered their marketing expenses from last month. This is partially due to the fact that Netflix has already become a household name and needs no more extra expenditure on advertising.

TARGET AUDIENCE:Netflix appeals to a large target market. According to Time Magazine, the

demographic ranges from 18 to 35 year olds with children and without. Netflix also has a strong appeal to people who have Internet access. A lot of customers use the live Internet streaming option rather than having DVDs sent to them by mail. Their target audience consists of movie buffs who like easy access to any show or movie they want.

BRAND CONSUMPTION PATTERNS: Since 1997 Netflix understood people. The company understood their customers, their consumers; they even understood their competitors. What makes Netlfix different is not that they offer a great service nor is it the fact that they are conveniently located online, majority of their competitors possess similar qualities; Netflix is different because the company understands consumer behavior. Initially starting off with VHS’s in 1997, the company shifted their content toward mass-producing DVD’s in 1999. A few years later in 2005, Netflix began its online streaming service. Its main competitor at that time, Blockbuster, followed the online streaming service two years later in 2007, but it was too late. Netflix gained more customers and had announced it’s billionth DVD delivery. So what’s next for Netflix? Well, that’s up to the people. So far televisions, mobile phones, mp3 players, game consuls, external video devices, and computers all have the Netflix application conveniently installed. Who knows, within the coming future we may have stream films in movie theaters?

MEDIA CONSUMPTION:Digital media is the future of video consumption. Netflix uses a variety of

different types of media to get people to interact with their products and services. Established in 1997, Netflix continues to grow and become the king of digital media. Here is a list of Netflix media choices:

Internet Streaming via PCs, Macs, Blu-Ray Players, TVs and Game Consoles Apple Co. Products Google TV.

PSYCHOGRAPHIC INFORMATION:Psychographically, Netflix customers have the following interests: Movies,

Music, Cosmetics, Books, Parenting, News & Information, Diet & Fitness, Politics & Commentary, Home Furnishing, and Consumer Electronics. It's not surprising that Netflix customers have these interests.

SIZE OF TOTAL MARKET:The market for in-home entertainment video is intensely competitive and

subject to rapid change. Many consumers maintain simultaneous relationships with multiple in-home entertainment video providers and easily shift spending from one provider to another. For example consumers may subscribe to Cable, rent a DVD from Redbox or Blockbuster, buy a DVD from Wal-Mart or Amazon, download a movie from Apple iTunes, watch a TV show on Hulu.com, and subscribe to Netflix, or some combination thereof, all in the same month. Different competitors may be able to launch new businesses at relatively lower costs. DVD's and online streaming represent only

two of the many existing and potential new technologies for viewing entertainment videos. In addition, the growth in the adoption of DVD and online streaming is not mutually exclusive from the growth of other technologies.

MARKET SEGMENTS:Netflix operates in the subscription segment of the in-home entertainment

video market. In 2007 they expanded their DVD-by-mail distribution model to include streaming content over the Internet. This hybrid distribution model expands the ordinary consumers appeal of the Netflix subscription service beyond the traditional reach of the DVD rental segment and offers subscribers a uniquely compelling selection of content, both streaming and DVD at one low monthly price. While costumer interest in this hybrid service has grown quickly, the market for Internet delivered video content is still in its formative stages, and intense competition is expected.

Currently the market for Internet delivered video consists of three market segments: Video on demand ("VOD"), ad supported, and subscription. The VOD segment includes competitors like Amazon, Apple, Blockbuster, Cinemanow, and Microsoft. The ad supported segment includes competitors like Hulu and YouTube. Currently, Netflix is the primary provider in the subscription segment, but direct and indirect competition is expected to emerge and continue to grow as the consumer appeal for Internet delivery of video continues to expand.

The market segment for online DVD rental has grown significantly since inception. Some of the increasing growth can be attributed to changes in Netflix service offering, especially the ability of Netflix subscribers to stream movies and TV episodes on their TV's and computers.

INFORMATION ON KEY COMPETITORS: Hulu is an online streaming website that streams movies and television shows.

Hulu offers viewers the ability to stream certain shows and movie clips for free. In addition they offer Hulu Plus, which has new television shows and movies available for full-streaming. Hulu Plus is $7.99 a month for unlimited access to everything on the website. They offer a free one week trial for Hulu Plus. According to Hulu's website, their target market ranges from men and women from ages 18 to 49 years of age. According to Comscore, in January, 2011, Hulu had 24,900,058 viewers. Hulu makes their profits by having advertisements in their videos and also from Hulu Plus. They are partnered with over 400 advertisers such as McDonald’s, Visa, Best Buy, etc. Hulu is able to stream on computers, cell phones, and tablets. You can also access Hulu videos on 40 other websites. For example: AOL, Myspace, IMDB, MSN and many more. Hulu is also partners with networks such as FOX, NBC, and MTV. This gives them access to various shows across these networks.

Another competitor of Netflix is Comcast On-Demand. Comcast cable offers a program called On-Demand. It allows customers to open a menu on their television where they can choose what they want to watch instantly. For new release movies, customers have to pay a fee to view them. If a customer pays for a movie, they usually have 24 hours to watch it. Only Comcast customers are able to use On-Demand, and they can only watch it on their TVs.

Blockbuster is a movie rental store nationwide. They have all the latest movies and video games. Customers can also rent or buy movies off of their website. They have a new program called On-Demand where you can download the movie you payed for to computers, cell phones, blu-ray players, game consoles, and other electronic devices. Blockbuster has a demographic that consists of both male and female, 18 to 40 years of age, some with children.

Redbox is a movie rental kiosk that operates solely on the home video rental market. Redbox kiosks are placed outside of high-traffic locations, like Walgreens and Walmart. Customers use their credit cards to rent movies from a Redbox kiosk for one night. The company that owns Redbox is CoinStar. The demographic for Redbox is similar to the other companies, it consists of male and females, ages 18 through 35, most of them have children.

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Online 7 Feb. 2011. Expanded Academic ASAP. Web. 5 Mar. 2011."Comcast CEO: Netflix is Web Equivalent of Television Reruns." PC

Magazine Online 28 Feb. 2011. Expanded Academic ASAP. Web. 5 Mar. 2011.

Friedman, Lex. "Netflix streaming-only plan." Macworld Feb. 2011: 78. Expanded Academic ASAP. Web. 5 Mar. 2011.

Greenblatt, A. (2010, September 24). Impact of the internet on thinking. CQ Researcher, 20, 773-796.

"Netflix Adding CBS Content to 'Watch Instantly'." PC Magazine Online 22 Feb. 2011. Expanded Academic ASAP. Web. 5 Mar. 2011.

"Netflix button debuting on remote controls." PC World 29.3 (2011): 14. Expanded Academic ASAP. Web. 5 Mar. 2011.

"Nintendo 3DS to Get Netflix, New 'Mario' 3D Game." PC Magazine Online 2 Mar. 2011. Expanded Academic ASAP. Web. 5 Mar. 2011.

"Why There's Nothing Good to Stream on Amazon Prime or Netflix." PC Magazine Online 23 Feb. 2011. Expanded

Academic ASAP. Web. 5 Mar. 20

Websites: http://www.netflix.com/ http://www.hackingnetflix.com/ http://topics.nytimes.com/top/news/business/companies/netflix-inc/

index.html http://quotes.wsj.com/NFLX http://www. datamonitor. com http://www. brandtags.com http://www. quantcast.com http://www.worldtvpc.com/blog/netflix-introduce-movie-demand- devices/ http://www.hulu.com http://www.comcast.com http://www.blockbuster.com http://www.time.com/time/magazine/article/ 0,9171,1002015-2,00.html http://finance.yahoo.com/q/pr?s=NFLX+Profile http://library.cqpress.com/cqresearcher/

FOCUS GROUP RESEARCH OBJECTIVES:1. Determine variety of ways people use Netflix?2. Determine why people watch Netflix?3. Determine from where people watch Netflix?4. Determine if costumers satisfied with the pricing?5. Are there additional opportunities to expand the brand?6. Determine promotional techniques via web trafficking?

FOCUS GROUP QUESTIONS:1. How often do you watch movies?2. How many television series do you watch?3. What do you do if you miss you film/show?4. Which do you prefer DVR, Live-Streaming, or DVD’s?5. Having a video quality of High Definition any concern to you?6. Have you ever heard of Netflix?7. Do you know of any competitors?8. Are you happy your Netflix experience?9. How would you improve Netflix?10. Who uses Netflix the most in your household?11. What do you hate about viewing content online?12. Have you ever streamed a movie from Hulu or Youtube?13. When you hear the words “Access Instantly” what do you think?14. What changes would you like to see be made in Netflix?15. How often are you around technology? (phone, tv, computer)16. What barriers have you encountered while using the Internet?17. What do you think of Netflix’s pricing?

KEY FINDINGS:1. Increase current selection of film to new releases or DVD releases2. Opportunity to increase pricing3. Expand high definition options4. Customers ARE brand loyal5. Positive reviews for customer service6 .Opportunity for a download option7. Positive reviews for television series selection8. One month free trial account is a high preference9. Continue capabilities to use others account10. Transition phase from DVD to instant streaming is necessary

StrengthsGood brand nameCheapDeliver via mailInstant-PS3,Internet, Xbox, PhoneGood reputationFirst month freeBlu-RayLarge consumer loyaltyInternet DeliveryNo late fees

WeaknessesPostal deliveryLarger DatabaseInternet-FocusMovie ChoicesNew Releases DelayHigher cost structureQuality of video streamingLimited HDConstant Updating

OpportunitiesMore HDMore movie choicesMore movie sectionsExpand to Game ConsulsFaster Downloading SpeedStream MusicText (SMS) to OrderDinner and a Movie CouponCostumer ReviewsStreaming to vehicles

ThreatsAmazonHuluContract RenewalsRed BoxOn DemandApple TVGoogle TV3-D TVLoyalty to other brands Youtube