Table of Contents
Introduction and Company Background 2
Current Strategy 2
Market Position and Key Issues 3
Alternatives Analysis 4
Introduction and Company Background
Netflix is a company that put a spin on the video rental industry. This was an industry where traditionally if customers wanted to rent a video they had to travel to a physical retail outlet; Netflix delivers the rental service right to the customer’s door. Their business model is a subscription based model where customers pay a monthly fee to have access to a large library of titles, depending on ...view middle of the document...
They have also patented red Netflix envelopes that minimize in weight which decreases the postal costs and increases processing speed. The strategy they are using to gain more subscribers is a 14 day trial period offered to anyone interested, the trial period automatically enrols the user when the trial ends. This has been very successful since most trial subscribers become paying subscribers. The company mostly uses the internet and word-of-mouth to advertise their services.
The company’s direct competitors are Wal-Mart and Blockbuster, who are starting their own version of a DVD online rental service. Their services are very similar to Netflix business model but also offer additional options. Blockbuster has been in the retail movie industry for many years, the case mentions that they hold 40 percent of the market share, although this includes sales of DVDs as well. They have thousands of Blockbuster stores over the US and are looking to utilize this extensive store network to become distribution centers. Blockbuster also offers video game rentals on top of movie rentals. Wal-Mart is a threat because it is doing what it does best, being price leader. Wal-Mart is charging the least for their service and gives the option for customers to drop off the DVD’s at any of their stores. Netflix’s competitive advantage is that they were first mover’s in this rental-by-mail service, their distribution network is unmatched. They are able to offer one business day delivery, whereas Wal-Mart can take up to five days with its current network.
Market Position and Key Issues
Netflix is currently leading in the rental-by-mail service, they are estimated to have over five times the subscribers as Wal-Mart. This could easily change as Wal-Mart is offering better prices and could lower their prices even more in the near future. Wal-Mart has a history of “taking out the small guys”, Netflix's best option is to focus on differentiation to compete with Wal-Mart's low prices.
Not surprisingly Netflix was creating losses in their first years of business, but once they established their subscriber base and optimized their expenses they were able to create a profit. In 2003 they had a net income of over $6 million and increased that to $21 million in 2004. However, its stock had lost 78 percent of its value in the last year, most likely due to the new competitors. Innovation is what made Netflix succeed and they need to prove to all of their stakeholders that they still have that innovative spark.
The movie industry is an industry that follows technology closely, the biggest technology jump was when movies went from VHS tapes to DVD. Using the internet as a catalogue and the DVD size being small enough to economically mail the movie, Netflix saw this opportunity and took advantage of it. Now the problem is that DVDs do not have the capacity to hold High Definition content. HD content is...