Netflix

Product Model






Netflix represents a classical “product” business model in the video-on-demand industry where users pay a subscription fee to access Netflix’ library of films and television shows. Netflix was one of the pioneers of offering entertainment content using video streaming technology in exchange for a subscription fee.

HISTORY – THE EXEMPLAR FIRM AND OTHERS:

Netflix video on demand (VoD) originated from a DVD rental business in 2007. The company still operates the DVD rental service, but its primary focus has since shifted to the VoD streaming business. This business model write-up focuses on the VoD business. Netflix is the largest online movie and TV show streaming provider with more than 40 million streaming members as of 2013; Netflix streaming accounted for 89% of shows streamed in Q1 2013. The company also produces original content. Video on demand industry is a crowded one, with multiple players and business models. Players in the industry compete on price, exclusivity and range of content, as well as user experience in terms of personalization and compatibility with different devices. Some of the largeest competitors include Hulu, which uses a hybrid business model partly based on advertising revenues, and Amazon’s Prime Instant Video offered as a complement to their retail market place business.

CUSTOMERS – WHO THEY ARE:

Netflix’s customers are the individuals who pay a subscription fee to access the entertainment content in Netflix’s library. They must have an internet connection. Netflix launched in the United States and is currently available in many other countries in North America, Europe, and Asia. Netflix customers span wide demographic ranges – young to old, wealthy to lower-income, men and women, etc.

ENGAGEMENT – VALUE CREATION PROPOSITION (INCLUDING NETWORK EFFECTS):

The main value propositions to streaming consumers are the legal access to a large movie database (in the UK there are currently almost 3,000 different titles available1 – note that availability varies by country) and the personalized service expressed in the suggestions of movies for each customer. The customers’ ratings serve as the basis for the recommendations and not a film’s popularity at the box office. The rating algorithm makes better use of movies available on the website tailored to his/her taste to watch. Netflix also creates value by having one of the widest supported devices ranges, including game consoles, smart phones, tablets, PCs, and internet TVs. Finally, Netflix offers original and exclusive content to its subscribers. New and exclusive series are released as full seasons, enabling binge watching; users do not have to wait week by week for new episodes to be released. Combined, these products and services significantly increase customers’ willingness to pay for access to Netflix’s catalogue as they have a wider choice and easy use.

DELIVERY – THE VALUE CHAIN:

Netflix licenses content from broadcast networks, cable network providers, and film and television studios. As an early entrant, Netflix was able to build a huge database of movies benefitting from the willingness of both TV studios and media companies to license their content. These companies hoped that Netflix users would have a chance to catch up on previous series of TV shows or films and, as a result, would be more willing to pay for their services to watch new episodes or film releases. As time passed, however, Netflix was viewed as a substitute rather than a complementary good to traditional content distributors.

Netflix also produces original content based on customer viewing data. By analysing behavioural propensities of its paying customers, Netflix determined that a political drama starring Kevin Spacey and produced by David Fincher would appeal to a large cross-section of its existing subscriber base, resulting in the highly successful (14 Emmy nominations) political drama “House of Cards”. Netflix has now licensed its original content to other distribution channels.

Netflix delivers its streamed media through Microsoft’s SilverLight platform, which is a platform that permits programmers to develop complex web applications. In 2010 Netflix switched to Amazon’s cloud services and started using some features of the HTML5 technology to extend the range of devices that could stream video through Netflix to numerous web browsers, consoles, and other devices including tablets and iOS systems since they do not work with Flash. Due to the fact that HTML5 platform is not yet implemented officially Netflix engineers had to work to integrate and innovate the way they deliver video in order to use the technology. The way Netflix integrates HTML5 enables a wider range of devices able to stream media, and uses less battery than other platforms. The supreme rating algorithm CineMatch, which recommends movies to customers matched to their tastes, makes for a distinct personalized service.

MONETIZATION – VALUE CAPTURE:

Netflix’s major source of revenue are the subscription fees of $7.99 per month for unlimited access to TV shows and movies streamed over the internet to a range of devices. Currently Netflix does not use price discrimination for its customers. A popular critique of Netflix is that the company cannot bring in enough revenue from customers alone to keep up with the need to continue purchasing new content for their service: "Netflix needs advertisements to bring in more money." Netflix's response has always been a solid "No." Instead, the company is planning to increase their fees, while still protecting the original add-free value proposition.

Disclaimer:

Written by Tatiana Mikhalkina and edited by James Knuckles under the direction of Prof Charles Baden-Fuller, Cass Business School, this case is designed to illustrate a business model category. It leverages public sources and is written to further management understanding, and it is not meant to suggest individuals made either correct or incorrect decisions. © 2014



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