Netflix Case Write-Up

Netflix Case Analysis

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Executive Summary:

Netflix CEO, Reed Hastings, is tasked with preparing how the company will enter the Video-on-Demand (VOD) market. Netflix, a rental company that uses the USPS to deliver DVDs to subscribers, offers over 70,000 films and can deliver to almost six million of its 6.6 million subscribers within one business day. By 2006, the company reached nearly $1B in revenue, while generating free cash flow of $64M. With Video-on-Demand anointed as the “next big thing” in home video, Netflix must decide which of its self-identified group or groups of available forms of Internet video, if any, the company must pursue. Through analyzing the company’s history, it’s resources, the competition, and all alternatives, I believe Hastings and Netflix should incorporate VOD into the company’s services.

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How did Netflix’ business model evolve over time? When and how did it begin to disrupt Blockbuster?

Netflix started by offering DVD rentals (as opposed to many stores which offered VHS) through its website, where subscribers could search the database of movies, select a film, and have it mailed through USPS. Netflix’s business model evolved throughout its history, adapting to customer preferences and to its competitors. Netflix increased its number of distribution centers, worked with USPS to cut down on delivery times, and tried several business models from per rental charges (plus shipping) to a prepaid subscription model. The company later evolved to an unlimited rental model, which attracted many new subscribers and improved customer retention. Netflix also relied heavily on its recommendation system as a differentiator, as lesser-known films were promoted at a low cost and to a broader audience, and stock shortages were avoided by only promoting movies in stock. Netflix began to disrupt Blockbuster when it improved its delivery time and film selection in 2003. The company’s no late-fee policy also differentiated it from Blockbuster. Blockbuster was no longer able to differentiate itself through being timelier and was behind in the technological space. Blockbuster attempted to launch its own online service in 2014, but had fallen behind and was unable to keep up.

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Compare Blockbuster’s and Netflix’s profit models. How did the difference affect the respective company strategies?

Netflix and Blockbuster originally had profit models that were vastly similar. Though Netflix was struggling due to its slower delivery of rentals, it charged the same rental prices as Blockbuster and other retailers which offered rentals. Netflix was spending large amounts on marketing, at one point spending “$100 to $200 to bring in a customer, and they would make one $4 rental”. Netflix, however, had the advantage of having low overhead costs by not requiring as many locations or offices. Blockbuster’s profits depended on maximizing the time movies were out for rent and profiling new releases. While late fees represented about 10% of Blockbuster’s total revenues, Netflix, on the other hand, moved to a no-late-fee subscription model in 1999 in order to improve customer satisfaction. Netflix then decided to move