Assess the structure and technological development of the video streaming industry: A case study of Netflix

 

"[N]o one is happier to see streaming services take nominations away from Cable

than Network television. Not very nice when someone younger comes along is it, Cable?

Cable is looking at Netflix the way Justin Bieber looks at One Direction."

Seth Meyers, 66th Primetime Emmy Awards

The emergence of video streaming

The modern ways of digital communication and advertisement that is backed up by the internet accounts for more than 22% of the world’s economic output (F., 2022). Video streaming consumes the biggest growth area of internet usage. Consumers have shown a magnificent interest in seeing the on-demand movies and watching the video content on every available device; video players, mobile phones, desktops, television, tablets, laptops, and now even mobile phones. People find it quite convenient to watch their favorite video content in high resolution especially online which is now available in 3D also.

If we look at the entertainment area then it is recorded that 30 percent of overall internet traffic is comprised of video streaming. Companies such as Time Warner, Comcast, Netflix, Hulu, and Amazon among other different small video streaming companies and working side by side to meet the demand of people which is increasing day by day (West, 2014).

This great upsurge in the video industry requires more telecommunication networks to meet the need for network management, network design, and speed. Internet providers and video streaming industries are struggling hard to reengineer the networks in a way to accommodate the massive growth of online and offline videos and make it easier to share the views online to catch more public (West, 2014).   

Structure, technological and strategic development of Netflix

Netflix is based on a long-term strategy of giving its users a wide variety of DVDs. This always put the company in a hustle to acquire as much new video content as possible to keep their process updated and subscribers intact (IvyPanda, 2021). When Netflix entered the market with the plan of delivering DVDs back in 1997, at that time the landscape of both TV and the internet was very different radically. Netflix was pushed back by the end of 1997 NBC successfully pose its footprint in the market by winning the rating race but the competitors like HBO were never behind to catch it (Osur, 2016).

Netflix started its journey with the out of box idea of utilizing the United States post office for the distribution of DVDs. This business idea was not only old-fashioned but also innovative. Using the post office was an innovative approach that was never tried by anyone in the rental-based industry. This was the building stone of the success of Netflix because such an approach was very hard to master, as Blockbuster tried and failed while Movie Gallery and Hollywood Video never dared to try.

Development strategy

Early years

The initial operations of Netflix were based upon only two innovations related to technology; DVDs and the internet (Keating, 2013). Although, the brains behind Netflix were never confined to close box thinking and thrive to adopt the innovation and technological changes that brick and mortar competitors of Netflix never realized. Netflix also digs out that alone technological change can never benefit any but also one has to keep an eye on the behavioral change if they want to thrive. It realized that behavioral and technological change goes hand in hand.

Randolph the founding father of Netflix was unaware of what Netflix could become in the coming year as he said,

"The model does not include being a geeky Internet company. We initiated it so that anyone with a DVD player has a place to go where they can rent any DVD and always have the title they want available " (Espe, 2019).

Netflix starts cutting deals with distributors for cheaper DVDs to make the window shorten for theaters and the rental DVDs available. They also tried to make arrangements in Las Vegas regarding the physical DVD kiosk but failed.

The Business Plan: Subscription Service and Marque program

The business plan of subscription was different from both of the previous ones; neither was the le carte rental nor purchase-to-own. Netflix first needs to make it more appealing for its user to shift from the “ownership” to the “access” and then from the pay-per rental to the rental plans every month. Netflix started by charging 4 dollars for the seven-day rental and 2 dollars for the handling and distribution as same the other whole video industry that was based on la carte distribution back in 1998 (Osur, 2016). Reels.com was the first to enter the market with this agenda to replace, rental with purchase-to-own business as they find it expensive with a minimum consumer market. At that time it was very hard to mold the public towards the subscription but Netflix took that challenge instead of losing hope. Hasting said,

“People prefer the convenience, we just need to wait for people to get more used to the DVD and web before our business model takes off” (Graser, 2000).

In 1999, soon after a year, Netflix launched a new program that is named as “Marque Program”. The program had costs of 15.95$ monthly and the subscriber can enjoy the four DVDs at a time. By 2000, the whole la carte rentals shifted in the favor of “Marque plan”.

This new model offers Netflix the numerous consumer-centric services that other stores that are stuck in la carte model cannot afford to give. Netflix has a no-hassle policy no late fee, no damage or loss of discs, and also no cancellation hassle policy (Osur, 2016).

The technological advancement in the video streaming industry

The DVD

Marketing has a sole aim is to add value and meet human needs (Philip Kotler, 2020). Netflix and DVDs have a similar story of development. DVD premiered first time in the spring of 1997, with only less than 1000 titles. They were expensive and also luxury items that cannot be afforded by everyone. Divx was an alternative method to DVDs as film storage. The idea of Divx is to provide a more financially feasible disc to watch for a few days. While the DVD is to watch and store for a long. Divx failed because the studios cannot return it while DCD technology allows the streaming agencies like Netflix to flourish and supersede the rental business.

Netflix was among the first video streaming companies that capitalize based on DVDs. By 2005, 2/3rd of the Americans have at least a DVD player in their home and the revenue generated by the DVDs surpassed the theaters (Sporich, 2005). Not only do DVDs give a boost to Netflix but also Netflix tries to make ties with HP, Sony, Toshiba, Apple, and Pioneer so that they can offer some free trials of Netflix to the users with DVD players and the users having computers with DVD players (Osur, 2016).

The technological advancement in the video streaming industry: The shipping

Hastings and Randolph; the founders of Netflix were trying to find ways to make the company internet-based. They knew that VHS tapes were fragile, impractical, and large whereas the DVDs are easy to store and ship in Bulk. Hence, they start using the United States Postal service to ensure the mobility of DVDs. Netflix invested a lot to innovate the DVD mailing. For this purpose, they tried 200 packages, innovate the machines in the post office, and introduced barcodes. Those machines can mark 5000 envelopes in an hour. For shipping, they installed several warehouses to minimize shipping time (Osur, 2016). 

The technological advancement in the video streaming industry: The Culture Deck

Netflix also focuses on the corporate culture to utilize the potential of customers fully. It is meant to encourage, intellectualism, innovation, and high expectations. They prefer that performance is worth more than effort. They abruptly kick out the high-level employee who fail to do the value addition in the company and only included people with relevant skills. Focusing on inside governance costs of organization can bring costs of information problems to minimum (Santos, 2005)

 

The Long Tail

The long tail is the business strategy that is used by the companies to gain profits by selling the less volume of rare items, instead of selling large volumes of popular items (HAYES, 2020). The long-tail model is very profitable for the companies like Netflix and Amazon. The companies that provide such content or access to such content can use the long tail model to generate an audience much more than a blockbuster hit.

The algorithm places an important role in such models as they first decide the search functionality and then the access to the inventory. The blockbuster can offer only one option while with long-tail there are thousands of options available. By this model, the need for large inventory increases which is also solved by the Netflix algorithm that already tells what the customers are intended to rent. In this way, the company can be saved from under and overstock of titles (Osur, 2016).

The mirage of Streaming: Internet Streaming

Netflix started working on internet streaming back in 2000. At that time it costs a lot which was almost 10$ and sixteen dollars to get a single movie (Copeland, 2010). It all changed when YouTube jumps in 2005. YouTube broads the path and gave the idea that videos can be streamed online instantly rather than downloading all the content. This was the point of tipping what Netflix was looking forward to for years. Netflix began working on it immediately and now it become one of the biggest Internet TV networks (Osur, 2016).

The strategic problem faced by Netflix

There are not many internal factors that can affect the functionality and profitability of Netflix. As an international organization with a vast niche the only strategic issue it can and it was faced was related to its growth and grip on subscribers. As only in the US, it has the most market shares, comprises 40% of the total subscriber it has are from the US. The first drop in subscribers it faced was in July 2019 when Disney and Apple takes a plunge and offer tough rates which were $7 and $5 respectively (per month) which pushed it behind a little (GAUS, 2019).

The international growth:

Globalization is the result of a tug of war between policy threats and economic fundamentals (Altman, 2019). Although, Netflix Holds the status of a pioneer in the streaming industry and gained the first-come benefit in the subscription video on demand (SVOD) model that charges a price for the monthly package the competition is getting interesting.

The competition becomes the elephant in the room for Netflix as Apple TV+, Disney+, HBO Max, Peacock, Comcast, and other giants join the competition and get a lot of attention from investors. Analytics questions about how Netflix is going to hold up to its subscribers when the AVOD and SVOD slot is expanding. The subscription domestic is hitting the wall but Netflix added 500,000 US subscribers in the last quarter of 2019 but then a great decline has been seen in the other quarter (GAUS, 2019).

Netflix is spending high in Asia, especially in India has a population of more than 1 billion. Netflix is gathering much Indian content and spend around $18 billion on the content in 2022 (theconversation, 2021). The company had the aim to touch more than 100 million subscribers in India and keeping in view the statistics, Netflix revealed that it has lost more than 200,000 subscribers in the first quarter earning of 2022 (theconversation, 2021).

To see, the possible strategic problems Netflix is confronting, we need to do the porter’s five forces analysis on it to take a look deeply.

Porter’s five forces analysis

Internal Rivalry

There is tough competition for Netflix with its competitors in the market which include Blockbuster, Amazon, and Redbox. This competition costs Netflix a heavy amount as it spends a lot of its revenue on marketing. As it has been said that the marketer’s job is to produce, create and communicate the customer’s value. It is not what the customer thinks of as the value but what the customer perceives when it comes to value (Kotler, Customer Value Management, 2017). So in 2021, Netflix spent 2.55 billion US dollars in marketing which was 14% greater than the previous year (Statista, 2022).

Substitute products and services

Netflix is losing its market shares as many new competitors have entered the market. Major competitors are HBO Max, Amazon Prime, Apple TV, and Disney plus. Netflix is quite penetrated in the US so it is said that any new entrant which damages the current marketing portion of Netflix can significantly affect the company’s value. Although Netflix has major market shares the local streaming companies can easily be accepted by the local customers (Journo, 2021).

Substitutes for internet streaming services provide minimal danger. The use of television has become obsolete since Gen Z and millennials prefer internet streaming services such as Netflix, Hulu, and Amazon. YouTube is another possible option; however, the quality, genre, and professional content available on it vary greatly. Cinemas and other forms of media entertainment are also available.

Entry of New competitors

Even though Netflix was the first organization to enter the internet video streaming business, and holds a very strategic alliance because one always needs a strong partner to polish his skills and it is the core business strategy in many cases (Bleeke, 1995). Despite this, the company today faces high intensity of competition. The internet video streaming business features many small and large-sized local and international firms such as Hulu, Amazon, HotStar, CraveTV, etc. Each competitor offers a unique set of value to customers such as Amazon offering its e-commerce retail products apart from its streaming services and leveraging its global brand name and huge customer base. Thus, Netflix is in a constant struggle to keep innovating and coming up with strategies to increase and maintain its competitive position in a highly competitive industry.

Netflix has to keep an eye on the rising popularity of the video streaming industry. This industry is open to innovation and improvement, which always opens a window for new competitors to peek in.

Bargaining Power of Consumer

The industry of video streaming is vast. This provides the customer with a great deal of bargaining. Major pressure for the change of marketing practices come directly from consumers (Kotler, Reinventing Marketing to Manage the environmental imperatives, 2011).  This bargaining may not be much from the direct consumers but as Netflix is expanding worldwide then the government officials of other countries can impose such taxes and regulations on Netflix that put it at some regulation risks. Also, due to the disputes between the United States with its new partners, the countries started to do the screening of foreign corporate sectors takeovers, and advance data policies of localization (Altman, 2019). 

With a growing number of streaming service options in the same price range and cheap switching costs for clients, buyers have more bargaining power than ever before in the business. Due to the monthly subscription model, customers can simply choose and leave services if the media material offered to them is not up to par.

Bargaining Power of Suppliers

Netflix is very much dependent on the studios to provide it with the content. In recent years it started to make its content but still, a major portion of Netflix is comprised of the other circulated content. This always put it at risk, as if the suppliers stop sharing the content with Netflix it may cripple the Netflix model.

Supplier power has increased as a result of growing industry competitiveness. Suppliers have understood that if they do not give these streaming services creative, appealing, and high-quality material, they will lose users who would unsubscribe and migrate to another streaming service. Recognizing this, Netflix and other streaming services, such as Netflix's Orange Is the New Black, have begun to create their original content. As a result, suppliers wield a moderate amount of power in the sector.

Solution

The digital revolution of social media and the internet are the major features of the consumer market these days. One way or another the consumer is trapped in this ecosystem and this is what big giants are utilizing (Kotler, Where Does Consumerism Stand Today?, 2020).

To counter the growth market strategic problem Netflix needs to adopt the “International Strategy”. To plunge deeply into what Netflix is offering and what issues it can face, let’s take a look at the SWOT analysis of Netflix. 

SWOT analysis of Netflix's strengths, weaknesses, opportunities, and threats (SWOT) and make strategic recommendations based on the results.

 

Strength

Netflix is an ad-free streaming service that sets it apart from its competitors and is a big strength for the firm because it offers a fantastic user experience. Netflix is a well-known service with a strong brand name and brand equity, allowing it to expand into new markets. This is especially true given Netflix's first-mover advantage in the internet streaming sector. Allows clients to download content and watch it at a later time.

Netflix has a sizable client base as well as a sizable content library. Netflix is an original content provider, developing its shows and movies that have grown immensely successful, in addition to acquiring media through contracts with third parties. Thus, these shows and movies are only exclusively available on Netflix only and cannot be found anywhere else.

Weakness

Apart from Netflix's content, all the other content is available on a contractual basis only meaning they are only available on Netflix for a certain period. Expensive licensing agreements with third-party content providers. Netflix has an easy to replicate business model which is a weakness since competitors can easily copy the model to enter the online streaming industry

An essential requirement for the company is customers' proper and high-quality internet connection speed which directly affects customers’ satisfaction while using the service.  A large amount of long-term debt used to finance new content Majorly depend on the U.S Market for revenue

Opportunities

Netflix has several opportunities to expand itself throughout the globe such as Increasing the number of customers by entering new markets, such as China. Consumer preferences are altering, with an increasing number of consumers turning to internet media consumption and on-demand streaming services.

Netflix is creating tailored content for new markets it is entering. Exclusive license and collaboration deals are being forged to produce more original content. Technology is always changing.

Threats

The industry Netflix operates in is facing increasing competition with many large players entering the market such as Hulu, Amazon, etc. Netflix's other main issue this year has been the rising costs associated with acquiring new users. From $308 per new member in 2012 to $581 now, marketing and streaming content spending has increased dramatically. This is compounded by the fact that the streaming giant's second-quarter reports in July revealed a slowdown in growth as well as a drop in domestic customers.

Another key issue is that, despite spending millions per year on original material, Netflix is still highly reliant on third-party content, which accounts for 63 percent of its viewing hours. In reality, two of Netflix's three most popular streams are 'Friends' and 'The Office,' both of which are set to leave the site in the next two years, with no effort made to replace them other than the costly acquisition of 'Seinfeld' for 2021 (Hughes, n.d.).

Netflix Needs to Succeed in International Market

Netflix is popular in the U.S., primarily due to its original content. Yet the assemblage is still trying to build its international library. Viewing preferences vary from country to rude and even between different regions of the same rural. To allure subscribers, Netflix needs to have an expanded content library catering to the preferences of the diverse audience. Lack of enough local extent is being cited as one of the principles of its slower growth in international nundinal. Further, several of its existing shows are commissioned only for the U.S. and cannot be broadcast in other provinces. This boundary is its content library until the crew renegotiates the terms for these tales. Expanding its existing satisfy to international mart will precedence to the higher licensing detriment, collision the margins negatively. Creating primary, local content for each international market is also a dear proposition, peculiarly if the costs cannot be justified by a prodigious subscriber base. However, as Netflix allures more subscribers, its international segment should become gainful. In our prediction, the contribution brink reaches around 30% by the extermination of the period.

Making its international party profitable is an insubordinate task for Netflix. The crew needs to invest heavily in local content and more streaming quality over low bandwidth connections to attract subscribers. However, these costs can be rescued only if the subscriber sordid expands rapidly. The crew faces rivalship from several topic players in international fair and broad players such as Amazon and YouTube Red who are looking to bag a higher market share. Furthermore, consumers in Asian countries accede to Pay-TV for local content and might not be face to restore this with Netflix in the immediate future. Subscribing to Netflix along with the existing Pay-TV subscription can prove to be expensive unless the former is competent to furnish plain and exclusive topic content. International nundinal will constrain Netflix’s augmentation in the future. However, the keynote defiance will be to make this segment profitable and grow margins over the yearn term. (Forbes, 2016)

 

 

 

 

 

 

Bibliography

Altman, P. G. (2019). The State of Globalization in 2019, and What It Means for Strategists. Harvard Business Review, 8.

Bleeke, J. (1995). Is your strategic alliance really a sale. Harvard Business Publishing.

Copeland. (2010). Reed Hastings: Leader of the pack. Retrieved from Fortune.: www.fortune.com

Espe, E. (2019). Retailer's plan: DVD and conquer. Silicon Valley Business Journal.

F., G. (2022). International Market Entry Strategies: Relational, Digital, and Hybrid Approaches. SAGE Publications, 32.

Forbes. (2016). Netflix Needs to Succeed in International Market. Retrieved from Forbes: https://www.forbes.com/sites/greatspeculations/2016/08/26/heres-what-netflix-needs-to-succeed-in-international-markets/?sh=56fd9a616df0

GAUS, A. (2019). Netflix's 3 Biggest Challenges for 2020. Retrieved from thestreet: https://www.thestreet.com/investing/netflix-3-biggest-challenges-for-2020

Graser, M. (2000). Diamond in the rough. Variety.

HAYES, A. (2020). Long Tail. Retrieved from investopedia: https://www.investopedia.com/terms/l/long-tail.asp

Hughes, J. (n.d.). Netflix SWOT Analysis : A Complete Overview. Retrieved from businesschronicler: https://businesschronicler.com/swot/netflix-swot-analysis/

IvyPanda. (2021, Jul 21). Netflix Company’s Strategy, Issues and Solutions Case Study. Retrieved from IvyPanda: https://ivypanda.com/essays/netflix-companys-strategy-issues-and-solutions/

Journo. (2021). 5 Strategic Risks For Netflix: From Competition to Regulation. Retrieved from Journo: https://journo.com.tr/netflix-strategic-risks

Keating, G. (2013). Netflixed: The Epic Battle for America's Eyeballs Paperback. Penguin Publishing Group.

Kotler, P. (2011). Reinventing Marketing to Manage the environmental imperatives. SAGE Publications, 5.

Kotler, P. (2017). Customer Value Management. SAGE Publications, 3.

Kotler, P. (2020). Where Does Consumerism Stand Today? SAGE , 5.

Osur, L. (2016). Netflflix and the Development of the Internet Television Network. Syracuse University, 226.

Philip Kotler. (2020). Marketing and Value Creation. Sage journals, 2.

Santos, F. M. (2005). Organizational Boundaries and Theories of Organization. JSTOR, 19.

Sporich. (2005). DVD sales altering vid biz: VHS drops 50%; rentals slide 11%. Retrieved from The Hollywood Reporter: www.hollywoodreporter.com

Statista. (2022). Netflix's marketing spend 2017-2021. Retrieved from Statista: https://www.statista.com/statistics/1097045/netflix-marketing-expenditure/#:~:text=In%202021%2C%20Netflix's%20marketing%20expenses,well%20as%20increased%20advertising%20expenditures.

theconversation. (2021). In a market swamped with streaming services, Netflix’s massive loss of subscribers is a big deal. Retrieved from theconversation: https://theconversation.com/in-a-market-swamped-with-streaming-services-netflixs-massive-loss-of-subscribers-is-a-big-deal-181780

West, D. M. (2014). The Evolution of Video Streaming and Digital. Technology innovation at Brookings, 8.

 

 

Post a Comment

0 Comments