Media Economics Instructor: Steven Hammersly Fall 2010 The New School

1. An Analysis
Joel Goodman, Teichka Rodriguez,
& Michael Strasser

2. ABOUT
Netflix is the world’s largest subscription based service streaming movies and
television episodes over the Internet and DVDs by mail with 16.9 million subscribers
at the end of September 2010. They offer a variety of attractive subscription plans
that have no due dates, no late fees, no shipping fees and no pay-per-view fees.
Approximately 2 million DVDs are shipped daily and during the last trimester of
2010 more than 66% of subscribers instantly watched more than 15 minutes of
streaming content. There were 30% more streaming options in 2009 than the
previous year.
In order to offer a unique selection of programming at a low price, Netflix depends
on their growing number of subscriptions. These are composed of both streaming
and disc-by-mail.
This past September, Netflix launched an option to instantly and unlimitedly stream
movies and TV episodes in Canada for a monthly subscription of $7.99. This marks
the first availability of the Netflix service outside the US.

3. ABOUT
Netflix maintains strong ties with various entertainment video providers. Their
offices in Beverly Hills forge effective business relations with the major studios.
The growing number of subscriptions is beneficial to Netflix as it provides studios
with a powerful new distribution channel to rely upon.
In November 2010, Netflix signed a multi-year contract with independent distributor
FilmDistrict. Under this deal major motion pictures that would have been licensed to
premium channels will now flow directly from FilmDistrict to Netflix starting in 2011.
Deals such as this one continue to enlarge Netflix’s control and growing dominance
in the online market.
Netflix is one of the top ranked websites for consumers. In February 2010 Netflix
was named the number one e-commerce company by the American Customer
Satisfaction Index.

4. VALUE CHAIN MAP

5. ACQUISITION
Netflix’s Business Model
Netflix obtains their content from several agreements: direct purchases from
studios and distributors, revenue sharing programs and license agreements. DVDs
are typically obtained by direct purchase or revenue sharing while streaming titles
are generally licensed for a fixed term.
Netflix obtains physical titles for a low initial cost in exchange for a commitment for a
defined period of time to either share a percentage of subscription revenues or pay a
fee based on content utilization. After these agreements expire Netflix has the option to
either returning the disc, destroying the disc, or purchase it.
Netflix also purchases DVDs from studios, distributors and other suppliers on a
purchase order basis. Under this arrangement typically a fee per disk purchased is paid.
The content of movies available for streaming is licensed directly from studios and
distributors for a specific amount of time. After this period expires the license is
extended or renewed, or the content is removed.

6. PACKAGING
Netflix’s Business Model
The Netflix website (www.netflix.com) features the base actions of the company and for
subscribers such as: Subscription account sign up and management; personalized
merchandizing; inventory optimization; streaming content and payment.
Netflix’s merchandizing technology creates a powerful method for catalog browsing and is believed
to be directly tied to the company’s success.
Proprietary and other technology manage processing and distribution of DVDs from shipping
centers and streaming content.
Proprietary recommendation technology offers a quick and personalized way of finding content
for subscribers based on their viewing preferences.
The technology also provides information about each title such as, factual data, trailers and
editorial information, recommendations and information gathered by the service for each
subscriber.

7. EXHIBITION
Netflix’s Business Model
Netflix utilizes various models to promote their service. Online advertising, TV and Radio
Advertising, Direct mail and third party promotions are some of their many marketing
strategies to gain subscribers. Electronic partners also help promote the service. The
company also acknowledges word-of-mouth advertising as a marketing enhancer.
Online advertising is an important channel that consists of: search listing, banner
adds, text links, permission based emails and an affiliate program whereby web-
banner ads are available on a self-assisted basis.
There are also cooperative advertising programs with studios under the terms in
with Netflix receives economic consideration in exchange for featuring the studio’s
movies in the promotional advertisement.

8. DISTRIBUTION
Netflix’s Business Model
Netflix distributes content through mail delivery of DVDs or instant streaming of available titles
to personal computers, mobile devices, and internet-connected home theater devices
The company maintains a nationwide network of shipping centers, which ensures the
efficiency of the mailing system and a fast delivery. Discs are shipped First Class mail
and subscribers return them in pre-paid mailers. After a disc is returned, the next
available title in the subscriber’s queue is shipped.
Third party delivery networks help the efficiency of streaming movies and TV episodes
in high volume.
Third party content delivery networks make streaming content through many different
devices possible. Among them: Xbox, PlayStation 3, Internet Connected TVs, Boxee,
Roku, and Blu-ray players.

9. SALES
Netflix’s Business Model
All revenues are generated from monthly subscriptions in the United
States and recently Canada.
Plans start at a monthly cost of $4.99 and continue to the most
expensive of $55.99. Subscription prices vary based on the number of
discs out at the same time.
Every plan from $7.99 and up includes unlimited streaming services.
Subscribers pay the monthly fee in advance via the Netflix website. A
third party authorizes and processes payments.

10. SALES
Netflix’s Business Model
Performance highlights from the past three years are positive and
show an increasing net income.

11. SWOT ANALYSIS

12. STRENGTHS
Presence in the Marketplace
Innovation
Netflix’s idea of starting an Internet based DVD rental system was and still is a
revolutionary idea. Removing the need for an individual to travel to a typical brick and
mortar rental retailer, consumers were now able to select and create lists of DVDs they
wished to watch that would be delivered to their door without the need for additional
shipping costs. Using this same shipping system for DVD returns and not requiring any
additional cost all while eliminating late fees made Netflix an innovator in what has
become a new era of home entertainment consumption.

13. STRENGTHS
Presence in the Marketplace
Diverse Physical Library
The number of physical discs offered by Netflix puts it in a strong position over
competitors. Unlike traditional brick and mortar retailers Netflix is able to harness Long
Tail economics to provide a complete library of content offerings. While offering the latest
releases in DVD content, a major boon to Netflix is its expanded library, which is as much
of a draw to subscribers as are new releases.

14. STRENGTHS
Presence in the Marketplace
Diverse Delivery Options
In expanding its services beyond DVD rentals, Netflix has set up a powerful streaming
service. Netflix is dedicated to being available on as many 3rd party devices as possible,
making it versatile as well as giving legitimate competition to cable on-demand offerings.

15. STRENGTHS
Presence in the Marketplace
Powerful Brand / Market Leader
Being the first company of it kind in the marketplace, Netflix has been able to build a
powerful brand. In the past where Blockbuster was the leader in movie rentals, Netflix
has been able to take over that space, making its brand synonymous with DVD and
movie rentals. This shift has positioned Netflix as the market leader in the physical video
rental space.

16. STRENGTHS
Presence in the Marketplace
Ease of Use
Netflix operates on a simple model. Sign up is an easy, streamlined, quick process. Users
can easily search for films and manage which movie they will receive next via the
Netflix.com website. Their website and streaming services also are a simple intuitive
system. Select you movie or TV show, hit play and Netflix begins to stream the requested
content.
Additionally Netflix’s website has been awarded for its ease of use and movie suggestion
engine that serves customized recommendations based on a user’s preferences, viewing
activities, and past film ratings.

17. STRENGTHS
Pricing and Distribution
Pricing
Netflix’s tiered pricing model offers a choice and price that matches anyone’s viewing
habits. Users are able to choose a price they feel provides sufficient value for their money
spent. In addition, all but the lowest tier includes unlimited online video streaming.
Distribution
Most locations in the continental US receive discs by mail in one day. Video-on-demand
allows users to stream content to a number of devices include iPhones, HDTVs, Blu-ray
players and video game consoles.

18. WEAKNESSES
DVD Release Gating
Netflix has arranged lower prices on its physical disc purchase
by entering into agreements with film studios. As a result, most
new releases are unavailable for 28 days after they are available
for sale at retail outlets.

19. WEAKNESSES
Streaming Library
While the Netflix streaming service is available on many devices,
the company has been unable to keep up with expanding its
library. While the service and delivery of streaming content is
good, content selection is severely lacking.

20. WEAKNESSES
USPS Distribution
Netflix has always included return shipping in the subscription
price. However, with the constant increases in postage, Netflix is
unable to control the costs of a key function of its business,
which is the distribution of DVD rentals. Additionally, by using
the USPS Netflix is unable to guarantee delivery times of DVD
rentals.

21. WEAKNESSES
International Distribution
Currently Netflix’s disc-by-mail rental service is available only in
the continental United States while its streaming service is
available in both the US and Canada. A major hurdle to
expanding their business is the cost of distribution
internationally. The company’s distribution network is not robust
enough to offer that sort of flexibility.

22. OPPORTUNITIES
International Licensing
Internally, Netflix has already positioned itself as a streaming
content company first, and a rental service second. The success
of its first foray into a country outside of the US suggests there
is a large untapped market for streaming film and television
services worldwide.
Obtaining licensing internationally could rocket Netflix to the top
of earnings lists.

23. OPPORTUNITIES
Domestic Licensing
As Netflix becomes the premier outlet for consuming
commercial video content outside of the theatre and broadcast
television, it wields enormous power in negotiating pricing and
gaining content exclusivity. Acting on this advantage will give
Netflix and edge over its competition.

24. THREATS
Competition
In the physical rental sphere, Netflix has competition from
traditional rental stores like Blockbuster as well as Redbox.
However, the real competition is in streaming. Netflix is in direct
competition with Amazon-on-Demand, Hulu, YouTube, Apple’s
iTunes Store, and several others.

25. THREATS
Delivery Costs
Postage continues to rise in the United States as demand for
physical mailing declines. Netflix could soon find its disc-by-
mail services in a financially unviable situation and be forced to
raise subscription prices to offset these costs.

26. RECOMMENDATIONS
Expand Beyond Subscription-only
Some strengths of Netflix today are its high level of consumer satisfaction, personalized
merchandising, and the fast delivery service. Though the company envisions strong
competitors to arise in the future, they should start taking advantage of their current
place as leaders in the market and of their services to maintain and generate more
faithful audiences.
They claim that word-of-mouth has a great impact on their advertising strategies. By
maintaining customer satisfaction they can take the lead over competitors in an
economic battle. Also by expanding their catalogue and keeping prices low (offering
more for less), they can continue to attract more consumers. We would also suggest
pricing for individual streams. In a bad economy someone may pay cheap to see a movie
once without the monthly commitment.

27. RECOMMENDATIONS
Prepare for ISP Threats
Although they are fighting to protect net neutrality rules and prevent broadband
distributors from blocking their services, Netflix must prepare their budget for further
expenses. By marketing and continuing to grow their online streaming service instead of
DVDs the financial pressure of shipping could be transferred to what would become
“online shipping.”
They should take advantage of their leading role in the market today to continue to
educate their subscribers and possible future subscribers about online streaming, the
growth of this area mixed with less disc-by-mail shipping can fend off rising distribution
costs.

28. RECOMMENDATIONS
Branch Into International Markets
Netflix should begin offering its streaming video services internationally, and quickly. The
longer Netflix remains a North America-only service, the greater the chance of them
losing the international playing field to another company.
In the long-run, the costs of licensing content internationally are diminished in light of the
potential number of new subscribers gained.

29. CONCLUSION
Netflix is the the US leader in online video streaming. It’s focus on customer satisfaction,
device ubiquity, and dedication to excellent service has cemented the company as being on
the consumer’s side.
As online streaming matures, Netflix will have to find ways to reach broader audiences with
better and more content while continually being more innovative than its competitors. In this,
Netflix has a robust an streamlined distribution process and is making great headway in its
content acquisition and licensing.

30. SOURCES
Netflix SEC Filing
http://ir.netflix.com/sec.cfm
“Netflix and FilmDistrict Announce Agreement to Stream First-Run Theatrical Films to Netflix
Members”. http://netflix.mediaroom.com/index.php?s=43&item=377
“Netflix Signs Distribution Agreements With Universal Studios, Twentieth Century Fox -
Update”. http://www.rttnews.com/Content/BreakingNews.aspx?
Node=B1&Id=1265166%20&Category=Breaking%20News
“Netflix Signs Pact With Epix for Studio Films on Web”. http://www.bloomberg.com/news/
2010-08-10/netflix-signs-deal-with-epix-to-put-studio-movies-available-on-internet.html
“Netflix, Warner Bros. End Dispute, Reach Deal on DVDs”. http://www.businessweek.com/
news/2010-01-06/netflix-warner-bros-end-dispute-reach-deal-on-dvds-update3-.html

31. SOURCES
“Netflix Signs Distribution Agreement With NBC”. http://seekingalpha.com/article/227209-
netflix-signs-distribution-agreement-with-nbc
“Netflix Is on a Roll!” http://www.fool.com/investing/general/2010/09/08/netflix-is-on-a-
roll.aspx
“Netflix looks to add newest TV episodes”. http://articles.cnn.com/2010-12-03/tech/
netflix.tv_1_netflix-relativity-media-content?_s=PM:TECH

32. An Analysis
Joel Goodman, Teichka Rodriguez,
& Michael Strasser