4

1. Brands are built through _____. a. customer awareness b. data assets c. excessive advertising d. customer profiling e. customer experience

e

1. The term _______________ refers to the rate at which customers leave a product or service.

Churn

1. Even though Netflix is now mainly focused on digital distribution, it continues to offer the DVD-by-mail service in its base-price product.

False

1. One of the benefits of Netflix moving internationally is that any title licensed from the United States also comes with the right to stream the title worldwide, regardless of customer geography.

False

1. At Netflix, the marginal cost for digital goods is zero for all licensees.

False

1. Brand and advertising are synonyms for the same concept.

False

1. How does the Cinematch recommendation system work? a. Cinematch develops a map of user ratings and steers users toward titles preferred by people with similar tastes. b. Cinematch gathers user ratings to calculate a gross average user rating which is continually updated with each subsequent user rating. c. Cinematch requests users to create profiles detailing their interests and preferences and serves recommendations accordingly. d. Cinematch uses a team of professional movie critics to create a comprehensive ranking system for each movie in its inventory. e. Cinematch ranks movies in two separate lists based on their critical and box office ratings, and subsequently alters user preferences.

a

1. In addition to serving as CEO of Netflix, Reed Hastings has also served as _______________ for two other leading tech companies, Facebook and Microsoft.

Member of the board of directors

1. How is Comcast vertically integrated?

The firm owns a cable provider, broadcast channels such as NBC, and studios that produce content.

1. Marginal costs: a. are minor, insignificant costs. b. are associated with each additional unit produced. c. are the costs incurred as a result of choosing one option over another. d. are constant and do not vary according to production volume. e. are also known as overhead.

b

1. The phrase __________________ refers to the media industry practice of making content available through a given distribution channel for a specified time period, usually under a different revenue model.

Windowing

1. What solution has Netflix come up with to address the need to deliver content to customers' televisions? a. Netflix has entered into a revenue sharing agreement with Apple to produce customized set top boxes. b. Netflix makes custom chips for television makers so they can offer Netflix in a way that replicates Google Chromecast and Amazon FireTV. c. Netflix launched a self-branded hardware division to build and market its own set top boxes. d. Netflix has acquired Vudu, a firm that specializes in the online streaming business. e. Netflix provides tools to firms seeking to build Netflix access into their devices.

e

1. In the context of the Netflix case, _____ refers to an extremely large selection of content or products.

Long Tail

Netflix's initial revenue model was based on a flat-rate monthly subscription fee rather than a per-disc rental fee

True

1. When firms enjoy economies of scale they: a. have a greater share of liquid assets than rivals. b. have bigger production facilities than their competitors. c. have a wider employee base than their competitors. d. leverage the cost of an investment across increasing units of production. e. leverage investment costs to decrease their subscriber acquisition costs.

d

1. _____ refers to a limit, imposed by the Internet Service Provider (e.g. cable or telephone company) on the total amount of traffic that a given subscriber can consume (usually per each billing period).

Bandwidth cap

Walmart and Blockbuster were well-known firms. Why weren't they able to leverage their brands to compete against Netflix

Blockbuster and Walmart, discovered that their strong consumer awareness didn't translate into any advantage when competing with Netflix. While both firms were well known, neither name was synonymous with a DVD-by-mail subscription service. Reed Hastings's early market entry and effective execution made Netflix the first firm consumers thought of. Everyone else in the space had to spend big to try to create awareness alongside the mindshare leader. Durable brands are built through customer experience. This is especially critical online, where opinion spreads virally and competition is just a click away. During the firm's ascendency in the DVD-by-mail business, Netflix wasn't simply considered to provide a good customer experience; it was often ranked the best. The firm was top in the American Customer Satisfaction Index (ACSI) and Nielsen rankings, while ratings agency ForeSee named Netflix the number one e-commerce site in eleven out of twelve surveys conducted (placing it ahead of Apple and Amazon).

1. _____ is a situation where two or more firms are both competitors and collaborators, or "frenemies."

Coopetition

1. The act of taking a job traditionally performed by a designated agent (usually an employee) and outsourcing it to an undefined generally large group of people in the form of an open call is known as _____.

Crowdsourcing

1. Firms with high churn rates are likely to be more profitable.

False

1. How does Netflix leverage its data asset, even as it has shifted from atoms to bits?

Netflix uses its substantial data asset to: recommend movies; drive software redesign to improve the user experience; evaluate potential licensing deals; and tailor promotions of existing content.

1. Durable brands are built through customer experience.

True

1. Once Netflix became a public company, the firm was required to disclose its financial position and reveal it was on a profit march.

True

1. The marginal cost of digital goods is typically considered to be _____________

Zero

1. User ratings act as _____ for Netflix's customers. a. marginal costs b. fixed costs c. switching costs d. variable costs e. barriers to entry

c

1. An internal team at Netflix developed a prototype set top box to enable the direct streaming of content to customers' television sets. However, the idea of offering it to Netflix customers was dropped because: a. the market for online streaming was nascent and unprofitable. b. all major US cable firms built Netflix streaming into their set-top boxes. c. the Blu-ray standard requires streaming features, as well. d. of the brutally competitive nature of the consumer electronics business. e. the entire software team was recruited by TiVo after LinkedIn made it easy to target and poach rival talent.

d

1. _____ refers to removing an organization from a firm's distribution channel. a. Disbarment b. Repudiation c. Annulment d. Disintermediation e. Revocation

d

1. A low _____ is usually key to a firm's profitability because acquiring a customer is more expensive than keeping one. a. subscription fee b. inventory size c. churn rate d. switching cost e. opportunity cost

c

1. Which of the following is true of Netflix streaming? a. Its content acquisition cost is fixed. b. Its competitors have been mostly vanquished. c. It has little appeal for new entrants. d. Content providers enjoy greater bargaining power as the sole source for unique titles unavailable from any other source. e. It provides very little opportunity for innovation. f. None of the above

d

1. Relate your understanding of Netflix dominance in the DVD-by-mail business to what you learned in the Strategy and Technology chapter: what three resources for competitive advantage did Netflix create in this market that rivals Blockbuster and Walmart couldn't match?

Brand, scale, data asset

1. ___________ refers to the rate at which customers leave a product or service

Churn Rate

1. _____ is a classification of software that monitors trends among customers and uses this data to personalize an individual customer's experience.

Collaborative filtering

1. In context to Netflix, what are the scale advantages associated with streaming?

Despite rising costs, a difficult-to-control cost structure, and increased competition, there are still key advantages that can be created by a leading player in the streaming business, and Netflix hopes that its advantages will be large enough to sustain it as the dominant firm for years to come. First on scale—while studios may charge more for deals involving more users, the firm with more users is likely to be able to pay far more than smaller rivals. A studio would rather accept a $200 million check from Netflix than three $50 million checks from smaller players. Start talking exclusives, and advantage once again goes to the biggest player. Size-based advantages come from both the scale of a firm's streaming library (a longer tail), and the scale of the customer base (the ability to pay for that tail). Once a firm gets big, there's a virtuous cycle where more titles attract more customers, and more customers increase a firm's ability to bid on attractive content. Netflix doesn't just see growth as a way to advance profitability; it sees it as a vital competitive asset to keep competitors at bay.

1. Netflix competitors in streaming are small and mostly unprofitable.

False

1. Netflix's decision to unbundle the single fee for its $10 base service into two separate $8 plans for DVD-by-mail and streaming over the Internet proved to be a welcome surprise to most customers.

False

1. One challenge that Netflix faced was that Blockbuster and Walmart were able to quickly extend their strong brands to also become synonymous with a DVD-by-mail subscription service.

False

1. The Netflix customer experience was always weaker than the in-store experience of DVD rental firms, which had human staff. However, consumers were willing to overlook their dissatisfaction given Netflix's other benefits.

False

1. The shift from atoms to bits does not stand to impact content creators, middlemen, and retailers.

False

1. Why are streaming services considered more appealing to creative content creators than traditional TV?

For producers, writers, and directors, the creative side feels less constrained. Netflix execs state, "If you give people a more creative format, then they can tell their stories better." With streaming, there's no need to plan cliff-hangers at the end of a program or even write for the standard time lengths, like the 22-minute standard for commercial sitcom television. "In the world of weekly serialized television you get fifty minutes of joy watching a show and then 10,000 minutes of waiting for the next one." With binge watching, users can keep track of more complex plot lines and series with many characters. It also removes standard episode length (like 22 minutes for commercial broadcast sitcoms). The kind of artistic creativity offered by streaming makes Netflix, as stated by the Hollywood Reporter, "one of the most attractive buyers of original programming in town."

1. In 2010, Reed Hastings was named Fortune Magazine's "Business Person of the Year." Yet according to readings and class discussions, what was the Netflix CEO's "biggest strategic regret" to that point? What was his reason for giving this answer?

His biggest strategic regret was taking his firm public too early. Once public, the firm was required to disclose its financial position, rivals saw firm's strong growth, and they invaded Netflix's market.

1. How does Netflix use collaborative filtering software to match movie titles with customer tastes? In what ways does this software help Netflix garner sustainable competitive advantage?

Netflix has proved that there is both demand and money to be made from the vast back catalog of film and TV show content by addressing the biggest inefficiency in the movie industry—"audience finding." To do this, Netflix leverages some of the industry's most sophisticated technology—a proprietary recommendation system that the firm calls Cinematch. Using Cinematch, the Netflix Web site gathers user ratings of movies that are viewed by its customers, and also prompts new users with a list of movies. Cinematch data also offers Netflix operational advantages. The firm examines inventory availability in the warehouse closest to a given customer, and tailors recommendations to favor movies that are in stock so that users aren't frustrated by a wait. Netflix has also learned to make studios happy, by leveraging Cinematch to help them find an audience for their back catalog of movies and TV shows. The firm developed a revenue-sharing system where studios could offer Netflix their DVD catalog at a wholesale price in exchange for a cut of Netflix subscriber revenues each time someone requests a given DVD. This was huge for studios—suddenly they had a way to extend the profit-earning life of their movie and TV catalogs, and all without requiring a dime extra in additional marketing.

1. Provide a brief description of the basics of the Netflix DVD-by-mail business model.

Netflix was started as a DVD-by-mail service that charged a flat-rate monthly subscription rather than a per-disc rental fee. Customers do not pay a cent in mailing expenses, and there are no late fees. Videos arrive in red Mylar envelopes which contain the requested DVD, prepaid postage, and return address. When done watching videos, consumers just slip the DVD back into the envelope, and drop the disc in the mail. Users make their video choices in their "request queue" at Netflix.com. If a title is not available, Netflix simply moves to the next title in the queue. Consumers use the Web site to rate videos they've seen, specify their movie preferences, get video recommendations, check out DVD details, and even share their viewing habits and reviews. This model helped Netflix grow into a giant, but Hastings knew that if his firm was to remain successful, it would have to transition from mailed DVDs to streaming video.

1. Netflix, the one-time "dot-com" upstart managed to achieve scale economies despite the fact that it faced two massive rivals: Blockbuster, a name synonymous with home video rental, and Walmart, not just a large firm, Fortune One, the largest firm in the US ranked by revenues. In what ways did Netflix offer size advantages over these rivals?

Netflix's scale in DVD-by-mail is based on three advantages where the firm's size outstripped all rivals: the size of the firm's distribution network, the size of the firm's customer base (which gave it economies of scales, or efficiencies to spread the cost of its massive network across lots of paying subscribers) and the size of the firm's long-tail. Walmart had the cash to compete with Netflix but decided doing so would require a massive investment and extended periods of loss to unseat the early-moving leader, so Walmart pulled the plug on their DVD-by-mail effort. Blockbuster decided to fight to the death—and lost. The firm never had the necessary threefold scale advantages (distribution centers, selection, and customers) needed to create a competitive DVD-by-mail business.

1. Explain the long tail phenomenon at Netflix.

The long tail is a phenomenon whereby firms can make money offering a near-limitless selection. This nearly limitless selection allows Internet retailers to leverage what is often called the long tail. While traditional retailers stock their shelves with the most popular items, it turns out there's actually more money to be made selling obscure stuff (the stretched-out, but larger area right-side of the curve) if you can reach the greater customer base provided by the Internet

1. Although sometimes referred to as "rental," Netflix's model is really a substitute good for conventional use-based media rental.

True

1. At Netflix, the majority of the DVD titles shipped are from back-catalog titles, not new releases.

True

1. By shifting to a streaming model, Netflix stands to eliminate shipping and handling costs.

True

1. Cinematch develops a map of user ratings and steers users toward titles preferred by people with tastes that are most like theirs.

True

1. Netflix uses data to create tailored audience promotions.

True

1. Original content is an investment in allowing a firm to provide differentiated goods, a way to entice and retain customers with exclusive programming not available anywhere else.

True

1. Ownership of digital assets isn't always as it appears to consumers. Many Netflix original series like "House of Cards" are actually not own by Netflix, and other firms can license these titles, while Netflix may need to acquire additional rights to stream these titles overseas.

True

1. The business of streaming video is radically different from DVD-by-mail in several key ways, including content costs, content availability, revenue opportunities, rivals and their motivation.

True

1. The high degree of customer satisfaction that Netflix enjoyed is tightly linked with the firm's sized-based advantages.

True

1. The shift from atoms to bits is realigning nearly every media industry.

True

1. While it may be possible for rivals to match technology, the true exploitable resource created and leveraged through collaborative filtering technology is the data asset.

True

1. Within the DVD-by-mail segment, Netflix remained bigger than both Wal-Mart and Blockbuster.

True

1. Why is bargaining power shifting to content providers as the video content industry shifts from atoms to bits?

Video content is perfectly differentiated, and as we learned in the Strategy and Technology chapter, providers of differentiated goods also have stronger bargaining power. There are only a small number of firms offering high-demand content, essentially operating as an oligopoly with concentrated supplier power. Over the past several years the ranks of bidders jostling elbows at the streaming media negotiating table has increased. When you buy a DVD you own it for life, but streaming costs are usually licensed for a limited time period.

1. Although Netflix had a larger distribution network than rivals, other firms could build a similarly large warehouse network. Why was the size of the Netflix DVD-by-mail customer base critical to repelling rivals?

While Netflix's warehouse network and product selection were greater than those of rivals, these assets could be bought by a competitor with a big wallet. But if one firm has far more customers than the other, then the bigger firm has a better cost structure and better profit prospects and should be able to offer better pricing. Scale economies are achieved by firms that leverage the cost of an investment across increasing units of production. In Netflix case the warehouse network is a big part of the cost behind scale economies, while a unit of production is a subscriber. More subscribers mean more revenue divided by the infrastructure cost.

1. By going public, Netflix encountered competition from the large, established firms Wal-Mart and Blockbuster. What aspect of Netflix going public lured these firms into the market? a. By going public, Netflix was required to disclose its financial position. b. By going public, Netflix was forced to reveal the Cinematch algorithm used to classify user ratings. c. Netflix's model of flat-rate monthly subscriptions was found to be more profitable than a per-disc rental fee model. d. Netflix's plan to enter the online movie streaming market alerted rivals to the possibility of losing their market share. e. The migration of Netflix services to cover the Blu-ray disc market opened up opportunities for rivals.

a

1. For traditional retailers selling physical goods, _____ is the biggest constraint limiting a firm's ability to offer customers what they want and when they want it. a. shelf space b. video piracy c. shipping costs d. distribution rights e. disintermediation

a

1. How is scale important to Netflix streaming business? a. A larger firm with more customers can spend more on content licenses b. The firm can build larger data centers as it competes with the likes of Amazon Prime c. Netflix can continue to expand its network of nationwide distribution centers to overseas locations d. It will allow the firm to improve the marginal cost of its titles, which will also improve profitability e. All of the above

a

1. The practice of windowing involves: a. making content available to a distribution channel for a specified time period under a different revenue model. b. scheduling movies to be streamed online at primetime periods to pull in more revenue from advertising. c. relaying advertisements for limited time periods during online movie steaming, as opposed to frequent ad breaks. d. displaying content in apps and browser windows. e. streaming movies to customers' computers beforehand and then relaying them on television.

a

1. Crowdsourcing is: a. a phenomenon whereby firms can make money by offering a near-limitless selection. b. the act of taking a job traditionally performed by a designated agent and contracting it out to an undefined generally large group of people in the form of an open call. c. a classification of software that monitors trends among customers and uses this data to personalize an individual customer's experience. d. the removal of an organization from a firm's distribution channel. e. an industry practice whereby content is available to a given distribution channel for a specified time period or 'window,' usually under a different revenue model.

b

1. How does Cinematch offer Netflix additional operational advantages for the DVD-by-mail business? a. Cinematch offers alternate recommendations of movies based on critical acclaim and box office performance parameters. b. Cinematch is linked to warehouses and recommends movies that are likely to be in stock. c. Cinematch is often used by movie studios to plan movie scripts based on user preferences. d. Cinematch is a source of additional revenue to Netflix as a marketing tool for recommending newly-released movies. e. Netflix leases the Cinematch collaborative filtering software to smaller firms at a fee, withholding the valuable user ratings.

b

1. Netflix enjoys the triple scale advantage of the largest customer base, the largest selection, and the largest network of distribution centers. This can be attributed to: a. Netflix's specialized focus on advertising and marketing. b. Netflix's first-mover advantage. c. Netflix going public to generate funds for expansion. d. Netflix's effective and aggressive pricing strategy. e. the bargaining clout it exercises over movie studios and the government.

b

1. Netflix has used the long tail in the DVD-by-mail business to its advantage, crafting a business model that creates close ties with film studios. What do film studios stand to gain from taking advantage of the Netflix model targeted at increasing the firm's long-tail offerings? a. Discounted fees for marketing some of the less-popular titles from the studios b. A cut of the subscription revenue from every disk sent out by Netflix c. Greater bargaining power with movie rental firms such as Netflix, Blockbuster, and Wal-Mart d. Lower costs related to screening movies in cinemas by releasing them straight on DVD e. An equal share of revenue from the digital distribution model through online streaming

b

1. Which of the following is true of Netflix? a. It started as two separate services but is now viewed as a single subscription. b. It began as a DVD subscription model and then simultaneously introduced a video streaming subscription while maintaining the legacy business. c. It isn't a substitute good for conventional use-based media rental. d. It got its start offering a DVD-by-mail service for an annual, per-disc rate subscription fee. e. It started out as an IPO.

b

1. In exchange for a percentage of the DVD-by-mail subscription revenue for every disk sent out by Netflix, movie studios offer Netflix: a. online streaming rights free of cost. b. higher fees for marketing less-popular movies. c. DVD titles at a discounted or wholesale price. d. distribution rights to certain movies free of cost. e. strong bargaining power in negotiations for digital distribution rights.

c

1. Which of the following represents an advantage enjoyed by the Netflix DVD-by-mail business over traditional video stores? a. Lower technology overhead b. Lower shipping expenses c. Larger entertainment selection d. Higher energy costs e. Higher churn rates

c

1. While the size of the tail in the long tail phenomenon is disputable, one fact that is critical to remain above this debate is that: a. traditional brick and mortar retailers offer selections that cannot be rivaled by Internet pure-plays. b. energy costs and worker wages drive up the costs of running stores like Netflix. c. selection attracts customers, and the Internet allows large-selection inventory efficiencies that offline firms can't match. d. the turnover rate of obscure titles in traditional video rental stores is only slightly higher than those for Internet pure-plays. e. the cost of store maintenance and real estate makes stores such as Netflix unattractive.

c

1. Churn rate is a term that refers to the: a. average number of recommended titles in a user's queue. b. rate at which the demand for a product or service fluctuates with price change. c. number of movie titles that are difficult to assign reliable user ratings. d. rate at which customers leave a product or service. e. number of new users that each existing user attracts through word-of-mouth and social sharing.

d

1. Collaborative filtering is a classification of software that: a. is used to gather user ratings and calculate a gross average user rating for each movie. b. provides Netflix users with parental controls and other options while streaming movies online. c. selectively sorts movies based on their censor ratings and delivers age-appropriate search results. d. monitors trends among customers to personalize an individual customer's experience. e. collates user ratings for a movie and creates a ranked list of movies most liked by users.

d

1. Even if Netflix gave Cinematch away to its rivals, they would still not be able to make the same kind of accurate recommendations as Netflix. This is because of Netflix's _____. a. technological superiority b. customer loyalty c. movie expertise d. data advantage e. large inventory

d

1. A manager's decision making is often shaped by its perception of the competition. Which of the following does Netflix see as being in competition with the firm? a. Video games b. Magazines c. DVD watching d. Amazon Prime e. All of the above

e

1. Costs that do not vary according to production volume are called _____. a. total costs b. marginal costs c. switching costs d. variable costs e. fixed costs

e

1. Internet retailers serve a larger geographic area with comparably smaller infrastructure and staff. This fact suggests that Internet businesses are more _____. a. churn-prone b. asymptotic c. capitalized d. vertically integrated e. scalable

e

1. Netflix offered its subscribers a selection of over one hundred thousand DVD-by-mail titles, while other video rental firms can only offer as much as three thousand. This presents a significant _____ for Netflix over its rivals. a. marginal cost b. price advantage c. variable cost d. studio preference e. scale advantage

e

1. The long tail is a phenomenon whereby firms can make money by: a. selling the same product at different prices with only minor tweaks in their design. b. leveraging customers to promote their products or services. c. reselling multiple versions of a single product under different brand names. d. offering a selection of products or services vastly greater than conventional retailers. e. sell the same product to virtually every customer the Internet can reach.

e

1. Choose the correct answer: Why is the "First-Sale Doctrine," including understanding when it does and doesn't apply, relevant to Netflix? a. It means content acquisition costs for DVDs are more predictable than streaming costs. b. It means that content acquisition costs for streaming are more predictable than DVDs. c. In cases of streaming media, it facilitates a shift of bargaining power to content suppliers. d. In cases of streaming media, it facilitates a shift of bargaining power to firms paying to license content from suppliers. e. None of the above. f. a & d g. b & c h. a & c i. b & d

h

1. Netflix can send out any DVD it buys because of a Supreme Court ruling known as the _____. a. clickwrap agreement b. Betamax ruling c. fair use law d. First Sale Doctrine e. Copyright Directive

d

1. Which of the following is true about the Netflix streaming business? a. Its marginal cost for title acquisition is zero as it is currently focusing on distributing digital content. b. It has the support of major studios such as Fox and Warner that have allowed it to stream any content the firm buys on DVD. c. Its cost of acquiring streaming content has fallen in the recent past due to its long tail advantages. d. It has attempted to counter rivals with exclusive content by securing exclusive streaming rights for several popular shows. e. From the beginning it has experimented with various streaming revenue models, including pay-per-view, download-to-own, and ad-supported content.

d

1. ________________ refers to a ruling which states that a firm can distribute physical copies of legally acquired copyright-protected products. This enables services such as libraries and video rental, but this right does not apply to streaming digital copies.

First sale doctrine

1. Describe Netflix's streaming video business model.

Today the firm is focused on digital distribution that it offers its streaming-only subscription as the default option for consumers. The default page at Netflix.com doesn't even mention DVDs; the disc subscription service that Netflix built its user-base with had become an optional add-on that the firm is actively discouraging new consumers from joining. For $9 a month, customers gain unlimited access to the entire Netflix streaming library (which is smaller than the number of DVDs available for mailing). Netflix streaming is now available on PCs, as well as all major tablets, smart phones, and Internet-connected televisions, DVD players, and video game consoles.

1. Fixed costs vary according to production volume.

False

1. The Netflix work culture is in many ways similar to its peers.

False

1. Netflix gets to retain the entire subscription revenue for every disc sent out to a customer.

False

1. Physical retailers are limited by shelf space and geography (meaning the density of customers around a particular location).

True