4.2 NETFLIX

collaborative filtering

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

sustainable, DVD-by-mail

Analysts and managers have struggled to realize that dot-com start-up Netflix could actually create __________ competitive advantage, beating back challenges in its initial and highly successful ______-_____-______ business, from Walmart and Blockbuster, among others.

moving time, reinforcing

As for Netflix, what delivered the firm's triple scale advantage of the largest selection, the largest network of distribution centers, and the largest customer base, along with the firm's industry-leading strength in brand and data assets? ____________ ________. Timing and technology don't always yield sustainable competitive advantage, but in this case, Netflix leveraged both to craft an extraordinarily valuable and mutually _____________ pool of assets.

awareness

Blockbuster and Walmart, however, 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 _____________ alongside the mindshare leader.

customer experience

Durable brands are built through ____________ __________, and technology lies at the center of the Netflix top satisfaction ratings, and hence the firm's best-in-class brand strength.

advertising, customer experience,

First let's look at the Netflix brand. Don't confuse brand with _____________. During the dot-com era, firms thought brands could be built through Super Bowl ads and expensive television promotion. Advertising can build awareness, but brands are built through __________ ______________. 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 a provider of 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).

increasing units, distribution centers, selection, customers

In Chapter 2 "Strategy and Technology: Concepts and Frameworks for Achieving Success" we learned that scale economies are achieved by firms that leverage the cost of an investment across ______________ _______ of production. If the entry price for getting into the national DVD-by-mail game is $300 million, but one firm has far more customers than the other (see Figure 4.2 for estimates in the one-time Netflix versus Blockbuster competition), then the bigger firm has a better cost structure and better profit prospects and should be able to offer better pricing. 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 (_____________, ___________________, and _______________) needed to create a competitive DVD-by-mail business.

long tail

In this context, it refers to an extremely large selection of content or products. The long tail is a phenomenon whereby firms can make money by offering a near-limitless selection.

scalable, physical

Internet retailers serve a larger geographic area with comparably smaller infrastructure and staff. This fact suggests that Internet businesses are more _______. Firms providing digital products and services are potentially far more scalable, since__________ inventory costs go away.

rate, Cinematch, collaborative filtering, trends

Netflix also keeps customers happy in brand-building ways by leveraging its massive and growing arsenal of user data. Data is collected when customers ______ movies they've seen, and this data on customer likes and dislikes is fed into a proprietary Netflix recommendation system called ___________. Cinematch is a software technology known as _____________ _________. These systems monitor _______ among customers and use this data to personalize an individual customer's experience. Firms use collaborative filtering systems to customize webpages and make all sorts of recommendations, including products, music, and news stories.

Cinematch, back catalog, subscriber, marketing, Fox

Netflix also learned to make studios happy by leveraging ______________ to help them find an audience for their _________ ________ of movies and television 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 _________ 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 ___________. As an example of this power, consider that Netflix delivered more revenue to ____ from the critically acclaimed but box-office-weakling film The Last King of Scotland than it did from the blockbuster film X-Men: The Last Stand.

entertainment selection, long tail

Netflix appeal also came from the scale of the firm's ___________________ ____________. A traditional video store would stock a selection of roughly 3,000 DVD titles on its shelves. Netflix, however, offered its customers over 125,000 unique DVD titles. The battle over who had the better selection wasn't even close. This nearly limitless selection allows Internet retailers to leverage what is often called the _________ ________(the tail refers to the large number of products unavailable through conventional retail stores, see Figure 4.1). Customers saw advantage in having vast choice. Roughly 75 percent of DVDs Netflix shipped were from back-catalog titles, versus the 70 percent of Blockbuster rentals that came from new releases.

latent studio, back catalog, expense, self space

Netflix technology revitalizes ________ _______ assets. Revenue sharing allows Netflix to provide studios with a costless opportunity to earn money from ______ ________ titles—content that would otherwise not justify further marketing _________ or retailer ________ ________.

building, stocking, staffing

Physical retailers are limited by shelf space and geography. This limitation means that expansion requires _________, ________, and __________ operations in a new location.

60, churn rate

Recommended titles made up over __ percent of the content that Netflix users placed in their DVD request queues—an astonishing penetration rate. This data is also a switching cost. Drop Netflix for a rival, and the average user abandons the two hundred or more films they've rated. The year after Blockbuster and Walmart launched copycat efforts, the Netflix ________ _____ actually fell. It seems that even though big-name rivals had arrived with shiny new offerings, the Netflix value proposition was actually growing stronger over time.

public, Walmart, The Last Picture Show

Reed Hastings once said his biggest strategic regret was taking his firm _________ too early. Once public, the firm was required to disclose its financial position, and the whole world soon learned that Netflix was on a profit march with a remarkable growth trajectory. The news was like blood in the water, attracting two very big sharks. First came Blockbuster, a firm with forty million card-carrying customers and a name synonymous with home video rental. Following Blockbuster was ____________, not just a Fortune 500 firm, but Fortune One—the biggest firm in the United States as ranked by revenues. One analyst referred to the firm's impending competition as "_____ _______ __________ _______" for Netflix, and another called the firm a "worthless piece of crap," setting a $3 target on a stock that was then trading at $11 a share. How did Netflix respond? With constant customer and revenue growth, record profits, and a stock price that skyrocketed past $400. Like the triumphant final scene in a feel-good movie, the dot-com did it. David knocked off not one but two Goliaths.

lower-cost, long tail, unprofitable

The ability to serve large geographic areas through _______-_____ inventory means Internet firms can provide access to the _______ ______ of products, potentially earning profits from less popular titles that are ______________ for physical retailers to offer.

size-based, distribution centers

The high degree of customer satisfaction that Netflix enjoyed is tightly linked with the firm's ________-_______ advantages. Yes, even though Netflix was the upstart, it managed to gain relevant scale greater than Blockbuster (even though that firm had 7,800 stores) and Walmart (with its nation-leading sales might). It did so by building and leveraging an asset that neither competitor had: a nationwide network of fifty-eight highly automated _____________ ________ that collectively could deliver DVDs overnight to some 97 percent of the US population. Drop a disc in the mail, and in most cases you'd get a new one the next day. No one else had a comparable network at launch, so the lack of scale among rivals harmed their customer experience, weakening their brand.

churn rate

The rate at which customers leave a product or service.

brand, data and switching costs, and scale.

The strategically aligned use of technology by this early mover has allowed Netflix to gain competitive advantage through the powerful resources of (4)

reinforcing, brand, scale, data asset

Understanding how this dot-com won the DVD-by-mail business provides a useful lesson in the execution of successful strategy. Netflix was able to create critical and mutually ______________ resources— __________, _________, and __________ ___________—that rivals simply could not match. The Netflix example also underscores lessons from Chapter 2 "Strategy and Technology: Concepts and Frameworks for Achieving Success" that timing and technology can be critical in nurturing assets for competitive advantage.

warehouse network, product selection

While Netflix's ______________ _____________ and ______________ __________ were greater than those of rivals, these assets could be bought by a competitor with a big wallet. Says Netflix's vice president of operations, "Anyone can replicate [our] operations if they wish. It's not going to be easy. It's going to take a lot of time and a lot of money." The yearly cost to run a Netflix-comparable nationwide delivery infrastructure is about $300 million. This is where another critical component of scale comes in—the size of the firm's customer base.

selection attracts customers, the Internet allows large-selection inventory efficiencies that offline firms can't match

While some debate the size of the profitable tail, two facts are critical to keep above this debate: (2)

Data disclosure,

______ __________ required by public companies may have attracted these larger rivals to the firm's market. In understanding the initially successful DVD-by-mail business, technology leveraged across the firm's extensive distribution network offers an operational advantage that allows the firm to reach nearly all of its customers with one-day turnaround.

Cinematch, inventory availability

______________ data also offers Netflix operational advantages. The firm examines _____________ _____________ 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.

Blockbuster, Total Access, 4, bankruptcy

______________ tried to combat Netflix on the playing field that Reed Hastings had defined, but the results were disastrous. During the three-year period that included the launch of its "_______ ______" DVD-by-mail effort, Blockbuster lost over $__ billion and closed hundreds of stores. The firm never recovered and was eventually purchased by Dish Network at a __________auction.

Collaborative filtering, data asset.

___________________ ______________ technology has been continually refined, but even if this technology is copied, the true exploitable resource created and leveraged through this technology is the ________ ______