Chapter 4: "Netflix in Two Acts: The Making of an E-Commerce Giant and the Uncertain Future of Atoms to Bits"

How does the "long tail" concept relate to Netflix's ability to offer the customer a huge selection of movies?

- Cost of production and distribution drop - It gives the firm a selection advantage that traditional stores cannot match - Geographic constraints go away and untapped markets open up

Fixed development costs

- Costs that do not vary according to production volume

What factors have contributed to Netflix's exceptional brand strength?

- technology lies at the center of the Netflix top satisfaction ratings and hence the firm's best-in-class brand strength -No one else had a comparable distribution network at launch -Netflix's early move in the market -leveraging its massive and growing arsenal of user data

What is the difference between brand and advertising?

-Advertising is informing users about your product -Branding is built through customer experience

Why did many analysts incorrectly suspect that Netflix was doomed to fail?

-Analysts and managers have struggled to realize that Netflix could actually create sustainable competitive advantage -Thought the other firm's money would win, but Netflix was the first mover so they won Competitors underestimated Netflix because: - Internet pure play without a storefront - Overall customer base was microscopic in comparison

Collaborative filtering

-Classification of software that monitors trends among customers and uses data to personalize an individual customer's experience ~can be mimicked by competitors ~CineMatch wins through data assets not algorithm

How does Netflix use collaborative filtering to match movie titles with the customer's taste, and in what way does this software help Netflix garner sustainable competitive advantage?

-Data is collected when customers rate movies they've seen, and this data on customer likes and dislikes is fed into a proprietary Netflix recommendation system called Cinematch -While data and algorithms improve the service and further strengthen the firm's brand, this data is also a switching cost, creating a competitive advantage -Also, leveraging Cinematch to help them find an audience for their back catalog of movies and television shows and keeping users from being frustrated from out of stock movies - Netflix's marketing costs benefit from satisfied customers, as referrals are better received by customers than advertisements

Variable deployment costs

-Expenses that change in proportion to the activity of a business

Software platform

-Firm developed a software platform that allows manufacturers to include Netflix access in their device

Why did other firms find Netflix's market attractive?

-It was clear water market with only one competitor -Firms thought their size and consumer awareness would dominate Netflix's monopoly in the market

Business model

-Netflix has a flexible business model, switched to streaming seamlessly -Operates via a DVD subscription and video streaming model -Large data asset was key to business's long tail business model -Defined to be: rationale of how an org creates, delivers, and captures value, in economic, social, or other contexts -business model: flat-rate subscription fee to access of movies/tv shows

How is the concept of "atoms to bits" impacting a wide range of industries?

-Newspapers struggle as readership migrates online (Job postings on Craiglist, Monster.com) -Apple and Spotify dominates music sales, selling not a single "atom" of physical CDs -Amazon jumped into the atoms-to-bits shift when it developed the Kindle digital reader

Pure play

-Single business focus -Netflix was an internet pure play without a storefront

Initial public stock offering (IPO)

-Taking a firm "public" so that people can invest and others can see your revenue growth -Hastings felt he went public too early, the world knew he had a huge trajectory for profit - Rivals such as Blockbuster and Wal-Mart showed up

Crowdsourcing

-Technique in which a firm states a problem it would like solved, the reward it will provide, and then makes this available to a broader community in the form of an open call ~Netflix Prize -These fuel innovation, identifying potential staffers and partners

What role do scale economies play in Netflix's strategies? How do these scale economies pose an entry barrier to potential competitors?

-The investment cost of the market was large, so the size of the firm's customer base had to be the largest to maximize economies of scale - the bigger firm has a better cost structure and better profit prospects and should be able to offer better pricing -The threefold scale advantage of distribution centers, selection, and customers allowed Netflix to have quicker movie deliveries, more movies, and cheaper costs -spend more on customer acquisition, new features

How do these scale economies pose an entry barrier to potential competitors?

-There must be a large investment to get the distribution and the selection that Netflix already has -Having a small starting consumer base means less product per investment costs, creating a dis-economic of scale -Also the amount of data that netflix has on each customer is a barrier to entry

What are the various key issues holding back streaming video models? How is Netflix attempting to counteract these challenges?

-Windowing, exclusives, and other licensing issues limit available content, and inconsistencies in licensing rates make profitable content acquisitions a challenge -Licensing issues will make it impossible to create a long tail as long as it is enjoyed in the DVD-by-mail business -Netflix is attempting to secure exclusive content and to fund the creation of original programming for first-window rights

Why is branding particularly important for online firms?

-is especially critical online, where opinion spreads virally and competition is just a click away - Building a great brand online starts with offering exceptional value - Advertising builds awareness, but brands are built through customer experience - Subscribers expectations from Netflix: - Huge selection - Ability to find what they want - Timely arrival - Fair price - Ease of use and convenience

Churn rate

-rate at which customers leave a product or service -Churn rates for Netflix's active regions were below 3 percent ~due to switching costs of CineMatch ~Also due to the value through rating their movies on Netflix

What was the downside to Netflix's early IPO?

-whole world soon learned that Netflix was on a profit march with a remarkable growth trajectory -Attracted two big "sharks," Blockbuster and Netflix

Long tail

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. -Demand exists, even though products aren't popular enough for stores to carry them -Area under the long tail actually bigger than the high demanded movies ~traditional retailers lack shelf space ~Netflix has economies of scale -Netflix drags users down the longtail through recommendations -Why it works: Studios earn percent of subscription revenue, netflix gets DVD at low cost, studios dont have to advertise

Atoms to bits

The idea that many media products are sold in containers (physical products, or atoms) for bits (the ones and zeros that make up a video file, song, or layout of a book). As the Internet offers fast wireless delivery to TVs, music players, book readers, and other devices, the "atoms" of the container aren't necessary. Physical inventory is eliminated, offering great cost savings -advantages of moving atoms to bits: ~netflix will eliminate a huge chunk of shipping and handling costs ~Bandwidth costs are minimal -Idea that many media products are sold in containers for bits ~as internet gets better, atoms arent needed anymore ~every industry affected -Netflix's shift to a streaming model is limited by access to content and methods to get content to televisions

What is Netflix's business model?

Two models: -DVD-by-mail service for a monthly, flat-rate subscription fee -digital distribution that it offers its streaming-only subscription as the default option for consumers

What are some of the technologies that Netflix uses in its operations to reduce costs and deliver customer satisfaction and brand value?

• 58 ultra high-tech distribution centers (DCs) • DCs located close to USPS facilities • Trucks collect shipments from USPS hubs and return the DVDs to nearest Netflix DC • Scanners pick out incoming titles • Pre-sort mail before dropping it off at USPS • DVDs hand-inspected for cracks/smudges • Processes linked to CineMatch