Netflix in two acts (3)

Netflix initially wanted its content to be available on television.

A prototype set-top box was developed, but impractical.

Netflix remained segment leader, as it had

An early entry • Effective market execution

collaborative filtering:

Classification of software that monitors trends among customers and uses this data to personalize an individual customer's experience. • Data provided by Cinematch is a switching cost.

In the case of Netflix, the shift from DVD-by-mail to the streaming business poses new challenges

Content availability Content acquisition costs The legal and regulatory environment Potential opportunities for revenue and expansion Potential partners Competitors and their motivation

windowing

Content is available to a given distribution channel for a specified time window. • Usually under a different revenue model (ticket or disc sales, and license fees for broadcast).

marginal costs:

Costs associated with each individual unit produced. • Marginal costs are (effectively) zero for content owners—when Disney spends over $300 million to make an Avengers sequel, it does that only once (all fixed costs). But Netflix never owned Avengers, so it needs to license any titles that it doesn't own.

fixed costs:

Costs that do not vary according to production volume.

Netflix started as a

DVD rental business (1997). • Known for best-in-class service

Data asset

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

Transition from a DVD-based service to Internet-based video streaming business resulted in:

Drop in customer base Drastic fall of share prices Hastings has since admitted, "We moved too quickly for our customer

Offers two potential benefits:

Eliminates the need to share revenues with a third party. Provides exclusive access to valuable consumer data assets.

Costs associated with digital distribution

Fees to telecommunications providers that connect them to the Internet (the more a firm transmits, the more it typically has to pay)

• Firm was split into two distinct services.

Internet-based streaming• Traditional DVD-by-mail, which was renamed Qwikster

User data is used to:

Make accurate recommendations.• Improve user interface design.• Help the firm determine the appropriate cost for acquiring content. • Shape creative decisions in original program offerings.• Make better content investments.• Inform the original content investments that Netflix is making. Netflix uses over seventy-six thousand (and climbing) unique ways to describe different types of movies. • Create ultra-tailored audience promotions.Every recent click, view, review, early abandon, and guide page view, as well as other data, is considered in order to identify the content the firm believes users will most likely want to see, considering your tastes alongside what those the data says are most like you in their viewing habits.

long tail:

Netflix appeal also came from the scale of the firm'sentertainment selection. 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 thebetter selection wasn't even close. This nearly limitless selection allows Internet retailers to leverage what is often called the 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. • Selection attracts customers. The Internet allows large-selection inventory efficiencies that offline firms can't match.

Advantages of Cinematch

Netflix could tailor recommendations based on availability of products and individual taste. Studios found an audience for their back catalog of movies and television shows.

Other challenges include unhappy consumer Internet service providers

Netflix streaming uses up more North American broadband traffic than any other service, and more than YouTube, Hulu, Amazon, HBO Go, iTunes, and BitTorrent combined! • Many Internet service providers (ISPs) aren't pleased by the firm's growth, viewing Netflix as a rapidly expanding, network-clogging traffic hog. • Cable companies that control the so-called last mile to your home (usually with little to no competition) want Netflix to pay more. • Internet service providers (ISP) are placing bandwidth caps: Limitations imposed by the ISP on the total amount of data traffic that a single subscriber can consume.

The market remains highly fragmented, with a long list of potential competitors and a varied list of models for reaching consumers.

New startups seem unlikely to threaten Netflix given the firm's scale advantages, the more significant threat is from firms that have thriving businesses in other areas. • Networks and content providers also have their own offerings: many stream content on their own websites.

churn rate:

Rate at which customers leave a product or service. The year after Blockbuster and Walmart launched copycat efforts, the Netflix churn rate actually fell

disintermediation:

Removing an organization from a firm's distribution channel, which collapses the path between supplier and customer.

By going public, Netflix had to disclose its financial position

Resulted in two big competitors entering the market: Blockbuster and Walmart • Netflix responded with:• Constant customer and revenue growth • Record profits• Rising stock price past $ 400.....

First Sale Doctrine:

Ruling that states that a firm can distribute physical copies of legally acquired copyright-protected products. • Allows firms to lend or rent products.• Applicable only to the atoms of the physical product and not to the bits needed in streaming.

Why Study Netflix?

Studying Netflix gives us a chance to examine how technology helps firms craft and reinforce a competitive advantage. • Netflix provides one of the very rare examples of a firm that has continued to lead as the firm shifts focus from one business model to the next.

Brands are built through customer experience.

Walmart and Blockbuster could create brand awareness but couldn't translate that into an industry advantage.

Brand -

brand-building by leveraging its massive and growing arsenal of user data.

Netflix is combating rivals with exclusive content

by offering exclusive content of its own.

Scale economies

can be attained by leveraging the cost of an investment across increasing units of production.

Netflix uses a proprietary recommendation system called Cinematch, which uses software technology known as collaborative filtering.

collaborative filtering, churn rate

Netflix executed a successful strategy of creating reinforcing resources rivals could not match:

data asset, scale, brand

Scale

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

The phrase atoms to bits represents the

shift from physical products to digital products.

Conventional, schedule-driven television viewing is being replaced by the new "WWW"

the ability to view what you want, when you want it, on whatever screen is available.

User data can be leveraged t

to provide better customer experience and build brands.

• Software platform was developed and made available to manufacturers (embedded).

• Made it easier to build apps. • Allowed Netflix to be baked directly into over 2,200 consumer electronics products.