Ch.5 Netflix In Two Acts: Sustaining Leadership in an Epic Shift from Atoms to Bits

Netflix is combating rivals with exclusive content by offering exclusive content of its own:

-Acquiring or developing original content is an expensive proposition. -It can give a firm exclusive first-window streaming rights, and allow Netflix to pursue additional revenue streams, such as DVD sales or licensing to other channels and services.

Netflix computing infrastructure runs on Amazon's servers:

-Amazon Web Services (AWS) has enabled Netflix to grow its services by millions of customers without adding any data center capacity since 2008. -12 Petabyte (PB) of data per day is routed through an Amazon S3 data warehouse. -AWS stores the vast library of Netflix-encoded video files.

Market remains highly fragmented, with a long list of potential competitors:

-Amazon is integrating its own streaming service into TVs and consumer devices. -Apple spent $6 billion on original content leading up to the launch of Apple TV+. -Viacom CBS has rebranded the CBS "All Access" streaming service as Paramount Plus. -HBO Max has everything HBO has, plus the Warner move catalog. -Disney+ leveraged the most recognized content pool, franchise-based originals, and direct-to-service movies.

Netflix realized early on that it couldn't rely on partners for long-term relationships and consistent pricing:

-Cast a very wide net, targeting a cross section of demographics, reviving and rebooting broadcast TV shows. -Launched over 3,000 originals. -Regularly releases more than one original program each day. -Created more original content in 2019 than the entire television industry did in 2005.

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

-Content availability - few titles, 12 percent of the firm's long tail -Content acquisition costs -Content acquisition costs -The legal and regulatory environment -Potential opportunities for revenue and expansion -Potential partners -Competitors and their motivation

Competitors:

-Deep-pocketed Apple -AT&T (which now includes HBO and Warner) -Viacom CBS -Comcast - Europe's Sky TV -NBCUniversal -Amazon

First sale doctrine?

-For Netflix this means that if studios sell their DVDs retail, they can't prevent Netflix or anyone else from buying DVDs at full price and distributing the discs to others. -It applies only to the atoms of the physical disc, not to the bits needed in streaming, so Netflix can't offer Internet streaming without separate streaming licenses.* -Windowing

Despite competition from Disney, Netflix:

-Held the crown as the world's biggest streaming service. -Has service available in every country on the planet, except for China, Syria, and North Korea. -Ended 2020 with over 200 million worldwide subscribers, street-beating growth, and record profitability.

Base $10 Netflix service was unbundled into two separate $8 plans:

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

Software platform was developed and a rich set of privately controlled APIs, which was made available to manufacturers:

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

Among the challenges that Netflix faces are unhappy consumer Internet service providers:

-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

So, What's It Take to Run This Thing?

-Netflix computing infrastructure runs on Amazon's servers. -Netflix uses a microservices architecture. -Netflix has a worldwide server network called Open Connect.

It's a Multiscreen World: Getting to Netflix Everywhere:

-Netflix initially wanted its content to be available on television. -Software platform was developed and a rich set of privately controlled APIs, which was made available to manufacturers.

Advertising can build awareness, but brands are built through customer experience:

-Netflix was top in the American Customer Satisfaction Index (ASCI) and Nielsen rankings. -Blockbuster and Walmart, however, discovered that their strong consumer awareness didn't translate into any advantage when competing with Netflix.

Netflix innovation

-Netflix, with they are DVD rental business. They hammered Blockbuster into bankruptcy. -Sent Walmart lasting for a very short time in the market. -Netflix rightly predicted without having evidence to confirm that digital streaming is the future.

Shift is realigning nearly every media industry.

-Newspapers struggle as readership migrates online and once-lucrative classified ads and job listings shift to the bits-based businesses of Craigslist and LinkedIn. Amazon developed the Kindle digital reader. -Video games are shifting to digital downloads. -Apple and Spotify rule the new world of music without selling a single CD

As apps replace channels and content is always available across all screens:

-Streaming experience is liberating both consumers and content creators from constraints of channel-driven "linear TV." -Binge-watching

COVID-19 enhanced Netflix performance:

-Those in quarantine watch multiple streaming movies and episodes of a television program over a short period of time. -New subscribers signed up. -Costs were lower than expected as production of new titles halted in lockdown.

Too much content can also be a problem:

-decision fatigue -congestion effect

Manufacturers need to make some investments to get started:

-fixed costs -marginal costs

What is decision fatigue?

A phenomenon, akin to congestion effects for attention, where consumers avoid selection decisions with an overwhelming number of choices.

What is "atoms to bits"?

A phrase that represents the shift from physical products to digital products.

Collapse of firm's share price

A poorly communicated repricing scheme was followed by a botched attempt to split the firm into two separate services. This caused an exodus of nearly a million customers in three months, a collapse of the firm's share price,

Netflix initially wanted its content to be available on television.

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

Netflix uses a microservices architecture:

A system of over 700 smaller programs that control their own resources.

A larger, more profitable firm also gains pricing advantages:

As of this writing, the Netflix basic offering is cheaper than HBO, commercial-free Hulu, and Showtime.

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

Brand Scale Data asset

What is collaborative filtering?

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

What is Windowing?

Content is available to a given distribution channel for a specified time window

What are marginal costs?

Costs associated with each individual unit produced. Ex. marginal costs are effectively zero for content owners.

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

Drop in customer base Drastic fall of share prices Drop in market value

What is Channel conflcit?

Exists when a firm's potential partners see that firm as a threat.

Advantages of Cinematch data:

Firms use collaborative filtering systems to customize Web pages and make all sorts of recommendations, including products, music, and news stories.

Creating Netflix wasn't easy

For Netflix, the path wasn't easy. Concerns over transitioning the firm to a future where Internet streaming dominates, and DVDs go away resulted in a painful series of self-inflicted wounds that left the firm reeling.

Netflix technology

How technology played a starring role in developing assets such as scale, brand, and switching costs that combined to repel well-known rivals.

Netflix's size advantage:

Its size advantage in the DVD-by-mail business, and how this large scale is a difficult-to-create asset for any startups trying to compete in DVD-by-mail. The role that scale economies play in Netflix's strategies, and how these scale economies pose an entry barrier to potential competitors. Netflix built a data asset

What are bandwidth caps?

Limitations imposed by the ISP on the total amount of data traffic that a single subscriber can consume.

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. Create ultra-tailored audience promotions.

Netflix allows you to choose movies as you want to

Netflix created a place where members could watch content instantly online basically changed the game. A continuing effect from this move are still being felt today, as more programming is geared around the ability to watch it as you want to, rather than catching it at a specific time when it airs.

Netflix Best-in-Class customer experience

Netflix did so by building and leveraging an asset that neither competitor had—a nationwide network of fifty-eight highly automated distribution centers that collectively could deliver DVDs overnight to some 97 percent of the U.S. population

Why Study Netflix?

Netflix gives us a chance to examine how technology helps firms craft and reinforce a competitive advantage. It was originally a rent-by-mail DVD service that used a pay-per-rental model.

Netflix loses $8 billion because of Disney

Netflix lost $8 billion in market value after Disney stated it would not renew a streaming agreement. The move was a real blow to Netflix. Disney launched its own streaming service.

Netflix recommendation systems

Netflix offered recommendations systems, which used members ratings to predict choices (not dissimilar to the rating feature that was featured on Netflix until recently).

Collaborative:

Netflix uses collaborative filtering software to match movie titles with the customer's taste, and in the ways this software helps Netflix collect sustainable competitive advantage.

Netflix founders

Netflix was founded in 1997 by Hastings and Randolph to offer movie rentals over the internet which focused on DVD rentals and sales.

The Netflix global bet is now paying off:

Netflix's international segment turned an annual profit in 2017. •International subscribers now make up more than half the firm's user base.

Netflix offered its customers over 125,000 unique DVD titles:

Netflix's long tail: The Internet allows large-selection inventory efficiencies that offline firms can't match.

What is disintermediation?

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

What is the first sale doctrine?

Ruling that states that a firm can distribute physical copies of legally acquired copyright-protected products.

What are colocation facilities?

Sometimes called "colos"; provide a place where the gear from multiple firms can come together and where the peering of Internet traffic can take place.

Firms offering unique (i.e., highly differentiated) products gain more pricing power if they have access to a larger customer base bidding up prices.:

Studios are the supplier in this case. But if access to customers is limited so that a single firm (such as Netflix) controls most of the distribution market, then suppliers may have to negotiate with a very strong intermediary that can hold back their pricing power

What is churn rate?

The annual percentage rate at which customers stop subscribing to a service or employees leave a job.

Windowing (usually under a different revenue model):

Ticket or disc sales License fees for broadcast

Netflix user friendly

Users would browse and order the films they wanted on their website, put in an order, and Netflix would post them to your door. After renters had finished with the DVDs, they would simply post them back.

Recognize the downside the firm may have experienced from an early initial public offering (IPO):

When a firm sells stock for the first time, the company gains a ton of cash to fuel expansion and its founders get rich. Going public is the dream in the back of the mind of every tech entrepreneur. By going public, Netflix had to disclose its financial position. Once the secret was out, rivals showed up. First in line with its own DVD-by-mail offering was Blockbuster. Following close behind was Wal-Mart—not just a big Fortune 500 company but the largest firm in the United States ranked by sales

What is the congestion effect?

When increasing numbers of users lower the value of a product or service.

What is cinematch?

a software technology known as collaborative filtering

Another definition for long tail?

a strategy that allows businesses to realize significant profit out of selling low volumes of hard-to-find items to many customers

Netflix has a worldwide server network called Open Connect:

colocation facilities

What are content acquisition costs?

costs associated with digital distribution. These might include the costs that a firm must pay to telecommunications providers that connect them to the Internet

What does the legal and regulatory environment do?

involved in securing the digital distribution rights for all the content that makes up a movie

What is streaming?

refers to any media content - live or recorded - delivered to computers and mobile devices via the internet and played back in real time. Podcasts, webcasts, movies, TV shows and music videos are common forms of streaming content.

What is co-opetition?

the idea that competitors can benefit by working together

What is long tail?

the large number of products unavailable through conventional retail stores.

In Porter's five forces, supplier power refers to:

the pressure suppliers can exert on businesses by raising prices, lowering quality, or reducing availability of their products

It introduces long tail:

to the large number of products that sell in small quantities. This provides Netflix's ability to offer customers a huge selection of movies

(T/F) Blockbuster never had the necessary threefold scale advantage (distribution centers, selection, and customers) to create a competitive business

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(T/F) 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

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(T/F) Data provided by Cinematch is a switching cost. When Walmart and blockbuster launched copycat effort, Netflix churn rate fell

true

(T/F) Data-driven decision-making isn't perfect, but it's a lot more reliable than the gut instinct of studio heads that still drives many media industry deals.

true

(T/F) For customers who still expected both discs and streaming, the move effectively constituted a 60 percent price hike.

true

(T/F) Netflix keeps customers happy in brand-building ways by leveraging its massive and growing arsenal of user data.

true

(T/F) Netflix's move to separate its DVD rental and streaming business has resulted in a loss of about a million customers and a decline in its stock price.

true

(T/F) The company added a subscription service, allowing the customer unlimited DVD rentals at a monthly rate.

true

(T/F) The high degree of customer satisfaction that Netflix enjoyed is tightly linked with the firm's sized-based advantages

true

(T/F) The old DVD-by-mail business allowed Netflix to offer up the longest tail money could buy.

true

(T/F) 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.

true

(T/F) 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.

true

What is an IPO?

when a private company becomes public by selling its shares on a stock exchange.

Even though Netflix has a huge customer base, many customers are willing to subscribe to multiple streaming services if they can't find what they want on Netflix:

•A supplier (studio) will see price-setting power diminished if a single firm controls access to most of the market. •Studios therefore may be wary of granting Netflix increasing power over product distribution, and as such, they may be motivated to keep rivals around.

Streaming changes viewing habits and frees creative constraints:

•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. •As apps replace channels and content is always available across all screens:

What are fixed costs?

•Costs associated with your business's products or services that must be paid regardless of the volume you sell. Example: might include buying land and building a car manufacturing plant.

Disintermediation 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 •Cost of running programs on the servers of other companies

The March to Global Dominance:

•Global expansion plays a key role in the Netflix drive for scale-driven dominance. •In 2016, Netflix announced that the service was now available in over 190 countries around the world. •Entering new markets involves heavy up-front expenses. •The Netflix global bet is now paying off.

Entering new markets involves heavy up-front expenses:

•Ramping up marketing campaigns •Securing licenses for both American and local content

Streaming and Scale Advantage:

•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). •A larger, more profitable firm also gains pricing advantages. •Netflix can spend so much more than competitors because it has more subscribers than rivals. •Netflix is seeing roughly five times more usage—scale economies in action.

Customer Experience, Complexity, Pricing, and Brand Strength:

•The world of bits offers firms the ability to take advantage of different pricing models for digital entertainment. •Netflix had been steadfast in insisting that all its content be available anywhere for a single monthly subscription fee. •In the Netflix view, you shouldn't have to choose between commercial content, pay-per-view, buying a title, or waiting for a viewing window. •The firm's goal is to be the first-choice entertainment destination across all possible offerings.

Channel conflict:

•Threat could come because it offers competing products or services via alternative channels or because the firm works closely with especially threatening competitors.

Example for cost of running programs on the servers of other companies:

•to deliver streaming video, Netflix uses computers provided by the cloud computing services of Amazon.