netflix

This week, the case study is on page 105. please read the textbook contents about Netflix, watch the video, and answer the three questions in the “Questions and Exercises” section

5.1 Introduction
Learning Objectives
Understand that although Netflix is one of the few firms to successfully pilot through disruption—remaining the top firm in two markets (DVD-by-mail and video streaming)—the firm has experienced wild swings in market perception and stock performance.
Appreciate that the dynamics at work in the old and new businesses are fundamentally different in many key ways that influence product offerings, operating cost, competitors, and more.
Recognize that the breadth of disparately motivated competitors, many of whom have a strong portfolio of competitive assets, presents uncertainty as Netflix seeks global growth in hopes of remaining the world’s leading streaming service.
Perhaps no CEO in recent memory has experienced more significant whipsaw swings than Netflix co-founder (and now co-CEO) Reed Hastings. In the firm’s early years, Hastings was a target of Wall Street naysayers who dragged down Netflix stock with predictions that the firm would crumble as Blockbuster and Walmart entered the firm’s then-core DVD-by-mail business. Plot-twist—Netflix growth surged as the tech-enabled strategic assets Hastings built hammered Blockbuster into bankruptcy and sent Walmart fleeing the market. Netflix’s profits, customer base, and stock went on to hit all-time highs, Fortune featured the Netflix CEO on its cover as “Businessperson of the Year,” and Hastings was appointed to the board of directors of two of the tech industry’s most influential firms—Microsoft and Facebook.
But concerns over transitioning the firm to a future where Internet streaming dominates and DVDs are a clutter-creating relic of the past resulted in a painful series of self-inflicted wounds that left the firm reeling. 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 1 million customers in three months, a collapse of the firm’s share price, and calls for Hastings’s resignation (see “The Qwikster Debacle”). Hastings quickly moved to address these mistakes while aggressively licensing streaming content, investing in its own original series and movies, and expanding the availability of the firm’s streaming platform across devices and into new global markets. Record subscriber gains and Street-beating earnings reports once again powered the firm’s previously beaten-down stock to record highs. But another market shift launched another round of bearishness on the firm’s future.
First, Netflix lost $8 billion in market value within minutes of Disney announcing that its new Disney+ service would undercut it in price. Disney stated it would not renew a streaming agreement with Netflix, taking the world’s most popular collection of media properties—including Marvel, Star Wars, Pixar, and the princesses—along with it. Oh yeah, and Disney now owns the majority stake in Hulu and has acquired 20th (now 21st) Century Fox. Then came a rare, big Netflix miss in subscriber growth. Analysts had been expecting Netflix to add 5 million subscribers in a quarter when the firm added only 2.7 million and actually saw U.S. subscribers drop by 126 thousand. Wall Street’s response was another $26 billion valuation haircut in the week after the shortfall.
Yet despite competition from Disney and its princesses, Netflix—home of Tiger King, the Queen’s Gambit, and The Crown—held the crown as the world’s biggest streaming service. Despite criticism over content quality, Netflix recently led all other studios in both Emmy and Golden Globe nominations. The firm’s service is now available in every country on the planet, save for China, Syria, and North Korea, and Netflix ended 2020 with over 200 million worldwide subscribers, Street-beating growth, and record profitability. While COVID-19 hurt so many, it actually enhanced Netflix performance as those in quarantine binged, new subscribers signed up, and costs were lower than expected as production of new titles halted in lockdown.
Lots of challenges suggest a brutal coming battle, and analysts are concerned about Netflix maturity (is there much growth left in the firm’s core U.S. market?), rising costs to license and create new content, the company’s prior debt load, and unprecedented competition. There are currently over 100 streaming services, and clearly not all will survive. Netflix streaming service rivals now include deep-pocketed Apple; “new” media giant AT&T, hot for growth after its 2018 acquisition of Time Warner (which includes HBO and Warner Bros. films); a reunited ViacomCBS (with fan-loyal Star Trek and family-friendly Nickelodeon in its portfolio); Comcast, which owns the most widely available U.S. cable pipe, Europe’s Sky TV, NBCUniversal television and movie properties, Olympics rights, and has launched its own streaming service—Peacock; and, of course, Amazon, which gives its service away for “free” as a bundled perk to Prime subscribers. While Netflix could vanquish all DVD-by-mail subscribers to become the single source favored above all, content fragmentation means there won’t be the same single choice for the full slate of streaming offerings, and we won’t have one winner.
Why Study Netflix?
Studying Netflix gives us a chance to examine how technology helps firms craft and reinforce a competitive advantage. Even more importantly, Netflix provides one of the very rare examples of a firm that has continued to lead as the firm shifts from one technology-focused business model to the next. While the still profitable DVD-by-mail business is dying, many will still want to read this section for key learning. Topics covered in this section include how technology played a starring role in developing assets such as scale, brand, and switching costs that combined to repel well-known rivals and place Netflix atop its industry. This section also introduces important business and technology concepts such as the long tail, collaborative filtering, customer churn, and the value of the data asset. In the second part of this chapter we examine Netflix, the sequel, and the firm’s transition to video streaming. This section looks at the very significant challenges the firm faces as its primary business shifts from shipping the atoms of DVDs to sending bits over the Internet. We’ll see that a highly successful firm can still be challenged by technical shifts, and we’ll learn from Netflix’s struggles as well as its triumphs. This section gives us an opportunity to examine issues that include digital goods, licensing, content creation, international growth and regulation, supplier power, crowdsourcing, platform competition, legal and regulatory issues, and technology infrastructure. We’ll also look at the kinds of competitive advantages that Netflix is crafting as the world’s largest streaming service.
Key Takeaways
Many firms are forced to deal with technology-fueled disruption that can challenge the current way they do business. However, successfully transitioning to a new business model is often extremely difficult, even for firms that were dominant under a prior operating model.
Despite being the clear leader in global streaming, Netflix faces a daunting set of challenges, including rivals that enjoy a set of assets that Reed Hastings’s firm lacks. These include existing distribution networks from telecom subscribers and hardware owners, popular media libraries with loyal fans, and profitable businesses that can fuel the foray into streaming.
Questions and Exercises
Survey your class, friends, or family. How many subscription services do they have and how many are they likely to have in the future? Have you or any relatives or friends ever dropped a service? Which one and why? Have you ever “rejoined” a service you’d previously dropped? If so, why? What would make you drop a service, switch services, or keep a service but subscribe to a new one? What role does technology play (if any) in the likelihood that you’d continue to subscribe to a service?
During his time as CEO of Netflix, Hastings has also served roles for other firms. What additional managerial roles outside of Netflix has Reed Hastings accepted? Why might these roles potentially be important for Netflix?
Can you think of once-successful firms that were forced to radically redesign their businesses based on technology change? How did the firms in your list fare with the new model—better or worse than their prior success? Why do you suppose they experienced the outcomes you’ve identified?