Netflix case review

Q1. Would you buy Blockbuster stock or short it at the time of the case? How about Netflix? Why?

When deciding whether to invest in either of the movie distributors at the time when the case was written, assuming year 2007, we have summarized strengths and weaknesses of each company.

Blockbuster:

(+) It is a well known brand name, and has established a strong financial reputation that has presence in more than 30 nations around the world, including Taiwan.

­(+) It has more stores around the nation that can and are serving as distribution centers to online orders.

(+) Movie rentals are impulsive decisions, and the overall market still prefers watching newest releases.

(+) Blockbuster has been meeting customer’s needs seamlessly when bringing new releases to the market as quickly and abundantly as possible.

(+) They have better agreements with the major studios, which will help a lot on keeping cost down.

(-) On the other hand, compared to Netflix, Blockbuster acted myopically when it came to embracing new technology, such as running an interactive web site, and promoting attractive pricing systems to retain the already existing customers and recruiting new ones. So rather than being a leader, it appears as a follower company, which may be seen as a bad signal and turn off many investors.

(-) No one can be sure of which mode of ordering and delivering movies to watchers will be most appreciated in the future, but had the Netflix’s model turned out to be sound, Blockbuster’s subscription rate of 2.2 million compared to Netflix’s 6.3 million would serve as a major disappointment for investors.

Netflix

(+;-) Obviously, Netflix’s popularity among movie renters has grown to such a degree, that Harvard had to write a case about its success. Therefore “brand-image”-wise Netflix is nearly as solid as Blockbuster. But compared to Blockbuster, Netflix’s operation only covers the United States.

(+) With their creative thinking, powerful management, systematic planning and careful execution of those plans, Netflix has grown from zero to profit in a mere 5 years. Their subscription rate, along with their stock value has been growing constantly since the late 2002. (See attachment)

(+) Their approach to capturing revenue is modest yet stable, as the case mentioned “positive cash flow before growing wildly”. Therefore, investors can be assured that the company won’t go bankrupt instantly.

(+) With more than warm intra-organizational atmosphere (naming offices by employees favorite movies); strong hold of the current and future technology (well appreciated online recommendation system); innovative actions to increase customer satisfaction, Netflix would have been among our investment portfolio.

Q2. Did Netflix offer same values for consumers that Blockbuster did? How did this evolve over time?

Blockbuster offers around 2500 newest movie releases on both VHS and DVD formats through each of its ten minute drive stores located all over the U.S.

Netflix, on the other hand, recommends more than 70,000 DVD titles to its subscribers based on their interests and past movie rental behavior, and delivers to most of them overnight without late return fee and unlimited monthly rentals for $18 a month. Although most of the movie rentals are new releases, Netflix observed that many customers never had chances to watch movies older than 6 months, and not only did they wish to watch those movies, but they were interested in lesser-known movies that didn’t make it to the box-office. To live up to the standards of its rivals and offer even more than that, Netflix systematically evolved over time.

-They started offering movies based on editorial reviews, which, after considerable amount of investment, was changed to more accurate algorithm + large user database recommendation system that has been receiving subscribers’ high appreciation ever since. With Netflix’s well thought, user friendly, versatile web site, anyone with internet access can easily subscribe, or unsubscribe (management decided to offer easier un-subscription to those leaving their service = less frustration, higher satisfaction, more recruitment) and make up a movie list, usually averaging 50 titles. The movies which are made of recommendation from the website are made sure that they are in house, hence no out of stock problem.

-At first, Netflix used a traditional video store pricing model, which included late return fees, but soon they changed it into unlimited rentals, no late-return fee package.

-They slowly increased the number of their distribution centers over the nation, and worked closely with USPS on shortening delivery and return time of DVDs. They claim that 90% of their over 6 million subscribers can be reached within a single business day.

-Instead of using store based inventory, they run national inventory, which doesn’t create over or under stock of titles at different regions.

-In order to decrease content acquisition cost, and increase the number of titles available, they collaborated with Ted Sorandos, who from Video City brought many personal experiences and relationships on acquiring titles from major studios.

-They work closely with lesser-known producers to help promote them, and in return acquire more variety of contents for relatively cheap bucks.

Q3. Compare Blockbuster’s and Netflix’s profit models. How might the differences affect the respective company’s strategies?

Blockbuster’s vision on making profit from movie rentals was:

Renting out new releases rather than old, or lesser known titles, since their demand was inconsistent and maximizing the days that any individual movie was out for rent, because about 10% of their income came from late return fees. They acquired each copy of new releases for 18$ and sold their previewed releases at a discount, generating incremental return on its investment and clearing shelf space for the next wave of new movies. Each one of its more than 5000 stores had to have several copies of new releases, which eliminates the need for mail delivery to customers, but creates over stock problem after a while.

Netflix’s model starts from subscription to the system, which generates cash on hand before any rental. They use the cash to acquire movie titles from major studios based not on the number of copies but for the number viewed. Through their Red Envelope Entertainment, they acquired copyrights to lesser-known titles at lower price, and enriched their movie selections for both new releases and lesser-known releases. Thanks to their national inventory system, no shelf space problem hinders their operation. What’s more, by combining movie queues based on recommendation system and national inventory, and well thought and fixed delivery method with USPS they don’t cause out of stock, or late delivery problems respectively. Their more titles, few copies, queues based on in stock titles, agreement with USPS on delivery and return make it possible for no late return fee and unlimited rental for subscribers.

Q4. As you examine each major shift in Netflix’s strategy, what might have been the assumptions that they might have at each stage? What assumptions will you make upon evaluating VOD?

1. DVD format - the next format for main stream entertainment

2. Mail delivery – being home entertainment provider means quick home delivery

3. More old, or less known titles – not everyone is interested in new releases, good movies never age

4. No late return fee; unlimited rentals – reward power is effective than coercive power; not everybody watches movies every night

5. Accurate, in stock recommendation system – movies are impulsive decision, yet if a system, based on past behavior, predicts one’s interest more accurately, obviously the act of “buying customers” succeeds

6. Easier un-subscription method – customer satisfaction increases with less frustration, and ease of use, ultimately it translates to better customer retention, and higher customer recruitment

With VOD, either it is live streaming, pay per view, or downloadable on several devices, the biggest problem will be content acquisition terms. Under current digital content distribution method, it is very unsecure to upload any content to the internet. As long as it is a digital content, there’s always a way to copy and redistribute it to the cyber citizens. Second, say that they come up with enough secure way of distributing the film, they should be aware that current internet speed or the cable is not fast enough to deliver high quality videos without lag or any other interruption. Third, going to the movies, or going to rental stores, walking through the movie isles, selecting titles, buying coke and pop corn, or ice cream cone might sound too old fashioned, but this has been part of American pop culture for the past several decades. If acquiring movies become a matter of a few seconds, what kind of consumption behavior will it produce? Had all of the above issues been handled correctly, would we be sure of the future of VOD.