By: Dora E. Plancarte-Yslas

BUS 550- Spring 2011

04/26/11

www.netflix.com

Chapter 4- Netflix: The Making of an E-commerce Giant and the Uncertain Future of Atoms to Bits

What is Netflix?• Online company that offers on-demand

streaming of TV shows, concerts, documentaries, and movie and DVD rentals by mail

• Over 100,000 titles to chose from creating a near-limitless section (long tail)

• One flat rate service starting at $7.99 with no late fees and no shipping costs

• Online streaming 24/7 with no limits from Netflix ready devices

How many people in this class have a subscription to Netflix?

Timeline• 1997: Incorporated in DE• 1998: www.netflix.com launched• 1999: Start of online subscriptions• 2002: Completed IPO (initial public

offering)• 2003: Revenues up 78% > than 2002 and profit was $6.5 million• 2006: Profit of $1 billion• 2007: Internet streaming• 2010: Streaming > DVD • 2010: Expansion to Canada• 2011: Over 20 million users

Development•Business Problem: Reed Hastings got a $40late fee from a video rental store. •Business Solution: Created a DVD by mail service rental business with no late fees.

•Trial run in 2009 with a 1 month free trial.

•After 1 month, only 20% did not want to pay a subscription.

How has the original

Netflix interface

improved?

Business Processes•58 ultrahigh-tech distribution centers located within driving distance of 119 USPS facilities•Handle 1.8 million DVD per day•100% of DVDs are hand-inspected•Turnaround time per DVD is 8 hrs. •Reach 97% of customers in a 2-day window•43 phone reps•2,180 FT & 2,149 PT employees

Technology Features

• Queue• Blogs• Friends and Communities• Reviews• Social Media share feature• Ready Devices• Suggestions via Cinematch

(Collaborative filtering)• The Netflix Prize for $1 million

(crowdsourcing)

Management Mistake?

• Founder and CEO Reed Hastings’ initial dream• In 2002, Netflix offered 5,500,000 shares at $15.00 • NFLX on Nasdaq• Stayed private longer • SEC filings exposed data and success• Brought forth competition but now had $$$ to expand and innovate• Redbox is still privately held• Currently at $252.22 per share.

Do you think CEO

Reed Hastings made a

good decision by

going public with

Netflix?

Competition

• DVD Windowing is forever (Film release window) yet licensing creates restrictions, typically 28 days after DVD release date

• Low cost start up• Pure play (no storefronts)• Helped drive DVD brick-and mortar rental stores to bankruptcy• Affecting the cable industry• Netflix offers: largest selection, largest customer base, largest distribution

centers, and the industry leading strength in brand and data assets

Why have competitors not been as

successful as Netflix?

New Business Model

• Blockbuster and Redbox: Rent a movie for a specified amount of time or late fees apply

• Netflix: Keep the movie as long as possible (no late fees) so less mail transactions are made since it costs 88 ¢ round-trip for a DVD by mail

Achievements• #1 in customer satisfaction 9 times in

a row by Foresee• The best at satisfying customers by

Nielsen and Fast Company • Retail Innovator of the Year by the

National Retail Federation• CEO: 2010 Business Person of the

Year• Churn rate <3%• 95% of subscribers have

recommended Netflix• 71% of new subscribers have been

encouraged by an existing subscriber

Do you think customer

satisfaction has been the main reason for Netflix’s success?

Future

• Physical DVDs will be completely replaced by online streaming (atoms to bits)

• Postage: 1/3 of expenses even w/discounts • Was named Netflix not DVDs-by-mail• Blu-rays meaning double inventory

Do you think Netflix will still be as

profitable in the future if

DVDs by mail become

obsolete?

Takeaways• Netflix’s business assets• IPO “mistake”• Netflix’s attractive business• Why is Netflix successful?• Durable brands: customer

experience• Physical retailers are limited• E-Commerce reaches more

users• Atoms to bits concept• Windowing and licensing limits

Any questions?

Question

A) Happy customers refer friends minimizing in subscriber acquisition costs.

B) It costs more to acquire a new customer than to keep one.

C) The longer a company has the customer, the less likely they are to leave.

D) The longer a customer stays with the firm, the more profitable they company becomes.

E) All of the above.

Why do companies strive for a low churn rate if new customers are always available?

Works Cited1. Gallaugher, J. (2011). Information Systems: A

Manager’s Guide to Harnessing Technology 1.1, Flat World Knowledge Inc.

2. Netflix’s 10-K filings with the SEC for 2010.

3. Yahoo Finance: http://finance.yahoo.com/q?s=NFLX NFLX <31 April 2011>

4. Virtual fun. Economist [serial online]. May 15, 2004;371(8375):15-16. Available from: Academic Search Premier, Ipswich, MA. Accessed April 24, 2011.

5. http://www.business-strategy-innovation.com/wordpress/wp-content/uploads/2010/06/Adam-Hartung-Netflix-Opportunity.jpg

6. http://www.ehow.com/facts_6757161_did-netflix-start_.html