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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