NETFLIX Case Study

Katherine McLarney
GBA 490
Netflix Case Study Katherine McLarney
GBA 490

Contents
Executive Summary .............................................. 2

Stretegic Issues and Options: ......................... 2

Recommendations: ........................................ 3

Industry Analysis: .................................................. 5

PESTEL Analysis: ................................................. 8

Legal: .................................................................... 8

Five Forces Analysis: ............................................ 9

Driving Forces: .................................................... 10

Key Success Factors:.......................................... 11

Strategic Group Map: .......................................... 12

Financial Analysis: .............................................. 13

SWOT Analysis: .................................................. 16

Netflix Current Strategy: ...................................... 17

Weighted Competitive Strength Analysis: ............ 19

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Executive Summary
This report was commissioned to examine the current state of Netflix and make recommendations
for areas of improvement to enhance Netflix sales, contain costs, or refocus Netflix present
strategy. The information in the Industry Analysis (page 4) draws attention to the growing video on
demand market and Netflix place in the market.

Strategic Issues:
Netflix is facing a number of strategic issues, which can be found in depth on page 4. The most
pressing issues are summarized below:

Decreased Domestic Customer Retention:

Customer retention has been a pressing issue since 2005, when the subscription cancellation rate
began to increase. The current management referred to this as the churn rate and believed this
was not an issue as long as the number of new subscriptions was higher than the number of
canceled subscriptions. During the period of July 2011-December 2011, there was a net loss in the
number of subscribers. This is a pressing issue that directly affects the profitability of the firm
should be addressed if Netflix wishes to continue to retain it’s market share in The United States.
There is also a trend of increasing utilization of content from internet-streaming but a decrease in
the purchase of internet-streaming video on demand, indicating that a larger portion of consumers
are receiving access to internet-streaming services for no cost.

Decreased Overall Financial Strength:

Netflix is currently facing a decrease in financial strength as a result of heavy investment in
markets abroad. In the past two years, the gross profit margin, operating profit margin, net profit
margin, total returns on assets, and return on stock holder equity have all declined, this is detailed
on page 12. The decrease in financial strength in a concern for Netflix as the decrease in financial
strength is caused by expansion into the United Kingdom and Latin America as well as rising costs
to show streaming content. There is little bargaining power with suppliers because there are few
suppliers, movie studios and those who provide licensing for movies, and the content if critical to
Netflix operation.

Options:
Offer reduced prices for long-term commitments:
As a way to reduce the churn rate, Netflix would offer a reduced price equal to Amazon Prime ($79
per year) paid annually and automatically renewed each year. A long-term commitment that is
automatically renewed may increase customer retention. The discount for a long-term commitment
would also provide a competitive advantage in that Netflix would be a lower cost per year than
Hulu Plus.

Commission a Report on Subscription Cancellation

Netflix should commission a report for internal understand the cause of the cancellation of
subscriptions and analyze trends to find any contributing factors to the cancellation. While this
report would be both labor and time intensive, it would provide insight into consumer patterns and
Netflix could adjust it’s model to address major factors leading to subscription cancellation.

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End Expansion in Latin America

Latin America was responsible creating a loss of $23.3 million dollars in the third quarter for Netflix.
While the current management believes there is a market in Latin America, despite the region
lacking critical components for success. Latin America does not have a highly developed Internet
infrastructure, there is little to no culture acceptance of video streaming, there are high costs of
obtaining licensing for content in native languages, and there are far fewer devices with the
capability to host Netflix. By putting the expansion in Latin America on hold until the infrastructure
to support internet-streaming video on demand is in place, Netflix can focus on customer retention
in domestic markets and continued international expansion into other markets that share the same
similar infrastructure as Canada.

Increase Price of Service:

Increasing the price of service could compensate for the increase in the cost of content acquisition
and boost financial strength. If chosen, the supplier, or the movie studios should do this with ample
communication of the increased costs, and that the CEO wishes he didn’t have to raise the price
but was left no choice after the movie studios increased the price. Through ample and genuine
communication, Netflix potentially could avoid the reaction of consumers when the DVD Delivery
plan and internet-streaming video on demand plan were separated.

Recommendations:
In order to continue to have strong profit margins and be market leader in the domestic market
Netflix should:

Commission an Internal Report on the Net Loss of Subscribers

If Netflix wishes to be an industry leader, they should seek to understand the loss of subscribers in
order to increase their value proposition to ensure a net gain of customers after each quarter. The
loss of customers due to subscriber cancelations has been a trend since 2005, and if Netflix does
not address this trend they face the risk of loosing their market share. An industry report would
investigate the cause of subscription cancelation and issue recommendations about how to contain
the causes to preserve market share and increase Netflix profits.

End expansion in Latin America

Netflix should end expansion in Latin America because the infrastructure to support internet-
streaming video on demand is not currently available. internet-streaming video on demand is a
scale economy and the cost to further acquire additional licensing that appeals to the Latin
American culture. Netflix should instead focus on expansion in countries that have similar
characteristics to Canada where they have already successfully launched. If the management of
Netflix still wishes to be a first mover in the region, they should continue to monitor to the region
until it meets agreed upon benchmarks that indicate the infrastructure to launch IS VOD is present.

Offer reduced price for long-term commitments and allow a contract priced option to
preserve members prices

In order to preserve market share and customer retention, Netflix should offer a one-year
subscription price. This will provide guaranteed revenues per year and protect Netflix from the
substitution effect. In order to build back customer trust after the attempted spin off of Netflix DVD

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division, Netflix should also consider allowing customers to lock in their rate for a period of 3 years
if they are a yearly membership subscriber. By allowing customers to lock in their price, Netflix will
begin to rebuild damaged relationships with it’s customer base and also decrease the churn rate
because subscribers would be less likely to cancel if they knew they would be saving money by
continuing to subscribe to lock in their price .

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Industry Analysis:
Industry growth potential
The video on demand industry has a high potential of growth in the coming years. As an emerging
industry, The NPD Group believes that the market will continue to grow because of the belief that
internet-streamed rentals have a better value and better selection than traditional movie rental
methods. As internet-streaming only accounts for one out of six video on demand rentals, the
industry is poised to continue expansive growth as more consumers begin to be attracted by the
value-proposition of streamed rentals and the wider product breadth offered through Internet
streaming video on demand.

Businesses within the industry have the potential to grow through the acquisition of exclusive
content, building partnerships with complimentary companies to bundle TV Subscription and
internet-streaming video on demand, and expanding technology to make the interface easier to
use for older generations.

Industry Risk & Uncertainty:

There is a moderate degree of short-term and long-term risk and a moderate level of uncertainty in
the video streaming industry’s future.
Piracy is a major concern for movie studios, and a majority of Netflix and other internet-
streaming services movie selections are available online as a result of the pirating of the
copyrighted material. As a major concern for movie studios, this could lead to strained relationships
between the streaming service and the movie studios or the supplier. If a strained relationship
between the suppliers were to develop, the selection of movies could decrease and result in the
loss of part of industry value proposition centered on the breadth. The reduction in the breadth
would lead to a reduced viability of the video-streaming industry.
As new technology emerges, prior technology becomes obsolete. Long-term any industry
involving a product that is significantly reliant on technology has moderate long-term risk due to the
threat of new technology replacing the prior technology. This is evident with DVD replacing the
VHS, and video streaming offering the same product as DVDs with increased convenience, and
often at a lower price.
There is also a moderate level of uncertainty in the movie the video-streaming industry because
of the range of potentials futures for the emerging industry. Two areas of uncertainty are the future
degree of global recognition of streaming technology and the time-line for widespread consumer
adaption of Internet streamed video on demand services. Currently, there is not the technology
infrastructure to support internet-streaming video on demand services abroad in most countries,
however with the evolution of technology there is the potential for revenues to be realized abroad if
the culture is accepting of the new technology and there is wide-spread consumer understanding
of the value proposition. The other area of uncertainty is the time-line for widespread adaption of
video on demand services. While the number of consumers utilizing video on demand services is
expected to increase, there is not a definitive timeline for widespread usage.

Netflix Competitive Position:

Netflix has a competitive presence in the internet-streaming video on demand industry. Netflix has
a majority of the market share of the video-streaming industry with over 56% percent of streaming-
rentals. Netflix enjoys competitive advantage over its rivals.

Both Hulu Plus and Netflix offer some high-definition programming at $7.99 per month, however

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Industry Analysis (continued):

Hulu Plus shows a commercial during it’s content. Hulu Plus lacks Netflix content breadth with only
15,425 titles in its content library compared to Netflix 60,000 titles. Netflix has worked with
consumer electronic device makers to have a Netflix button in the remote controls, which allows for
ease of access to Netflix and an increased consumer awareness of Netflix. The case does not
mention Hulu Plus being integrated in remotes so it is assumed that Hulu Plus does not have this
competitive advantage. (Chart 1)

Netflix and Amazon both offer the same amount of content to subscribers, however the majority of
Amazon Prime’s content is only accessed through paying a fee per title in addition to the yearly
subscription price. The billing and price of Netflix and Amazon Prime differ, Netflix is a monthly fee
of $7.99 and Amazon Prime is yearly fee of $79. Amazon Prime differentiates itself from Netflix on
the other product offerings including: free two day shipping on all amazon orders, one Kindle e-
book per month. Despite the increased product offerings, Amazon Prime only has around 15% of
total number of subscribers of Netflix. (Chart 1)

Netflix ability to capitalize on industry opportunities or the vulnerabilities of weaker rivals:

Netflix is poised to capitalize on the weaknesses of its rivals. Through offering a wider content
selection than both Amazon Prime and Hulu Plus, Netflix is able to attract customers through a
wider selection at a comparable price to Hulu Plus and offering monthly billing rather than yearly
billing as is the case with Amazon Prime. While Netflix does not offer the additional products and
services that Amazon Prime does the numbers of the subscribers show that the additional perks
are not appealing to the majority of consumers, and by choosing Netflix subscribers fees can be
used towards a wider content library instead of the costs associate with the additional product
offering.

We also make the assumption from the case that Netflix is the only internet-streaming video on
demand service abroad. Having a profitable business segment in Canada, Netflix has the distinct
advantage of being the first internet-streaming video on demand service abroad and finding a
successful strategy demonstrated by the expansion in Canada. It should be noted that despite the
success in Canada, Netflix is currently not profitable in other countries where they have attempted
expansion.

Netflix Hulu Plus Amazon Prime

Titles in Content 60,000 titles 15,425 titles 17,000 titles included
Library with the subscription and
42,000 titles for an
additional fee
Monthly Cost: $7.99 $7.99 $79 per year, billed
annually
Advertisements: No Yes No
Amount of Streaming: Unlimited Unlimited Unlimited
Free Trial Period: One Month One Week One Month
High-Definition: With Apple TV Many Episodes Not Mentioned
Subscribers: 23.4 Million Not Mentioned 3.5-5 Million
Global Presence: Yes Not Mentioned Not Mentioned
Chart 1: This chart compares the product offerings of Netflix and their 2 major video-streaming
rivals

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Industry Dominant Economic Characteristics:

Market Size:
Annual Sales Revenue: $1.1 Billion
Total Volume: 40 Million Consumers
Scope of Competitive Rivalry:
The geographic area over which most companies compete in the video-streaming segment is global, only
limited by internet connection. However for physical movie rental, geographic area is regional, limited by
movie delivery times through traditional mail services. Having a presence In foreign markets has not
previously proven to be instrumental to success of either video streaming or physical movie rental.
However, in this emerging industry it may become increasingly important and reduce overall costs.
Market Growth Rate:
The market growth rate in the industry is expected to increase in 2012 to 3.4 Billion movies viewed via a
video on demand service.
Degree of Product Differentiation:
Video on Demand providers are not highly differentiated by the movie titles offered due to movie studio
bargaining power to avoid giving exclusive rights to just one company in order to fully realize the revenues
of each film.
Number of Companies in the Industry:
Physical DVD Rental: 3: Blockbuster, Redbox, Netflix
Subscription Based Video on Demand: 3: Netflix, Hulu Plus, Amazon Prime
Number of Buyers:
In 2011, there were 40 million users of video on demand services. There are 134 million potential users with
access to the technology in place to enjoy video on demand services.
Product Innovation:
Product innovation exists through the continued experimenting of the timing of movie releases by movie
studios. Opportunities exist to overtake rival firms by cultivating relationships with movie studios to allow the
video on demand provider to be the first to offer streaming content of movies.
Product innovation also occurs in the form of content provided for various age groups, including expanding
the products offered for children.
Supply and Demand Conditions:
Due to the nature of the video on demand product, significant issues with supply shortages do not exist as
the product offered, videos on demand, can be viewed by multiple viewers at the same time. There are
multiple firms offering video on demand services, some as complementary products for already subscribing
members, others charging a fee per movie or a flat subscription fee.
Technology and Innovation:
Technology is key to success in the video on demand industry, all services require significant technological
infrastructure in place for users to stream videos on their own devices. Advancing technology through the
creation of easy to navigate interface, algorithms to accurately recommend movies, and increased
compatibility of devices all are keys to allowing a video on demand service. Technological advances are
driven by research and development, with multiple firms heavily investing in technology and product
innovation in order to secure and retain a spot as an industry leader with a large market share.
Scale Economies:
The video on demand industry is characterized by economies of scale in purchasing, advertising and
building technological systems. The fixed costs can be spread out over multiple users to lower the
percentage of revenues reduced by the fixed overhead costs.

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PESTEL Analysis:

Political:
 Changes in movie regulations that limit content shared online

Economic:
 Currency fluctuations that would impact profit
 Changes in credit card processing fees that would impact profit
 Changes in disposable income of consumers that would impact revenue

Social:
 Change in the knowledge and usage of technology by different age demographics that
would change number of subscriptions
 Change in the time spent watching videos that would change the number of subscribers
or value placed on the internet-streaming video on demand
 Change in the consumer assigned value of videos reducing the number of consumers
interested in watching videos

Technological:
 New technologies emerging that limit certain video on demand services ability to be
watched on devices
 New technologies emerging that make video on demand segment obsolete
 Internet Infrastructure changes or throttling that slow down or speed up certain firms
content delivery to consumers

Environmental:
-

Legal:
 Movie licensing changes that would change the availability of content
 Expanded legal liability for contributions to pirated movies that would change the ability to
access content for subscribers and affect the number of subscriptions

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Five Forces Analysis:

Competitive Pressures Created by Rivalry Among Competing Sellers:
Moderate
 Buyer demand is growing rapidly
 The products of rival sellers are moderately differentiated by content library
 The buyer experiences low costs when switching competitors

Competitive Pressures Created by Threat of New Entrants:

Moderate
 Buyer demand is growing rapidly, the industry is expected to increase in views
 The products of rival sellers are moderately differentiated by content library
 The buyer experiences low costs when switching competitors

Competitive Pressures from the Sellers of Substitutes Products:

Strong
 Good substitutes are readily available (i.e. Hulu Plus, Netflix, Amazon Prime)
 Substitute goods are attractively priced
 Features such as interface ease of use, movie recommendations, etc. differentiate substitutes.
 The end consumer has low cost to switch between internet-streaming video on demand providers
 The buyer experiences low costs when switching competitors

Competitive Pressures from Supplier Bargaining Power & Supplier- Seller

Collaboration:
Fierce
 Movie Studios have a differentiated input that enhances the quality of the product and is critical to
the internet-streaming video on demand
 There are some movie studio and internet-streaming video on demand providers that are
collaborating to offer exclusive rights of certain movies
 There are few suppliers of certain movies

Competitive Pressures Stemming from Buyer Bargaining Power & Seller-Buyer

Collaboration:
Weak
 Buyer switching costs are low
 A particular internet-streaming video on demand can deliver quality that is not matched by other
brands
 Buyers are individuals and cannot easily negotiate as a group
 There are multiple buyers in the market place, one buyer is not critical to internet-streaming video on
demand provider success

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Driving Forces:
Changes in the Long-Term Industry Growth Rate:
The NPD estimated that share of video on demand rentals is expected to increase 3.4 billion views
in 2012. The market share is continued to increase past 2012 due to customer perceived value of
Internet streaming and customers perceive video on demand providers to have a better selection
of movie titles than traditional movie delivery services.

Increasing Globalization:
Netflix has begun an aggressive campaign to promote customer understanding and awareness of
streaming in untouched markets to gain market share. This campaign to increase understanding of
video streaming may open the markets to companies and decrease the entry barriers to enter
global markets for other firms in the industry.

Technological Change and Innovation:

Technological change is a major driving force in the industry. In 2012, there were 700 devices with
television streaming capability built into the device, and television remote controls are adding
devices to allow for a direct connection for video streaming services.

Every major network broadcaster, multichannel TV provider, and premium movie channel have
been investing in Internet apps for all types of Internet connected devices to position to be able to
offer TV everywhere packages.

Marketing Innovation:
Both video on demand services and movie studios are working together to experiment with
shortened release periods to discover revenues allowing movies to be shown on video demand
services before they had previously been released for at home viewing.

Entry of Major Forces:

There may be a large influx of entry into the market by traditional television subscription services
offering video streaming as a complimentary service to preserve their market share. Among the
industry there is also a wide spread belief that the only way to compete effectively with Netflix
Internet streaming service is to offer shows and movies at any time through a traditional television
subscription.

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Key Success Factors:

1. Technology:
 Expertise in internet-streaming video on demand Technology
 Easy to use interface system to watch content

2. Manufacturing Related:
 Ability to achieve economies of scale
 High utilization of content library

3. Marketing Related
 Wide breadth of movie selection
 Well known brand name

4. Skills and Capability Related:

 Instant Delivery
 Global Distribution Capabilities
 Strong online user interface site that is easy to navigate
 Talented workforce to design technology and maintain relationships with suppliers

5. Other:
 Low costs that are able to meet customers expectations for value
 Strong balance sheet and access to financial capital to acquire content
 Convenience in ability to access ISVDO on multiple devices

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Strategic Group Map:

High

Value Hulu
Netflix
Amazon Prime

Low Content Breadth High

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Financial Analysis:
Financial Analysis of Netflix
2000 2005 2007 2009 2010 2011
Revenue: 35.90 682.20 1,205.30 1,670.30 2,162.60 3,205.60
Profitability Ratios: 2000 2005 2007 2009 2010 2011
Gross Profit Margin: 0.02 0.32 0.35 0.35 0.37 0.36
Operating Profit Margin: -0.65 0.29 0.41 0.76 0.76 0.75
Net Profit Margin: -1.63 0.06 0.06 0.07 0.07 0.07
Total Returns on Assets -1.11 0.13 0.13 0.17 0.15 0.07
Net Returns on Total Assets -1.11 0.12 0.10 0.17 0.16 0.07
Return on Stockholders Equity: 0.80 0.19 0.16 0.58 0.55 0.35

2000- 2007- 2009- 2011-

Growth Ratios: 2011 2011 2011 2010
Capital Annual Growth Ratio: 0.50 0.28 0.24 0.22

Liquidity Ratios: 2000 2005 2007 2009 2010 2011

Current Ratio: - 1.77 2.08 1.84 1.64 1.49

Leverage Ratios: 2000 2005 2007 2009 2010 2011

Total Debt to Total Assets Ratio: - 0.38 0.31 0.33 0.40 0.40
Long-Term Debt to Capital Ratio: there is no information about any long term debt in the case
Debt to Equity Ratio: - 0.61 0.49 1.14 1.34 1.91
Long Term Debt to Equity Ratio: there is no information about any long term debt in the case

Other Ratios: 2000 2005 2008 2009 2010 2011

there is no information about the yearly average price of common
Dividend Yield on Common Stock: stock
there is no information about the yearly average price of common
Price-to-Earnings Ratio: stock
Dividend Payout Ratio: there is no information about dividends per share in the case
Internal Cash Flow: 884.96% 40.52% 26.97% 16.61% 7.28% -0.71%

Gross Profit Margin:

= (Revenues- Cost of Goods Sold)/ Revenues

The gross profit margin is an indication of a Netflix financial health computed by using the formula above.
The gross profit margin is an indication of the amount of money Netflix will have to pay for additional
expenses and savings after accounting for the cost of goods sold. Netflix gross profit margin has decreased
by 2.345% from 2010 to 2011, and signals that the firm has a decreased profit margin despite the increase
in revenues.

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Operating Profit Margin:

= Operating Income/Sales Revenues

The operating profit margin signals how much of Netflix revenue is left after paying for variable costs of
production, such as technology and development, general expenses, marketing costs, among others. Netflix
should have an operating profit margin of at-least the industry average, which is not provided in the case.
Since we do not have the information about the industry average operating profit margin, we can look at the
trends within Netflix to see that between 2010 and 2011, the operating profit margin decreased by -.6%.
While this is not a major change, the operating profit margin should be continually monitored to ensure that
Netflix continues to make a profit in the years ahead.

Net Profit Margin:

= Post-Tax Net Profit/Net Sales

The net profit margin indicates how much of each dollar earned by a company is transformed into profits. An
increase in the net profit margin will indicate that a company’s financial health is improving. In the period of
2005 to 2010, Netflix net profit margin was volatile. Of most pressing concern is the 5% decline from 2010
to 2011, which indicates that Netflix was earning 5% less on every dollar earned.

Total Return on Assets:

= Net Income+ Interest Expenses + Taxes

Total returns on assets are a ratio that is used to measure how a company is using its earnings, or the
earnings for each dollar of the assets of company.

Capital Annual Growth Ratio:

= (Ending Value/Beginning Value)(1/Years)-1

The capital annual growth rate is way to look at growth of a company but instead of growth per year the
capital annual growth rate averages the growth over a number of years to find the rate of return if it had
been a steady investment. Netflix higher annual capital growth rate over 11 years compared to it’s capital
annual growth rate over two years demonstrates that the majority of the growth of the company was fueled
in the first few years.

Current Ratio:
= Current Assets/Current Liabilities

The current ratio indicates the ability for a company to pay off its debts. A current ratio over one indicates a
company is able to take care of its obligations. Netflix current ratio of 1.49 indicates that they are capable of
paying of their debts for the current year and is sufficiently investing excess assets.

Internal Cash Flow:

= Operating Cash Flow/Sales Ratio

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Total Debt to Total Assets:

=Short Term Debt + Long Term Debt/ Total Assets

The total debt to total assets ratio when compared overtime shows if a companies financial risk profile is
becoming more or less risky. The gradual increase in the total debt to total asset ratio has shown that Netflix
is taking on more debt and becoming financially riskier.

Debt to Equity:
=Total Liabilities/Stock Holder Equity

The debt to equity ratio shows a firm liquidity.

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SWOT ANALYSIS:

Strengths: Weaknesses:
•Largest market share in the internet-streaming •High churn rate
VOD segment •Unprofitable markets abroad in Latin America
•Proprietary technology to improve user and the United Kingdom
experience •Leadership lacks appropriate communication
•Over 80% utilization of content library with consumers
•Economies of Scale

Oportunities: Threats:
•Expanded partnerships to gain exclusive •Rival firms developing similiar technology
movie rights •Loss of partnerships
•Expanded partnerships for bundling of •Decreasing bargaining power with suppliers
products •Piracy
•First mover advantage in International markets •Market trend in increased usage of Video on
Demand with a decrease in purchased Video
on Demand (video on demand being bundled
for free by TV networks to perserve market
share)

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Netflix Current Strategy:

Netflix currently deploys a best-cost provider strategy, in which Netflix balances low cost and product
differentiation. This strategy allows Netflix to be a provider that offers a product that is appealing to broad
markets and targets buyers willing to pay a fair market price for performance and functionality. The
evidence that Netflix is deploying this strategy is made evident by Netflix offering a larger amount of titles in
it’s content library at a price that is equal to it’s rivals.

Netflix current strategy is not currently effective in helping Netflix reach it’s long-term goals. The following
key indicators discussed below influence the conclusion of Netflix’s current strategy’s lack of effectiveness.

Decreased Trend in Customer Acquisition and Customer Retention:

Netflix spends heavily to attract new customers and offers a free one month trial, with the hopes of having
gained additional customers, this strategy works well as demonstrated by the graph below in acquiring
customers but does not ensure the long-term retention of customers.

Netflix marketing strategy is based off acquiring customers at a higher rate than the number of canceled
subscribers. This strategy does not seem to be effective as shown by the large number of cancelations from
July 2011- December 2011 that led to a net loss of subscriptions.

Decreased Trend in the Acquistion and

Retention of Netflix Customers
Number of Subscriptions

18000
16000
(in the 1000s)

14000
12000
10000
8000
6000
4000
2000
0
Jan -
July-Dec
2000 2005 2007 2009 2010 June
2011
2011
Additional Subscriptions 515 3729 5340 9322 15648 11614 9930
Canceled Subscriptions 330 2160 4177 6444 8415 6521 10129

Graph 1: This shows the trend of subscription additions and cancelations between 2000-2011

Decrease in Overall Financial Strength::

Netflix is currently facing a decrease in financial strength as a result of heavy investment in
markets abroad. In the past two years, the gross profit margin, operating profit margin, net profit
margin, total returns on assets, and return on stock holder equity have all declined, this is detailed
on page 12. The decrease in financial strength in a concern for Netflix as the decrease in financial
strength is caused by expansion into the United Kingdom and Latin America.

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Another contributing factor the decrease in financial strength is the rising costs to show streaming
content. There is little bargaining power with suppliers because there are few suppliers, movie
studios and those who provide licensing for movies, and the content if critical to Netflix operation.

Continued Strong Focus on Continuous Improvement Activities:

Netflix is committed to continuous improvement activities as their current CEO noted in his post to
consumers when he stated the reason for the spin off Netflix DVD rental division to Quikster was to allow
Netflix to focus on rapid improvements in it’s streaming technology. Netflix is looking to improve all three of
it’s product offerings by improving domestic streaming technology, actively looking to expand it’s
international presence through improvement of content offered abroad, and the enhancement of value
added to the Domestic DVD by Mail service by expanding it’s offerings to allow video game rentals in
addition to DVD rentals beginning in 2011.

Decreased Image and Reputation Among Customers:

Despite the aggressive spending by Netflix to attract and retain new customers, Netflix faces a strained
relationship with its customers due to lack of communication and increases in the price. In 2011, Netflix
announced a new pricing plan that resulted in an increase in the total price paid for over half of their
customers, by separating the mail by DVD service from the video streaming service, which would increase
the cost of a comparable plan by 59.98%, from $9.99 to $15.98. This move by Netflix alienated many
customers who posited negative comments on social media about the move. The result of the pricing
change resulted in the loss of an estimated 600,000 subscribers who canceled their membership during this
period.

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Weighted Competitive Strength Analysis:

Netflix Hulu Amazon Prime

KSF/ Strength Measure: Weight: Rating: Weighted: Rating: Weighted: Rating: Weighted:
Other Products Offered: 0.1 1 0.1 1 0.1 9 0.9
Advertisements during Content: 0.1 8 0.8 1 0.1 8 0.8
Cost: 0.2 5 1 5 1 6 1.2
Global Presence: 0.2 7 1.4 1 0.2 1 0.2
Selection: 0.2 10 2 4 0.8 4 0.8
New Product Innovation: 0.2 6 1.2 2 0.4 5 1
Sum of Weights: 1
Overall Strength: 6.5 2.6 4.9

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