Netflix

The Rise of Online Movie Streaming

Question:

Discuss About The Netflix Prize Roduction Algorithmic Culture?

The movie stream business model has challenged and replaced the traditional business model of video rentals (Chao, Hegarty and Fray 2016). Online streaming has enabled the customers to access high quality movies and videos instantly by connecting to the Internet. Technological advances helped customers to overcome the issues that they faced when they were dependent on traditional as well as DVD movie rentals. Customers started preferring online streaming as they could save their time and money. Blockbuster Video provided video rentals services in the US and even across the world (Davis and Higgins 2013). Customers used to take the movies by paying a certain fee and had to return within a given time else they were charged late fees. Netflix introduced the concept of DVD-by-mail service and later moved to online streaming followed by original programming (Cook 2014).

This report focuses on describing how Netflix could beat the business of Blockbuster Video. It gives a brief overview of the history of Netflix as well as Blockbuster. It gives a detailed explanation of how Netflix beat Blockbuster by focusing on changing technology and pricing strategies. It discusses how online operations and innovations helped Netflix to achieve success and beat the business of Blockbuster. This report also shows what led to the failure of Qwikster and how Netflix regained its position through original programming. This report also carries out an analysis for predicting the future of Netflix. It tries finding out whether Netflix will remain to be the dominant provider of online movie and video streaming in the future.   

In 1985, the first video rental store of Blockbuster Video was opened in Dallas, United States. David Cook founded Blockbuster after the demise of Cook Data Services in Texas. David Cook left the company in 1987 and sold it to the founder of Waste Management Inc. along with two other investors (Davis and Higgins 2013). In 1994, Viacom bought Blockbuster at a price of $8.4 billion. Blockbuster collected around $800 million as late fees that constituted to be more than ten percent the total revenue. It became the leader in the video rental market of the US and also across the world with more than 9000 video rental stores in 2004. After the entry of Netflix in the market, the business of Blockbuster was running at a loss (Freedman 2012). In 2010, it filed for getting protection against bankruptcy. The assets of Blockbuster were bought by Dish Network in 2011. Dish Network announced to close some of the rental stores in 2012 and in 2013 it announced the plan to close down all the remaining stores in the US. It was able to continue the operations of approximately ten stores in the United States.

A Brief Overview of the History of Netflix and Blockbuster

Reed Hastings along with Marc Randolph co-founded Netflix in 1997 for enabling the people to get access to movie rentals over the Internet. Netflix.com website was launched in 1998 (Cook 2014). It started offering monthly subscription plan in 1999 that provided unlimited DVD or video rentals to the customers. In 2000, Netflix introduced an algorithm based recommendation system for accurately predicting movie preferences of the members depending on their previous movie ratings (Amatriain 2013). Netflix was able to gain 4.2 million members by 2005. It moved to online streaming in 2007 (Netflix Media Center 2018). Netflix started focusing on original programming and released “Lilyhammer” in 2012 followed by “House of Cards” in 2013. Netflix had spread its business worldwide by 2016.     

Netflix introduced the concept of online rentals by utilizing the features of advanced technology such as the Internet and compressed technology (Lusted 2012). It moved from DVD-by-mail services to online streaming for the convenience of its members. The business of Netflix totally depended on the Internet technology (McDonald and Smith-Rowsey 2016). On the other hand, Blockbuster did not adopt advanced technologies. It was still operating its retail outlets in the US. Netflix developed a virtual platform for interacting with its client. It focused on a digital business model and data virtualization. Blockbuster failed to transform digitally and this had a negative impact on its business (Davis and Higgins 2013). One of its main technological initiatives was the recommendation system for suggesting movies to the members by analysing their movie ratings. Netflix had offered a prize of $1 million to anyone for providing a better and advanced algorithm for the recommendation system (Hallinan and Striphas 2016). Later on, Netflix focused on streaming technologies and online streaming for allowing its customers to easily access video contents in real-time. Open source technologies were used by Netflix for make maximum utilization of the customer data (Cook 2014). Blockbuster did not utilize online streaming and open source technologies for improving its business process (Freedman 2012).  Netflix made maximum utilization of the Internet for delivering high quality video content to the members. Blockbuster on the other hand failed to see the spread of high speed broadband connections in the US. Netflix utilized data analytics technologies for dealing with a huge amount of customer data and enhancing its business operations (Amatriain 2013). Blockbuster on the other hand focused on increasing the number of retail outlets. The spread of high speed broadband connections in the US and enhanced video compression facilitated Netflix to grow its business at a fast rate and beat Blockbuster (Stelter 2013). The traditional business model of Blockbuster was responsible for the failure of its business.

How Netflix Beat Blockbuster by Focusing on Technology and Pricing Strategies

Netflix utilized the benefits of online operations for achieving success in its business. With the increase of Internet usage in the US, Netflix succeeded in the market of video services and movie streaming (Stelter 2013). The internet-distributed video rental services led to the change of practices in the traditional television industry as well (Freedman 2012). Netflix developed a virtual platform for user interactions and enabled the users to place online orders for DVDs. It followed a DVD-by-mail technique for its business. Customers could stay at home and easily get access to movies at a cheaper cost as compared to the cost of hiring movie cassettes from retail outlets (Chao, Hegarty and Fray 2016). They were able to save the travelling cost as well as time. Hence, the online service provided by Netflix proved to be more convenient for the US customers as compared to the video rental services provided by the retail outlets (Cook 2014). Blockbuster did not make use of online operations and this affected its business growth. The online streaming services provided by Netflix enabled the customers to watch movies and play games at any time (McDonald and Smith-Rowsey 2016). Streaming allowed the customers to watch videos online without downloading it. Blockbuster retail stores had fewer movie collections as compared to the online library of Netflix. Netflix could save its operational costs by carrying out online operations (Lusted 2012). It did not have to spend money on sales executives and other staffs that are needed in any retail outlet. The virtual platform and online operations proved to be beneficial for Netflix and it could beat and disrupt the traditional business of Blockbuster.   

The retail outlets of Blockbuster charged a fee for each rental. The customers could keep the video cassettes with them till a given time span (Freedman 2012). On the other hand, customers could access movies and videos at a much cheaper price by becoming a member of Netflix (Stelter 2013). The pricing strategy of Netflix was to follow a monthly subscription model. The prepaid subscription pricing plan provided unlimited access to rentals with no late fines. But on the other hand, Blockbuster charged late fees for not returning the cassettes within the specified time (Davis and Higgins 2013). A significant percentage of its revenue constituted the late fees.  The subscription strategy proved to be more convenient for the customers and helped Netflix to retain more customers (McDonald and Smith-Rowsey 2016). The customers did not have to worry about their monthly expense. But Blockbuster on the other used a pay-per-rental model that was inconvenient for the customers (Lusted 2012). This prepaid subscription strategy helped Netflix to improve its business stability. It saved customers effort and time (Cook 2014). Blockbuster on the other hand could not enhance its business stability and simplify business processes by using a traditional pricing model. The customers in the US preferred the subscription pricing strategy of Netflix over the traditional pay-per-rental strategy of Blockbuster. Cost leadership strategies focus on reducing cost and increasing profit by charging the customers an industry-average price or lower prices as compared to its competitors. Netflix followed a differentiation strategy where it focused on providing online rentals and video streaming (Allen, Feils and Disbrow 2014). It provided a unique service as the concept of online rentals were not used by its competitors. Netflix made proper use of the Internet technology and the postal services of the US for achieving success in the differentiation strategy and gained competitive advantage over Blockbuster. Blockbuster did not utilize the differentiation strategy and this adversely affected its business to a great extent. The differentiation strategy is suitable for Netflix. Netflix constantly focuses on improving its services for creating uniqueness in the market of movie streaming and online rentals.

The Failure of Qwikster and the Rise of Original Programming

Netflix started its business by introducing online rentals and DVD-by-mail services in the country. Netflix focused on innovation and created a virtual platform for operating its rental services (McDonald and Smith-Rowsey 2016). Blockbuster on the other hand, operated physical retail outlets in the US. Netflix got the first mover advantage in the US as there were only video rental outlets in the country. It was the first to introduce the concept of online video rentals in the market. Netflix disrupted the existing market of video rentals of Blockbuster and proved to be a disruptive leader (Davis and Higgins 2013). To enhance the experience of the customers, Netflix developed a recommendation system that worked on an advanced algorithm and gave appropriate movie suggestions to the customers. This algorithm worked on the previous movie ratings gave by the customers (Hallinan and Striphas 2016). The innovation of the recommendation system helped Netflix to gain competitive advantage in the market. But Blockbuster did not focus on innovations. Lack of innovation led to the downfall of Blockbuster. Later on, Netflix realised the importance of online streaming and focused on providing video streaming services across the US. The concept of online streaming also gave the first mover advantage to Netflix in the US. Online streaming helped the Netflix members to watch movies in real-time without downloading it (Stelter 2013). Netflix kept on innovating and improving its services whereas Blockbuster was still trying to rent video cassettes in a traditional manner. The next innovation of Netflix was to produce original contents. Blockbuster on the other hand just focused on increasing the number of stores and could not predict the future of the video rental industry in the US (Freedman 2012). Blockbuster lagged on innovations and did not adopt advanced technologies in its business processes. Original programming increased the revenue of Netflix and increased the number of its subscribers (Tryon 2015). Appropriate future prediction and continuous innovation led to the success of Netflix.

Netflix announced in the month July, 2011 about a hike in the price of their combined online streaming and DVD-by-mail services. Later on, Netflix announced the plan for separating the video streaming and DVD-by-mail services for improving both the services. It planned to create Qwikster for handling the DVD-by-mail services (Som.yale.edu 2018). After the announcement of the Qwikster plan, Netflix lost more than 800,000 subscribers or members along with a drop in its stock price. Netflix decided to end the plan of Qwikster but stick to its plan of price hike. The Qwikster plan had failed due to several reasons. The change of name had confused the people. The ‘Qwikster’ name could be easily misspelled. New users would get confused and might not understand that Netflix and Qwikster were owned by the same company. Splitting of Netflix into two websites meant that the users had to create two separate accounts. They needed to undergo two separate billing procedures for the two companies. The separate websites would mean separate ratings for both the websites, despite being a part of Netflix (Stelter 2013). Another main reason for the failure of Qwikster was the assumption that DVD-by-mail service had no future. It was assumed that Netflix wanted to focus on online streaming as it had a huge scope in the future. Netflix needed to recreate its ratings as well as customer preferences on Qwikster. Although this plan might have seemed to be good from the business perspectives, customers did not support this idea. Qwikster would offer DVDs to the customers and an optional upgrade was needed for accessing video games. It would not offer both the services to the users on joining Qwikster. Netflix had lost several subscribers resulting in business loss (Allen, Feils and Disbrow 2014). Netflix realised that the customers were unhappy with the Qwikster plan and had dropped the plan.

Analyzing the Future of Netflix

Netflix regained its market position by focusing in the production of original contents. It realised that more customers could be attracted by offering original contents rather than renting movies that are produced by others (Tryon 2015).  It made huge investments in the original programming. Its first original content “Lilyhammer” was debuted in the year 2012. In 2013, Netflix released its original content, “House of Cards” that was based on a political drama.  The production of original content played a significant role in the success of Netflix (Netflix Media Center 2018). Original programming could retain the existing subscribers of Netflix and also attract new subscribers.  Netflix started focusing on original content production as it wanted the customers to keep subscribing for a long time and reduce the sudden cancellation of the subscription plan (Stelter 2013). Original programming could help Netflix to introduce a hike in the service prices in the near future without any issue. Netflix could reduce its operational cost by adopting the concept of original programming (Cook 2014). The cost of licensing was increasing and this created a problem for Netflix. Netflix faced several issues in acquiring the license for the contents of other producers. The production of original content and programming proved to be beneficial for Netflix (McDonald and Smith-Rowsey 2016). Netflix was able to illustrate its authority, increase the SEO ranking and increase the website traffic by creating original contents. Netflix focused on original programming for achieving long term benefits. Its main aim was to beat the business of HBO (Amatriain 2013). The production of original content attracted several customers from the US. The original content created for the US market resulted in huge success. Netflix was able to gain competitive advantage in the market of online streaming by producing original contents.

Netflix plans to spend around $8 billion on original programming in 2018. Its main focus is to fill its online library with 50 percent original contents. It is planning to release 80 films in the year 2018. Netflix believes that original programming will help to raise the service price in a continuous manner without causing any problem (Tryon 2015). Netflix has planned to increase the subscription plan by $1 in every month. Its focus is on offering a $15 subscription plan for beating the business of HBO. The concept of original programming can help Netflix to remain the leader in the video streaming market of the US. Original programming can help Netflix to build its credibility (Cook 2014). Netflix could predict the future of the video streaming industry and aimed to move into original programming. Netflix has several risks as well. Its competitors in the market are trying to catch up with the business model of Netflix (Harvard Business Review 2018). It has a risk of brand dilution if the movies are not much compelling. The original contents produced by Netflix is expected to act as its key differentiator in the video streaming market and help to retain its leading position in the US (Stelter 2013).  Netflix also aims to become like Disney and produce animated video contents. The hike in subscription plan can help Netflix in generating more revenues in the future. Netflix has the capability to become a “must subscribe” channel over the Internet across the US market. High quality original contents will help Netflix to secure a leading position in the video streaming market. Innovative business strategies and models can help the business of Netflix to attain competitive advantage in the market (Allen, Feils and Disbrow 2014). Although there are several risks that Netflix can face in the future, it is still expected to be the dominant provider of online video streaming in the US market.    

Conclusion

This report analysed the innovations along with the future plans of Netflix and said that Netflix can remain to be the leader in the movie streaming industry of the US in future. It showed how Netflix adopted advanced technologies for beating the traditional business model of Blockbuster. Customer experience got enhanced with the introduction of online retailing. This report showed that customers started preferring the virtual platform of Netflix over the retail outlets of Blockbuster as they could save their time as well as cost. It said that the disruptive innovation strategy and the prepaid subscription pricing model of Netflix played a major role in achieving success. Some of the disruptive innovations of Netflix were DVD-by-mail services, development of the recommendation system and original programming. According to this report, Netflix got the first mover advantage in the US for providing online streaming services. This report predicted the future of Netflix. It said that Netflix wanted to split its DVD-by mail and online streaming businesses. It had planned to create “Qwikster” for handling the DVD-by-mail services. According to this report, Qwikster plan failed because the customers did not support the idea of creating two separate accounts and paying separate bills. The price hike and the Qwikster plan led to the loss of over 800,000 subscribers. This report showed how Netflix regained its position by producing original contents. Netflix can maintain market dominance by focusing on original programming. Production of high quality original content would help Netflix to minimize competition and attain further success in the future. According to this report, Netflix has several market risks in the future. Netflix is mainly focusing on producing original content and filling 50 percent of its online library with original contents. It has a plan of investing $8 million in original contents in the year 2018. This report concludes that production of original content can help Netflix to remain the dominant provider of video streaming in the US.

References;

Allen, G., Feils, D. and Disbrow, H., 2014. The rise and fall of Netflix: what happened and where will it go from here?. Journal of the International Academy for Case Studies, 20(1), p.135

Amatriain, X., 2013, August. Big & personal: data and models behind netflix recommendations. In Proceedings of the 2nd international workshop on big data, streams and heterogeneous source Mining: Algorithms, systems, programming models and applications (pp. 1-6). ACM.

Chao, C.N., Hegarty, N. and Fray, I., 2016. Impact of Movie Streaming over Traditional DVD Movie Rental—An Empirical Study. Journal of Industrial and Intelligent Information Vol, 4(2).

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Davis, T. and Higgins, J., 2013. A Blockbuster Failure: How an Outdated Business Model Destroyed a Giant.

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Hallinan, B. and Striphas, T., 2016. Recommended for you: The Netflix Prize and the production of algorithmic culture. New Media & Society, 18(1), pp.117-137.

Harvard Business Review., 2018. Netflix and Why the Future of Streaming Looks Like Old-School TV. [online] Available at: https://hbr.org/2017/10/netflix-and-why-the-future-of-streaming-looks-like-old-school-tv [Accessed 22 Jan. 2018].

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McDonald, K. and Smith-Rowsey, D. eds., 2016. The Netflix effect: Technology and entertainment in the 21st century. Bloomsbury Publishing USA.

Netflix Media Center., 2018. About Netflix. [online] Available at: https://media.netflix.com/en/about-netflix [Accessed 22 Jan. 2018].

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