Netflix.com: An overview


Netflix is currently the largest online DVD rental company in the US. The company offers a prepaid plan for customers to rent DVDs online and have the DVDs mailed to them in envelopes. Since the inception of the company, Netflix has been constantly trying to improve itself on a few fronts of the business in order to better position the company to its partners and most importantly, its customers. Moreover, the company faces tough competition not only from traditional video rental stores, but also other online video rental companies. On top of that, Netflix has a huge rivalry with Blockbuster, the largest video rental chain in the US. In recent times, Netflix has also been facing the threats of online video and Video-on-Demand (VOD), and are currently looking into the possibility of entering this space. As being a rental service provider, it generates the revenue mainly from the subscription fee. Netflix has earned the huge revenue of $493.7 million in 2011(according to a survey of 25 analysts polled by FactSet Research). It is planning to expand its business into 43different countries with the full phase service.

Netflix has implemented the effective CRM (Cinematch) and SCM (Stevens 2005) in the business process to tap the environmental opportunities and create a competitive advantage in the industry.

Netflix’s current business model is very technology intensive but only has a simple concept of operation attached to it. The main idea was for Netflix to offer convenient access to movies. Customers subscribe for a fee through the website and they can start adding movies to their “wish” list and recommendations for movies are even provided based on individual customer preferences. Customers can view videos and TV shows in not only from laptops and TV but also from the smart devices like iPad and iPhone. The major software supported by Netflix are Microsoft Windows, Mac OS X, Android including the HTC Incredible(2.2), Samsung Nexus S(2.3), Motorola Droid(2.2), LG Revolution(2.2), Commando C771(2.2), and Archos32 Internet Tablet(2.2), iOS iPad, iPhone, iPod Touch, Apple TV.

Hence, Netflix have been doing the traditional type of business differently with the help of e-commerce and able to add value to the customer and its other stakeholders.

  

1.     Introduction:

Netflix, Inc., (NASDAQ: NFLX) is an American provider of on-demand internet streaming media in the United States, Canada, and Latin America and flat rate DVD-by-mail in the United States. The company was established in 1997 and is headquartered in Los Gatos, California. It started its subscription-based digital distribution service in 1999 and by 2009 it was offering a collection of 100,000 titles on DVD and had surpassed 20 million subscribers. On February 25, 2007, Netflix announced the billionth DVD delivery and in April 2011, it announced 23.6 million subscribers.

Netflix was founded in 1997 in Scotts Valley, California by Marc Randolph and Reed Hastings, who previously had worked together at Pure Software, along with Mitch Lowe. Hastings was inspired to start the company after being charged late fees for returning a rented copy of Apollo 13 after the due date. The Netflix website launched in April 1998 with an online version of a more traditional pay-per-rental model (US $4 per rental plus US $2 in postage; late fees applied). Netflix introduced the monthly subscription concept in September 1999, and then dropped the single-rental model in early 2000. Since that time the company has built its reputation on the business model of flat-fee unlimited rentals without due dates, late fees, shipping or handling fees, or per title rental fees.

With more than 20 million streaming members globally, Netflix, Inc. (NASDAQ: NFLX) is the world’s leading Internet subscription service for enjoying movies and TV shows. It is estimated that the total no of subscribers at the end of 2011 will reach 25 million. For about US$7.99 a month, Netflix members in the United States, Canada, Latin America and the Caribbean can instantly watch unlimited movies and TV episodes streamed over the Internet to PCs, Macs and TVs. Among the large and expanding base of devices streaming from Netflix are: Microsoft’s Xbox 360, Nintendo’s Wii and Sony’s PS3 consoles; an array of Blu-ray disc players, Internet-connected TVs, home theater systems, digital video recorders and Internet video players; Apple’s iPhone, iPad and iPod touch; Android and Windows tablets and phones; and Apple TV and Google TV. In all, more than 700 devices that stream from Netflix are available.

2.     Literature review:

When it comes to online movie, television, and video services, there are several service providers that give the similar type of services. Some of them are as follows.

·         Hulu:

Hulu distributes video both on its own website and syndicates its hosting to other sites, and allows users to embed Hulu clips on their websites. In addition to NBC, ABC and Fox programs and movies, Hulu carries shows from other networks such as Current TV, PBS, USA Network, Bravo, Fuel TV, FX, NFL Network, Speed, Big Ten Network, Syfy, Style, Sundance, E!, G4, Versus, A&E, Oxygen and online comedy sources such as Onion News Network. Each supplier gets 50 to 70 percent of advertising revenue resulting from its content.

·         Amazon Instant Video

It allows customers to download to any Unbox-registered PC or TiVo from any Internet-connected computer. For example, a user can purchase an Unbox video from a work computer and request that it be downloaded on a home computer. It also allows users to create their own media library by adding or deleting most large video files from their local hard drive when finished and store those in Amazon’s Media Library for later re-download. This allows people to download more movies than their hard drive could otherwise store, and it provides a backup in case of hard drive failure.

All of the online video services mentioned in this review are paid, premium services. However, there are also many places on the web that offer free television and movies as well. Most premium online television and movie offerings are run as a service. Thus, they require a monthly fee. In many cases, however, these services are much cheaper than cable television services. This is because online based video services are nationwide, so they can offer a more competitive rate. Cable services are a monopoly industry, so they are often more costly.

The one advantage that cable and satellite companies have over these companies is, the offering of live television. While most of these companies are able to offer replays of your favorite TV shows, they do not yet offer live TV, which is unbeatable when it comes to sporting events and other live shows. Still, many consumers prefer savings over certain features, and these internet based services offer maximum value.  Internet services can be streamed or played on televisions in a variety of different ways. However, HTPC (Home Theater PCs) and media centers are among the most popular.

3.     Business Operating Modality:

Since the inception of Netflix, they have been constantly trying to fine-tune their business model to make it as profitable as possible for the company, suitable for current market situation and at the same time, create the most value for the stakeholders in Netflix’s business. Since Netflix started, they had already position themselves solely on the online DVD rental space without a physical chain like blockbuster, rather, using mails to delivery DVD rentals to its customers. As such, traditional video rental business model of having a fix price per DVD rental would not work; as seen from Netflix’s first business model which it quickly changed not long after. The stakeholders in Netflix’s business are the DVD distributors and studios who will serve as Netflix’s supplier, Netflix’s customers and an important factor unique to online DVD rentals and not traditional video rental, the delivery mail which in Netflix’s case, the USPS.

Netflix’s current business model is very technology intensive but only has a simple concept of operation attached to it. The main idea was for Netflix to offer convenient access to movies.

Customers subscribe for a fee through the website and they can start adding movies to their “wish” list and recommendations for movies are even provided based on individual customer preferences. Customers pay a flat monthly fee that would allow them to rent any number of DVDs according to their subscription plan and keep them as long as they wanted. There are no due dates and late fees involved. The DVDs are received via the USPS (US mail services) and customers return their rented titles at their own convenience with a postage paid return envelope from Netflix.

As mentioned above, it took Netflix a couple of tries before it managed to successfully fine-tune its business model to the current version. The current model brings a sort of balances between the three other stakeholders, the DVD distributors and studios, the USPS and lastly, the customers. Previously, one of the main problems that Netflix faces was the high acquisition cost of acquiring DVDs from distributors and studios. As a result, the company had deals with these distributors that will greatly decrease the cost for Netflix and yet increase customers satisfactory. As for the USPS, Netflix had established a special relationship with them to further help decreasing delivery and returning time. The fact that Netflix was one of USPS’s fastest-growing first class mail clients further illustrates Netflix’s importance to USPS. The opening of more distribution centers around the US and having a national inventory further make delivery faster to and from customers (a key component in Netflix’s business model); plus a special understanding with USPS further help strengthen this area of Netflix’s business model.

In this below presented business modality, first the customers get into their web browsers and select the required Videos and DVD’s through the single portal Netflix.com. Customers have basically three alternatives (we assume) of electronic payment for the subscription fee. They are EFT through their bank account, credit card, and e-cash (digital wallet) system.  

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

4.     Finance and revenue Generation:

As a subscription-based company, Netflix’s income comes almost exclusively from subscription fees. Netflix provide the rental service of DVDs and TV shows to the customers and charge the flat fee in return. In the immediate future, Netflix will continue outperforming analyst expectations and maintain an edge over competitors by increasing profitability through subscription based growth, reducing cost, and pricing competitively.

Netflix’s revenue condition in 2010 and 2011 are presented below.

 2010: In 2010, Netflix’s stock price increased 219% to $175.70 and it added 8 million subscribers, bringing its total to 20 million. Revenue jumped 29% to $2.16 billion and net income was up 39% to $161 million.

2011: In April 2011, Netflix is expected to earn $1.07 a share in the first quarter of 2011 on revenue of $705.7 million, a huge increase compared to the year-earlier profit of 59 cents on revenue of $493.7 million, according to a survey of 25 analysts polled by Fact Set Research.

5.     Business Expansion:

Netflix announced, on July 5, 2011, that by the end of 2011 it would expand its services into 43 countries and territories in Latin America and the Caribbean, offering items in English, Spanish and Portuguese. On September 5, Brazil became the first country in Latin America to introduce the service, followed by Argentina on September 7, Chile on September 8, Colombia on September 9 and Mexico on September 12, with the rest of the continent having the service in the next few weeks.

 

6.     Business Norms:

Netflix have been following the different business norms as stated below:

I. Judgment

  • Should make wise decisions (people, technical business and creative) despite ambiguity
  • Should identify root causes, and get beyond treating symptoms
  • Should think strategically, and can articulate what to do and what not to do

II. Communication

  • Should listen well, instead of reacting fast
  • Should be concise and articulate in speech and writing.
  • Should treat people with respect independent of their status
  • Should maintain calm self-confidence in stressful situations

III. Impact

  • Should accomplish amazing amounts of important work.
  • Should demonstrate consistently strong performance so that colleagues can rely upon
  • Should focus on great results rather than on process
  • Should exhibit bias-to-action, and avoid analysis paralysis

 IV. Curiosity

  • Should learn rapidly and eagerly
  • Should seek to understand organization’s strategy, market, subscribers, and suppliers
  • Should be broadly knowledgeable about business, technology and entertainment

V. Innovation

  • Should re-conceptualize issues to discover practical solutions to hard problems
  • Should challenge prevailing assumptions when warranted, and suggest better approaches
  • Should create new ideas that prove useful

VI. Courage

  • Should say what to think even if it is controversial
  • Should make tough decisions without excessive distressing
  • Should take smart risks
  • Should question actions inconsistent with our values

VII. Passion

  • Should inspire others with thirst for excellence
  • Should care intensely about Netflix’s success
  • Should celebrate wins
  • Should be persistent

VIII. Honesty

  • Should be known for candor and directness
  • Should be non-political
  • Should say things about fellow employees
  • Should be quick to admit mistakes

 IX. Selflessness

  • Should seek what is best for Netflix, rather own group
  • Should be ego-less when searching for the best ideas
  • Should make time to help colleagues.
  • Should share information openly and proactively.

7.     Client base:

Netflix have been providing the variety of DVDs and TV shows to satisfy the different customer segment in a flat rate. These are demonstrated below in the presented table.

Segment

Product Offering

Children

Cartoons, Animated Movies

Teenager

Romantic Movies, TV serials, Sports, Musical Shows and so on.

Elder

Latest movies, Sports, Musical shows

Job Holder

News Channels, Sports, Business shows.

Old age

Spiritual shows, Reality shows

8.     Customer Relationship Management Systems:

Netflix uses an intelligent agent to provide its consumers with their own “personal box office”. The intelligent agent, called Cinematch, is a movie recommendation system that constantly gives the customer suggestions on movies that he or she might enjoy. Cinematch joins two methods (collaborate filtering and adaptive filtering) to predict consumer preferences. First, Cinematch urges the customer to rate movies using a 5 star rating system. The more movies the customer rates, the more accurate his or her recommendations will become. By doing this, the system starts to find out what kind of movies he or she enjoys . Cinematch collects the user’s rating and adds it to its huge database of user ratings for movies. Then, Cinematch would take two movies and find two customers who have rated the two movies similarly. Thus, when Cinematch gives recommendations, it recommends movies that the customer has not watched and received a high-rating from like-minded viewers. Cinematch is very valuable for the customers because they do not have to waste time looking for movies. In fact, 60% of movies that customers add to their list of movies come from recommendations.

Netflix also uses electronic catalogues on its website. The catalogue allows customers to quickly search for movies and view movie information on its website. Customers can search for movies by genre, new releases, top 100 or critics’ picks. The electronic catalogue makes looking for movies quick and easy.

    Supply Chain Management Systems:

Netflix’s SCM systems are strategic to the company; thus, they are a trade secret. Netflix’s main SCM system is Web-based proprietary software that tells the workers where to ship its inventory as soon as it arrives in the warehouse. This is how it works: as soon as a disk comes in, the worker checks to ensure that the right disk is in the right sleeve. Then, the disk’s serial number is scanned. Netflix’s proprietary software then checks many factors, such as the total inventory of the item, its locations, and the movies on customers’ wish lists. It then retrieves a name and address of the next person waiting for the DVD, prints out a label, and the disk is dropped back into the mail.

Netflix’s SCM system also tracks inventory and determines the fastest route to get the disc into customers’ hands:

For example, an order placed by a customer in Manhattan will be assigned to the distribution center in nearby Flushing, New York. If the DVD is not available, the system will poll the next-closest distribution center, in Stamford, Connecticut. If that center doesn’t have it, the system contacts the next closest, and so on until the DVD is located (even if that means sending it from Netflix’s main library in San Jose, California). If the disc is not found, the system will look for the customer’s second choice back in Flushing. No matter where the disc is sent from, the system knows to print a return label to the Flushing facility to minimize return-mail times.

1    Technology Used

Netflix migrated its infrastructure to Amazon EC2. Master Copies of digital films from movie studios are stored on Amazon S3, and each film is encoded into over 50 different versions based on video resolution, audio quality using machines on the cloud. In total, Netflix has over 1 Petabyte of data stored on Amazon, and the data is sent to content delivery networks (including Akamai, Limelight, and Level 3) that feed the content to local ISPs. Netflix uses a number of open-source software in its backend, including Java, MySQL, Apache Tomcat, Hive, Chukwa, Cassandra, and Hadoop.

Netflix streams HD content using Microsoft VC1AP encoding at a maximum bit rate of between 2600 kbit/s and 3800 kbit/s (depending on the movie). A lower bit rate feed may be supplied if the user’s network connection is not capable of handling the maximum bit rate available for the film in question.

Netflix recommends that people stream its movies over a broadband connection with a speed of at least 1.5 megabits per second (1.5 Mbit/s), and that people use an Internet connection of at least 3 megabits per second to get better-looking video on par with a DVD.

Netflix supports the following hardware and software:

I. Hardware supported

•           Apple TV set-top box

•           Boxee Box set-top box

•           Insignia Blu-ray Disc players and home theater systems

•           LG Electronics Blu-ray Disc players, TVs (LH50 series, LCD, and PS80 plasma), and home theater systems

•           Logitech Revue Google TV Buddy Box

•           Microsoft Xbox 360, (Xbox Live Gold Subscription Required)

•           Nintendo Wii and Nintendo 3DS (Wii U support also confirmed)

•           Philips Some Blu-ray Disc players and TVs

II. Software support

•           Microsoft Windows: Windows XP Service Pack 2, Windows Vista, Windows 7 running Internet Explorer 6 (or higher), Firefox 2 (or higher) or Google Chrome 6 (or higher). New viewer requires use of the Microsoft Silverlight technology and a 1.2 GHz CPU.

•           Mac OS X: An Intel-based Mac with OS 10.4.8 or later. Browser support is Safari 3 (or higher), Firefox 2 (or higher) or Google Chrome. Mac Netflix was added October 27, 2008, which requires use of the Microsoft Silverlight technology.

Other software options:

•           Android including the HTC Incredible (2.2), Nexus One (2.2/3), EVO 4G (2.2) and G2 (2.2), Samsung Nexus S (2.3), Motorola Droid (2.2), LG Revolution (2.2), Casio G’zOne Commando C771 (2.2), and Archos 32 Internet Tablet (2.2)

•           Boxee OS X and Windows versions only (beta)

•           iOS iPad, iPhone, iPod Touch, Apple TV

•           PlayOn Windows, from Median Mall, used with UPnP clients such as PlayStation 3, Wii and XBMC Media Center

•           Windows Media Center Windows XP Media Center Edition, Windows Vista, Windows7

11.  Future Works and enhancement:

Netflix announced on July 5, 2011 that by the end of 2011 it would expand its services into 43 countries and territories in Latin America and the Caribbean, offering items in English, Spanish and Portuguese. On September 5, Brazil became the first country in Latin America to introduce the service, followed by Argentina on September 7, Chile on September 8, Colombia on September 9 and Mexico on September 12, with the rest of the continent having the service in the next few weeks.

12.  Conclusion

With more than 20 million streaming members globally, Netflix Inc. is the world’s leading Internet subscription service for enjoying movies and TV shows. Netflix members in the United States, Canada, Latin America and the Caribbean can instantly watch unlimited movies and TV episodes streamed over the Internet to PCs, Macs and TVs. It has become one of the most prominent entertainment cite providing the variety of services like DVDs and TV shows among the industry.  Since it expanded it service from TV, laptops, and other sophisticated hand devices like iPOD, it has gained further popularity in this sector. Others blockbusters.com and hulu.com are also providing the same sort of services to the customers. However, Netflix have been generating the consistent revenue throughout the year and providing the best value to its customers in the industry.

Netflix has been one of the most successful dot-com ventures. Netflix’s growth has been fueled by the fast spread of DVD players in households; nearly two-thirds of U.S. homes had a DVD player. It capitalized on the success of the DVD and its rapid expansion into U.S. homes, integrating the potential of the Internet and e-commerce to provide services and catalogs that brick and mortar retailers could not compete with.

 

   

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