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Netflix: The Customer Strikes Back

   

Added on  2019-09-26

6 Pages2466 Words338 Views
1 Netflix: The Customer Strikes BackIntroductionThree years after earning his MBA, Hunter Keay was starting to make a name for himself at a leading investment bank when, in February 2012, some of his clients grew increasingly anxious about the value of their holdings in Netflix, Inc. (Netflix), the subscription-based media distribution company. Six months earlier, Netflix had announced a plan to split its on-demand video streaming and DVD mail delivery into two businesses and to increase the price of its most popular service. But in the face of near-universal criticism, Netflix had abandoned the plan within a month, only to lose 800,000 subscribers and half its stock value (Figure 11-1). Keay’s clients who held Netflix wanted to know what remained of their investment.Figure 11-1 Netflix stock price and volume, March 2002 to February 2012Source: Yahoo! Finance.To determine a more accurate value of Netflix stock, rather than apply one of the standard methods favored by his firm, Keay was considering the use of customerlifetime value (CLV). He was not certain that the metric applied in this instance, whether the firm even considered it valid, or how CLV related to the more accepted methods. He was certain about one thing, though: New technologies were transforming the industry and the ways customers received video content. The question was whether “Netflix 2: The Sequel” would ever be as popular as the original.An Industry Driven by TechnologyThe video rental industry has been substantially altered by technological developments outside the industry. Major milestones included the DVD by mail that could be ordered via the Internet, video streaming, and lately kiosks.

The Traditional Retail Rental StoreThe advent of videotape, acceptance of the VHS cassette standard, and subsequent affordability of home videocassette players in the 1980s brought with them the proliferation of the movie rental business. By the 1990s, the majority of market share had consolidated to a few participants with similar business models competing on selection, price, and especially location. National chains, such as Blockbuster and Hollywood Video, grew by staking claims at strategic locations with adequate population density. By 1990, Blockbuster professed to have a store within a ten-minute drive of 70% of the U.S. population. Mom-and-pop video storessurvived by finding locations the chains did not seek.Movie rental required that a customer leave his or her home with the intention of renting, then make a spontaneous decision based on what was available. The cost ofa video rental ranged from $3.00 per week for older movies to $6.00 per three days for new releases (allowing for weekend viewing when rented on Friday, the most popular day). Small mom-and-pop stores typically had a collection of a few hundred videos for rental; a Blockbuster store had about 2,500 titles. A store’s video paid for itself after 13 rentals, so films with mass appeal were the norm; nearly 70% of all films rented at Blockbuster were new releases. Limited selection and stock-outs were a common concern, as was the relative convenience of store hours.Late returns were a thorny problem: A movie could not be rented until it was back on the shelf, and a scarcity of titles might deter a customer from returning. So videostores charged late fees, which monetized the delay and encouraged the customer toreturn movies promptly. In reality, as one commentator noted, late fees called attention to customer failure, in the manner of “a disapproving librarian tallying up 35 cents in overdue fines while floating the unspoken accusation you were irresponsible on top of everything else.”1 When Blockbuster eventually dropped many forms of late fees, the move resulted in a charge to revenue of $400 million. The bricks-and-mortar value proposition was eroding.DVD by MailDVD mail service started to gain popularity in the early 2000s. The subscribing customer selected a movie on a website, and a DVD would arrive at his or her homein about one business day. The customer could keep the DVD as long as he or she liked, then mail it back to the provider in the envelope provided. By selecting multiple movies and arranging them in order of priority in an online queue, the customer could ensure prompt delivery of subsequent selections and always have something on hand to watch as opportunities arose. Subscription tiers were based onhow many movies a customer could receive simultaneously and priced accordingly,starting at $7.99 per month for one movie at a time. (See Exhibit 11-1 for a co (Venkatesan 144-146)

Venkatesan, Rajkumar, Paul Farris, Ronald Wilcox. Cutting Edge Marketing Analysis: Real World Cases and Data Sets for Hands on Learning. Pearson Learning Solutions, 06/2014. VitalBook file.DVD by MailDVD mail service started to gain popularity in the early 2000s. The subscribing customer selected a movie on a website, and a DVD would arrive at his or her homein about one business day. The customer could keep the DVD as long as he or she liked, then mail it back to the provider in the envelope provided. By selecting multiple movies and arranging them in order of priority in an online queue, the customer could ensure prompt delivery of subsequent selections and always have something on hand to watch as opportunities arose. Subscription tiers were based onhow many movies a customer could receive simultaneously and priced accordingly,starting at $7.99 per month for one movie at a time. (See Exhibit 11-1 for a complete pricing comparison.)Video on DemandVideo on demand (VOD) was content distribution via an Internet-connected television, computer, or mobile device. The customer selected a movie from an online menu and, within seconds, the movie began streaming to his or her device. The customer could view the content as it was downloaded, rather than waiting for the complete file, which otherwise could take almost as long as the running time of the film. No exchange of a data-storage medium was required, so stock-outs and late fees were avoided, and a significantly larger and more eclectic catalog could be offered.Kiosk RentalsMovie rental kiosks were freestanding dispensers of DVDs located in high-traffic areas with extended—sometimes 24-hour—access, such as convenience stores, grocery stores, and fast-food restaurants. Redbox, the dominant player, founded in 2003, was originally funded by McDonald’s. As of 2012, Redbox claimed to have rented 1.5 billion movies from 30,000 kiosks nationwide and to operate a kiosk within a five-minute drive of two thirds of the U.S. population. Its only significant competitor, albeit a much smaller player, was Blockbuster’s “Blockbuster Express” kiosks.Kiosks revolutionized the rental price point (about $1.00 per night per movie) and changed consumer renting behavior by eliminating the planning ahead required by DVD-by-mail services and the need to go to another location required by rental stores. Plus, 24-hour access freed customers from time constraints. Selection, however, was limited by two major shortfalls: the physical space inside the kiosk

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