Netflix's Business Model and Impact

This assignment explores Netflix's evolving business model, focusing on its streaming service, content acquisition strategies, and international expansion. Students will examine Netflix's pricing models, analyze their impact on traditional media industries, and evaluate the company's future challenges and opportunities in a competitive global landscape.

Running head: STRATEGY AND CASE ANALYSIS
Strategy and Case Analysis
Name of the Student:
Name of the University:
Author notes

1STRATEGY AND CASE ANALYSIS
Executive Summary:
The purpose of the report is to perform a comparative study on different strategies of two
video rental companies, Blockbuster Video and Netflix, and to analyse the reasons behind the
systematic rapid growth of Netflix along with the sudden downfall of Blockbuster videos.
The report explains the strategic differences between both the companies and interprets the
reasons for Netflix beating Blockbuster. The report also elaborates on its DVD rental strategy
that did not work for the company and discusses the impact of the new content of Netflix in
the marketing statistics. In the end, the report describes the future strategies that are going to
be implemented in Netflix.

2STRATEGY AND CASE ANALYSIS
Table of Contents
Introduction:...............................................................................................................................3
Discussion:.................................................................................................................................4
Institutional Background:.......................................................................................................4
Brief overview of Blockbuster:..........................................................................................4
Brief overview of Netflix:..................................................................................................4
Reasons of Netflix Beating Blockbuster:...............................................................................5
Technological aspect:.........................................................................................................5
Retail outlets versus operating online:...............................................................................6
Pricing strategies of Netflix and Blockbuster:...................................................................8
Netflix’s innovations:.......................................................................................................10
Vicissitudes faced by Netflix as a dominating provider of online video streaming:...........10
A vulnerable point in Netflix’s growth story: Qwikster..................................................10
Trial of rebuilding Netflix again: Introducing Netflix original:.......................................12
Future of Netflix:..............................................................................................................12
Conclusion:..............................................................................................................................13
Referencing:.............................................................................................................................14

3STRATEGY AND CASE ANALYSIS
Introduction:
Home videos are the pre-recorded videos meant for home-based entertainment. Home
videos are either sold or rented or streamed in digital media. The home video market is
distributed over films, television-films and various television series in the form of pre-
recorded videos in multiple formats to the worldwide public. A video rental market is a
market for the home videos. Along with time, people have tended towards the entertainment
media more, and the demand in video rental market is increasing. Around the decade of 80-
90, Blockbuster video had been the crownless king in the world of the home video rental
market in the United States, and the worldwide distribution of the home videos had
dominated the whole market. Around in the year of 1997, new start-up company Netflix came
up on online video rental service and slowly started dominating the market and outshined
Blockbuster soon, followed by the bankruptcy and downfall of once famous Blockbuster
LLC (Netflix Media Center 2018). The report takes the case study of Blockbuster LLC and
Netflix and analyses the probable reasons for Netflix’s rapid growth and Blockbuster’s rapid
downfall to interpret how Netflix was able to beat Blockbuster. The report contains a brief
description of both the companies. It elaborates on the probable reasons for Netflix
outshining Blockbuster video from four different aspects of technological changes, offline
and online retailing strategy, the difference in pricing and the innovations incorporated in
Netflix time-to-time. The report further discusses the ups and downs witnessed by Netflix at
the time of introducing new DVD rental strategy and also elaborates on the new content
introduced by the company named Netflix original. The report also discusses the future of
Netflix.

4STRATEGY AND CASE ANALYSIS
Discussion:
Institutional Background:
Brief overview of Blockbuster:
Blockbuster LLC, previously known as Blockbuster Entertainment, Inc., is an
American based home entertainment provider. Blockbuster provides home-based
entertainment and video games through video shops, streaming in digital media, video-on-
demand and various theatres. Blockbuster had started its journey along with another company
named Cook Data services founded by David Cook with the objective of supplying software
services to the oil and gas industries. In 1985, the old software service was sold and in place
of that, the video rental business was found (Greenberg 2010). Blockbuster kept on growing
and eventually became a multibillion-dollar company within the year of 1993. In 2010,
blockbuster owned almost 6500 stores all over the world. However, in that year only, the
company was reported to be bankrupt, and many of the stores were closed. In the year of
2011, Dish Network bought the company at the worth of $329 million (Dishnow.com, 2018).
Dish network continued streaming blockbuster video-on-demand services and tried to revive
the market of the company by incorporating new technologies and strategies. However,
blockbuster survived, and the official website currently has identified 51-franchise location
active in the United States, and although the Blockbuster-video on-demand package has been
shut down, the television package is still running under the banner of the new name of Dish
network.
Brief overview of Netflix:
Netflix is a popular video rental service provider purposed for mainly home
entertainment services. It is an American company established in Scotts Valley of California
by Reed Hastings and Marc Randolph in the year of 1997, August. In the year of 1998, the

5STRATEGY AND CASE ANALYSIS
first official rental site of the company has been launched, and the service incorporated the
pay-per-rent model similar to the rival companies (Netflix Media Center 2018). It introduced
a change in the marketing strategy and introduced monthly subscription service after a year.
Incorporation of new technologies along with the different revised approaches let the
company witness the growth in a swift way, and Netflix started reigning in the video rental
market soon. The company started introducing video recommendation scheme and
maintained an extensive personalization system. In the year of 2007, it incorporated the idea
of streaming on the internet along with the concept of video on demand. Netflix also
introduced ‘Netflix Originals’, the content which is entirely produced and distributed
exclusively by the company itself. By the time the company spread its wings throughout the
world and became popular in the countries like Austria, Belgium, France, Germany, Latin
America, Caribbean, Canada, Switzerland, Luxemburg, Australia, New-Zealand, Spain,
Portugal, Japan, Italy and it has almost 50 million members in a global count.
Reasons of Netflix Beating Blockbuster:
When Netflix came up first in the video rental market, Blockbuster was the crownless
king in the world of video rental services. Still, within a decade where Netflix witnessed a
significant uplift, Blockbuster lost its existence followed by bankruptcy. The reasons that
have been observed behind this change are addressed in the following sections.
Technological aspect:
 Technology in Blockbuster: The first reason that is observed to be responsible
for the fall of Blockbuster is its inability to adapt and evolve with the ever-
changing technological trends. Blockbuster had emphasized mainly on the brick-
and-mortar model. Before 2004, Blockbuster had operated mostly in the physical
stores for video rental service. Though online DVD subscription was introduced

6STRATEGY AND CASE ANALYSIS
in 2004, primarily to compete with the then-growing company Netflix, the
primary target was always the physical market rather than the virtual market
(Brescia et al 2014). Along with time, the lack of flexibility in the technical
ground and inability to adapt in the era of digitalization using strategic
reformatting strategy compelled blockbuster to lag behind in the market despite
its desperate trails to revive using new online strategy.
 Technology in Netflix: Netflix had started as a simple DVD rental service.
However, it became adaptive with the technological trend and evolved digitally to
grow in the market. From the first, Netflix offered online DVD rental service via
mail rather than a brick-and-mortar structure. With the growth in the area of the
internet, Netflix started the service of screaming using Microsoft technologies and
codecs. Adaptive bitrate streaming is incorporated into Netflix to adjust the
quality of audio-visual synchronization to match the broadband speed of the
customer (McDonald and Smith-Rowsey 2016). Netflix maintains a user-friendly
public application-programming interface (API). Along with time, Netflix has
developed several technologies to evolve itself in the field of IT. With the latest
trend of data analytics, Netflix has incorporated robust algorithms of the movie-
recommendation system (Hallinan and Striphas 2016).
Therefore, from the aspect of technical evolution with time, Blockbuster has lagged
far behind from Netflix.
Retail outlets versus operating online:
 Retail marketing in blockbuster: Blockbuster video was mainly based on retail
outlets rather than trying to step in the digitalization. It has been reported that
blockbuster video had rejected several offers of buying Netflix for $50 million back in
2005 when the company was still a less-known and simple rental by mail subscription

7STRATEGY AND CASE ANALYSIS
service trying to spread online (Phillips 2015). Rather than working on the online
retailing more, Blockbuster concentrated on developing the bricks and mortar market
by increasing the stock of books, toys and merchandise. Though the physical shops
and retail marketing have some benefits like availability, in the era of technological
development it faces certain difficulties as well. Some of those disadvantages that
affected Blockbuster videos badly are:
o Location-based marketing: When the online retailing is available, not more
of the customers want to visit shop locations and to spend more money to buy
a video while the option of watching the same videos from home (Kohijoki
and Marjanen 2013). The company did not ponder over this point and did not
revolve accordingly.
o Lower profit margin: Blockbuster’s profit margin was not enough to sustain
the worldwide-distributed market facilities and staffing levels (Dunne, Lusch
and Carver 2013). It became a hurdle to maintain the broad distribution.
o Customer management: Due to the impersonal communication between the
customer and the retailers, the management of Blockbuster could not maintain
the synchronization with the customer feedback and because of that, the
business could not improve itself according to the trend of the customer
(Pauwels and Neslin 2015).
 Online operation of Netflix: Netflix started its business from the basic mail rental
service for videos, and along with time, the company concentrated on the online
service. There are certain advantages of online retailing that helped Netflix to grow up
more. The benefits of retailing online that profited Netflix in various aspects are:
o Easy access to market: The customers found it easier to get their home-based
entertainment right in the home via online media than to go to the location-

8STRATEGY AND CASE ANALYSIS
based market to get the videos. This way, online retailing and rental service
via mail helped Netflix to grow up at a fast pace.
o Reduced overheads: Netflix enabled the online operation of handling
consumers that could remove expenses of staff management and other
location-market based management along with opening the facilities of better
visualization for customers in online interfaces via smart e-commerce
technology (Laudon and Traver 2013).
o The potential for rapid growth: One of the main reasons for Netflix’s rapid
growth in the video rental market is its online retailing. The mechanism of
marketing and retailing on the internet gives the facility of overcoming the
traditional constraints of brick and mortar market (Liu, Li and Hu 2013).
Online marketing management gives a better opportunity for making a proper
digital marketing strategy and scales up order fulfilling systems to the
company, which boosts the profit.
o Extensive Market: One of the major advantages of the online operation of
Netflix over the conventional location-based retailing system is the ability to
expand the market for the target customer in the whole world in a high speed
and to overcome the constraints of restricting in the limit of the local
customers (Kacen, Hess and Chiang 2013). The management got an
opportunity to invent as demand for the same type of videos in other countries,
which the company could respond to by targeted marketing, introducing and
recommending different types of videos, which are compatible with the
particular country’s cultural and social background and matches with the
mindset of the audience.

9STRATEGY AND CASE ANALYSIS
o Customer Dealing with Intelligence: Netflix enabled online marketing tools
along with their targeted audience as well as customers. The management also
could take advantage of website analysis tools to understand the mindset of the
target audience and to fill their need accordingly (Rafiq, Fulford and Lu 2013).
Pricing strategies of Netflix and Blockbuster:
The difference between the pricing strategies of the two companies played a
significant role in the growth of Netflix followed by a downfall of Blockbuster. Blockbusters
pricing old and conventional pricing strategy did not attract the customers more when they
found a better choice in front of them at a comparatively reasonable price.
 Blockbuster pricing: The conventional business model that Blockbuster had adapted
in the first days was to pay a hefty flat fee per video unit purchased or rented. The
price used to be $65 on average. There had been various offers of unlimited rental for
the lifetime. In the mid of 1980, a new revenue policy was introduced, and
Blockbuster started obtaining videos for lesser cost and started keeping 60% of rental
fee, and 40% was paid in the studio (Dana and Dana 2017). The company also
ventured on the fact that movies are not available to purchase before the release,
hence the customers were compelled to rent first and to wait for release or to buy the
film on tape in higher cost suggested by the manufacturer. Sometimes, the cost had
been $70 to $100 per movie title. The rate was indeed high for the typical target
audience.
 Netflix pricing: Earlier in 1998, Netflix had adopted a per rental charge model along
with the shipping charges in their DVD-by-Mail services. It was observed that this
model is spending almost $100 to $200 to the customer for no reason (Nagle, Hogan
and Zale 2016). To solve this problem, a prepaid subscription-based model was

10STRATEGY AND CASE ANALYSIS
introduced by the company. In the new model, the company offered the facility of
unlimited videos per month in a specific price subscription, which became a big hit
among the users. After that Netflix came up with a new model named “all you can
eat” which included the late fee subscription and became an alternative to the
payment per day fee structure.
In the US, currently, Netflix has enabled three-price tier model. While the basic plan
of the tier model costs $7.99 per month, the standard plan costs $9.99 and the premium
package is priced $11.99 each. For the international target audience, the price plans cost
from $6 to $19 per month (McGoogan 2018). With the change of taxes, Netflix is
compelled to increase the price sometimes. However, for the typical audience, Netflix’s
pricing strategy is highly reasonable, and hence it can attract more subscribers.
Netflix’s innovations:
One of the main reasons for the rapid increase in the market of Netflix is the
innovation strategy. Netflix is a disruptive, innovative organization, which introduces new
technologies periodically to keep on growing more. Back in 2001, almost $10 million a year
had been allotted to the research team (Forbes.com 2018). Even today, a large amount of
Netflix’s revenue is spent on the research team to develop new algorithms mainly on
recommendation system (Gomez-Uribe and Hunt 2016). The latest approach that has been
incorporated is the technology of fixing the level of compression based on the content of a
particular scene by applying dynamic optimization technique to the video processing
(Cousins 2015).

11STRATEGY AND CASE ANALYSIS
Vicissitudes faced by Netflix as a dominating provider of online video streaming:
A vulnerable point in Netflix’s growth story: Qwikster
During the first days of Netflix, it was a mail-based retailer. Along with time and
further online application developments, Netflix kept on running the mail rental service too.
However, in the year of 2011, Netflix decided to split out and rebrand the DVD renting by
demand-on-mail service as Qwikster service. It was declared that the re-branded service with
the new name Qwikster would even introduce video game rental service. The combined
subscription of both the services was divided into two separate plans at $7.99 each from the
integrated subscription cost of $9.99 (Ryan 2013). However, the idea was never praised,
rather the decision of splitting the services was criticized by different eminent business
personalities. It was noticed that the split website Netflix would generate two sites that can be
completely autonomous from each other and will create a mismatch in case of ratings,
reviews, and queues maintained for customer service (Venkatesan et al. 2017). It would also
have required separate user accounts, which might become an extra hazard for the customers.
Additionally, it was also observed that the different websites might need separate
subscriptions for a single user, which means the DVD-by-mail and streaming service would
now cost US$16 per month as a total instead of than $10 (Ryan 2013). The sudden increase in
price for the change in marketing strategy was obviously not going to entertain the users.
Moreover, customers were comfortable with the old set-up, and the sudden change in no
reason created confusions among the customers, which were not at all a good sign for the
marketing.
After Qwikster, the new scheme of DVD renting was released, the revenue graph of
Netflix suddenly dropped. The stock of the company started stumbling. At the end of the
year, it was noticed that more than 70% of the share price of Netflix was down in share

12STRATEGY AND CASE ANALYSIS
market, which was quite a shocking report for the management (Allen, Feils, and Disbrow
2014).
1 2 3 4 1 2 3 4 1
0
2
4
6
8
10
12
Figure 1: Stock market of Netflix in 2010 and 2011
Source: (Hoffman 2013)
On October 10, 2011, seeing the downfall of the newly released project, Netflix
announced that the management would not continue with the planned re-branding of the
DVD rental service and both the DVD-by-mail and streaming services would keep on
working through a single website under the same Netflix brand like before (Cronin 2014).
However, the hike in pricing was never resolved resulting in the loss of subscribers. Netflix
further stated that it had lost almost 800,000 subscribers in the fourth quarter of 2011, and the
introduction of Qwicker was responsible for it (Hoffman 2013).
2010 2011

13STRATEGY AND CASE ANALYSIS
Trial of rebuilding Netflix again: Introducing Netflix original:
In March of 2011, Netflix started its new venture on Netflix original; the content
produced and distributed by the company itself exclusively. The first original show in Netflix
was an hour-long political drama named ‘House of Cards’, which became popular among
viewers (Netflix Media Center 2018). Along with time, the standard of the content and the
popularity of the original shows kept on increasing, and from a recent survey it had been
reported that Netflix won the voting pole as the best original media content. Netflix acquired
almost 29% vote of the audience, while the other media was in the range of 5%-18%
(Forbes.com 2018). It is understandable that how the original content in Netflix will help the
company to increase the number of the subscribers. It has been reported from an investment
bank survey that almost 58% of the total subscribers of Netflix pay for the original shows
(Forbes.com 2018). It has been reported that Netflix has spent about $5 billion on their
original content in 2016 and it will be investing more on its original shows in future and will
increase the subscription charges for the significant numbers of audiences of the original
shows at the end of their two-year grace period (Forbes.com 2018).
Future of Netflix:
The company is analysing the status of the market currently and is preparing itself
accordingly for future to take the risk and evolve so that it survives the changes in the market.
Since the competition in the video rental market is increasing along with time, and various
rental service companies have taken the same policy of Netflix’s business model, Netflix is
going to make another vast change in its business strategy. It has been noted that Netflix has
decided to shift from the online streaming service company to a full-fledged entertainment
channel, which will be operating across multiple mediums (Lobato 2017). Along with the
normal full-length movies and other popular series, Netflix has started opting for anime series
and has already invested a lot behind it. It has been also reported, that Netflix is thinking to

14STRATEGY AND CASE ANALYSIS
launch 20 reality TV-based unscripted shows soon in order to expand the business
internationally (Forbes.com 2018). To grow more globally, Netflix already incorporated 20
different languages of different countries through proper subtitles or via dubbing. While the
network of Netflix in Latin America is growing rapidly and the network in Europe is also
showing a healthy growth, currently Netflix is targeting to grab the large market of Asia.
Conclusion:
From the above discussion, it can be stated as a conclusion that the main reason for
the demise of Blockbuster is their inability to adapt to the changing world of digitalization.
Blockbuster emphasized more on their brick and mortar structure than the online marketing,
which slowly distracted the viewers with the trend of internet entertainment becoming
popular in the market while the revised online marketing strategy of Netflix helped it to grow
fast. The incorporation of new technologies and innovations of Netflix became a market
booster. Along with it, the report also states how the pricing strategy of Netflix helped in
increasing the subscribers while Blockbuster’s traditional pricing method started losing the
customers. Along with this, the report has mentioned about the pitfalls of newly Qwikster
project of Netflix, which became a pitfall for the company and have discussed on how the
introduction of Netflix videos have increased the subscriber and opened a new horizon of
opportunity for the development of the company. In the end, the report has stated that Netflix
is going to shift their focus from the streaming service to an entertainment channel as their
new model of a revised business strategy.

15STRATEGY AND CASE ANALYSIS
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16STRATEGY AND CASE ANALYSIS
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