Netflix Business Model Analysis

This assignment requires an in-depth analysis of Netflix's business model. It involves examining the provided research papers and case studies to understand Netflix's origins, its innovative strategies, particularly its shift from DVD rentals to streaming, and its impact on the entertainment industry. Students are expected to synthesize information from various sources to critically evaluate Netflix's strengths, weaknesses, opportunities, and threats.

Running head: NETFLIX AND BLOCKBUSTER
Netflix and Blockbuster
Name of the Students
Name of the University
Author’s note

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Table of Contents
1. Introduction..................................................................................................................................2
2. Institutional Background.............................................................................................................2
2.1 A brief history of Blockbuster...............................................................................................2
2.2 A brief history of Netflix.......................................................................................................3
3. How Netflix beat Blockbuster.....................................................................................................4
3.1 Changing technology.............................................................................................................4
3.2 Retail outlets versus operating online....................................................................................5
3.3 Pricing strategies....................................................................................................................6
3.4 Netflix’s innovations.............................................................................................................7
4. Will Netflix remain the dominate provider of online video streaming?......................................8
4.1 Netflix stumbles: The demise of Qwikster............................................................................8
4.2 Netflix rebuilds: The rise of original content........................................................................8
4.3 The future of Netflix..............................................................................................................9
5. Conclusion.................................................................................................................................10
References......................................................................................................................................12

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1. Introduction
Online streaming has replaced the traditional concept of video rentals. Viewers are able
to access real-time online contents through Internet streaming by adopting a fast data or Internet
connection. Online streaming helps in preventing the act of pirating. Wider range of audience
can be reached via online streaming. Netflix is the leader of the digital content market since the
year 1997. It is known for providing online entertainment services such as movies, TV series and
original contents in more than 190 countries (Netflix Media Center 2018). Members are able to
watch at anytime and anywhere without any commercials. Netflix used subscription plan for
attracting more members and moved to original programming. It was able to decline the business
of Blockbuster. Blockbuster was the leading company in the video rentals market in the 80s as
well as 90s but lost its position after the arrival of Netflix.
This report analyses how Netflix beat Blockbuster Video. It begins with discussing the
history of Blockbuster and Netflix. This report focuses on various aspects such as changing
technology and the benefits of online operations that led to the success of Netflix. It also shows
how the pricing strategies as well as the innovations of Netflix were responsible for declining the
business of Blockbuster. This report analyses whether Netflix will be able to retain its position in
the future. It gives an overview of the withdrawal of Qwikster and the original programming of
Netflix. This report also gives a brief outline of the future of Netflix.

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2. Institutional Background
2.1 A brief history of Blockbuster
After the downfall of the oil and gas industry of Texas where Cook Data Services used to
deliver software, David Cook had opened the first store of Blockbuster in Dallas in the year
1985. Blockbuster was able to achieve success quickly because of its ability to satisfy customers
by renting a variety of videos and films. The founder of Waste Management Inc., Wayne
Huizenga along with two other investors purchased the Blockbuster Company for $18 million in
1987. By the end of 1992, Blockbuster had opened 2800 and more number of retail stores around
the world. In 1994, Blockbuster was sold to Viacom for $8.4 billion. Blockbuster earned
approximately 16 percent of the total revenue from its late fees in the year 2000. By the end of
2004, Blockbuster became the largest video rentals in the world with around 9000 stores. The
business of Blockbuster was declining as physical retail stores were getting replaced by online
operations and in 2010 it had to file for protection against bankruptcy (Davis and Higgins 2013).
After buying the assets and retail stores of Blockbuster in 2011, Dish Network had announced to
close some of the stores in 2012. In 2013, Blockbuster announced to close all the remaining
stores in the U.S. Despite the challenges faced due to traditional business models and strategies,
Blockbuster managed to operate around ten stores in the U.S.
2.2 A brief history of Netflix
Netflix was co-founded by Reed Hastings and Marc Randolph in 1997 for offering movie
rentals over the Internet (Lusted 2012). The website of Netflix was launched in 1998. In 1999,
Netflix started offering subscription services to its members and unlimited movie or DVD rentals
for a less price on a monthly basis. Netflix introduced a recommendation system for giving
movie suggestions to the users based on their ratings. By the end of 2005, Netflix had 4.3 million

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members. Netflix introduced video streamlining in 2007 (Netflix Media Center 2018). In 2008,
Netflix partnered with electronics companies for streaming on the Blu-ray disc, set-top boxes of
TV and Xbox 360. In 2009, it partnered with electronics companies for streaming on the PS3 that
can be connected to the Internet. Netflix moved to original programming and offered original
contents to the users in 2013. By 2016, Netflix was available across the world and had planned to
expand their original programming.
3. How Netflix beat Blockbuster
3.1 Changing technology
Netflix was able to gain leadership in the video rental industry by utilizing the features of
the Internet technology. Reed Hastings could predict the future of video rental industry and
started providing video rentals to the users over the Internet (Adhikari et al. 2012). The increase
in the use of Internet led to the growth of Netflix. The executives of Netflix understood the
importance and need of advanced technologies. The business strategy of Netflix was to provide
Internet streaming for the convenient of the customers. The initial strategy of Netflix allowed its
members to place online orders and the DVDs were delivered via mail. Netflix focused on
building a virtual organization that helped it to deliver video rental services flawlessly and at a
reasonable cost (Cook 2014). On the other hand, Blockbuster was using its old business model
and strategy of renting videos from the retail stores. Netflix utilized the features of compressed
technology as well as Internet technology for gaining leadership in the video rentals market.
Later on, Netflix focused on online streaming that allowed its members to watch online videos
without downloading it. Netflix utilized the technological advances and algorithms to build its
recommendation system for giving appropriate movie suggestion to the users. For improving the

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algorithm of the recommendation system, a “Netflix Prize” of $1 million was offered to the
people (Hallinan and Striphas 2016). Netflix utilizes open-source technologies and constantly
focuses on the implementation of new technologies for media streaming. Netflix has focused on
the use of data analytics for making its virtual platform scalable (Amatriain 2013). Technological
advancements and increased use of the Internet has helped Netflix to achieve success and beat
the business of Blockbuster.
3.2 Retail outlets versus operating online
Reed Hastings, the co-founder of Netflix could correctly predict the decline of the video
cassettes rental market. He focused on developing a virtual platform for renting movies and
videos. Netflix preferred online operations over retail outlets. The customers considered online
retailing to be more convenient than retail outlets. Netflix enabled its members to order and book
movie DVDs by using connecting to the Internet. Online platform of Netflix could enhance the
customer experience, which led to the increase of the number of its members to 4.7 million in
2005 (McDonald and Smith-Rowsey 2016). Customers did not have to face sales pressure and
could save their time by using the website of Netflix. Online retailing could also save the
travelling cost of the customers. Blockbuster was still operating the traditional retail outlets.
With the emergence of the Internet technology, customers started realising the benefits of online
stores and declined the business of Blockbuster (Freedman 2012). After introducing video
streamlining in 2007, Netflix was able to reach the leading position in the video rentals industry.
The technical team of Netflix could carry out online operations for implementing a
recommendation system for enhancing customer experience by suggesting them movies based on
their preferences. Netflix was also able to save the cost of operating retail outlets unlike
Blockbuster. The retail outlets of Blockbuster stored only limited number of movies but the

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online platform of Netflix was able to provide variety of movies to its members (Hiller 2017).
People preferred Netflix over Blockbuster because they could access various kinds of video
games, movies and web series at their homes, save their time and travelling cost. The online
streaming of movies and original programming has played a significant role in the success of
Netflix. The virtual platform and online operations of Netflix could provide several benefits to
the users that helped Netflix to become the leader in the video rental and streaming industry by
beating its competitor, the Blockbuster.
3.3 Pricing strategies
Blockbuster followed a pricing strategy where the customers were charged for each
movie. The customers were charged late fines for not returning the movies within a mentioned
time. The executives of Blockbuster believed in following an optimized pricing strategy based on
the conditions of the local market. This strategy worked well until the arrival of Netflix. The
pricing strategy of Blockbuster was considered to be unfavourable as compared to its
competitors. The late fines collected by Blockbuster constituted more than ten percent of its
revenue. Netflix initially adopted the traditional pricing strategy of charging for every rental
along with the shipping charges (Allen, Feils and Disbrow 2014). Later on, Netflix moved to a
new strategic model of pricing. It opted for the subscription pricing model where the customers
were asked to pay a certain amount of money on a monthly basis. This strategy of monthly
subscription enabled the users to watch unlimited videos and movies without any late fine.
Netflix focused on providing customer convenience rather than renting huge of number of
movies (Goldfayn 2012). This subscription plan of Netflix attracted several users and increased
the value of the existing users. The recurring income of the business was able to add business
value (Stelter 2013). Subscription pricing lessened the burden of the users as they did not have to

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guess the price or remain worried about their monthly expenses. Netflix was able to increase the
scalability and flexibility of its business. It could build stronger relations with the customers.
Customers found the model of subscription pricing of Netflix more convenient than the
traditional pricing model of Blockbuster. The subscription pricing strategy of Netflix made a
major contribution towards its success and helped in gaining competitive advantage over
Blockbuster.
3.4 Netflix’s innovations
Netflix adopted a disruptive innovation strategy and became the market leader. Netflix
started the business by focusing on a niche market that constituted movie lovers and online
shoppers. Blockbuster Video rented video cassettes to the customers by charging a certain fee.
The entire video rental industry operated in the same manner. Netflix launched an innovative
approach of online retailing where it offered in-mail subscription services to the members
(Euchner and Ganguly 2014). This innovative strategy of Netflix could beat all the competitions
in the market and it could achieve the topmost position. Later on, Netflix decided to be even
more innovative and move to online streaming and original programming. Netflix used
algorithms to develop the recommendation system based on customer ratings. This system could
suggest various movies to the customers based on their personal preferences. The
recommendation system could satisfy the customers and enhance their online experience. Online
streaming helped the users to watch videos in real-time and without downloading the video. This
innovative idea of Netflix helped to gain million of members. Netflix flourished in the industry
and kept on improving its business strategy through innovations (Afuah 2014). The next
innovation of Netflix was to produce original content. In 2013, Netflix released the “House of
Cards” series which was its original content. Original programming of Netflix attracted several

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customers. All the innovations of Netflix led to the demise of Blockbuster. Netflix attracted the
customers of Blockbuster by offering various types of contents. Netflix adopted an on demand,
high quality and low price approach for becoming the market leader (Villarroel, Taylor and
Tucci 2013). The innovative approaches adopted by Netflix were highly convenient for the
customers and it led to the collapse of Blockbuster.
4. Will Netflix remain the dominate provider of online video streaming?
4.1 Netflix stumbles: The demise of Qwikster
Netflix was initially offering unlimited movie rentals along with a single DVD at $9.99
every month. It had increased the rate by charging $7.99 for streaming unlimited movies and
$7.99 for providing unlimited DVDs. Therefore, the customers had to pay $15.98 every month
for getting both the services. Customers were unhappy with this strategy as Netflix did not
announce about any extra benefits for increasing the price. To overcome this challenging
situation, Netflix decided to create Qwikster for offering the DVD-by-mail service. Netflix
decided to focus on the streaming business as it could grow in the future (Som.yale.edu 2018).
The idea of Qwikster was put to an end after losing 1 million users or subscribers. One of the
main reasons of the demise of Qwikster was its name. It had confused the users as both names
“Netflix” and “Qwikster” were unrelated. The dual account and dual billing system were
disapproved by the users. The users had objections regarding the business split. No investors
would buy the business of Qwikster as the DVD-by-mail service had high operational cost and
no future growth prospects. Netflix predicted that the business of Qwikster would come to an end
in the near future. After losing 1 million subscribers, Netflix realised that the Qwikster plan
would create more difficulties and had withdrawn it.

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4.2 Netflix rebuilds: The rise of original content
After losing 1 million subscribers, Netflix could gain its position in the market by
producing original content. It launched “Lilyhammer” in the year 2012. It completely moved into
original programming with the launch of “House of Cards” in 2013. Netflix invested a huge sum
of money in original programming for maintaining its topmost position in the video streaming
industry. Netflix had several reasons for moving to the original programming approach. New as
well as original content helped in retaining the existing subscribers and attracting new
subscribers (Bellante, Vilardi and Rossi 2013). Netflix wanted to reduce sudden cancellation of
subscription by introducing original contents. Original programming could help Netflix to
increase the subscription price in the future without any issue (Tryon 2015). Netflix had to buy
license for online streaming. The licensing cost was increasing at a fast pace. Netflix would not
have to worry about licensing cost by producing in-house content. Netflix could save its
operational cost by adopting the approach of original programming. Netflix focused on original
programming for retaining its position in the market and achieving more success. It mainly
focuses on customer convenience. Its main motive was to beat HBO.
4.3 The future of Netflix
Netflix planned to spend around $8 billion on the production of original contents in the
year 2018. It planned to release 80 movies in 2018. The price of its subscription plan is expected
increase by $1 every month and its premium subscription plan is expected to increase by $2
every month. Their plan is to offer a subscription plan of $15 every month to beat its competitor,
HBO. Netflix has a chance of becoming similar to a traditional TV network. The business model
and strategy of Netflix can be adopted by various other companies in the future (Harvard
Business Review 2018). This can create high risk for the business of Netflix. It is predicted that

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there will be several online channels in the future. Netflix is also focusing on producing animated
series and becoming like Disney. The increase in the subscription plan would help Netflix to
generate more revenues and grow in the future. Netflix can become the “must subscribe” online
channel across the world and the US market by adopting innovative strategies and business
models. Netflix might face certain risks in the future as its business model can be implemented
by other businesses. The quality of original contents would help Netflix to secure its position in
the market. Economical growth would help Netflix to fight against competitions in the market.
Netflix is expected to have a tremendous growth in the US market. Original programming would
help Netflix to grow its business and achieve further success in the future (Abraham 2013). By
the end of 2018, Netflix is supposed to fill its library with 50 percent of original contents.
Although there is a chance of high risk in the future, Netflix is still expected to retain its position
as the dominant leader of the online streaming industry in the US.
5. Conclusion
This report analyses the background of Netflix and concludes that Netflix could achieve
success by adopting and utilizing the features of advanced technologies. It demonstrated how the
use of traditional business model had led to the decline of Blockbuster Video. Customers had
started to prefer the online operations of Netflix over the retail outlets of Blockbuster due to their
own convenience. According to this report, Netflix used the features of Internet technology for
offering in-mail subscription services to the users. This report said that the subscription pricing
model and the disruptive innovations of Netflix were the main strategies that helped it to beat
Blockbuster. It also said that Netflix had lost 1 million subscribers after announcing about the
Qwikster plan. The Qwikster plan would make the business operations complicated and reduce
customer convenience. This report said that Netflix adopted original programming as it would

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bring several benefits to its business such as increase in the number of subscribers and no
licensing cost. According to this report, Netflix has a plan of investing $8 million in original
programming in 2018 and fill 50 percent of its library with original contents. This report said that
although there are several business risks that Netflix can face in the future, there is high
possibility of its growth in the US. This report concludes that the main focus of Netflix is on
original programming and this can help it to maintain a dominant streaming provider in the US.

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