Managerial Economics Report: Netflix's Market Position and Strategy

This report provides a comprehensive analysis of Netflix's managerial economics. It begins with an overview of Netflix's history, market presence, and operational structure, highlighting its evolution from DVD rentals to a global streaming service. The report identifies Netflix as operating within an oligopolistic market and examines its pricing power, demonstrated by its ability to increase subscription prices without significantly impacting revenue, although recent trends suggest a decline in this power due to increased competition. The analysis explores Netflix's key competitors, including Amazon Prime and Disney, and discusses the potential impact of Disney's entry into the streaming market. The report also delves into Netflix's business model, including its pricing plans and value-based pricing strategy. Furthermore, it examines Netflix's acquisitions, such as Millarworld and StoryBots, and discusses the implications of these acquisitions on its content library and subscriber base. Finally, the report addresses external factors influencing Netflix's operations, such as the Academy of Motion Picture Arts and Sciences' proposed restrictions on streaming platforms' eligibility for awards and the Department of Justice's response to these proposals.

Running Head: Managerial Economics
NETFLIC INC.
Managerial Economics

Managerial Economics
Netflix started in 1997. Reed Hastings is heading the company as Chief Operating Officer. It
has its presence around 190 countries. Earlier, it started by renting DVD’s of old movies
through mail without any late return charges. In 1999, the company came into subscription
service and now it streams a library of TV series, movies, documentaries etc. (Netflix, n.d.).
Netflix is also into Video on Demand services wherein contents are accessible on any internet
connected device like laptop, smartphones, desktop etc.
Netflix operates in oligopoly market because it is a paid online video streaming service and
there exist only few competitors. Also, barrier to entry is very high in this market because it
requires large capital and IT expertise to handle sufficient database. Along with this, it would
be difficult for new firms to achieve economies of scale in this market (Taylor’s University,
n.d.).
Market power is also known as pricing power. In 2017, Netflix raised the subscription prices
of two streaming plans out of three by one dollar and 2 dollars. It did not affect the revenues
adversely. Rather, after the price increase there was a significant rise in the new global
subscribers which stood at 8.33 million that year (The Motley Fool, 2018). This shows the
pricing power of Netflix. Recently when it raised the subscription prices, there was a decline
in the newly added subscribers of Netflix which stood at 2.83 million and expected number
was 4.8 million (Reuters, 2019). This shows that Netflix pricing power has somewhat
declined in the recent years which may be a result of increased competition after 2017. Since,
it operates in an oligopolistic market it enjoys more power over the market as compared to
other markets where threat of entry and exit are high.
The key competitors of Netflix include Amazon, Android Market, blockbuster, Hulu, iTunes
etc. (Weebly, n.d.). Out of other streaming companies, around 52% of American population
prefer Netflix and its one-fifth goes for Netflix subscription alone. At present, Netflix has the
biggest fear from Disney because it is coming with its own video streaming segment and
would no longer provide its content to Netflix. No doubt, just the brand Disney attracts
millions and billions of traffic towards itself but now when Disney would have its own
streaming segment the whole traffic may divert towards it. Amazon prime cannot be a threat
for Netflix because half of the subscribed users of Netflix have also got Amazon Prime
(Forbes, 2017). In DVD’s by mail segment, Netflix is having competition with Blockbuster
who is also providing the customers with the facility of returning DVD at the stores of
Blockbuster (Weebly, n.d.).
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Managerial Economics
In business, conglomerate means when a business acquires many other firms or deals in
different segments which are completely unrelated to the parent’s primary business.
Conglomerates happen for many reasons which primarily include utilising the existing assets
of the company, enhance market position through variety of products, mitigating risk arising
from relying on the demand of a single product etc. (Britannica, n.d.). The traditional
business of Netflix is still into distribution of DVD’s however company is generating
maximum revenue from its video streaming section. Still both the sections of Netflix business
is focussed on procuring and distributing entertainment contents. As a result, Netflix is not a
conglomerate because the company is not having varities of branches as well as subsidiary
companies dealing in segment other than entertainment segment.
Netflix offers three types of pricing plans; basic plan, standard plan and premium plan. Under
basic plan, the standard definition quality videos and audios are accessible on a single device
at a single time which could be laptop, phone, desktop, tablets etc. Under standard plan high
definition quality videos and audios can be accessed through two devices simultaneously.
Under premium plan, high definition quality and ultra-high definition quality videos and
audios can be accessed through four devices simultaneously. Netflix is following the value
based pricing strategy because there are three different values attached with the different
prices.
To enhance the content library, Netflix acquired Millarworld in 2017.. The acquisition was
made by Netflix for getting the intellectual property along with the ownership rights over the
attractive comic characters of Millarworld (24/7 WALL ST, 2017).
Recently, Netflix has acquired StoryBots property, a children media brand. This brand has
won many awards like Parents’ Choice Award, Emmy and Annie. This acquisition of Netflix
was done to promote educational content among its emerging subscriber base of families and
children all over the World (Netflix Media Center, 2019).
Director Steven Spielberg proposed the Academy of Motion Pictures Arts and Sciences to
restrict the Netflix’s and other streaming platforms’ eligibility for Oscars and other annual
awards. However, the head of Department of Justice antitrust division wrote a letter to the
Academy for rejecting such proposals and keep the eligibility rules for Oscars unchanged. He
did so because such rules could be the reason for antitrust issues and could even break federal
competition law (News, 2019).
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Managerial Economics
References
Britannica. (n.d.). Conglomerate. Retrieved from
https://www.britannica.com/topic/conglomerate-business.
Forbes. (2017). Netflix And Amazon: Competitors Or Complementary?. Retrieved from
https://www.forbes.com/sites/greatspeculations/2017/06/01/netflix-and-amazon-
competitors-or-complementary/#2426ea3556cc.
Netflix. (n.d.). About Netflix. Retrieved from https://media.netflix.com/en/about-netflix.
Netflix Media Center.(2019). Netflix acquires the critically and fan-acclaimed storybots
property and commits to bringing educational content to kids and families around the
world. Retrieved from https://media.netflix.com/en/press-releases/netflix-acquires-
the-critically-and-fan-acclaimed-storybots-property-and-commits-to-bringing-
educational-content-to-kids-and-families-around-the-world.
News. (2019). DOJ to Oscars: Potential new Netflix rules could be an issue. Retrieved from
https://www.nbcnews.com/pop-culture/awards/doj-oscars-potential-new-netflix-
rules-could-be-issue-n990151.
Reuters. (2019). Netflix shares plunge as global growth falls short, U.S. customers shrink.
Retrieved from https://www.reuters.com/article/us-netflix-results/netflix-shares-
plunge-as-global-growth-falls-short-u-s-customers-shrink-idUSKCN1UC2JE.
Taylor’s University. (n.d.). Market Structure. Retrieved from
https://sites.google.com/site/netflixraisesprice/content/market-structure.
The Motley Fool.(2018). Why Netflix's Prices Will Be Raised Again -- and Again. [Online].
Retrieved from https://www.fool.com/investing/2018/10/26/why-netflixs-prices-will-
be-raised-again-and-again.aspx.
Weebly.(n.d.). Netflix. [Online]. Retrieved from
https://netflixcompanyprofile.weebly.com/key-competitors.html.
Weebly.(n.d.). Netflix. [Online]. Retrieved from
https://netflixcompanyprofile.weebly.com/key-competitors.html.
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Managerial Economics
24/7 WALL ST. (2017). Meet Netflix’s First Ever Acquisition. Retrieved from
https://247wallst.com/media/2017/08/07/meet-netflixs-first-ever-acquisition/.
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