Netflix


 * Executive Summary: **

**(1) Industry Analysis: ** **Definition of the Market: ** **Please define the competitors and suppliers to our market as well as any other characteristics. (Please include a graph as done in class for competitors) **

#1 Write-up

The movie rental industry has been going through a significant transition for the last several years. Traditionally, the consumer had to go to bricks-and-mortar locations, browse a selection of available titles, pay a set rental fee to hold the movie for a specified amount of time, and incur late fees if the movie was not returned on time. New entrants to the market have questioned every aspect of the traditional model. A variety of firms have entered the market-space allowing consumers to stay at home to browse and rent titles online, pay for movie rentals through membership fees or per-day charges, and some have no late fees associated. The movie rental industry has also undergone significant consolidation during the last two decades. As the VHS format grew in popularity during the 1980s many small video rental locations followed. Those smaller players were replaced by a few larger players like Blockbuster and Movie Gallery. More recently, movies have transitioned from VHS to DVD, a more compact and lightweight medium for storing movie content. The move to DVD format enabled the advent of firms, like Netflix, to use mail delivery of movies due to lower shipping costs. The industry continues to go through changes with the current trend moving to internet stream of content. Each major change gives the consumer more immediate gratification when they wish to watch a movie. Internet streaming appears to be the ultimate in immediate gratification because all streaming content is available immediately, on demand. This change has also had profound impacts on the industry as a whole and has changed the players.

Our definition of the industry with regard to this analysis includes four primary requirements. Each firm must: 1.) Offer movies and/or television shows available to use on a temporary basis. 2.) Have products that are available nationally and are accessible throughout the United States. 3.) Allow consumers to select the specific program or movie they choose to watch. 4.) Derive revenue from a fee or subscription related to use of the product.

Following is an overview of the competitors in the movie rental industry defined above and a brief biography of each firm. **include market share**

**Amazon **- Market share: unknown. Amazon is a relatively new entrant into the movie rental industry. They have entered only through the online medium, not offering any type of physical movie rental products. Amazon has made its entrance through downloads for a price comparable to other movie rental firms, $3.99. Also, the firm has begun offering streaming content to customers that subscribe through Amazon's Prime membership. Prime membership costs less than $7 per month and includes other features, like free 2-day shipping on all purchases. However, Amazon's library of streaming content is smaller than other streaming offerings.

**Redbox **- Market share: unknown. Redbox operates over 30,000 kiosks throughout the US. Redbox kiosks are fully automated and take up about the same amount of space as a soda vending machine. Redbox offers movie and game rentals and purchases through the kiosks. The kiosks are primarily located in grocery stores, drug stores, and other high-traffic retailers. The firm pays a fee to the retailers that house the kiosks. Redbox rentals are charged on a per-night basis of $1 plus tax. Redbox became a wholly-owned subsidiary of Coinstar Inc. in 2009 when Coinstar increased its ownership from 51% to 100%. (Coinstar Inc. 10-K)

**<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">Blockbuster - **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;"> Market share: 43%. Blockbuster has been the dominant player in movie rentals for several years. Their business model was based on a network of physical locations that housed a library of DVDs available for rent and purchase. Recently, Blockbuster has faced major financial issues. With the popularity of rent by mail and online streaming gaining, Blockbuster has lost a great deal of market share. The firm filed for bancruptcy in September 2010. Initially they planned to restructure and emerge from bancruptcy as an independent firm with a new business strategy. However, Blockbuster is now seeking to sell the entire firm and assets. (Blockbuster 10-K) Blockbuster was estimated to have 36% of the of the rental industry in an IBIS report from October 2010. (IBIS DVD, Game, and Video Rental)

**<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">Hulu Plus **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">- Market share: unknown. Hulu Plus is an online subscription service provided by Hulu.com that gives customers access to stream movies and television shows for $7.99 per month. Hulu has a smaller library of movies than other streaming providers, but has greater access to many television shows due to its owners. Hulu is a private entity owned in partnership by NBCUniversal, News Corporation, The Walt Disney Company, and Providence Equity Partners. Hulu was conceived and built beginning in 2007 and became available to the public in 2008. (About Hulu)

**<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">iTunes **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">- Market share: unknown. iTunes is a well-established online music vendor owned by Apple Inc. The site has moved into the movie television show rental space, allowing consumers to purchase and rent movies online that can be downloaded and streamed, respectively. iTunes developed a large customer base through its music sales that has been leveraged for sales of other media like movies, television shows, and books.

**<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">On-Demand Cable **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">- Market share: unknown. On-demand cable has grown in availability and popularity in recent years. Consumers are increasingly moving to digital cable in order to receive high-definition broadcast of television. Digital cable typically offers on-demand features and channels that allow a consumer to choose and watch movies and television in the same way they would choose a traditional television program. This medium has some obvious advantage in that consumers do not need to learn any new technology to use. The on-demand content through cable comes in two primary ways. First, consumers can pay an additional monthly charge for access to on-demand channels, like HBO, which give the consumer access to a list of content. There is no additional charge once the monthly fee is paid. The other means is through non-subscription movies and television shows on-demand. This feature allows consumers to rent content from a list provided by the cable company. These rentals come on a per-rental charge that is typically $4-6. This medium is the current champion when it comes to ease-of-use. A consumer can simply navigate using their remote control to have a movie rented and queued for viewing in about ten seconds (depending how decisive they are in selecting a movie). The charge is applied to the next bill from the cable provider, allowing the consumer and ease of payment as well.

**<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">HBO **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">- watch HBO videos on TV, on-demand GOING TO REMOVE

**<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">Time Warner **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">- rent movies on-demand GOING TO REMOVE

**<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">CinemaNow **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">- Best Buy's CinemaNow gives consumers the ability to stream content over the web to televisions, DVD players, computers, and home theatres that are connected directly to the web. This is the only form of content delivery CinemaNow offers for movie rental and purchase. The service requires no subscription fee and charges on a per-unit basis.

**<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">Sezmi **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">- Sezmi is a content service that operates very similar to a cabel provider. The difference is that Sezmi is completely web-based. Sezmi provides consumewrs access to basic content through reglar subscription fee. In addition, Sezmi allows consumers to rent and buy movies and other content and download through the web. Online TV, DVR, on-demand movies. Sezmi offers a large amount of on-demand viewing content to subscribers.

**<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">Walmart **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">- Walmart entered the movie-rental industry with its purchase of VUDU in early 2010. The VUDU service offers high-definition movie streaming on a cost-per-use basis. VUDU allows consumers to stream content directly to televisions that are connected to the web and to computers. VUDU boasts that it has the largest collection of high-definition movies available anywhere, including online and DVD formats.

**<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">GreenCine **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">- Movies ordered online and delivered to door GOING TO REMOVE

**<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">LoveFilm **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">- Game, DVD, and movie rentals GOING TO REMOVE

**<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">Videolla **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">- Upload and sell personal videos online GOING TO REMOVE

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">**Zediva** - online DVD streaming GOING TO REMOVE

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Suppliers in this industry include production companies, manufacturers that create dvds which movies are burned to, internet service providers that deliver movies through streaming and on-demand. Production companies create the actual movies that are offered for rental through the competing firms in the industry. Production companies hold a fair amount of power in the industry since there are only a few major players. They are able to release

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Consumers- Consumers of movie rentals are the consumer market. Movie rentals are going to the end-users.

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Overall Profitability of the Market- Profitability in the market is possible, but requires continuous innovation to stay ahead of, or at least in step with, the competition. Blockbuster serves as an example of a firm that once enjoyed great success in the industry, but failed to see competitors entering the market in an entirely new way, mail order only. The newest trends are moving to streaming only and kiosk rental. These two changes have almost entirely made the traditional movie-rental box store a thing of the past. The keys to profitability are offering a large selection of content, competitive pricing, and gaining the attention of consumers. However, with new services offering pay-per-use streaming and rentals, there are practically no barriers to consumer movement from one service to another. This will force firms to compete more on price and promotion.

**<span style="font-family: 'Arial','sans-serif';">External environment: ** <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Economic - The recent economic recession and continuing slow economy in the US and other developed nations has not been a major source of the declining revenue the industry has experienced. While movie rentals are made using consumers' discretionary money, renting a movie is a much lower cost alternative to other forms of entertainment, like going to a movie theatre, sporting event, or theatrical performance. The movie rental industry's declining revenue and profits is not at the hand of the economic slowdown, rather, it has likely declined more slowly due to the slow economy. Consumers continue to seek entertainment during a recession, but they focus on lower-cost entertainment. The movie rental industry should be experiencing high levels of unit rentals during this slow down as consumers trade down from more expensive forms of entertainment to less costly alternatives. As the country and world climb out of recession discretionary budgets will grow which will serve initially as a boost to sales, but will then lead to consumers trading back up to more costly forms of entertainment.

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Demographic - Demographic shifts in America will play an important role in the profitability of the movie rental industry. Certain types of delivery are more likely to appeal to certain age brackets more than others. According to an IBIS World Industry Report 40% of consumers in the movie rental industry are under the age of 35. These are the consumers that will be the first adopters of new delivery methods, like streaming, while older age brackets may prefer mail delivery to avoid issues with new technology. New firms that focus solely on streaming will limit their market share due to demographic issues. However, as the population moves through the age brackets in coming years more consumers in the older brackets will be comfortable with streaming technology.

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Political/legal - Political and Legal issues are not a major factor in the profitability of the movie rental industry in the US. The presence of long-standing copyright laws has created a stable legal environment for this industry. However, in other parts of the world where copyright laws are not established or enforced as well as the US profits will be eroded.

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Technological - Technological advancements are a significant source of change in the movie rental industry. The proliferation of high speed internet has enabled the coming shift to movie streaming. Delivery of movie rentals through streaming is a far less costly medium than maintaining a physical store or delivery by mail. The shift to streaming will help expand margins in the industry due to lower operating costs. However, technology advancements have also removed some entry barriers by allowing fimrs to deliver content through the web and not have to set up bricks and mortar locations or sophisticated logistical systems.

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Global - The movie industry has historically been fragmented by country due mainly to language barriers. The movie rental industry has followed the same trend for good reason. The traditional movie rental store model required physical locations to distribute the movies to consumers and relied heavily on location and promotion. Good location can be very costly and bad location can be fatal to the business. Moving into countries that a business is not familiar with is a difficult move when location is such an important factor. Also, promotion dollars are leverageable across locations in the same country. A large firm like Blockbuster can run a nationwide advertisement and the cost is spread across all of its stores in the country. However, moving into a foreign country would require a much higher price per location for advertising. Movie rentals through streaming require contracts with producers that are also segmented. Globalization will be an important frontier for firms that are streaming movie rentals due to the reduced cost of delivery. However, globalization is more likely through acquisition rather than organic growth. Acquisition would immediately put a firm into contract with foreign producers.

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Socio-cultural - The American lifestyle is a busy lifestyle and continues to become busier. This trend seems to carry through all sectors of American households and continues to decrease leisure time for families. This trend could have some impact on the movie rental industry, but it will not likely be a significant impact. As Americans become increasingly busier they will look for leisure activities that require less time. Streaming a movie is one example of a way that American's can continue to enjoy the movie experience without the additional time of packing up the family, driving to the theatre or rental store, and driving back home. With streaming a family can save vital time that can be used in other ways.

**<span style="font-family: 'Arial','sans-serif'; font-size: 13.5pt;">Five Forces: **

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 10pt;">Rivalry- <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 10pt;">The movie rental industry has a wide variety of direct and indirect competitors. Among the direct competitors there are more than a handful in this market. Many indirect competitors who do not traditionally offer on-demand services are switching over in order to remain competitive. The number of large competitors including Walmart, Amazon, cable, and Blockbuster leads to a high amount of rivalry and a lower amount of power and profit for any one company within the industry. Also, there are low product differences in an on-demand movie. The movie will be the same wherever you order it from, except maybe a difference in load time, availability, and blue-ray technology. The industry does face a growing demand, which keeps demand higher than the current supply. This helps to balance the lack of company power somewhat. The fact that firms have basically no ability to differentiate their products forces firms to compete on price and service, which tend to erode profitability in an industry and transfer power to consumers.

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 10pt;">Threat of New Entrants- <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 10pt;">Right now the threat of new entrants is relatively high. For years the industry was dominated by Blockbuster, which used economies of scale and a large network of stores that made them convenient for most Americans and helped to limit new entrants. However in the last ten years a variety of new models have come forward and eliminated Blockbuster's competitive advantage. First, Netflix introduced a model where they mailed DVDs to customer's homes, then Redbox started using vending machines to rent movies to customers in convenient locations, and finally a variety of companies started streaming content instantly over the internet direct to consumer's homes. All three of these models proved to be lower cost than operating a store front and more convenient for consumers, which turned Blockbuster's network of stores into a giant liability for the company. Right now, most of the major players are fighting to figure out the best way to offer streaming video, since this method would be the most convenient for consumers and have the least amount of overhead for the company. The biggest obstacle is gaining access to content. Movie studios are worried that if streaming movies instantly over the internet is cheap and easy it will cannibalize sales of DVDs, a significant source profit for movie studios. Netflix, Amazon, Apple, Redbox, and Hulu are all trying to be the first to develop a model that is appealing to consumers and the movie studios, and while none of them have succeeded so far, they will all keep trying. It is widely believed that if a firm can be the first to lock in long term contracts with all the major studios then they will be awarded with a profitable monopoly. This is currently brining new entrants to the industry, but once the goal of locking in contracts with all studios is achieved, new entrants will become a much smaller threat.

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 10pt;">Substitutes- <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 10pt;">The movie rental industry battles several substitutes that pose a significant threat given the fact that customers have minimal switching costs. A customer can easily cancel a Netflix subscription, or choose not to go to a video store to rent a movie. Alternatives to renting movies include purchasing movies, borrowing movies, piracy, or going to a movie theater. The video rental industry also battles other forms of entertainment that can include live shows (concerts, plays, musicals, etc.), music, games (video games, board games, etc.), television shows, internet, and books. These are all ways for an individual or household to enjoy leisure time, but have a variety of different levels of cost assiciated. The threat of substitutes is relatively strong mainly because of the large number of options available. Technological advances only enhance the threat of these substitutes by making them more convenient and accessible. For example, DVR and TiVo allow cable and satellite customers to record shows or movies on television and watch them at their convenience. The overall threat of substitutes for the video rental industry is high. This high threat results from various forms of entertainment and increasing technology that make this forms of entertainment much easier to access. While the threat of substitutes is rather strong, renting a movie is toward the lower end of the cost spectrum. This makes the threat of substitutes more tepid given current economic conditions, unemployment rates, and the move away from conspicuous spending.

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 10pt;">Complements- Compliments include hardware that enable streaming of movies, like xbox, and mail services that transport movie rentals to your home. Although both are compliments to the movie rental industry, the proliferation of streaming hardware serves as a replacement to conventional postal services that transport physical dvds to the consumer and back. This should shift power to the movie rental industry as the compliments battle each other for the large amount of revenues available in the movie delivery business.

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 10pt;">Suppliers-

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 10pt;">Consumers-

**<span style="font-family: 'Arial','sans-serif'; font-size: 24pt;">(2) Competitor Analysis: ** <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Go more in depth with each competitor. Tie to porters 5 forces for each

**<span style="font-family: 'Arial','sans-serif'; font-size: 12pt;">Direct Competitors: ** **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">1) ****<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">Amazon **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">- Movies on demand, watch tv and video online instantly  **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">2) ****<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">Redbox **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">- Rent and buy movies from kiosks **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">3) ****<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">Blockbuster- **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;"> Rent and buy movies in-store, Rent and buy movies on demand  **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">4) ****<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">Hulu Plus **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">- watch shows online and on other media **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">5) ****<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">ITunes **<span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">- rent TV shows and movies online and watch immediately

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Netflix response to competitors as a whole (Page 89)

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 0.5in; text-indent: -0.25in;">1) Future objectives:

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 0.5in; text-indent: -0.25in;">2) Current strategy:

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 0.5in; text-indent: -0.25in;">3) Assumptions:

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 0.5in; text-indent: -0.25in;">4) Capabilities:

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt; text-indent: 0.25in;">5) Target firms response

**<span style="font-family: 'Arial','sans-serif'; font-size: 24pt;">(3) Resources and Capabilities of the Firm: **

**<span style="font-family: 'Arial','sans-serif'; font-size: 13.5pt;">Value Chain Analysis: ** <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">What are the different sections of the value chain within the company?

1) Purchasing The biggest resources Netflix has in their purchasing department are the contracts that they have obtained to stream content online. In 2010 Netflix passed a milestone, and now their customers are watching more of their content via streaming over the internet than via the dvd through mail distribution channel. Streaming represents the fastest and most convenient way for Netflix to distribute content to their customers, but there are some unique challenges in delivering streaming content. First it might be helpful to know something about the First Sale Doctrine. The first sell doctrine is a part of U.S. copyright law that allows the purchaser of a lawfully made copy of a copyrighted work to rent or sell that copy without any kind of permission from the copyright holder. This means that movie studios have very little control over who can rent or sell the DVD's that they produce. If a studio were to refuse to sell DVDs to Netflix because they wanted end consumers to purchase more DVDs instead of renting them, then Netflix could just purchase those DVDs from a wholesaler or retailer that the movie studio does sell the DVDs to. Netflix doesn't need the movie studios permission to rent the DVDs out, so Netflix doesn't need the studios cooperation to make their DVD rental business work, they can offer any content that comes out on DVD. Now granted, it may add expense for Netflix to purchase from a wholesaler or retailer instead of directly from the studios, but the studios have no way to destroy Netflix's DVD rental business because of the protection that the First Sale Doctrine offers.

Now, as of right now the right to stream content over the internet does not fall under the First Sale Doctrine. This means that for Netflix to stream content over the internet they have to have express permission from the studios to stream that content, and of course studios aren't just giving away that permission. How it has worked so far is that studios have bundled up libraries of content and sold contracts to companies like Netflix allowing them to stream that content library over the internet for a set number of years. These contracts have often been exclusive, which has been a great source of advantage for Netflix when it has been able to purchase these contracts making it the exclusive streamer of certain content. It has also been a source of disadvantage when there has been content that Netflix is unable to stream do to a studio entering into a contract with another online distributor. Currently, Netflix has one of the largest libraries of content that they are able to stream, and in total their contracts provide them with a strong competitive advantage over firms like Redbox that have been unable to obtain such contracts. However, there is some concern that eventually these contracts will become too expensive for Netflix and they will lose their online streaming capability. There are a couple of very large, cash rich companies like Apple and Amazon that are interested in increasing their abilities to stream content over the internet. If one of these companies were to enter into a bidding war with Netflix as Netflix is trying to renew some of their contracts then they could muscle Netflix out and steal some of Netflix's market share. This means that in the short term Netflix's contracts are a source of competitive advantage, but in the long term as those contracts come up for renewal they could become a source of disadvantage. As an interesting footnote there is a company called Zediva that has tried to find a workaround to the issue of obtaining streaming contracts by playing DVDs on DVD players in their warehouse and streaming the content of the DVD over the internet. Zediva claims that they are a video rental service that is renting the DVD and DVD player to their customers and simply transmitting the movie to the customer over the internet. The Motion Picture Association of America has filed a suit against Zediva claiming that the company is just using a technical gimmick in an effort to avoid complying with copyright law, and that Zediva is infringing on the studios' exclusive right to publicly perform the copyrighted work. Depending on how the courts rule on this matter, streaming capabilities may become more widely available, in which case contracts with studios would become less important.

2) Warehousing Netflix has several resources and capabilities related to its warehousing and distribution networks. For starters, Netflix's extensive distribution network consists of over 36 distribution centers throughout the USA. The shipping centers are very efficient, each shipping an average of between 5,000 and 30,000 disks in an average of less than 8,000 square foot facilities each (Netflix DVD). It hasn't always been this way, however, Netflix started out seeing shipping delays as 'business as usual'. This changed in 2002 when Netflix developed an aggressive strategy to build regional distribution centers across the country. Their goal was to provide 7 percent of customers with overnight delivery by the end of 2003. This goal was met and exceeded by opening even more centers after 2003 and continuing expansion and refining of their distribution processes. Another resource Netflix uses, is its proprietary software that is used to track and ship the companies five-million plus DVD's. In addition, Netflix has a patent on its subscription rental service which includes the method they use to ship DVDs, keep inventory, and communicate with customers. These resources have a high strategic importance in the industry, since consumers do not want to wait long periods of time to watch movies. They also are something that Netflix has a very high relative strength in, as competitors are not able to deliver as quickly as Netflix. These resources have given Netflix the capability to develop next-day delivery for over 90 percent of customers nationally (Netflix DVD). The ability to deliver products faster than is achievable by competitors, dramatically increases customer satisfaction and gives Netflix a competitive advantage. This advantage may not be sustainable, however. While quick delivery is valuable and rare in today's market, many companies are able to copy the processes that Netflix uses, even with the patent on these processes. Netflix does not often bring up suits against companies who try to copy its processes, which allows for competitors to steel this advantage. Also, there are other ways to get movies quickly which may completely negate this advantage. Customers are able to drive to a kiosk, such as with Redbox, and instantly get the DVD of their choice, although choices are far more limited than what Netflix offers. Another substitute is to watch movies online, another service Netflix is very proficient at. There are a number of other possible solutions which could be created that would reduce or eliminate Netflix advantage. This strategy is currently used in the marketplace and is a key success factor for Netflix, it is possible, however, that consumers in the future may not even consider waiting for a DVD to be delivered.

3 and 4) In-store Operations and Information Technology For Netflix in-store operations and information technology go hand in hand since the primary way that customers interact with Netflix is through their website. Netflix is a subscription based service, where customers pay a monthly subscription fee in exchange for unlimited access to movies and television shows. Netflix customers access all of this content through the Netflix website. After logging in to the Netflix website customers can search for the shows and movies that they want to watch. Some of that content is only available on DVD, in which case Netflix will mail the customer the show or movie. For some content though, customers are given the option to have a DVD mailed to them or to stream the content live over the internet.

Since Netflix customers interact with Netflix almost solely through their website it is very important to Netflix that their website is easy to use and convenient. Of course there are lots of things that Netflix can do to make their website easy to use and convenient, such as having a search function, however many of those things are not a source of competitive advantage because they are so easy to copy. Take the example of a search function, it may be essential, but it is also something every website has. However, Netflix has found two sources of competitive advantage in their website. The first way is that Netflix has developed some complex algorithms that allow them to predict what their customers might enjoy watching. Actually, Netflix held a contest and offered a cash prize to whoever could develop the algorithms for them. Either way, Netflix now has advance algorithms that allow them to predict what their customers will enjoy watching. This helps because it allows Netflix to make suggestions to their customers about the shows and movies they might enjoy watching, and the last thing Netflix wants is for their customers to run out of things that they want to watch. Using their algorithms though, Netflix can make sure that they never have that problem.

T The second thing that Netflix has done to get competitive advantage through their website is to make it accessible through more devises. This is especially important when it comes to streaming content. Most customers do not want to watch TV shows and movies on their computer, they would much rather watch those things on their television. So what Netflix has done it to make the Netflix app available on just about all-new internet connected TVs, DVD and Blu-Ray players, and gaming consoles. This allows Netflix customers to watch their streaming content on their televisions. However, it also serves as great advertising for Netflix. Anytime someone purchases a new internet connected TV, DVD or Blu-Ray player, or gaming console, there is a good chance that it will come with the Netflix app, and that will be an incentive for that person to subscribe to Netflix, otherwise they will feel like they are missing out on a feature of their new devise. Netflix has also done a great job expanding beyond the home as well though. You can also download Netflix apps on most new smart phones. This means that Netflix customers can access their streaming content where ever they go. Stuck in an airplane terminal? No problem! Netflix to the rescue!

5) HR Management The work culture at Netflix has few rules and no tolerance for poor or average performance. They are also responsible for their own training and development. Employees earn top pay but no bonuses or incentives. Regardless of paying top pay, competing for talent with other players in Silicon Valley is challenging, as everyone is paid top dollar. Differentiation is key to Netflix HR success. Over time, a culture was developed that included an extremely flexible work environment, with few constraints, and one in which everyone was able to work with each other, both upper and lower level. At the headquarters, there are no badges or security checkpoints and no dress code. Everyone is included and able to see clearly all decision-making, metrics, and strategies. Many employees participate in meetings from their cars or homes through email, text, and video-conferencing. Vacation time is not tracked and can be taken at any time, the exception is that time beyond 30 days must be approved by an HR officer. Additionally, employees have the freedom to determine their own travel and entertainment costs. Rather than time spent at work, focus is instead put on how much employees achieve, both at work and outside of work (Grossman). These practices have led to a motivated, creative, and top-of-the-line work force.

To build this resource, Netflix began by hiring hundreds of young, smart, hardworking people that believed in the mission. After the business started evolving, the HR team was able to narrow in on specific skills they were looking for. Netflix began to switch out employees with average skills, with new employees with exceptional skills in the defined areas necessary. Netflix hiring process is different than many other software companies. The company typically hires only employees with seven-15 years of experience and only people who are film enthusiasts. Additionally, every new employee is interviewed by Hopkins or McCord, Chief Talent Officer. Any employee that is accessed as mediocre or average during the annual review process is let go. It is believed that having even one person on the team who is no extraordinary will destroy the elite aura surrounding the culture (Grossman).

The hiring process, culture, and HR team, allow Netflix to attract and keep top talent, giving them a high relative strength; this allows them to keep ahead of competitors in regards to customer satisfaction, product innovations, and process efficiencies. Because of this, these resources also have a high strategic importance. While these capabilities are valuable, rare, and exploitable, there is a threat that they could be copied. Many companies are already relaxing working rules and raising salaries to attract the best talent. This results in a competitive advantage in Netflix HR practices that are most likely non-sustainable.

6) Organizational Management Netflix organizational management system is well structured and has produced a well-known brand and innovative services. One resource that Netflix has, is its innovative management team. The majority of the team has been with the company since its inception, and has retained its original founder along with its Chief Talent Office, who has been acquiring innovative talent ever since (Netflix: Management). While most management teams try to continuously grow their product even when they see an end, the Netflix team admits and plans for an end to their product life cycle. The team plans to grow their DVD-by-mail market until 2013 when they will then begin to phase out this segment and build their streaming market (Exhibit A). Planning ahead is vital for this industry where constant change is inevitable. The management team is pouring resources into further developing their streaming content. Netflix management team is also very strategic. For example, the team chose to outsource the companies web technology such as customer movie queues and search tools to its rival Amazon.com (Netflix to Host). Outsourcing resources that the company has a low relative strength at, allows the team to focus on its core resources and capabilities which are already strong and that have a strong strategic importance. The innovative and strategic management team at Netflix gives the company the capability to constantly change and adapt to customers' needs, which allows for customer satisfaction and retention. The talent of the management team offers a sustainable competitive advantage and is a key success factor for Netflix, as it is valuable to the industry, is rare, it cannot be copied, unless someone from the team leaves Netflix for another company, it cannot be substituted, and is needed in the marketplace.

Another resource that has been developed, is the Netflix strong brand. The brand is well-known and has produced consumers who are raging fans of the company. Leslie Kilgore, Chief Marketing Officer at Netflix says, More than 90% of our customers tell us they evangelize the service to friends and family. The biggest impact we've seen is people spending a lot of time talking about what's in their queue of movies they want shipped to them next. Some even use Netflix as a verb, as in, "//Whale Rider//? I Netflixed it (Kilgore). Netflix other resources and capabilities have contributed, over time, to develop a trusted and well respected brand name. The company has a first-mover advantage which has given the company considerable mind share. Because the Netflix name will come to mind for consumers in the market, this resource makes Netflix capable of counteracting some of the competitive rivalry within the industry and serves as a point of differentiation against competitors. This capability is valuable and exploitable because a strong brand name will help attract new customers and can be used in the marketplace as a means to charge a premium for services. A strong brand is currently rare within the movie rental industry, as most competitors are new to this market and are still developing. Additionally, a brand name cannot be substituted and cannot be legally copied. Because of this, the Netflix brand name should provide a sustainable competitive advantage, provided that the company can maintain the company's image and innovate as fast as competitors.

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 3.75pt;">Mention this during the discussion of the value chain:

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 3.75pt;">Evaluation of resources <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 3.75pt;">Where does each resource lie on the relative strength/ strategic importance map?

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">2. Enter a partnership <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">3. Learn capability (pull/create) ||
 * || <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Low Strategic Importance || <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">High Strategic Importance ||
 * <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">High Relative Strength || <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Move resources/ knowledge to important area || <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Focus here ||
 * <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Low Relative Strength || <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Outsource || <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">1. Acquire the capability

**<span style="font-family: 'Arial','sans-serif'; font-size: 24pt;">(4) Business/Corporate Level Strategy: **

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">What does firm do differently to gain a competitive advantage for each product? (Convenience, first mover advantage, affordability, quality)

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">1) On-demand movies:  · <span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">Who are the core customers? What is our segment?    · <span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">What needs are we trying to meet in order to create value?    · <span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">How will we go about doing this? (use resources and capabilities) Are we increasing quality or decreasing costs?

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">2) Movies delivered to door:  · <span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">Who are the core customers? What is our segment?    · <span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">What needs are we trying to meet in order to create value?    · <span style="font-family: 'Arial','sans-serif'; font-size: 10pt;">How will we go about doing this? (use resources and capabilities) Are we increasing quality or decreasing costs?

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Which of the 5 Generic Business Level Strategies is NetFlix using and why/how? Narrow or broad competitive scope? Cost or Differentiation basis of competition?

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">From a domestic standpoint, Netflix reaches customers on a broad competitive scope. On a global scale, Netflix is still very narrow. As far as cost/differentiation is concerned, Netflix has implemented an integrated basis for competition. The service, and convenience, that Netflix offers to its customers achieves a certain level of differentiation in the sense that it was a pioneer by offering movie rentals by mail. At its inception, Netflix also offered a differentiated service through internet streaming, although this channel of service can't be considered a differentiated product anymore given that streaming is now simply a standard to customers. Another result of this strategy is cost leadership. Netflix is able to forego the overhead costs associated with physical outlets and invest in strategically placed warehouses to reduce its overall expenses. This combination of differentation with cost efficiencies, and middle-ground between narrow and broad scopes, creates an integrated competition basis for Netflix. (THIS WAS JUST AN INITIAL BELIEF THAT I HAD REGARDING NETFLIX AND ITS POSITION. IF ANYONE WANTS TO EXPAND AND/OR ADAPT THIS STANCE, I AM PERFECTLY FINE WITH THAT. I KNOW WE HAVEN'T DISCUSSED THIS MUCH AS A TEAM, BUT I JUST WANTED TO GET THE BALL ROLLING ON THIS SECTION.)

**<span style="font-family: 'Arial','sans-serif'; font-size: 13.5pt;">Functional Analysis: ** <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in; text-indent: -0.25in;">1) Technology- <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in; text-indent: -0.25in;">NetFlix: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in; text-indent: -0.25in;">Redbox: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Amazon: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Blockbuster:

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">2) Design- <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">NetFlix: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Redbox: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Amazon: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Blockbuster:

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">3) Manufacture- <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">NetFlix: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Redbox: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Amazon: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Blockbuster:

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">4) Distribution- <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">NetFlix: Netflix uses supply chain innovation to offer movie rentals to its customers by means of mail service and internet streaming. <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Redbox: Redbox offers movie rentals to its customers through strategically located kiosks. <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Amazon: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Blockbuster:

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">5) Brand- <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Netflix: Similar to Redbox, Netflix carries the perception of convenience for its customers. While the brand image is similar, the means of achieving this image are very different. Distribution is the key player in establishing this perception of convenience. Netflix achieves this through providing movie rentals to customers in a timely and accurate manner. <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Redbox: Redbox achieves its convenience image by being readily available to customers at grocery stores, fueling stations, and other high traffic areas. A customer can simply walk up to the kiosk and have a movie within a minute to enjoy at home that evening. <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Amazon: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Blockbuster:

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">6) Marketing- <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Netflix: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Redbox: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Amazon: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Blockbuster:

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">7) Customer Support- <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Netflix: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Redbox: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Amazon: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Blockbuster:

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 1in;">Is the current business level strategy being used appropriate?

**<span style="font-family: 'Arial','sans-serif'; font-size: 13.5pt;">Diversification: ** <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">What level of diversification is Netflix using if any? <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt; text-indent: 0.5in;">Related constrained- <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 0.5in; text-indent: 0.5in;">-Original TV series <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 0.5in; text-indent: 0.5in;">-Delivery <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 0.5in; text-indent: 0.5in;">-Instant download <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 0.5in; text-indent: 0.5in;">Any diversification through Product/services, geographic, vertical integration?

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 0.5in; text-indent: 0.5in;">Acquisitions/ Partnerships: <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 0.5in; text-indent: 0.5in;">On October 1, 2008, Netflix announced a partnership with Starz Entertainment to bring 2,500+ new movies and television shows to Watch Instantly in what is being called Starz Play. <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt 0.5in; text-indent: 0.5in;">In August 2010, Netflix announced it had reached a five-year deal worth nearly $1 billion to stream movies from Paramount, Lionsgate and MGM.

**<span style="font-family: 'Arial','sans-serif'; font-size: 24pt;">(5) International Strategies: **

Netflix has recently reached the point at which domestic expansion has become exhausted. Given its current technological capabilities, particularly video streaming, Netflix entered into the Canadian market in mid-2010. This is form of global international expansion because the streaming product hasn’t been adapted to the market. Netflix plans on making one customization in the near future for the Canadian market, though: the offering of service in French (Liedtke). The mode of entry into the Canadian market is exporting. Netflix has a unique opportunity to expand internationally without incurring the overhead costs that many other companies would face. Netflix can enter markets without building several warehouses to store DVDs for distribution. The technological base of Netflix’s services is an optimal way to enter into markets before determining if there is a demand that warrants physical DVD delivery. Moving forward, one can expect Netflix to identify other foreign markets that have a demand for the films that are currently offered through the streaming service, such as Europe and even parts of Asia. Australia could be another expansion opportunity. Once Netflix gains knowledge from offering service in French (Canadian market), these learned efficiencies will be able to be carried over into the other potential foreign markets, France in particular. It is also a reasonable expectation that Netflix will begin to adapt the selection of videos available to fit specific markets. This will shift Netflix’s international strategy from global to transnational. As Netflix continues to exhaust the domestic US market, and as the focus of services continues to shift toward streaming, it will be imperative to the expansion and success of the company to go abroad.

**<span style="font-family: 'Arial','sans-serif'; font-size: 24pt;">(6) Cooperative Strategies: **

Netflix has a number of strategic alliances that give them competitive advantage, including their contracts that allow them to stream content live over the internet, their partnership with Amazon to lease server space, and their new agreement with Oscar winning actor Kevin Spacey and Oscar nominated director David Fincher to create a new television series.

Probably Netflix’s most important strategic alliances are the contracts that it has with movie studios and television channels that allow Netflix to stream content over the Internet. In US copyright law there is a clause called the right of first sale that allows the purchaser of a legal copy of a copyrighted work to resale or rent that copy. This means that for their DVD business Netflix doesn’t need contracts with the movie studios and television channels. Anything they release on DVD can be repurchased and rented out by Netflix. Now Netflix does buy most of their DVDs directly from studios, which enables them to keep costs down, but the studios can’t keep Netflix from renting out DVDs unless they just stop making DVDs. This is not true when it comes to streaming content over the internet. Netflix has to have a contract with the copyright holder to legally stream copyrighted material over the internet, and in most instances the studios have only granted that right to one company at a time, which means that Netflix is constantly having to battle to keep the content they have and gain new content. For Netflix to be successful as a company they have to be successful at maintaining and gaining new content contracts. In 2010, for the first time ever, Netflix streamed more content to their customers than they sent out on DVD, and the streaming segment of their business is growing much faster than the DVD segment. In fact, Netflix estimates that virtually all of their future growth will come from customers streaming content.

Netflix also has an important strategic alliance with Amazon, who hosts Netflix’s website on their servers. In fact, Netflix doesn’t own any servers, they lease server space from Amazon exclusively. This allows them to focus on their core competencies instead of worrying about updating their servers and bandwidth. So far this has worked very well for Netflix, and they continue to expand their online offerings by simply leasing more server space from Amazon. The one thing Netflix will have to think about going forward though is just how much Netflix can trust Amazon. Amazon has recently announced plans to stream shows and movies as a perk for their Amazon Prime members. This puts Amazon in direct competition with Netflix. Meanwhile Netflix is totally reliant on their new competitor to be able to run their business.

Netflix newest strategic alliance is a deal that they have struck with Kevin Spacey and David Fincher to create a new television show called “House of Cards”. This show could be a huge driver of growth for Netflix. Currently, Netflix only offers their customers content that can be obtained through other means. Everything you can watch on Netflix you can watch on TV, buy on DVD, or rent from somewhere else. By creating their own show Netflix will be offering something that you can only get through Netflix for the first time. As long as the show is really good and can generate a buzz then it will bring them tons of new subscribers. Just think about how many people bought HBO to watch “The Sopranos” or “Sex and the City”. Beyond that though, the new show will give people a chance to see Netflix in a new light. Netflix became successful by reinventing the model for a DVD rental company; they were more convenient and more cost effective than Blockbuster. If Netflix creates original content then they can become the new model for a television channel. We all know the big problem with TV shows right now is that you have to watch them when they’re on. Who wouldn’t want to be able to watch their favorite shows when it is convenient for them?

**<span style="font-family: 'Arial','sans-serif'; font-size: 24pt;">(7) Important Management Issues Relevant: **

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">1) Has Netflix reached a plateau in customer base/market share?
<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">-Saturating market <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">-How many Americans have high speed internet? Infrastructure? <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">-Profits/ sales revenue <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">-Challenges changing product from delivery to streaming <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">-Current state of international markets

__ International Expansion __ As Netflix continues to grow, reaching a plateau is imminent. With minimal international presence, Netflix runs the risk of saturating the domestic market. The financial statements currently indicate the opposite of a plateau, but it is only a matter of time before the growth slows, or even stops. In addition to a limited population to target, Netflix faces infrastructure as a constraint. As more of Netflix’s revenues are generated by internet streaming, it will become more dependent upon the reach of high-speed internet, which is a required technology to utilize streaming functions. As Netflix continues to expand domestically and internationally, it will face potential limitations as a result of the absence of high-speed internet infrastructure in some geographic regions. Assuming that Netflix continues to expand internationally, Netflix will also face challenges of market entry. These challenges can be in the form of pre-existing competition and even political issues.

<span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">Russ <span style="font-family: 'Arial','sans-serif'; font-size: 10pt; line-height: normal; margin: 0in 0in 0pt;">2) What affect will technology changes have on their product offerings? Early mover advantage?

<span style="font-family: 'Calibri','sans-serif'; font-size: 11pt; line-height: 115%;">Netflix also faces the task of keeping up with technological changes within the industry. These changes present opportunities to reach customers in new and more convenient ways. If Netflix chooses not to exploit these opportunities, then competitors will. Recent technological changes include the increase in popularity of hand held, application-powered devices and the rise of more on-demand focused entertainment services (television networks) and devices (Apple TV). The world of entertainment is becoming more technologically advanced and convenient to the customer. Failing to adapt to these changes can place Netflix in a poor position within the entertainment industry.

3) Faciliating couterparties/ Cooperative Strategies gone bad Scott -Amazon could increase fees or disallow it completely Ross -Competitors merging and combining resources and capabilities As the movie rental market matures, many companies are merging and forming joint ventures in order to remain competitive and grow economies of scale. This is an issue that Netflix should be concerned over. When companies combine, they use each other's resources and capabilities to form a stronger and more competitive company. If Netflix does not improve their current capabilities or gain capabilities from other companies, their advantages could become obsolete if their capabilities are no longer rare, can be copied, or become substitutable for new processes or technologies. One example of this happening, is with Amazon's purchase of LoveFilm. While LoveFilm offers movies by mail and by internet, just as Netflix does, they also offer video game rentals, Blue-Rays, CDs, and books. The company operates in the UK, Germany, Sweden, Denmark, and Norway (Chabot). Amazon's extensive servers and capital combined with LoveFilm's customer base of 1.5 million and extensive product offerings could make it extremely difficult for Netflix to expand into these regions and remain competitive with a company that is much stronger and quickly expanding. Another example are the joint ventures formed between Huluplus and popular networks. NBC, ABC, and FOX have already formed joint ventures with HuluPlus (Hulu). These partnerships allow for extended content and programming for Hulu, and alternate income for TV networks. The capabilities of the two partnering firms make HuluPlus a bigger threat to Netflix. Additionally, there is a possibility that companies such as Apple, LG, and other players could form partnerships or mergers with competitors which could cause these companies to remove Netflix from their products such as access to Netflix apps on the Ipad or access to widgets on televisions.

Joseph 4) As we mentioned in the last section, Netflix projects that almost all of their future growth is going to come from streaming content. It has rapidly overtaken DVDs as the preferred method of consumption by Netflix customers, and it is a segment that is growing much faster than DVDs. The problem is that it is harder for Netflix to stream all the content that their customers want. Unlike with DVDs Netflix has to have contracts with the copyright holders to be able to stream content over the internet. For Netflix to continue to grow they are going to have to be able to maintain and expand on the contracts that they have to stream content over the internet. By the company’s own projections virtually all of their future growth will come from increased streaming activity, which means they have to have the content their customers want.

**<span style="font-family: 'Arial','sans-serif'; font-size: 24pt;">(8) Analysis and Recommendations for Strategic Action: **

<span style="font-family: 'Arial','sans-serif'; line-height: normal; margin: 0in 0in 10pt;">Travis <span style="font-family: 'Arial','sans-serif'; line-height: normal; margin: 0in 0in 10pt;">International expansion

Recommendation: To better prepare itself for, and even avoid, a future plateau in sales and market share, Netflix must expand internationally and increase its market size. The best way to achieve this expansion is to first determine which markets have the highest demand for the services offered by Netflix and which countries Netflix is best equipped to serve. Language capabilities and internet availability are two major factors that will play roles in this decision making process. By focusing on internet streaming, Netflix will be able to avoid significant overhead expenses throughout its expansion. Most emerging and developed markets have a solid foundation in place already for internet streaming; however, it is important to confirm this availability before entering into a new market. To overcome any political resistance and to eliminate some preexisting competition, Netflix should expand through international acquisition. By purchasing companies that already have a presence in the targeted market, Netflix can take advantage of the foundation that has already been laid and enter into an automatic market share to get started. International expansion is primary way for Netflix to avoid a sales plateau, and to keep growing. This type of expansion will require a semi multi-domestic strategy because of differing movie demands from country to country, but this cost can easily be justified by the growth in customer base and diversification that Netflix will experience. If times of economic uncertainty plague one market, Netflix will be able to exploit other market to continue to generate revenue. Netflix has become a major player in the US movie rental market, and now it is time to take its capabilities to other markets to establish an international powerhouse.

<span style="font-family: 'Arial','sans-serif'; line-height: normal; margin: 0in 0in 10pt;">Russ <span style="font-family: 'Arial','sans-serif'; line-height: normal; margin: 0in 0in 10pt;">Early adopter, innovative thinking, stregthen capability of attracting creative and best talent- ties to 2

<span style="font-family: 'Arial','sans-serif'; line-height: normal; margin: 0in 0in 10pt;">Risk Management: Servers- ties to 3 <span style="font-family: 'Arial','sans-serif'; line-height: normal; margin: 0in 0in 10pt;">Scott 1) //Move to server space from several places- through partnerships// //<span style="font-family: 'Arial','sans-serif'; line-height: normal; margin: 0in 0in 10pt;">to manage level of risk // <span style="font-family: 'Arial','sans-serif'; line-height: normal; margin: 0in 0in 10pt;">Ross 2) Acquire the capability from a firm with servers <span style="font-family: 'Arial','sans-serif'; line-height: normal; margin: 0in 0in 10pt;">Netflix could find and acquire a smaller company that specializes in handling servers. This company does not necessarily have to be in the movie business, but should be one that is highly discounted and has the equipment and systems in place to handle Netflix' networks. While expensive, this strategy allows for Netflix to own servers that are already developed, which would provide security against the threat of Amazon raising prices and fees for allowing Netflix to use their servers. <span style="font-family: 'Arial','sans-serif'; line-height: normal; margin: 0in 0in 10pt;">Ross 3) Create our own servers by either selling off delivery service or fund through the higher margins of streaming content. Another option to solve the Amazon server issue, is for Netflix to develop their own servers. Netflix would need capital to fund the research and development as well as the fixed costs of buying the components needed to handle their own servers. The company could do this in one of two ways. For one, as Netflix moves from delivery to streaming content, profit margins will increase significantly. These extra margins can be used to fund the development of new servers while Amazon is still hosting these services for Netflix. Another way to raise capital, would be for Netflix to sell of their movie delivery portion of the company in exchange for captial which can then be used to expand the streaming business and server development.

Joseph: <span style="font-family: Arial,sans-serif;"> Netflix has to aggressively pursue all opportunities to expand their offerings for streaming. First and foremost this means that they have to maintain a good relationship with the content creators. Right now the production studios are all scared to death that if customers can stream content over the internet then there will be no incentive for people to watch traditional television channels or purchase DVDs, and right now television and DVD sales are huge money makers for production studios. Netflix is going to have to show the studios that allowing Netflix to stream their content can add to the studios’ bottom line instead of subtracting from it. The studios need to see Netflix as a new partner that can help grow their business because as soon as they see Netflix as a threat then Netflix will start losing contracts and their growth prospects will go up in smoke. So far Netflix has done great at this, which is why you can stream more content through Netflix than anywhere else. To give you an idea of what a big deal this is, Apple couldn’t convince the studios to allow them to stream content, which is why you have to buy or rent movies and TV shows one at a time through the iTunes store. Netflix is competing with much bigger companies with much bigger cash flow, but right now they are winning because they have been able to convince the studios that allowing Netflix to stream content can be lucrative for all the parties involved. This has to continue to be Netflix’s focus. On the other hand though, it is very smart that Netflix is getting rid of some risk by creating their own show. If it is successful then Netflix could potentially start producing a lot of their own content and eventually even cut out the studios. Right now content creators have all the power at the bargaining table because content creators have multiple ways to distribute their product whereas Netflix needs their content to have a product at all. By creating their own content Netflix will be gaining power. It will be a long time before Netflix could even think about making it without their streaming contracts, but if “House of Cards” is a big success, and if they can keep duplicating that success, Netflix could eventually control their own destiny in a way that they simply can’t right now.

=<span style="font-family: 'Arial','sans-serif'; line-height: normal; margin: 0in 0in 10pt;">Works Cited: = Chabot, Jeff. "Amazon to Purchase Europe's LoveFilm Movie Service." //HD Report//. 20 Jan. 2011. Web. 16 Apr. 2011. <http://www.hd-report.com/2011/01/20/amazon-to-purchase-europes-lovefilm-movie-service/>.

Grossman, Robert J J. "Tough Love at Netflix." //Society for Human Resource Management//. 1 Apr. 2010. Web. 13 Apr. 2011. <http://www.shrm.org/Publications/hrmagazine/EditorialContent/2010/0410/Pages/0410 grossman3.aspx>.

"Hulu: Disney to Join NBC Universal, News Corporation and Providence Equity Partners as an Equity Owner of Hulu." //Hulu//. 30 Apr. 2009. Web. 16 Apr. 2011. <http://www.hulu.com/press/disney_press_release.html>.

"Netflix DVD Distribution." //DVD Direct for Less//. Web. 12 Apr. 2011. <http://www.dvddirect4less.com/netflix_DVD_distribution.html>.

"Netflix : Management." //Netflix//. Web. 12 Apr. 2011. <http://ir.netflix.com/management.cfm>.

"Netflix to Host Data and Software on Amazon's Servers." //Hacking NetFlix//. Web. 12 Apr. 2011. <http://www.hackingnetflix.com/2010/04/netflix-to-host-data-and-software-on-amazons-servers.html>.

Kilgore, Leslie. "Netflix: Project a New Experience." //Fast Company//. Web. 12 Apr. 2011. [].

Liedtke, Michael. //Netflix chooses Canada for international debut//. July 7, 2010. []

Richtel, Matt. //Amazon Couples Movie Streaming with Shipping.// Web. 14 Apr. 2011. []

About Hulu. []

Exhibit A: Get picture from Ross... will not upload

=Presentation:= Year 2020: What Netflix will look like in the future International, technology used, future of their capabilities

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