1. Introduction

Netflix, founded in 1997, is a young company which has capitalised on the ever-increasing appetite for on-demand entertainment. With $8.8bn in revenues for 2016, y-o-y growth of 30%, and over 109 million members globally, it is the market leader for in its field. (Netflix, 2017) Their product mix includes licenced content and original production offering a mix suitable to all subscribers.

2. Corporate Strategy

Netflix is a
global internet TV network offering movies and TV series commercial-free, with
unlimited viewing on any internet-connected screen for an affordable,
no-commitment monthly fee. (Long Term View, 2017)

3. Scope of the Firm:

3.1 Internet providers

Netflix, from its outset, utilised the
internet as a medium to reach its subscribers. From its initial catalogue of
content which was then dispatched through the postal service, to the current
streamed content. (See Appendix 1) The dependence on Internet Service Providers
(ISP’s) has impacted the delivery of its content in the past, now controlled
under the Net Neutrality order. (See Appendix 2) However, Netflix and other
service providers remain at the mercy of ISP’s if the order were to be removed
through deregulation.

This downstream vertical boundary is likely
to remain. The task of delivering internet service across a global network falls
on a core group of providers. These have economies of scale, the ability to
deliver all internet based services through one connection. They further
diversify by delivering multiple other resources such as telephone and
traditional TV services. The incentive simply does not exist to design, build
and implement a solitary Netflix delivery system, a cost ineffective
integration.  

3.2 Creating original content

Since Netflix’s infancy, their greatest expense has always involved the procurement of the latest material from studios. This vertical boundary left Netflix at the mercy of studios, continuously being subjected to increased licence costs, as a direct result of their success and growth. (See appendix 3) Further, some now see Netflix as a direct competitor, removing their right to their content, Disney integrating with ESPN and its streaming service. (Castillo, 2017) Netflix saw a movement higher in the vertical chain as a key to protecting their long-run success.

Content is the key to both attracting, and
crucially, retaining subscribers. Utilising their deep funding pool, Netflix
began developing original material in a bid to secure a greater control over
the sources of its content. The payoffs are twofold: the shows can be licenced
to create an additional revenue stream, and it will make Netflix a service
which people feel they have a subscription with. If the original content is the
only place to find shows such as House of
Cards and other future projects, they retain subscribers.

“Ted Sarandos wants “to become HBO faster than HBO can become Netflix”

Writing a Similar Assignment?

Get a Scholar-Written Paper Matched to Your Brief

Every order is handled by a degree-holding expert in your subject — written to your exact rubric, fully original, and delivered ahead of your deadline.

Start My Order

(Salmon, 2013)

This is a statement of intent by Sarandos, to
survive they must adjust. As highlighted by the fallout between Disney and
Netflix, the competition is increasing in the on-demand entertainment providers
and Netflix. Competitors see the decline in traditional TV, seeing the future
in the flexible viewing available through on-demand entertainment.

3.3 Analysis of their M&A history

The acquisition of Millarword, is the first
in Netflix’s history. Millarworld will complement their strategic move into
original content, with much of their work restricted to comics. Netflix sees
this as an opportunity, like an untapped oil well, to transform the comics into
TV Show and movie phenomenon’s. (See appendix 4)

Mark Millar – “[Netflix] would help us take Millarworld’s characters and turn them into global powerhouses”

(Wile, 2017)

Their vision is to mimic the success of
past comic related productions and
the significant returns associated. Marvel, an original creator of the likes of
Spiderman and X-Men but had licenced these off, has returned over $12bn at box
office in the last decade off its other characters. (Cain, 2017)
Netflix hope to follow this success of developing the lesser known characters
through to franchise behemoths.

4. Competitive advantage

Netflix generic
strategy – “grow our streaming membership business globally within the
parameters of our profit margin targets” – (Appendix 5)

The key to a competitive advantage is
sustainability. Through Kay’s distinct capabilities, Netflix’s strengths and
weaknesses become apparent. (See Appendix 6) Netflix’s reputation and the
consistent delivery of high-quality, current content and the relative dominance
over competitors, gives a competitive advantage at present. Is it sustainable
however?

As mentioned previously, competitors are
entering the market and investing heavily in content, some removing their
content from Netflix to promote its service. (Castillo, 2017) The generic strategy of growth will
only last while new markets are available. As shown in appendix 1, only China
is remains unexploited. The US market is almost fully saturated, this is a sign
of the long-term future of the global market. Netflix is relying on growth to
cover the increasing content costs. (See appendix 3). Once saturated this
strategy will become an inefficient at protecting market position and margins. They
will either need to cut costs or increase the monthly subscription.

Weaknesses above and below on the vertical
chain could also diminish their advantage. They are at the mercy of these
providers; Netflix’s success only encourages increases in procurement costs
from these third parties and pressure from ISP’s. Further deterioration in
relationships could cause difficulties in the medium to long run.

5. Conclusion

Netflix has a defined corporate strategy,
one which has the potential to guide the company to success over the long term.
The decisions made to date have resulted in strong financial and subscriber
growth. As highlighted within the report however, it faces increasing
challenges with an ever-increasing number of competitors entering the market. Further
acquisitions and development of original content can protect their advantage
and make Netflix a must have in households throughout the world.

6. References

• Cain, R. (2017, 07 10). The Marvel Cinematic Universe Just Topped $12 Billion In Worlwide Box Office. Retrieved from Forbes.com: https://www.forbes.com/sites/robcain/2017/07/10/the-marvel-cinematic-universe-has-now-topped-12-billion-in-total-worldwide-gross/#51476f077759
• Castillo, M. (2017, 11 01). Disney will pull its movies from Netflix. Retrieved from CNBC.com: https://www.cnbc.com/2017/08/08/disney-will-pull-its-movies-from-netflix-and-start-its-own-streaming-services.html
• Dunn, J. (2017, 04 12). Net Nutrality. Retrieved from businessinsider.com: http://uk.businessinsider.com/fcc-ajit-pai-net-neutrality-internet-association-google-facebook-netflix-2017-4?r=US&IR=T
• Long Term View. (2017, 10 25). Retrieved from Netflix.com: https://ir.netflix.com/long-term-view.cfm
• Lovett, J. (2017, 10 25). Millarworld-Netflix. Retrieved from comicbook.com: http://comicbook.com/comics/2017/08/07/millarworld-netflix/
• Molla, S. O. (2016, 10 18). Netflix risky expedition. Retrieved from bloomberg.com: https://www.bloomberg.com/gadfly/articles/2016-10-18/netflix-gambles-u-s-profits-on-pricey-global-ambition
• Netflix. (2015). Netflix Annual Report 2014. Los Gatos, California: Netflix.
• Netflix. (2017). Netflix Annual Report 2016. Los Gatos, California: Netflix Inc.
• Netflix Acquires Millarworld. (2017, 08 07). Retrieved from ir.netflix.com: https://media.netflix.com/en/press-releases/netflix-acquires-millarworld-1
• Netflix, I. (2017, 01 18). Long term view. Retrieved from ir.netflix.com: https://ir.netflix.com/long-term-view.cfm
• Salmon, F. (2013, 06 13). Why Netflix is producing original content. Retrieved from reuters.com: http://blogs.reuters.com/felix-salmon/2013/06/13/why-netflix-is-producing-original-content/
• Wile, R. (2017, 08 07). Netflix buys Millarworld. Retrieved from time.com: http://time.com/money/4889565/netflix-buys-millarworld-mark-millar-kickass-kingsman/
• Zappe, F. (2017, 01 10). Diffusion of Netflix. Retrieved from SlideShare.com: https://www.slideshare.net/FelixZappe/the-diffusion-of-netflix

7. Appendices

Appendix 1

Appendix 2

The conflict arose through the high demand
placed on the broadband infrastructure as Netflix increased in popularity. The
perceived disproportional usage by Netflix subscribers relative to overall
demands on traffic caused the ISP’s to slow the speed of Netflix related
content. This directly impacted the quality of product delivered and the fight
over Net Neutrality began. The current Net Neutrality order, introduced by the
US government, states “your internet provider cannot slow down a Netflix,
YouTube, or any other service and give other websites and apps preferential
treatment, nor can it charge internet companies for faster access.” (Dunn, 2017)

Appendix 3

Appendix 4

Appendix 5

Appendix 6

Kay’s Distinct Capabilities

Reputation

Netflix, through consistent advertising and
marketing, has maintained its reputation of high-quality content. The use of an
introductory offer, one free month’s subscription, gives subscribers the
opportunity to experience what Netflix has to offer. Further, the professional
accreditation received for the quality original content gives support to claims
of a superior service.

Innovation

Netflix’s original competitive advantage
through providing a streaming service has unfortunately been eroded through
imitation. Amazon, Hulu and others have entered the market. There key advantage
to retain subscribers is the recommendation algorithm which tailors the content
suggestions based on past viewing history and associated content.

Architecture

Netflix has a distinct advantage over its
rivals through the strong relationship with current subscribers. In mature
markets as the US, Netflix has saturated the market. Crucially, it is not
losing subscribers to competitors. Once Netflix maintains customer
satisfaction, subscribers will be less willing to pay for two on-demand
subscriptions restricting the growth of competitors.

The relationship with those above and below
on the vertical chain and is an area of weakness. They are under the mercy of
the creators and the prices they set for their content. They have no real
bargaining power to try and gain the best price possible. Further, they are
reliant on ISP’s to deliver the content and the Net Neutrality Order to keep
the quality to Netflix’s desired standard.