Netflix

Case Study
BUS 550
The Contemporary Firm
Aaron Contreras
CSUCI
www.netflix.co
m
Agenda
Company
History
Company Financials
Five Influencing Forces
CineMatch
Netflixs Quantum Theory
Challenges
Conclusion
Who is Netflix
Netflix
is a internet TV company
providing online streaming content as
well as DVD/Blu Ray rentals direct to
home
CEO Reed Hastings
Main headquarters located in Los
Gatos, California
2,022 Employees at end of 2013
Company Timeline
1997
- NetFlix.com founded to offer online

movie rentals
1999 - Launches subscription and selling
service
1999 Secures $30M in investment capital
from Group Arnault
2000 - Launches personalized movie
recommendation service CineMatch
2002 - IPO with ~850,000 members
2006 Announces Netflix Prize $1M for 10%
improvement in recommendation accuracy
www.netflix.co
m
Company
Timeline, cont.
2007
Netflix introduces streaming

2008 Partners with consumer electronic
companies to incorporate Netflix streaming
on their devices
2010 Launches in Canada
2011 Launches in Latin America and
Caribbean
2011 Announces Qwikster a separation of
online streaming services and DVD rentals
2013 Original programing is started with
House of Cards
www.netflix.co
m
Company Financials
Company is traded under NFLX:NYSE currently valued $322.08

(4/26/14)
Had $4.3B in Revenues in 2013
Spent over $3.04B in content in 2013
As of Q1 2014 48M worldwide subscribers
Announcement of Qwikster results in a 60% devaluation of Netflix stock
Announcement of Qwikster
www.yahoo.finance
.com
Netflix evolved a progressive view

on culture and talent management
Personal Management
Hire the right people
Have them use their logic
If they hire the wrong person they part ways quickly
Performance Reviews
Elimination of Formal Performance Reviews
Implemented peer reviews
Team Rapport
Strategy is understood by the team
Company Culture
Knowledgeable employees
Understand the drivers of the business
Human Resource
Innovative approach
Vacation and Absences are not tracked
Five Competitive Forces on

Netflix
Bargaining
Power of
Suppliers
- Film industry
- Original Content
Developers
Threat of
Substitute
Products
- Pirated On-line
Content
- Gaming
Threat of new
entrants
- Cost of entry is
low
Rivalry of
competitor
s
- Amazon
Prime
- Hulu Plus
- Redbox
Bargaining
Power of new
buyers
- Services for
competitors is
relatively similar
Is Netflix threaten by new

entrants
Supply
side Economies of Scale
Cost relatively equal, lack of net neutrality may make it easier for smaller
firms
Demand-side benefits of Scale
Netflix large content library and extensive deals allows them to leverage deals
across the industry
Customer
Switching Cost
Relatively Low
Collaborative Filtering and Profiles increases consumer switching cost
Capital
Requirements
Large content libraries and original content drives up capital investment

Incumbency
Advantages
Collaborative Filtering Netflix has more history of collecting this data on

viewers
Unequal
access to distribution channels
Not highly impactful

Restrictive
government policy
Changes in policy on net neutrality could increase or decrease entrants
Power of suppliers
Netflix
has leverage content from suppliers that

otherwise would not provide profit
By Expanding their offering in the tail end of demand
increase Netflix profitability
Netflix also obtains independent films which are not
picked up by large film companies.
Licensing and windows play a large role in content
availability
Rivalry of Competitors
Netflix
Offers Original Content

Subscriptions - $119.88/yr10
www.netflix.co
m
Highly Personalized via CineMatch, Collaborative
Filtering and Profiles
Amazon
Prime

Subscription - $99/yr10
Some content available to purchase
www.amazon.c
om
Hulu
Plus
Subscription - $95.88/yr10
Original Content
Ad supported
Personalized via Recommendation Algorithms
Associated with Networks
Video
www.hulu.com
On-Demand (VOD)

Cost is variable
www.comcast.
com
www.timewarner.c
om
Threat of Substitute
Products
Netflix
is on the benefiting side of

substitution
On-line streaming is the substitute
product for in home DVD/Blu Rays as
these devices become commodities
Increased
access to content through

Piracy could be an influence for Netflix
Increase in gaming communities could
detract viewers of traditional format
into more interactive content
Recommendations
CineMatch
DVD
recommendations delivered based on

ratings
Initially launched as part of the DVD delivery service
Basic
Principle
Captured likes and dislikes of categories Romance,

Action, Foreign, etc.
Based on viewers ratings it would suggest movies
Linked to distribution center and availability
Claimed a 60% accuracy on selected options from
recommendations
Netflix Prize ($1M) was for the first to obtain a 10%
increase in accuracy
Final algorithm was not implemented
Collaborative Filtering Netflixs

Quantum Theory
Current
algorithms process petabytes of

information
This has led to over 76,000 alt-genres
Alt-genres are compilations of several larger genres
sliced into more specific targeted audiences and
tastes
Micro-tagging
is done by individuals trained

on Netflixs Quantum Theory document (34
pages) on how to micro-tag for consistency
Includes for all content measuring such things as
social acceptability of lead characters
Ending Type
Romance
A reverse engineered version of

Netflixs alt-genres categories
http://www.theatlantic.com/technology/archive/2014/01/how-netflix-reverse-engineeredhollywood/282679/
Profiles have enhanced the

ability to personalize content
Allowing
profiles allows for more specific viewing

which allow for less mash up of preferences
Urge
www.netflix.co
m
you to develop different profiles for different

timeframes
Daytime viewing
Weekend viewing
Linking
these profiles to Facebook allows for

further personalization as increased viewing
experiences also fostering a expanding network
Netflix faces a big challenge against

its future profitability and expansion
Obvious position for Netflix is net

neutrality
Netflixs
monitors
and publishes the
ISP providers with
the best primetime
delivery
Netflix entered into
a peering deal with
Comcast for an
undisclosed amount
Potential impact to
customer
satisfaction
Conclusions
Netflix
knows your viewing habits

better than you do
Competitors are developing with
slightly different business models
Firms will need to rely on original content
and licensing agreements to edge out the
competitors
Without
net neutrality larger streaming

firms may need a long term strategy
on profitability impact due to peering
fees
Questions
1.
What business decision resulted in a 60% stock devaluation

in Netflixs history?
a. Amazon Prime Launch
b. Qwikster Annoucement
c. Blockbuster On-line Launch
2.
What are potential substitutes for Netflix services/products?

a.
b.
c.
d.
3.
Amazon Prime
Hulu Plus
Gaming
Pirated Content
How can peering with ISPs affect Netflix customer service

experiences?
a. Slow internet speeds
b. Increase cost of subscriptions
c. Increase streaming performance
References
www.netflix.com
2. Netflix broke the rules and won according to stanford business school research. (2008,
Apr 16). Business Wire. Retrieved from
http://search.proquest.com/docview/444648479?accountid=10043
3. Mccord, P. (2014, Jan 20). How netflix reinvented HR. Businessline. Retrieved from
4. Seitz, P. (2013, Mar 13). Netflix feature will test limits of facebook sharing. Investor's
Business Daily. Retrieved from
5. Shalvey, K. (2013, Apr 12). Netflix files to disclose key data via social media some
investors may object follows up fast on SEC report saying facebook, twitter 'perfectly
suitable'. Investor's Business Daily. Retrieved from
6. The Pragmatic Theory solution to the Netflix Grand Prize, Martin Piotte, Martin Chabbert,
August 2009
7. http://www.businessinsider.com/amazon-prime-versus-netflix-versus-hulu-plus-2014-4
8. Netflix Case Study: David Becomes Goliath, www.gallaugher.com, Copyright 1997-2008,
John M. Gallaugher, Ph.D.
9. The Five Competitive Forces that Shape Strategy, Michael E. Porter, Harvard Business
Review
10.How Netflix Reverse Engineered Hollywood, The Atlantic, Alexis C. Madrigal, Jan 02
2014, http://www.theatlantic.com/technology/archive/2014/01/how-netflix-reverseengineered-hollywood/282679/
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Case Study

- NetFlix.com founded to offer online

Netflix introduces streaming

Company is traded under NFLX:NYSE currently valued $322.08

Netflix evolved a progressive view

Five Competitive Forces on

Is Netflix threaten by new

side Economies of Scale

Large content libraries and original content drives up capital investment

Collaborative Filtering Netflix has more history of collecting this data on

access to distribution channels

Not highly impactful

Changes in policy on net neutrality could increase or decrease entrants

has leverage content from suppliers that

Offers Original Content

Offers Original Content

Offers Original Content

is on the benefiting side of

access to content through

recommendations delivered based on

Captured likes and dislikes of categories Romance,

Collaborative Filtering Netflixs

algorithms process petabytes of

is done by individuals trained

A reverse engineered version of

Profiles have enhanced the

profiles allows for more specific viewing

you to develop different profiles for different

these profiles to Facebook allows for

Netflix faces a big challenge against

Obvious position for Netflix is net

knows your viewing habits

net neutrality larger streaming

What business decision resulted in a 60% stock devaluation

What are potential substitutes for Netflix services/products?

How can peering with ISPs affect Netflix customer service

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