Netflix Case

Since the publishing of this case, Netflix has entered the video on demand (VOD) market. What is your analysis of how Netflix has attempted to update their business model with VOD?

Introduction - Netflix, Inc.is the world's largest online movie rental service, providing more than five million subscribers access to over 70,000 DVD titles. The company offers a variety of subscription plans, starting at $4.99 a month (current rate). There are no due dates, no late fees and no shipping fees. Netflix can reach more than 90 percent of its subscribers with generally one business-day delivery. Netflix offers personalized movie recommendations to its members and has more than one billion movie ratings. Netflix also allows members to share and recommend movies to one another through its FriendsSM feature.

Netflix Business Model – Netflix was the first in the industry to offer DVD’s. A Subscription service for unlimited mail order DVD rentals with no late fees. Netflix has changed the movie rentals business by eliminating late or extended viewing fees and allowing consumers to watch movies on their schedule. In short, I would call it a ‘Rent by mail business model’. This model has allowed it to thrive in the rental industry amidst big competitor ‘Blockbuster’.

Entry into the VOD Market & Netflix Business Model - On January 16, 2007, Netflix announced that its Video On Demand service was finally available that allowed people to immediately watch movies and television series on their personal computers. As stated in the article, Hastings repeatedly stated that Netflix’s purpose was not to provide DVD rentals through the Internet but rather to allow for the best home video viewing for its customers. Additionally, pursuing this strategy was vital to Netflix’s future, because it realized that as new innovations in technology become popular, the DVD-rental subset of the home movie market will shrink, while the downloading and streaming of movies will eventually come to dominate the majority of this market. Netflix realized this change in the market and entry into VOD was a significant enhancement to its’ service where subscribers still continued to receive DVDs by mail and also had the additional option of instantly watching the movies on their PCs. Through this initiative Netflix hoped to keep itself relevant in the video industry. There was no additional charge for the service, but the number of hours of VOD movies one could watch depended on his / her current service plan. In mid 2007, Netflix launched a new service called ‘Watch now’ that allowed films to be viewed directly on the Internet. Netflix quickly emerged as the leader for web rentals and with the introduction of VOD they continued to capture the instant download market as well. Watch now started with about 1,000 films and TV titles.

Downloading and watching movies online could be a painful process due to the amount of time one has to wait for the downloads. Watch now did not require users to wait until a movie is downloaded, which could take considerable time even on high-speed Internet hookups. Instead, Netflix used a real-time playback technology that allowed users to begin watching the movie within 10 to 15 seconds after downloading begins. This also allowed Netflix to differentiate and position itself in it’s current market. Based on my research few customers have commented that viewing Netflix movies works a lot like viewing standard DVD’s. Clicking on the “play” button on any of the shows in the Netflix library launches the Netflix Movie viewer in an explorer window. The movie will start in less time. And most importantly, all this is available at no additional cost to the users. Therefore, to maintain their current business model of ‘no late fee and allowing viewers to watch on their schedule’ Netflix included the ability to watch movies and TV episodes streamed from Netflix to PC or Mac with all plans.

A basic plan at Netflix costs $4.99(reference www.netflix.com), with this plan a customer could rent 1 DVD at a time and instantly watch up to 2 hours of movies (some new releases) online for free. With other unlimited plans they can watch more but at an increased cost. Therefore, this clearly indicates that Netflix has targeted their existing customer base to leverage the VOD service. Netflix has efficiently used their current business model and has offered the VOD service as a bonus / complementary product to the DVDs and has included it in the membership. This will serve two purposes: 1) Make the existing customers happy 2) Also, will slowly get them used to the ‘Watch Now’ program (will help in transition when Netflix fully migrates to VOD in the future). Although this has impacted the DVD rental business, in most cases the Video on demand service has served to be a complementary unique product and reinforced customers’ satisfaction. Although few customers have complained about connectivity and content issues (which will improve over the coming years with technology enhancements), given its first mover advantage with DVD mail rentals Netflix stands a very good chance to become a dominant player in the VOD market. Netflix’s current position demonstrates the enduring value of being first. Finally, Netflix has made the right choice with the introduction of the Video on demand service with its DVD rentals. It has proved itself to the market that its’ business model works; therefore it is a matter of continuous learning, improvement that will help Netflix to slowly migrate to its VOD service from DVD rentals and further update its business model.