Marketing Challenges and Opportunities in Digital Media: Case Study of Netflix

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Abstract

Media consumption across the globe is progressively happening in digital formats. The surge in the number of devices capable of supporting digital media along with increasing internet access speed, has delivered consumers with an option to access the media content of his choice be it data, entertainment or social activity anytime, anyplace. Media consumption in the world has shown marvelous increase and has seen a momentous jump from traditional media to new (digital) media. The rise of digital media players such as Netflix, Hulu, Amazon etc. are challenging the traditionally maintained supremacy of the television as the main entertainment hub for today’s audiences it’s all about immediacy and mobility, the content they are looking for must be just a click away to fit their needs. Now everything is possible. Maybe you want to watch an episode of your favorite show when you are traveling, or maybe each member of your family wants to watch something different in a separate room of the house. In this project, we aim to study and analyze the marketing strategies of digital media company Netflix and how the rise of Netflix is challenging the conventional ways like T.V and cinema. Additionally, we’ll also study the challenges faced by these digital media companies and come up with solutions for the existing marketing challenges.

Introduction

Video Streaming and broadband connections help users around the globe download and watch large video files from the comfort of their homes. Taking benefit of this technology, the American company Netflix launched a video streaming website on 2009 where users could watch the most recent Television episodes and Hollywood Blockbusters. Netflix changed content consumption models in the entertainment industry and led to the vanishing of the mainstream video rental store in North America.

For today’s audiences it’s all about proximity and mobility, the content they are looking for must be just a click away to fit their needs. Now everything is possible. Maybe you want to watch an episode of your favorite show when you are traveling, or maybe each member of your family wants to watch something different in a separate room of the house.

All of these demands are being fulfilled with the help of video streaming as well as the proliferation of devices that gives the user access to it. Now if you want to play movies, music or watch an episode of your favorite TV show you can easily do it wherever you may be.

If we want to completely know the impact of video streaming in society and the entertainment industry we must first look at the technological progressions that paved the road so companies and services like Netflix, HBO or Prime could become successful.

Literature review

Over time, the theory of disruptive innovation established by Clayton Christensen, in 1997, has often been used to explain the implications of all disruptive innovations; however, Markides (2006) and McGahan (2004) argue that even though different disruptive innovations share many similarities, there are differences between them. Therefore, understanding what kind of disruptive innovation, at hand, we are looking at is the key to successfully determine what its implications are for the market. Markides (2006) defines two finer categories of disruptive innovation – namely, business model innovation and radical innovations. In this framework, business-model innovation occurs when the current product or service and the way it is delivered to the consumers are being redefined, and essential innovations represent new-to-the-world services. As Markides (2006) explains, business-model innovations usually broaden the market size by either attracting completely new customers and/or by encouraging existing customers to spend more. If successful, the growth of these new business-models over time increases the attention of established players so much that they cannot afford not to respond to these new “players”. Radical Innovations on the other hand create new-to-the-world products/services that disrupt prevailing value propositions, consumer habits and undermine the competences and the core assets, which the industry is built on (Markides, 2006).

The reasons and allegations of unruly innovations have been further broadened by several other authors as well. For example Yoffie (1997) explains that market entry is more likely to happen through creative mixtures of complementary technologies and with digital convergence these new technologies can have important implications for industry structures (Dowling, Lechner, Thielmann, 1998). While disruptive innovations often create difficulties for established incumbents, as the modest environment changes, Markides (2006) and Charitou & Markides (2003) recognize that these strategic innovations are not necessarily destined to make traditional ways of competing totally obsolete. Though, to avoid losing market position, officials must find ways to cope with these changes.

The big question then becomes what allegations these strategic movements have for the industry structures. While online media services represent a fairly new industry segment, several scholars discuss the economic and competitive benefits of the Internet. For example, digital material goods and the Internet provided delivery system offer major competitive advantages over other media, for marginal costs are being lowered to insignificant levels and bundling can create extraordinary “economies of aggregation” (Shapiro & Varian, 1999; Bakos & Brynjolfsson, 2000). Also, the most important value of these online services lies in their size to provide enhanced services for both consumers and suppliers. While there are several economic advantages of online market efficiency; some argue that improved product features made available through electronic markets can have more significant impact on consumer welfare gains (Brynjolfsson, Smith and Hu, 2002).

Strategic issues

As society and science technology develops, the Internet has begun to change people’s daily lives, such as the ways of study, communication and entertainment. Thus, in the situation online business has become very mutual. Netflix was online business, founded by Hastings in 1997. Its service item was online subscription-based DVD rentals. In the process of development, Netflix existed seven main strategic issues:

Firstly, Netflix ignored the actual situation and chose the similar business model with the other famous internet brands like eBay, Amazon. Because of competition advantages with other retailers, Netflix did not understand this until they found out the subscriber would not choose to return after their first involvement.

In order to develop the market, the firm has to spend much money to attract more new customers, and Netflix neglect the customer service, so that some early customers still lost by the sluggish service that Netflix offered.

Customers always like top new released movies which were the most expensive, thus increased the cost of Netflix. As a result, the viewers should expense more cost to gain new movie because of the strategy called “all you can eat”. And Netflix was always distribution the new movies package which has some old movies, but most viewers may not like them.

The number of new films was less than the desired one and it leaded to customer’s dissatisfaction. Due to there was no direct relationships with the major studios, Netflix only built its film library through relationships with a small number of movie distributors.

Due to Netflix set up a single distribution center in Sunnyvale and California, Post Office may spend a long time to mail on cross-country and then lead to extend delivery period. As a result, it lost a lot of customers.

According to the subscription-based services, customer loss is the key strategic issue of Netflix. Due to the high competitive market and raise of price, customer loss has become an urgent problem. Hence, customer acquisition, which includes developing new clients and retaining old clients, has become the main strategy to improve the business performance of the company.

The threat from video on demand (VOD) influences the performance of Netflix seriously. VOD can instantly provide viewers to watch latest movies. Therefore, they consider that VOD is more fitting than DVD rental and traditional video stores.

Swot analysis

Netflix’s Strengths analysis

Competitive ‘first-mover’ advantages comprise identifying strong brand name and knowledge base.

Online flexible organization and interface allows Netflix to preserve low operating expenditure whilst raising its subscription base. Netflix’s position in the industry will rise if movie downloads become the consumption technique of choice by viewers. Accordingly, Netflix’s subscribers increase, will lead to a decrease in marginal operating costs and increase in profits.

Netflix was able to achieve competitive benefits by offering low price, free shipping, large selection, and no late fee policy. This expands the levels of consumer satisfaction and referrals.

Netflix’s Market Power:

Netflix has been gaining control of a large area of the online DVD rental market and as a pioneer in this industry, Netflix has become a household brand.

Netflix presents a dedicated DVD recommendation facility based on the valuations and viewed films by its previous viewers. These references coupled with Netflix’s extensive DVD inventory enable consumers to learn beyond the video content of the prevailing video feature films. The service is branded and unique to Netflix services.

Presently, Netflix has a large, video content library. Netflix has more than 100,000 titles and 74 million discs, this including; TV shows, unclear movies, and new releases.

Netflix’s workforces have a desire for movies which translate into positive work ethic.

Netflix’s Weaknesses analysis:

Financial Resources.

Small Economic resources compared to competitors like Blockbuster.

Consumers have to wait at least one or two days to get their films.

Despite of that fact that Netflix present its services across the U.S and some other countries, Netflix has not expanded outside those few countries, which makes Netflix to depend on one or few markets. The globalization can benefit the Netflix’s business by increased opportunities for growth and strength.

Dependent on USPS as subject to stamp price increases, distribution channel to forward.

Subject to technological change.

Netflix’s product based on its services to their viewers, this means that the Netflix’s strength and growth will depend on the high Average Income per User, low consumer Acquisition Costs, and upholding low churn rate. These issues might be difficult to control due to the lack of transition costs in the video entertainment industry.

Netflix’s Opportunity analysis:

Netflix’s Potential Growth of Subscription

The business of DVD rental increases every year, and Netflix might tap into this growing and Growth into markets.

Growth of movie download ability.

Sustained international expansion of DVD internet access, acceptance of e-commerce and component sales.

A small meteor crashes into Blockbuster Corporate Headquarters

Netflix’s Threats Analysis:

Extremely Economical Market: The industry of DVD video covers a wide range of viewing prices, technologies, and services. There are some other streaming competitors that might theoretically present home video cheaper than Netflix. If those competitors surface with a better streaming ability and lower prices, Netflix’s business model might be sternly compromised.

Changeable Video Rental Industry: The industry is constantly emerging due to organizing and technological innovations. Prices, goods, and customer preferences are subject to rapid change, creating uneven and changeable markets where new competitor usually a threat and a suggestible business model is necessary to achieve.

Subject to direct attack by countless Netflix’s rivals, such as subscription products presented by HBO.

Finding and suggestions

Streaming giant Netflix had ‘a strong but not stellar’ second quarter, according to the company’s letter to shareholders. About 5.2 million viewers were added across the globe, down slightly from the same period last year, but still a big number in absolute terms. Relative to Netflix’s guidance calling for 6.2 million new subscribers, the company fell well short.

The miss on subscribers is a minor point in my book. What investors should really be concerned about is the company’s exploding marketing costs. Netflix not only gained fewer subscribers than expected in the second quarter, but it did so while spending far more to lock down each of those subscribers. Customer acquisition is getting a lot more expensive for the streaming company, particularly in the U.S.[image: NET1.png]

Even in the international side of the business, customer acquisition costs are rising. Netflix spent $278 million on marketing overseas in the second quarter, gaining 4.47 million new international subscribers. That’s around $72 per subscriber.

Saturation and Competition

Netflix invested $526.8 million into marketing during the second quarter, about 13.5% of its total income. That’s approximately double what the company spent in the second quarter of 2017. In spite of this heavy investing in marekting, Netflix gained slightly fewer subscribers overall, and far fewer in the U.S.

As recently as 2015, Netflix had to spend around $52 in marketing to acquire a new domestic streaming customer. That number has been rising ever since, partly the result of a shrinking pool of non-subscriber households.

The company spent $228 million on marketing in the U.S. in the second quarter and gained just 670,345 new viewers. That works out to a whopping $340 per subscriber. On a 12-month basis, which smooths things out a bit, Netflix’s domestic consumer acquisition value is now above $145.

Profits are taking a hit

This heavy marketing spending, along with Netflix’s debt-fueled content spree, are starting to knock down the company’s margins. Operating margin was 11.8% in the second quarter, down from 12.1% in the first quarter. Netflix’s guidance calls for that value to fall to 10.5% in third quarter.

Cash flow remains deeply negative. The company expects a free cash flow loss between $3 billion and $4 billion this year, a staggering range. Netflix plans to continue to fund its growth with junk bonds, despite its stock trading for more than 150 times earnings. Netflix is currently paying more than $100 million in interest quarterly, wiping out nearly one-quarter of its operational profit.

Solutions

Partner with Multichannel Television Provider – By partnering with a multichannel television provider to offer its streaming content alongside well- known premium channels such as HBO and Showtime, Netflix will likely be able to grow its subscriber base and help offset its churn rate. Additionally, such a move could help strengthen and broaden the Netflix band, as it would provide an additional communication channel to customers and also benefit for effects of association with premium names such as Prime.

Emulate HBO – Given the rising new content acquisition costs, and the likelihood that, given the market conditions, these costs will not depress in the foreseeable future, Netflix should consider imitating premium channel powerhouse HBO – rather than (or, in addition to) acquiring new (and expensive) content from movie studios, HBO creates its own content ex: Games Of Thrones.

Focus on Managing the Brand – Given the lack of satisfaction of customers over the decision to chop the business into separate by-mail and streaming units, along with an associated price increase, Netflix has some recovery work to perform to repair its brand. Attempting to brand the streaming service separately dilutes the strong Netflix brand

Continue International Expansion (But Keep a Diligent Eye Open) – Netflix stands to achieve important competitive advantage within the international arena with its aggressive enlargement plans. This advantage can come from Netflix size, connected economies of scale, and early mover edges in several international markets. The returns from a successful international expansion outweigh the risks; however, given the prices and time required to induce operationally healthy in a very given foreign market, Netflix should diligently manage its efforts and control its prices and be good and deliberate in its international growth plans.

Roll Out New Ideas In the Market – Netflix should come out with more of its new exclusive ideas. Example: Recently Netflix released an interactive movie, which focused on taking input from the viewer and let viewer decide how and in which direction the movie will proceed. This is a brilliant concept and can open the floodgates for Netflix in future as these types of innovations are very important to survive the vigorous competition in streaming industry.

Conclusion

In conclusion, Netflix has been successful in maturing and developing to adapt to the changing needs of customers over time. While their original DVD-by-mail business model was effective against competitors such as Blockbuster, the rise of internet streaming’s popularity meant they had to adjust, and the marketing challenges can be dealt in orderly and controlled fashion by focussing on brand management, team up with other giants like HBO, making your own content but with considerably less budget and international expansion with equal focus on expenditure. The continuous efforts on this area will help Netflix grow and they won’t incur loss, rather their profits will increase with balanced margins and systematic investments.

References

Amematekpo, O., Moreno, O., Pruneda, T., Runnion, B., and Troester J. (2011) Netflix. Northern Illinois University.
Fritz, B. (2009) Warner Bros. takes aim at Netflix along with Redbox. The Los Angeles Times Business. August 13.
Knowledge@Wharton (2009) Netflix: One Eye on the Present and Another on the Future. October, 28. http://knowledge.wharton.upenn.edu/article.cfm?articleid =2367
MSNBC (2009). Netflix third quarter earnings climb 48 percent.
Netflix, 10K (2009) Netflix’ Business.: http://yahoo.brand.edgaronline.com/EFX_dll/ EDGARpro.dll
Rothaermel, F. (2012) Strategic Management: Concepts and Cases. New York: McGraw-Hill.
Barna, D. (2014, January 3). Netflix Has 76,897 Ways To Label Your Taste. Retrieved from Refinary29 website: http://www.refinery29.com/2014/01/60036/netflix-has-76897- subgenres
Madrigal, A. (2014, January 2). Netflix Built Its Microgenres By Staring Into The American Soul. Retrieved from NPR website: http://www.npr.org/sections/alltechconsidered/ 2014/01/02/259128268/netflix-built-itsmicrogenres-by-staring-into-the-american-soul.

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