ASSIGNMENT TITLE :NETFLIX
COMPANY BUSINESS MODEL ANALYSIS
GROUP ASSIGNMENT
Vaishnavi Paroha
1Anshuman
| Page Tiwari
NETFLIX
Rani Sahu
Introduction
E-business is the method of the future, and gradually Kiwis are adopting
it. This report focuses on an exploratory study of Netflix business model
with a digital enterprise context and its business activities. Moreover, its
mostly concentrate on the nature of the organization and the business
exercises in e-commerce. This report will analyze the efficiency of Netflix
working and proceeds with a overview of the company's revenue area
and cost structure furthermore also the ways to deal with value creation
from the point of view of the organization and for its customers.
Ultimately, the report finishes up with outlook on possible changes to
enhance the organization's value creation. There are some key issues
that can be a case to propose the organization to concentrate more on
the activity of the site and focus on significance of online networking .
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TABLE OF CONTENTS
INTRODUCTION......................................................................................2
TABLE OF CONTENTS...........................................................................3
BUSINESS BACKGROUND....................................................................4
INDUSTRY OVERVIEW..........................................................................5
REVENUE ANALYSIS.............................................................................6
COST ANALYSIS.....................................................................................9
VALUE CREATION................................................................................12
CONCLUSION........................................................................................14
REFERENCES.........................................................................................15
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BUSINESS BACKGROUND
Netflix, Inc. is a pay television over-the-top media service and American production
company that offers subscription-based video on demand from a library of films and
television series, 40% of which is original programming produced in-house. As of
October 2021, Netflix has over 214 million subscribers, including 74 million in the
United States and Canada, 70 million in Europe, the Middle East and Africa, 39
million in Latin America, and 30 million in Asia-Pacific.[10][11] It is available
worldwide except in mainland China (due to local restrictions), Syria, North Korea,
and Crimea (due to US sanctions). Netflix has played a prominent role
in independent film distribution, and is a member of the Motion Picture
Association (MPA).
Netflix was founded in 1997 by Reed Hastings and Marc Randolph in Scotts Valley,
California. Netflix initially both sold and rented DVDs by mail, but the sales were
eliminated within a year to focus on the DVD rental business. In 2007, Netflix
introduced streaming media and video on demand. The company expanded to Canada
in 2010, followed by Latin America and the Caribbean. Netflix entered the content
production industry in 2013, debuting its first series House of Cards. In January
2016, it expanded to an additional 130 countries and then operated in 190
countries.
The company is ranked 164th on the Fortune 500[20] and 284th on the Forbes Global
2000. It is the largest entertainment/media company by market capitalization. In
2021, Netflix was ranked as the eighth most trusted brand globally by Morning
Consult. During the 2010s, Netflix was the top-performing stock in the S&P 500 stock
market index, with a total return of 3,693%.
STAKEHOLDERS
Netflix tries to take into account everybody who has an overabundance
to broadband web access. It engages mostly grownups who are
excessively occupied, making it impossible to move out and search for
alluring banner. Netflix also focuses on people those are movie buffs and
individuals who want the most value for their money.
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INDUSTRY OVERVIEW
Netflix is a leading streaming video on demand (SVOD) company operating in 190
countries with 130 million subscribers . The product and revenue model in video
streaming industry is very tangible and direct. Users watch TV shows, movies (on-
demand) or any video content on variety of devices e.g. Tablets, Laptops, Smart
phones. Netflix, being one of the early pioneers in this industry has a managed to
make a firm user base and as well as a business model that generates a
substantial revenue for the firm. The video streaming industry is growing and is
expected to grow at approximately USD 82 Billion by 2023, at 17% of compound
annual growth rate (CAGR) between 2017 and 2023. As the prospect of the growth
is higher and some of the big market (like Asia-Pacific) remains relatively
unexplored so, the video streaming space is increasingly becoming a competitive
industry. Companies like Amazon (Amazon Prime/Fire TV), Hulu, HBO, Google
(YouTube Premium) have entered the market or adapted their existing
infrastructure to enter the market. And other companies e.g. Apple, Disney are
planning to enter the market. The barrier to entry in streaming space is low. There
is no “entry blocking” patented technology or any regulation that hinders the
entrance of new player. Environment analysis of SVOD industry in presented in
Exhibit 1. With no differentiation in the distribution of the content, subscription
(annual or monthly) and business model, the video streaming industry is rapidly
converging towards becoming an entertainment or media industry or a content
generation industry. Users do not incur any switching cost and can quickly change
the provider. In such scenarios, the content is and will be the sole differentiator in
SVOD space. There two ways the companies get the content, they license it
already produced content (popular movies, series etc.) from the studio or they
make their own series and movies. With the licensed product, the content remains
with the company only for a fixed time. So, there are limited popular content with no
exclusivity. Besides, there are contractual obligation (like only for certain region,
countries) that company must adhere, and this hinders the same user access and
experience across the platform. The content provider companies like Disney
themselves are entering into SVOD space and will pull out their content from other
SVOD providers . This is the reason that Netflix and other competitors are making
their own shows and movies. The company needs a quality content to entice the
user to them. And, this demand and creation of “original” content is expansive and
there is no guarantee that every new shows and movies will be received the user
favorably. Even if the new content is popular, there is only fixed shelf life for the
content. Most content remain popular only during first 6–12 months. Then, there is
piracy, one of the biggest threats to SVOD. It quickly starts eating into the potential
revenue .
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BUSINESS MODEL
Netflix business model canvas is made of these standard segments
VALUE PROPOSITIONS
CUSTOMER SEGMENTS
CHANNELS
CUSTOMER RELATIONSHIPS
REVENUE STREAMS
KEY RESOURCES:
KEY ACTIVITIES:
KEY PARTNERS:
COST STRUCTURE
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The image below will give the detailed parameters falling under each segment .
Convenience
Revenue Analysis
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In the third quarter of 2021, Netflix generated total revenue of nearly 7.5 billion U.S.
dollars, up from about 6.44 billion in the corresponding quarter of 2020. The
company's annual revenue in 2020 amounted to almost 25 billion U.S. dollars,
continuing the impressive year-on-year growth Netflix has enjoyed over the last
decade.
Netflix’s global position
Netflix’s revenue has been heavily impacted by its ever-growing global subscriber
base. The leading Netflix market is the United States, and the service is also
incredibly popular in Canada and Scandinavia. Netflix has also
significantly increased its licensed and produced content assets since 2016.
Despite concerns among investors that the company’s content spend was
negatively affecting cash flow, Netflix’s plans to amortize its content assets long-
term along with generating revenue from other sources such as licensing and
merchandise should ensure the company’s future profitability.
Netflix’s original content
Netflix is also fortunate in that many of its original shows have been a hit with
consumers across the globe. Shows such as ‘Orange is the New Black’, ‘Black
Mirror’ and ‘House of Cards’ won the hearts of subscribers long ago, but newer
content such as ‘Bridgerton’ and ‘The Crown’ have also been favorably reviewed
and proved popular among users.
Netflix Revenue Model
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Netflix is one of the current pioneers of subscription-based content. It runs on
a Subscription Video on Demand (SVOD) model. Subscribers pay for a monthly plan
and are given access to a vast library of media—any time, anywhere. Thus,
subscriptions are Netflix’s main source of revenue.
But unlike apps like Spotify which also runs on premium subscription, there’s no
free option in Netflix. This means all members are paying for the content they want
to watch. Users enjoy the convenience of ad-free entertainment, although ad
trials have taken place recently.
It also has a DVD rental on a subscription basis, but only the streaming side of the
business will be discussed in this blog.
Pricing strategy of Netflix
Netflix offers different prices based on the quality of video required- Basic,
Standard and Premium. Generally, it provides the first month of subscription for
free. Basic with standard resolution is $7.99 a month, but it can only be used one
device at a time. On the other hand, for $10.99 a month, one gets HD video on two
devices, and shelling out $13.99 a month offers Ultra HD streaming on four
devices. Additionally, opting in for Netflix’s DVD service will be costly- with their
Premium service, as it will be $30 a month when all is said and done.
The diagram below shows the structure of Netflix pricing.
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Netflix Revenue
Growth
There are a number of risks involved with the concerned revenue
component. Netflix is completely dependent on its content streaming
and the subscribers for the revenue generation. However there are
some weaknesses of the company that could affect the total revenue of
the company.
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They are ;
1) Netflix has a big window of time since when the movie is
launched to when it is been adopted by the Netflix library.
Customers have to wait for 28 days to access the content unlike
its competitors which affects the revenue of the company as a
whole.
2) Contractual restrictions on streaming content by the content
providers limits the expansion of the company
There are also some opportunities associated with the revenue component.
1)
The component has a scope of more expansion in the international
market.
2)
Netflix has opportunity of growth in various internet streaming
services which has been untapped by them.
In a nutshell, Netflix is one of the best companies in streaming
media which has been growing at a rapid scale since it first
started. It has some revenue components which if evaluated
with its risks and opportunities could help maintain the success
graph of the company as a whole.
COST ANALYSIS
Netflix spent $607 million, $472 million, and $270 million on marketing,
technology and development, and general and administrative expenses
respectively. Here are the Netflix’s key costs and operating expenses
areas:
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Cost of Revenue:
Information from the income statement usually gains the most attention from the
media when the company’s report quarterly and annual earnings. Income
statement reports will most often focus on a company’s revenue, net income, and
earnings per share, which is usually projected by the company’s sell-side industry
analysts.
The income statement can be broken down into three parts: direct, indirect, and
capital. Revenue is the top line sales for the company during the reporting period. It
is the most direct aspect of the income statement and immediately provides an
assessment of the company’s marketplace performance. Here we will look at the
income statement through the first three quarters for Netflix. Their company
revenue through the third quarter of 2018 was $11.61 billion. This increased from
$8.41 billion for a total percentage increase of 38%. Netflix had direct revenue
costs (costs of goods sold) of $6.898 billion, leaving them with gross profit for the
nine months of $4.71 billion. This equates to a gross profit margin of 41%, which is
slightly higher than their trailing twelve-month (TTM) average of 38%.
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Next, we move on to their indirect costs, which include marketing, technology and
development, and general and administrative. These are costs that are spread
across all of their revenue. In 2018, the company has been increasing indirect
costs with the greatest increase in marketing at 68%. Subtracting the indirect costs
from the gross profit gives us operating income, also known as earnings before
interest and tax (EBIT). EBIT for Netflix was $1.4 billion, an increase of 134% from
2017.
Financial Risk
The financial statements provide important financial data on every aspect of a
business (Kenton). Companies use their financial statements to manage the
operations of their business and also to provide transparency to shareholders. To
begin the financial analysis process, We will compare the income statements and
balance sheets over the past 5 years (2016-2020) for Netflix, INC. I will start by
analyzing the income statements and balance sheets using a horizontal analysis.
The financial statements can be used to evaluate the performance of a firm and to
compare percent changes over the years. All of the data used for the financial
analysis of Netflix, INC can be found in the consolidated income statement and
balance sheet found below. All of the data was found on Netflix.com.
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Value Creation
Current Approach:
What is interesting about this business model is that this form of interactive
experience offers new data insights for companies such as Netflix. According to
Damiani (2019), Netflix uses the gathered data from the user participation to create
an internal programmatic marketing infrastructure. Since the viewers need to make
real-life decisions about for example their product preference (such as the choice
between the cereals), musical taste and engagement with human behavior, an
individual personalized pattern can be discovered. Moreover, how users handle
certain decisions (for example if Stefan has to jump off the balcony) offer insight
about what the viewers want out of a story and what they want to see the character
in a story do (Damiani, 2019).
By analyzing this data, Netflix could even better personalize the content, but also
associate products with specific content or demographics. An example that
Damiani (2019) mentions is that the frosted flakes cereals could be associated
with, for example, 18 to 24 years old men. This way, effective targeted advertising
could take place. Another interesting part of the business model is that Netflix could
work together with different brands to test their product designs. Think of the
already described example of the breakfast cereal boxes as shown to the viewer
with two different box covers.
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Internal organizational perspective:
Netflix Inc.’s organizational structure is hierarchical but with modifications that
account for business flexibility and responsiveness to global market changes.
Through this corporate structure, the company is able to continually evolve to offer
original entertainment content and on-demand media streaming service that attract
target customers around the world. Thus, the organizational structure allows for the
achievement of Netflix Inc.’s corporate mission statement and corporate vision
statement, which point to the strategic goal of leadership in the online
entertainment industry. A firm’s organizational structure is the practical
manifestation of organizational design elements that influence how various
components of the business function and work together. In this business analysis
case, Netflix’s structural framework provides the necessary form and composition
to ensure that the business responds well to changes in consumer preferences.
Through its corporate structure, the online enterprise keeps its corporate
headquarters up-to-date with operational concerns that require changes in strategic
management direction.
Netflix Inc.’s corporate structure is based on the business need to make rapid
decisions as a way to respond to changes in the online entertainment market. This
organizational structure allows the company to effectively perform against strong
competitors, such as Amazon, Walmart, Apple, YouTube (Google), Disney, and
HBO, among others. Netflix Inc.’s business model, generic strategy for competitive
advantage, and intensive growth strategies are all linked to the company’s
corporate structure and how its configuration supports strategic implementations .
External Customer Perspective:
has designed customer-friendly platform which offers:
Self-Setup: Netflix platform was originally designed to ensure that it is simple
Netflix and easy to use. Developers of the website ensured to associate
elements and themes that serve, promotes friendliness and provides self-setup.
Unbelievable Customer Experience: Customers can solve their queries by
reaching the Netflix team through website portal, emailing enquiries and
directly reaching the representative on call or live chat.
Social Media Channels: Netflix also engages its audience through social
media platforms such as Facebook, Instagram, LinkedIn. It advertises, offers
deals to gain the high attraction customers and enhance customer base.
Netflix Gift Cards: Netflix offers its customers special promotional discounts
and other gift cards as a part of their subscription plan.
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Value Creation in next 5 to 10 years.
No crystal ball is perfect, but you have to like Netflix's (NASDAQ:NFLX) chances of
becoming a much larger force in 2026 than it is right now. Just think of how far the
leading premium streaming service has come in the five previous years.
Netflix had just 74.8 million streaming subscribers worldwide at the end of 2015.
Five years later it's reaching a global audience of 203.7 million paying homes. Five
years ago it was generating roughly double the amount of revenue in the U.S. as it
was internationally. Now the majority of its subscribers and revenue generation hail
from abroad. There is still a lot of digital real estate left to conquer, so let's take a
look at where Netflix might be in five years.
Conclusion
In conclusion, Netflix has been extremely 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. The comparison to
Blockbuster is important, as they were a company that failed to adapt and didn’t
foresee the impact the internet would have on the movie rental industry
(Kellmurray, n.d.) Netflix was then able to gain customer loyalty by providing things
Blockbuster didn’t, such as no late fees and only needing to go to the mailbox to
get the DVD (Kellmurray, n.d). When the popularity of online streaming grew,
Netflix embraced the change and used it to their advantage to become the
company they are today.
The long tail theory has been one of the most important factors for the success of
Netflix. Their ability to provide significantly more content than any physical DVD
rental store has allowed them the continuously gain customers. By being a purely
internet based service, Netflix has benefited from e-commerce advantages such as
reduced costs and the expansion of the marketplace. In 2015, 10 billion hours a
month were spent watching Netflix (Smith, 2015). This shows that it has been
effective in the attention economy despite the number of competitors and other
options providing the same or similar material. It can therefore be concluded that by
optimising things such as the long tail, the subscription business model and
network effects, Netflix has developed over time to become a successful and
attention gaining business in the attention economy.
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REFERENCES
Mikhalkina, T. (2014). Netflix Business Model. London: Cass Business School.
Popper, B. (2016, January 19). netflix-q4-2015-earnings. Retrieved from
theverge: http://www.theverge.com/2016/1/19/10790282/netflix-q4-
2015-earnings
Statista. (2016, July). quarterly-number-of-netflix-streaming-subscribers-
worldwide. Retrieved from statista:
https://www.statista.com/statistics/250934/quarterly- number-of-
netflix-streaming-subscribers-worldwide/
Williams.T. (2016) Netflix’s weak subscriber growth is just a blip.
Retrieved from: http://www.marketwatch.com/story/netflix-is-improving-
earnings-revenue-at-the-cost- of-subscribers-2016-07-19
Rosenfeld. E.(2016) Netflix beats on earnings, but plunges after weak
guidance, Retrieved from:
http://www.cnbc.com/2016/04/18/netflix-reports-first-quarter-2016-results.html
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