Netflix and Movie Rental Industry Case Questions – part 2
Netflixand Movie Rental Industry Case Questions – part 2
1.)Lookat exhibit 2. Make one graph like the one below (or another effectivestyle) for Netflix showing for each of the years 2007, 2009, 2010 and2011:a.Revenue (also called Sales) b.Net Income/Net Loss (also called Profit or Loss)c.Net Profit Margin % (Net Income divided by Revenue x 100. Thismeasures how many cents they keep in profit for every dollar theycollect in revenue)
Figure1 clearly shows the Netflix’s revenue and net income continue toincrease from 2007 to 2011. Its Net Profit margin however starteddeclining from 2010 to 2011. Notice also that its expenses itsrevenue is relatively higher than the net income indicating that itis spending a he amount of capital in exchange for a small profit.
Figure1: Revenue, Net Income, and Net Profit Margin of Netflix in 2007,2009, 2010, and 2011
2.Think about your answer to questions from Part One of these casequestions about the driving forces, KSFs and the Movie RentalIndustry of the future and Netflix’s current strategy. Looking atthe movie rental industry moving forward towards the future, doesNetflix need a new strategy or can they modify what they are doing?Explain.
TheKey Success Factors which I listed in part one are: Securing dealswith movie suppliers, competitive and cheap customer package, andtechnology. Furthermore looking into the movie rental industry whichI also mentioned in part one to be offering much cheaper rentals orpackages will use advance technologies like movies which could beuploaded in hand held devices, and is dominated by large companies. With these two part one answer, it very obvious that Netflix needs tochange or modify what they are doing. First, its DVD is becoming moreand more obsolete which means people will start to like more thestreaming videos of the VODs. Netflix must, therefore focus more onimproving its streaming videos services. Moreover, notice that it isusing relatively high capital to get very little revenue (see figure1), this may be due to the delivery expenses for the DVDs and itsinability to secure contracts with movie suppliers.
3.What are some specific things that Netflix should do differently tocontinue to compete successfully and earn profits in the new movierental industry of today and the future?
Netflixmust, in order to survive the movie rentals business, stop consumingtoo much capital for a very small profit which can be done byfocusing more on VODs or streaming videos and securing more contractswith movie suppliers to be able to control the price moreefficiently. It must also try to make its movies available for handheld devices. This means that it must acquire a technology such asapplications which can be downloaded into hand help devices likesmartphones which can be used to watch streaming movies.
4.If management agrees with your ideas described in question #3, whatwould be the top 4-5 action steps to implement your recommended plansand turn them into reality? Be clear on what you mean.
Step1: Minimize marketing of the DVDs and focus on VODs or streamingvideos – this means it should shift its focus on streaming videoswithout dissatisfying the service in currently provides for DVDsubscribers. This action will minimize its cost or expenses.
Step2:Establish contracts with Movie Suppliers – It must have a lot ofmovies in store for its customers at a low price. Note that it hadalready lost a contract with Starz, which is not a good thing as itaffected its pricing of movies. The contract should be long enough,such as 50 years or so and within this contract the price should beindicated including possible limits of increase.
Step3: Acquire a more efficient technology to distribute its movies –this means that Netflix must invest on the most advanced technologieswhich can allow it to live stream movies faster than anyone else inthe movie rentals industry. Examples of such technologies may includeWiFi devices, fiber optics, etc.
Step4: Start modifying the format of its movies so that they can be sentto hand held devices such as smartphones – this means that Netflixhas to start researching on the many different apps which people areusing that will be compatible with what technology they have fortheir movies.
5.Preparea 200-300 word message that you could leave on a voicemail to Netflixtop management:
Ihave evaluated your company and situation, and I would like meet withyou to give you a summary of my ideas on how you can keep yourcompany competitive in the future: Here is a summary of myrecommendations: Inview with the amount of revenue Netflix has and the discrepancy ofthis revenue to its net income it would be advisable to reduce thecost that you spend for your DVD rentals. This means that you need tocut spending on this products that you provide and shifting that costto improving your VODs or live stream products. This also means thatyou will need to focus on getting more movies into the live stream sothat you will have a large repository or greater list of moviesselections for VODs. You will also need to make long lastingcontracts with your suppliers as this will be necessary to furtherlower or at least avoid the rapid increase in movie acquisitioncosts. Note that there has already been an instance when you havelost a the renewal of a contract with Starz, hence it is necessarythat you avoid such from happening again. You will also need to avoidmaking too much change in the package that you provide your client.You do not need to separate DVD with VODs as the customer willautomatically like your VODs when you shift your focus to it and awayfrom DVD. You must also be prepared for the future trend in the movierental industry, which is the proliferation of the live stream moviesover DVDs and their easy accessibility through hand held devices likesmart phones. In line with this you must acquire differenttechnologies to make you ready to live stream movies at a much fasterrate, larger coverage area, and on different devices. Theseinitiatives will greatly improve your competitiveness as they willimprove the quality of your products without taking much burden inexpenses or cost. You must do this as soon as possible in order toobtain the upper hand advantage against your competitors.
Thankyou and I look forward to discussing these ideas in more detail inperson.