Case Analysis: Netflix
1.0 Problem Statement:
This case analysis deals with “Loss of Revenues and declining growth of Netflix in the face of stiff competition.”
Founded in the year 1997 by Reed Hastings, the company started the DVD online service in 1999 and expanded rapidly to be the world’s largest Online DVD movie rental service in the year 2005, having 3.59 million subscribers as at the third quarter of 2005. The company has the exclusive advantage of proprietary software ‘Cinematch’ to provide subscribers with personalized movie recommendations.
The company has 37 regional shipping locations to efficiently manage the logistics of the DVDs. Netflix has eight different subscriptions plans ranging from $9.99 to $ 47.99 for the customers to choose from with no time limit for the return of the DVDs, of course subject to a maximum number of DVDs the subscriber can hold at any point of time. The Company faces the problem of decline in profits due to lower subscription prices. To combat the competition from the nearest rival Blockbusters Neflix had to lower the subscription in its premium segment. The decline in revenues had made the company to put on hold its expansion plans to UK and Canada.
The analysis of the case of Netflix presents three distinct problem areas relating to the structure and design of the organization which the company needs to concentrate on. They are:
3.1 Revision in subscription Rates:
The company was rather forced to lower its subscription rates to cope up with the competition from the rivals. The reduction being in the most sought segment of $ 21.99 plan, has severely affected the revenue realization of the company. As a result the cost of revenues rose to 59.71 percent for the first nine months period of the year 2005 as compared to 54.61 percent for the year 2004. This has caused a decline in the gross profit. There is no significant change in the operating expenses to total revenues. The percentage of operating expenses remains at 41.5 percent for 2004 and 40.2 percent for the first three quarters of 2005.
3.2 Number of Subscribers:
Though there is an increase in the number of subscribers the rate at which the subscriber list is expanding does not relate itself with the reduction in the subscription rates. This is evident from the fact that the subscriber acquisition cost has increased from $ 36.09 for the year 2004 to $ 36.92 for the broken period of 2005. In order to break even it is essential for the company to concentrate on increasing the number of subscriber base to result in enhanced rental revenues.
Addition to the subscribers is at 75.5 percent for the year 2004, whereas it stood at 37.6 percent for the first nine months of 2005. Even considering the estimated increase to 4 million subscribers at the end of 2005 the percentage addition would still remain at 53.25 percent which is not working to the advantage of the company in terms of revenues. This may be due to the presence of competitors as well as other modes available to the subscribers for obtaining movie DVDs.
Netflix has so far been only on the online rental of movie DVDs. The competition in this particular segment of the business is increasing with more players like Blockbusters and Green cine entering the business. Moreover the Video on Demand (VOD) and brick and mortar rental outlets like Gallery also pose a competition to Netflix’s business. Although it is estimated that the company would be able to get a subscriber network of 7 million by the end of the year 2007, unless the company takes steps to enhance its revenue from other sources still it may find it difficult to take advantage of the increased subscriber base.
The following are some of the issues that need to be attended to by the company Netflix to augment its revenue and the resultant profitability:
Rate of increase the number of subscribers is not commensurate to increase the earnings
The subscription rates are kept low to meet the competition which has caused an erosion in the earnings
The company is facing competition from companies who offer other modes of providing the entertainment options.
Some of the suggestions for improvement in the earnings and ensure the growth are:
Increase the number of subscribers by undertaking vigourous advertisement campaigns
Reduce the number of options for subscribers from the present 8 options to 4, by rationalizing the subscription rates and adopting modified subscription structures which will increase the earnings for the company
Have a look in to the other modes of offering DVDs by opening brick and mortar stores using the existing goodwill of the company. Additionally providing VOD services and rental of game DVDs may also be looked into.