Monday, May 28, 2012

Netflix's Strategies

Last July, Netflix announced that it was splitting its online streaming video and mail-order DVD services, and charging a monthly fee of $7.99 for each ($15.98 total) whereas the former package of the two cost only $9.99 per month.  The DVD service was dubbed Qwikster, and it only lasted until October before Netflix decided to reunite the two services while maintaining the price increases.  According to the Wall Street Journal article linked below, Netflix fell prey to the "growth trap" mentioned in Porter's "What Is Strategy?"  By attempting to differentiate its own products, Netflix lost many subscribers of the service due to price sensitivity.  Realizing this to be a major strategic mistake, Neflix removed the unnecessary differentiation before too much additional damage was done.

Although Netflix was surprised by the high number of subscribers it lost due to the price hike, it declared that the company's long-term strategy would eventually return it to its former glory and beyond.  It seems that Netflix fully understood the inevitable trade-offs that it would face in making such a major change, and so it is taking advantage of organizational fit by using one activity to offset the limitations of another.  The CNET article indicates that Netflix is using better merchandising to remove the negative PR surrounding the brand that was generated from the company's recent changes and which will "dissipate over time."  Indeed, it appears that Netflix is already advancing toward a full recovery, since roughly one third of it's new customers are actually returning subscribers who left after the announcement of the changes.

We can also see how Netflix's experience in the past year has been shaped by Porter's Five Competitive Forces.  The catalyst for the original price increase was the bargaining power of suppliers -- the movie studios and television networks.  The CNN Money article demonstrates why the cost for Netflix to obtain the rights to various films and TV shows to include in its services became so high that the company was forced to transfer the burden of the increased costs to its customers.  The studios and networks simply wanted a bigger piece of the pie.

At first, it appeared that Netflix's customers had bargaining power as many of them canceled their subscriptions.  However, the recent trend of former customers returning to Netflix implies that consumers simply cannot find the same services elsewhere, or at least not at a similar price.  Thus, the threat of substitute products or services, such as cable television and on-demand services, seems minor as many price-sensitive consumers do not have a better value option than Netflix, even in spite of its price increase.  New entrants to the industry would probably be vulnerable to the same strong-arm negotiating tactics employed by the studios and networks, so they are not much of a threat, either.  Finally, for much the same reason that new entrants are deterred from breaking into the industry, Netflix does not yet have a rival with a comparably deep library of media to provide with its service, so it is still able to thrive and stabilize itself even in the face of significant strategic blunders.

Will Netflix be able to overcome similar mistakes in the future or does it lack the strategic focus to remain a top player in such a rapidly changing industry?

Wall Street Journal:


CNN Money:

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