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Netflix’s Underperformance Analysis

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Netflix’s Underperformance Analysis | BUS 478 FINAL GROUP PROJECT | Instructor: Anthony Chan | Group MemberJackSandraJing(Ivy) Cong 301087222Gavin |

Table of Contents EXECUTIVE SUMMARY 1 BACKGROUND INFORMATION 3 CORE ISSUES 5 Price Pressures 5 Competition 5 International Expansion 6 ANALYSIS 6 Industry Analysis 6 Business Model 8 Company Analysis 9 Competitor Analysis 11 Amazon 11 Blockbuster 12 Redbox 13 ALTERNATIVES 13 Additions of Subscription Fee Package 14 Introduction of Netflix' Pay-For TV Channels 15 Domestic Elimination of DVD-mail-in Services in 16 Strategic Partnerships 17 International Expansion 19 Market Strategy 20 RECOMMENDATION 22 CONCLUSION 26 REFERENCES 26

Netflix is the world’s leading subscription service provider, offering its members access to an extravagant collection of TV shows and movies. Initially, the company offered its subscribers a low price, single monthly plan, consisting of both the unlimited Internet video streaming service and a DVD-mail-in service. Subscribers could “watch TV shows and movies anytime, anywhere.” In July 2011, Netflix eliminated the combined plan and separated the two services into their own monthly plans. If subscribers wanted to continue receiving both services, they were obliged to sign up for both the services separately, Consequently, the resulting price increase of the new “combined” plan significantly increased subscription cancellations and resulted in a 50% drop in Netflix’ share price over one month ( Yahoo Finance, 2013).

The Internet video streaming industry becoming increasingly more competitive, particularly due to the fact that many substitutes exist and number of competitors is increasing. In addition, the bargaining power of content providers is high; resulting in increasing cost of revenues for companies, thereby further increasing competition. Conversely, the DVD industry is stagnant, and soon about to decline as consumers start to migrate towards other sources of entertainment viewing. Competition is increasing as companies try to steal market share from each other to remain in the industry.

Netflix’ first-mover advantage as it pioneered the online subscription streaming has allowed it to continue outperforming its competition. The company was able to provide a great variety of TV shows and movies for both females and males of all ages. Moreover, its proprietary recommendation system further allows the company to personalize movie and TV choices to individuals’ subscribers, providing great customer value. Despite these competencies, Netflix suffered from a significant increase in subscription cancellations from upset and disappointed subscribers, after its price hike in 2011. The company is also experiencing significant cost pressures of acquiring new content from content providers and film studios.

Netflix needs to strongly focus on increasing its market share to ensure its success in the long run. There are multiple alternatives Netflix can consider in attempts to increase its market share and increase its profitability. First, Netflix could introduce additional subscription plans to its subscribers. It can decrease the price of its Blu-ray and game disc DVD rentals, and provide a bundle package, including both DVD-mail-in rentals and unlimited online streaming for a lower price. Secondly, a pay-for channel can be established through agreements with telecommunication companies, allowing for subscribers to watch Netflix content on their TVs, without the need of an internet connection. Third, the DVD-mail-in rental service could be eliminated in efforts to significantly decrease costs and increase profit margins. Fourth, strategic partnerships could be established with significant film studios providing consumer-desired content, airlines, among others. Fifth, Netflix could pursue international expansion to increase its market share abroad, however a majority of its content would need to be adapted to local tastes and preferences. Finally, actions could be taken to reach out to former subscribers, which cancelled their subscription due to the 2011 price increase, and offer them a discounted service price if they returned to Netlfix. Simultaneously, Netflix could offer its current subscribers incentives for referrals for new subscribers.
In order for Netflix to reach a broader and larger subscription base, and grow its market share, it needs to implement more than one of the six alternatives discussed. First, it is recommended for Netflix to expand its services internationally to take advantage of the significant opportunity to increase its streaming member growth abroad. Second, the introduction of the pay-for TV channel will allow the company to make its services available to a larger demographic and thus increase its market share in North America. Lastly, the elimination of the DVD-mail-in rentals is recommended as the Netflix pay-for TV channel will provide similar services. Although implementation costs of these alternatives may initially have a negative effect on profit margins, due to expansion and licensing, as member growth beings, and revenue increases, these alternatives will add to the overall profitability and growth of the company.

Netflix is the world’s leading internet subscription service for enjoying movies and TV shows (Datamonitor, 2011). It was founded in 1997 by Reed Hastings and Marc Randolph to provide online movie renting, and had their first IPO in 2002 (Netflix Inc., 2012, pg 3). During its first few years of business, Netflix used a pay-per-rental model which meant customers paid for each DVD rental separately. In late 1999, monthly subscriptions were further introduced to increase the attraction factor for potential subscribers (Ashley Henshaw). By providing these services, Netflix had the confidence to state that customers can “watch TV shows and movies anytime, anywhere,” on its website’s homepage (Netflix, 2013). The convenience of renting from your home, a policy of no late fees, and the motto of “No commitments, cancel anytime and no ads or commercials,” made Netflix very attractive.

After years of targeting consumers in the United States, Netflix decided to expand its business to Canada in 2010. Furthermore, it expanded into Latin America and the Caribbean in 2011; and, throughout the United Kingdom, Ireland, and Nordics in 2012 (Saba, 2011). Today, Netflix surpasses 30 million members globally (Netflix, 2013). According to the data, Netflix employed 2927 people of whom 579 were part-time employees as of December 31, 2011(CITE, I believe this is from the 2011 annual report!). (

Prior to July 2011, subscribers were able to receive both online streaming and DVD-mail-in rentals under a single plan with a single monthly fee. After this date however, the "hybrid" plan was split into a DVD only plan and a separate streaming plan. If subscribers wished to have both, they were forced to pay for each plan separately. This separation was the force that resulted in increased prices for subscribers who wished to have both services. Furthermore, in Q3 of 2011, the company further announced that it would be spinning off its DVD-mail-in service under a separate business, under the name Qwikster. These two events were the drivers of the significant increase in subscription cancellations in 2011.

Every company faces some issues regarding to their business strategies, and this is no exception for Netflix.

Price Pressures
Price pressure from the content providers is another core issue for Netflix. Netflix strongly relies on film studios, which means, without the license of the movie or TV show providers, it cannot be able to survive in the industry (Datamonitor, 2012). The licensing cost of Netflix rose from $406 million in 2010 to $2.32 billion in 2011 (Netflix, 2012). The cost hiking definitely puts a great amount of pressure on Netflix. If costs continue to increase, Netflix will need to increase the prices it charges its subscribers, possibly negatively affecting its market share if subscribers choose to switch to alternative sources of online streaming content

It is clear that Amazon, Apple, Hulu and Wal-Mart etc, these originally from other industries companies are trying to enter the online movie streaming business. Most of their streaming devices are using game consoles, TVs, and computers, which means that these companies have started working with game console companies to reach Netflix’ target group. These companies are targeting at the same customer segment, posing a great challenge for Netflix.

International Expansion
The costs of international expansion is quiet high, however its benefits are also great. Netflix has to pay compensation to foreign personnel and the licenses from the local firm studios and content providers. Due to the fact that movies and TV shows are more based on local culture, standardization strategy will not work for Netflix. Therefore, Netflix has to provide the local contents online in order to satisfy the varying local subscriber tastes. It extent of time necessary to form contracts and agreements with these providers can sometimes be unkown. Without the localization strategy, the demand will be low; thus, it is necessary for Netflix to use localization strategy. And the cost of localization will be very high.

Industry Analysis
The Internet video streaming industry is competitive. Growing demand for video streaming has been able to reduce rivalry among existing companies as they are able to increase their subscription base without taking market share away from their rivals. The industry is relatively consolidated; companies are interdependent, therefore actions of one company can have an impact on the market share of its rivals. As companies try to provide more value to their consumers, it terms of cost or differentiation, competition is bound to increase. As companies try to outbit each other for content from providers, licensing costs of content increases, thereby increasing competition. It is important to note that the streaming industry also competes with other industries for consumers. Cable TV, satellite TV, and video-on-demand appear to also be competitors.

Again, the power of license providers, is high as there are no other substitutes for their content. Furthermore, video streaming companies are unlikely to enter the providers’ industry and attempt to make their own content with the goal to lower prices as this would be extremely costly and require distinctive knowledge and skills.

Subscribers have moderate bargaining power as their switching costs are low. For example, subscribers are able to cancel their Netflix subscription any time they desire and switch to competitors. However, their choice of the subscription provider is limited as there are only few companies offering such online streaming services. In addition, the large customer base for such services reduces the bargaining leverage of single end buyers.

In the online streaming industry, many substitutes exist. Consumers can use cable TV, satellite TV, and video-on-demand services, not to mention free, legal or illegal, content downloadable straight of the Internet.

The threat of potential competitors entering the industry is low. Existing firms have brand recognition and loyalty as consumers prefer their services over those of a new entrant. They continuously advertise, have patent and copyright protection, and provide greater value to consumers. In addition, established economies of scale as they’re able to spread their costs and expenses, particularly licensing costs and marketing expenses, over a larger volume of subscriptions.

The DVD rental industry is also competitive, but much less so than the online streaming industry. As DVD rental demand is declining, competition between companies, such as Blockbuster and Red Box, in increasing as companies are trying to maintain their market share and revenues. Content providers have high bargaining power as they provide a product that has few, if any, substitutes. Similarly, to the streaming industry, the bargaining power of buyers is moderate. High number of substitutes exists, for example, streaming movies online, acquiring movie through video-on-demand, or using satellite TV. The threat of potential entry is low as the industry does not provide any growth opportunities and profits are relatively low, which is unattractive for potential entrants.

Business Model
In the past fourteen years, the success of Netflix's DVD rental business stemmed from its competitive business model, which was built of online recommendation systems, web-based movie selection, and prompt delivery. This model was superior to the traditional movie-rental store model (Blockbuster) since it provided customers with an overall greater value. It was more convenient, faster, and less costly for the customer. Simultaneously, this model provided a much greater selection of TV shows and movies. As a result of this advantage, Netflix established a significant brand image, sales volume, and profitability.

Today, the business model of Netflix has started to change. It has not only span off the DVDs rental operations into a separate business, called Qwikster, but Netlfix' online streaming has changed as well. In the recent years, Internet streaming has become a disruptive technology to the traditional DVD rental business. It is a technological change that can provide the same products to the customer but through a much more convenient and flexible manner. One important thing to note is that Netflix’ online streaming and DVD rental business models are very different. Netflix has occupied the leading position of the DVDs rental industry, while online streaming is highly competitive with no clear market leader at this point. Also, the technology is distinctive and the commercialization of the online streaming content requires a fundamentally different value chain and a completely different cost structure, perhaps Netflix has to establish a new business model. For these reasons, it may appear to justify Netflix's decision to split the divisions.

Company Analysis
Netflix unique value position provides an immense variety of TV shows and movies from which subscribers can choose and order from the convenience of their homes. Its DVD collection alone consist of 100,000 titles (CITE). Consequently, the company is able to satisfy the tastes and preferences of males and females of any age. Netflix’ proprietary personalized film recommendation system, based on existing customer knowledge, allows for customized film suggestions to better fit subscribers’ preferences. Such extensive individual customization increases the value of Netflix’ services. Unlike its competitors, the company provides a unique DVD-mail-in service in the US, where selected titles are mailed directly to subscribers’ homes. Netflix engages in substantial marketing initiatives to ensure they establish brand recognition and increase the number of subscriptions. Netflix promotes its services through various marketing programs, including online advertisements, TV and radio advertising, first month free trials, and other promotions with third parties. Its one month free trial allows them to expose potential subscribers to the convenience, flexibility and quickness of renting/watching on Netflix, which entices such individuals to join.

There seem to be an optimistic outlook for Netflix’ future member growth as video streaming is on a rise. According to the industry sources, the total video streams increased by more than 31.5 percent in January 2011 over the previous year (Datamonitor, 2011). In addition, Netflix announced the introduction of Netflix One-click remote. Netflix Major Consumer electronics manufacturers are to place the Netflix on-click button on remote controls (Datamonitor, 2011).This move increases convenience for subscribers as well as brand awareness of Netflix. Most importantly, Netflix should utilize its brand recognition and established position in the industry to acquire more recent and diversified content by forming deals with content providers and film studios.

On a more negative side, the split of the initial “hybrid” plan has significantly increased subscription cancellations (Netflix Inc., 2011, pg 23). Moreover, subscribers are migrating towards the single, low price plan, rather than the combined, higher priced plan which will lead to lower operating margins, unless member growth increases. Although the DVD-mail-in service was once a unique and demanded service, its declining demand may lead to an unprofitable service. Increasing costs of licensing from content providers further cuts into profit margins, unless it is passed onto consumers in terms of price hikes. In addition, Netflix was involved in litigation matters and claims, such as claims relating to business practices and patent infringement, and alleged anti-trust class action suits (Datamonitor, 2011). These legal issues can have a negative impact on the company’s brand image and dampen future growth.
Netflix' use of Amazon Web Services (AWS) for its cloud-based processing services could lead to potential problems as Amazon becomes one of its main competitors. Although only the retail side of Amazon competes with Netflix, one can never dismiss the thought that Amazon might use this to disrupt Neflix' operations to gain a competitive advantage over them. Although unlikely, the company should not dismiss the possibility of such an unethical act ever occuring.

Competitor Analysis
Netflix’s primary competitors are, Redbox and Blockbuster Video. They all provide videos at low price. Depth of movies offerings, convenience and price would be compared among the companies. Depth of movies variety offering, ease of movie order and return and monthly membership are the competitive advantages of Netflix.

* Amazon
Amazon competes with Netflix in the streaming video segment. There are 12,000 titles available in Amazon’s library. Many of these titles can be streamed to Amazon’s popular kindle. The price of streaming video services is $79.99 per year. Amazon has a lot of capital since it benefits from its large brand awareness associated from its e-commerce business. (Oren, Ozzie, Theresa,Brad, & Jason, 2011) Although Amazon does not have as broad of a selection as Netflix, it has ability to purchase content due to its large capital resources. On October 31, 2011, Amazon announced that it partnered with Disney-ABC to add 800 titles to its library.Currently, Amazon’s cloud computing services, called Amazon Web Services, has allowed Amazon to move into the streaming video market with more ease. In addition, Amazon has distribution centers in place, but it does not have the services to offer DVDs-by mail. Amazon is not Netflix’s closest competitor in offering DVDs-by mail, however is becoming a competitor in Internet video streaming.

* Blockbuster
The market leader in the video rental industry is Blockbuster. Blockbuster lost its market share and declared bankruptcy in 2010, resulting from inability to foresee the shift in how video were viewed. In 2011, Blockbuster was purchased by Dish Network. Blockbuster operates 4,000 stores throughout the United States and offers services in DVD and video game rentals to customers.
The pricing strategy of Blockbuster is a $10 fee per month which offers unlimited video streaming. This also includes a 1-DVD out rental policy and does not charge an upgrade fee for Blu-ray (Oren et al, 2011). Blockbuster has a 100,000 title DVD library which is larger than Netflix. Blockbuster also has similar return services as Netflix which customers are able to return discs via the US Postal Service. In addition, Blockbuster also allows customers to return them to the physical Blockbuster store. The deep relationship with studios and distributors is the most significant advantage that Blockbuster possesses. Videos are 28 days before they appear on Netflix due to its existing deep relationship (Oren et al, 2011).

* Redbox
Redbox is based out of Oak brook, Illinois, so it offers a different take on movie rentals. Redbox has 28,000 kiosks situated through the United States at convenient locations, such as MacDonald, grocery stores, and pharmacies. Redox allows customers to rent DVDs on a per-night basis. Approximately 68% of Americans live within a five-minute drive of a Redbox kiosk. (Redbox, 2011). Each kiosk is limited to 630 discs and a selection of 200 titles, which are predominately newer releases. The price of a DVD rental is $1.20 and a video games rental is $2.00 per night. Due its nightly service, the advantage for customer is no contract which customers are bound to. Conversely, a disadvantage to Redbox is that it does not offer streaming, but reports have indicated that the company is currently developing that service (Hoovers, 2011).Currently, Redbox does not compete with Netflix in the streaming video segment.

Additions of Subscription Fee Package
In 2011, Netflix announced that they had changed their price to the lowest ever, $7.99 a month for 1-DVD out plan. Blockbuster, its competitor at the time, remained at $9.99 a month for 1-DVD out plan. Although Netflix has a price advantage, Blockbuster has the advantage of greater variety of rental possibilities (DVD, Blu-ray, and video game discs).In addition, Blockbuster was able to provide its consumers the latest movies earlier than Netflix, 28 days earlier to be specific (John P. Falcone). If Netflix' customers choose Blu-ray, the subscription fee would also be $9.99 a month, the same price as Blockbuster (Falcone). Therefore, in order to attract new subscribers and retain Netflix current subscribers, Netflix should release additional cost-efficient subscription fee package.

The first option for the new subscription plan is to keep the unlimited 1-DVD out plan at $7.99 per month, and reduce the price of Blu-ray and video games disc to $8.99 per month. Since Blockbuster has the early release date advantage, Netflix needs to have a lower monthly price relative to Blockbuster to attract new subscribers.

Netflix could have a bundle package including both unlimited DVD rentals and online streaming for $12.99. This option has a lower price than purchasing both services seperately but still higher than the original price of $7.99. Through this suggested plan, customers are more likely to choose the bundle package for flexibility and maybe a perception of a receiving a better deal through this discoutned price. Although these two additional subscription fee packages are able to attract more customers, Netflix should also concern itself with the company's profit margin and cost. Since reducing the monthly fee will shrink Netflix’s profit margin, we do not recommend this alternative in the short-run. However, as long as Netflix has a fixed large number of customers to cover the cost, it can consider this alternative to retain existing customers in the long-run. SHOULD WE INCLUDE THIS IN THE RECOMMENDATION PART, SAYING WHY WE DON'T RECOMMEND THIS OR SHOULD WE DESCRIBE HERE THE DOWNSIDE OF THIS ALTERNATIVE?

Introduction of Netflix' Pay-For TV Channels
To reach more customers, Netflix can expand the platforms on which it could provide its Internet video streaming services. Further expansion of the subscriber base could be accomplished by pay-tv services. Through establishing contracts with Telecommunication Companies (TCs), Netflix could offer all its content on a specific channel which would be available as a monthly pay-for channel. Subscribers could watch their favorite movies and TV shows simply by controlling their remote controls. Thus far, it was necessary for subscribers to own some version of a game console to be be able to stream Netflix' movies and shows on their TVs, now this constraint will be removed. Consumer segments, such as seniors, individuals who dislike video games, and less fortunate individuals/families who are unable to afford them, would be able to watch Netflix' content right off their TVs; therefore, the base of potential subscribers would be significantly increased.

Customers could pay for the Netflix channel through their monthly TV bills which would be easy and convenient. Netflix would need to negotiate with TCs on how to set up such channels, and how to allocate revenues between Netflix and the TC. Netflix could provide two options to customers which sign-up for the pay-for channel. The first option would be very similar to the DVD-mail-in operations, where customers would pay for the number of movies and TV shows they watched each month; TV shows could have a lower price relative to movies as they are shorter in length. The second option would be similar to the unlimited online streaming, where customers would pay a flat rate per month and be able to watch unlimited movies and TV shows. The choice of which option to pursue will be under the discretion of the subscriber based on their predictable pattern of future use of the channel.

Domestic Elimination of DVD-mail-in Services in
Despite the fact that DVD-mail-ins are still generating revenues after the restructuring of service plans in July, 2011, subscribers keep moving away from the combined, higher priced plans to single, low priced, unlimited streaming plans (Netflix Inc., 2011, pg 19). As it is likely such a trend will continue, Netflix could eliminate its DVD-mail-in service in the US, thereby substantially decreasing their costs. First, the company would be able to eliminate its delivery expense consisting of postage costs to mail DVDs to and from subscribers; and, DVD production costs, including packaging and labeling costs. Second, overall lease costs would be substantially reduced from the elimination of the domestic receiving and storage centers; processing and shipment centres; DVD corporate, and general and administrative, offices; and, the DVD customer service centres. Finally, compensation of personnel associated with the DVD-mail in business and working in these facilities would be further eliminated. It is worth noting that there could be a possibility of some penalties arising from the cancellation of leases prior to their natural expiration date. However, such penalties could be offset by the millions in savings from all the other DVD-mail-in service related costs discussed above.

Although come subscribers may cancel their subscriptions, resulting from disappointment or frustration from such elimination, majority of subscribers are moving towards unlimited online streaming regardless; we believe this trend to continue. The potential decrease in revenues from subscription cancellations will be less than the decrease in costs related to the DVD-mail-in business, resulting in a positive net effect. To entice DVD-mail-in subscribers to remain with Netflix post elimination, the company could offer them one free month if they switch to the unlimited online streaming service.

Strategic Partnerships
Netflix can enter into a number of strategic partnerships in order to improve its competitive advantage. It can enter into a multi-year licensing agreement with movie studios, such as The Walt Disney Studios, Twentieth Century Fox Distribution, and so on (MarketLine, 2012). These make Netflix become exclusive US subscription television service provider. Netflix also can increase its selection of streaming titles since it partner with movie studios. Furthermore, Netflix can establish partnerships with the airline industry. Major airlines have now begun installation of Wi-Fi broadband routers in aircraft (Patricia). With broadband capabilities in aircrafts for all major airlines, Netflix could distribute its services through airline to airline and Netflix customers alike. This would bring Netflix into the airline market segment.

The cost of strategic partnerships is fairly expensive, especially entering into agreements with film studios. These costs could increase incrementally in the next few years. Thus, if the cost of content provided by studios continues to increase, the company’s costs and therefore operating margins would be adversely affected.

Additionally, strategic partnership is a feasible alternative since Netflix has already entered into a number of strategic partnerships in the recent past. For example, Netflix announced the introduction of Netflix One-click remote which enables subscribers to instantly watch movies and TV shows streamed from Netflix in January 2011. In May 2011, Netflix announced a multi-year licensing agreement with Paramount Pictures which added hundreds of new movie titles for its Canadian subscribers. The five-year agreement added 350 titles to a collection of classics from the studio which can be watched anytime. (Datamonitor, 201).

As the industry moves toward streaming content, Netflix will be able to attract more consumers and improve its market share by continuing to improve its selection of online current releases, and more popular movies. Since Netflix continue to focus on the streaming rentals, it will be important that they can leverage new releases, which have the highest demand. Therefore, strategic partnerships will be a good alternative to be selected by Netflix.

International Expansion
Yet another alternative is expanding Netflix' business internationally, which is also what the company is trying to do currently. Exploring international markets for Netflix is a long term strategy to enhance its competitive advantage and avoid some interior challenges it has (what do you mean?. Some countries do not have strong competitors, which can lower the price pressure and provide an opportunity to increase profit margins. International expansion is a great opportunity for Netflix to utlize its brand image and take advantage of the potential subscriber base from international markets. Due to the international competition in the online streaming industry being less fierce relative to the competition in U.S., Netflix would be able to attract subscribers with mroe ease. While in the long run, Netflix may also experience high competition from local competitors. Customers in foreign countries may not only demand movies that are currently provided by Netflix, which is tailored to the North American demographic, but also local movies and TV shows. Netflix would need to become more customer responsive and locally adaptive, and invest in the localized content to further attract subscribers in other countries.

However, the international expansion road for Netflix can be very challenging. Due to online streaming being based on internet; the speed of broadband will impact its quality. As mentioned above, Netflix is expanding in Latin America. It is a large market for Netflix, but in fact, it is not a very good target market. Unlike the U.S. and Canada, broadband Internet penetration in Latin American countries is fairly low. Only 20% of Brazil’s 42 million Internet users have a connection speed above 500 kbps while you need a minimum 800 kbps to stream movies. In addition, Latin America is also plagued by rampant video piracy which will make it tougher for Netflix to see subscriber growth. Moreover, in May Netflix also had to lower its video quality for Canadian subscribers given bandwidth caps placed by Canadian telecom and cable operators. (Netflix, 2011)

In addition, when international expansion brings thousands of subscribers, high content costs does incur as well. As the result, Netflix’s operating losses due to international expansion is increasing. In its Q3 investor guidance, the company indicated an increase in operating losses from $70 million to $80 million for the second half of 2011. (Netflix, 2011)

Although the road of international expansion for Netflix can be very rough, and many challenges will frustrate Netflix’s progress, it is still a feasible long term strategy for Netflix. The domestic market is limited; the international market is bigger and has more opportunities. So Netflix should maintain the international expansion strategy, improve its brand image, and increase sales volume and profitability.

Market Strategy
Netflix lost thousands of customers after it raising prices of online streaming by canceling its "hybrid" plan, which included both unlimited streaming and DVDs by mail in 2011. Subscribers who want to subscribe to both streaming and DVD plans need to pay separately for each plan, paying more than its earlier offering. In order to help Netflix stop losing the customers it is necessary for Netflix to show that it appreciates them by using an effective market strategy which also can help them obtain new customers.

Netflix could send an e-mail to previous customers and reiterate their importance to Netflix. Netflix could offer a quarter of free service if they return to Netflix. Netflix can also utilize its large collection of subscribers' e-mail addresses and launch an e-mail campaign which expresses the value of its customers and asks for a referral. For instance, Netflix can offer two months free of online streaming for every customer they get to membership for Netflix. Furthermore, Netflix could also create an application for Facebook and Twitter as a vehicle to disseminate the referral information.

The cost of this alternative will be negligible since Netflix already has the contact information for the customers which have previously cancelled the subscriptions and e-mail is free definitely. In addition, it should be noted that offering a free subscription is a marketing strategy that Netflix has had success with, so the alternative of marketing strategy we have provided is feasible. In order to get losing customers to return, the e-mail for losing customers should be written by the top management of Netflix. This will show that Netflix greatly values its customers and has strong ability and determination to tackle the problem it did. Since Netflix has good experience about marketing strategy such as e-mail promotions, package, and so on, Netflix will be easy and successfully to implement this alternative.

For Netflix to be successful in the long run, we believe that it needs to implement more than one of the six alternatives discussed above. With the North American market experiencing increased competition and coming close to saturation, Netflix must strongly consider expanding internationally and taking advantage of untapped foreign markets. In addition, it needs to take steps towards increasing its market share in the North American online streaming market, while eliminating less profitable operations. As such, it is recommended that Netflix pursue international expansion, introduction of the Netflix pay-for channel, while simultaneously eliminating its DVD-mail-in business.

Internationalization and localization are important strategies to pursue in order to acquire foreign subscribers to increase the overall customer base and increase sales growth. The international service would be limited solely to the unlimited Internet video streaming business and available to any consumer with a broad-band connection. As Internet use
Localization is a key determinant to the success of this internationalization. Despite the fact that American movies and TV shows are globally watched, in country specific translations, local content streaming is also important. As such, Netflix will need to adapt its content offerings to local movies and TV shows, to cater to differing local consumer preferences. Europe and Asia are the most untapped expansion opportunities, particularly India and Turkey. India's and Turkey's substantial entertainment industry provides large amounts of potential content which Netflix could stream.

The successful implementation of this strategy relies heavily upon recruiting appropriate, highly motivated, country-specific personnel to handle the technical, organizational, and communication functions to ensure localization. Furthermore, local licensing agreements with content providers to acquire titles and revenue sharing contracts with local film studios will need to be established. Exceptional communication skills, for the clear articulation of Netflix' brand and vision; and, superior persuasive and negotiating skills of foreign personnel, allowing for hightened possibility of signing more agreements with providers and studios, will exponentially increase the success of internationalization. Netflix needs to primarily focus on providers and studios that possess content most prefered by local consumers. If multiple providers/studios are able to licence out the same content, extensive negotiating will be crucial to secure agreements that will provide Netflix with the lowest cost structure.

Once implemented, it is important for Netflix to continually assess the success to of its international expansions. As mentioned above, Netflix experienced losses in its Q3 of 2011 due to its expansion to Latin America, however one should not make premature assumptions about future success. Realistically, the possibility of losses in the first few years is expected due to increased costs of recruiting foreign personnel and their compensation, negotations for content agreements, and so on. In addition, its subscription base will slowly increase as Netflix' brand image and reputation are established.The initial increase in costs and low subscriber base may lead to losses, however over time we are confident that profits will increase due to higher revenues from subscription growth.

Along with the internationalization and localization strategy, it is recommended that Netflix grow the number of devices on which subscribers can watch its content.Currently, Netflix content can only be watched through the company’s website on devices such as PCs; laptops, tablets, and mobile devices, such as iPhones, only when connected to the Internet; and, on TVs, utilizing game consoles, such as XBox or Wii, given they have Wi-Fi connectivity.

Netflix can significantly grow its number of subscribers by providing its content on TVs, where no game consoles are needed. As mentioned above, seniors, low income individuals/families, and those uninterested in video gaming, who want to but cannot watch Netflix on TV due to a lack of such consoles, would significantly benefit from the addition of pay-tv services. As competitors are currently not offering such a platform, Netflix has an opportunity to increase the value of its services in the eyes of potential subscribers and significantly increase its market share, thereby increasing its profitability.

Despite the fact that the strategy to grow the number of devices, which stream Netflix content, can be implemented in both domestic and international markets, for now, we recommend that Netflix implement it only in the US and Canada. The reason being is that the Netflix brand is well established and recognized in both countries, therefore the success rate of acquiring more subscribers is much higher. In addition, it is much easier to establish relationships with telecommunication companies within North America rather than abroad. Internationally, Netflix has to first establish its brand and attain more local content. Thereafter, it should assess its success in terms of subscription growth and profit margins, and then decide if growing the number of devices would be beneficial, and if relationships with foreign telecommunication companies can be established.

We are confident Netflix will be able to establish relationships and long-term agreements with telecommunication companies to establish pay-for channels. They will need to convince prospective companies about the opportunity such a channel provides for them ( for the telecommunication companies) and the value they could derive from entering into a contract with Netflix. It is best for Netflix to enter into proportional revenue sharing agreements, rather than fixed-monthly payments with TCs, as month to month will vary; in case of many cancellations, both Netflix and the TC will have proportional s rather than Netflix taking the bigger hit. Consequently, we recommend for Netflix to only enter into contracts which provide them with a reasonable, or even favorable, proportion of revenues.

Lastly, we recommend for Netflix to eliminate its DVD-mail-in service. The introduction of the Netflix pay-for channels completely eliminates the need to continue the service. Netflix will be able to reap significant cost reductions from the elimination of postage, packaging and labeling, compensation, and future lease expenses. As discussed above, penalties from lease cancellation may arise, however the costs savings from this elimination would offset such penalties. Furthermore, Netflix need not concern itself with disappointed subscribers as the pay-for channel essentially replaces the DVD-mail-in service as subscribers would be able to pick any movie or TV show they wanted to watch, just as if they were picking out the DVD they wanted mailed in. Even better, they would get it instantaneously, which would increase the service’s value. Whenever value increases, the company has the opportunity to charge a premium, increase operating margins, and earn higher profits.

The increasing competition and price pressures within the Internet video streaming industry require Netflix to make a change to its business model if the company wishes to succeed in the long-run. The company can choose to implement various strategies, based on Netflix’ strengths, to improve its performance by address these challenges. We believe international expansion and localization provides an opportunity to reach a broader and larger customer base, thereby increasing market share and revenues. In addition, market share can also be increased domestically by opening up Netflix’ services to a broader range of consumers through utilizing a pay-for channel offering Netflix content. Lastly, the introduction of the Netflix pay-for -channel replaces the need for the DVD-mail-in service, and therefore is should be eliminated.

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