Challenges facing Netflix in VOD market

One of the main issues that Netflix is forced to cope with as they enter the growing VOD market is the ever before present threat of competition. These competitors include standalone sites such as Vongo, traditional cable tv and dish providers and probably Blockbuster's MovieLink. Another significant challenge for the company which could convert to a switch in the business model is the level of commitment required to successfully penetrate the VOD market. Further issues include limited content availableness and connectivity troubles.

Analysis/Rationale for issues (1. 25)

Rivalry strength is a substantial issue for the company specifically in the VOD sector. As a number of potential new entrants look to enter the market, this space will probably become saturated by the next competition. Price wars will probably occur due to the large number of new entrants. Vongo as mentioned in the SWOT analysis is a potential hazard as they provide customers having the ability to rent films, purchase them for looking at and burn off them directly to a Dvd and blu-ray, all for small rate. Other rivals include cable and satellite companies. Both in entertainment providers reach a sizable audience and also have begun to provide 'on demand' services. As their reach raises they are really poised to manage a sizable chunk of the buyer market. This 'free' offering is likely to dissuade consumers from signing up for Netflix services.

Alternatively, Blockbuster may also pose a substantial danger as they intend to acquire MovieLink. This acquisition will give them usage of new movies as well as a pre-existing data source. Blockbuster has the ability to leverage its brand and has integrated cross promotions, offering in store local rental coupons to online customers all in an effort to outmaneuver the competition.

Another major obstacle faced by Netflix is the intensity and timing of these entry in to the online loading business. The business needs to select from integrating the option of online video tutorial streaming into their central offering or concentrating solely on building a stand-alone site. A switch available model may lead to Netflix alienating its current customers and even creating misunderstanding among the labor force regarding the route and goals of the business. The problem of limited content availability is because of the lack of a agreement with studios and therefore studios are able to exert pricing power. While a remedy to the availability of content is vital to the organization, connection is also a significant problem. Due to the limitations of these technology, Netflix is currently unable to offer customers the ability to synchronize media observing devices in the house.

An integrated strategy for the business (1. 5)

A wide-ranging differentiation strategy happens to be utilized by the firm. The online DVD local rental business currently appeals to large segment of the marketplace. This differentiation was made by decreasing the entire costs of renting DVDs, improving consumer satisfaction, offering detailed customer service and constantly innovating over time. In order to build on this success Netflix should take benefit of the rising internet capacities and changing technology. Embracing the VOD feature to match the move in consumer attitudes, as fast paced on- the-go standards of living become the norm, will provide Netflix with another chance to create value for the customer.

The amalgamation of a strategy for Netflix's VOD feature is basically predicated on the firm's key success factors. In order to provide enhanced convenience, faster delivery and meet the needs of a movie adoring price mindful consumer, Netflix should offer users movie loading functions. However, the advantages of this feature shouldn't lead to the abandonment with their core business model. Instead Netflix should put into practice a two part composition, whereby the inescapable top and plateau of Dvd movie local rental sales is quickly accompanied by an increase in the availability of streaming content. The intro to VOD could take the proper execution of any '3 month freemium' offered to existing customers to gradually begin their transition into online video tutorial loading. Potential consumers on the other palm will be prompted to try the service with the offer of any '1 month freemium'.

Gaining a following within the mass market will depend on the availability of content. A significant element of the overall strategy will rely upon Netflix's potential to leverage their pre-existing romantic relationship with studio room owners as discussed in the worthiness chain evaluation, to work out an agreement pertaining to distribution protection under the law for the web content. The negotiation of exclusive circulation rights pertaining to online content will generate an additional competitive advantage, assisting to combat the threats of opponents such as Vongo and the cable television providers. To take pleasure from success in the VOD market, Netflix will need to ensure the wide syndication of online content that is easy to get at to all potential users. Developing proper alliances with game playing companies provides the hardware program essential to solve connection issues. In addition Netflix could provide a simple connectivity kit allowing notebook computers to be wirelessly linked to television sets.

Monitoring online DVD rental sales to display for changes in demand is an essential part of the plan to get first mover gain. Using the Netflix brand and the commitment associated with it'll provide Netflix with a significant advantage over challengers. To address the actual confusion amongst the workforce created by a shift in the business model, area of the strategy will include creating a mix functional team that will concentrate exclusively on Netflix video recording streaming, the future of the industry.

Key Economic and Industry Variables


Demand for convenient movie rentals

Movie nights as a standard part of entertainment at home

People want a big variety of videos to choose from


Rise of the online DVD rentals business

The beginning of Video-On Demand through the Internet

Unwillingness to pay overdue fees

Key Motorists for the Industry:

Emerging new Internet functions and applications

Improved technical changes and process advancement (i. e. individuals are now in a position to download movies on their laptop instead of purchasing a Disc from a shop)

Netflix was able to rent out films through the internet and deliver it via USPS to customers alternatively than using traditional "brick-and-mortar" retail stores

They also offered consumers increased scientific products such as DVDs somewhat than VHS'

Changes in who purchases the product and exactly how they use it

Greater volume of individuals are using internet railing as an alternative to shopping in a physical movie retail stores

Product innovation

DVDs and Movie players were created which appealed to many consumers

With greater adoption of big-screen, high-definition Tv sets, consumers no more wished to view movies on the laptops

Changes in expense and efficiency

Offering products through the internet to consumers helps you to save Netflix from expenditures incurred due to building/renting a physical store space

Changing societal concerns, behaviour, and lifestyles

Consumers behaviour change as they now require "video recording on demand", lower fees and access to older movies that aren't available in stores.

The above mentioned driving forces have made a significant impact on the industry as it now allows consumers access to a pool of videos on demand, a service that was not recently available.

Porter's Five Forces

Rivalry Strength:

Rivalry strength for Netflix happens to be strong as there are "multiple opponents with techniques that spanned the three delivery channels" (advertising-supported video, digital file possession and online video tutorial local rental and pay Tv set).

Competitors include stand-alone online VOD services such as Vongo and CinemaNow as well as established traditional cable tv and satellite tv providers. Blockbuster also poses a danger as it expressed its intend in acquiring MovieLink (a project between several major studies such as MGM, Paramount, Sony, Warner Brothers, and Universal).

Potential New Entrants:

Liongate, Microsoft, and Cisco came into the industry and made your competition stronger using their venture CinemaNow, offering consumers thousands of game titles from major studios.

Substitute Durability:

Currently the effectiveness of substitute companies is modest as buyers can buy movies from retail stores such as Blockbuster, Wal-Mart, mom-and-pop stores, etc. That said, as there are scientific improvements being made, the pattern of VOD will too increase.

Supplier Durability:

The supplier power is relatively strong as studios tend to be concerned about pirated downloads and "insufficient urgency to supplant their profitable Movie sales" which makes them reluctant to offer content to VOD websites.

Buyer Durability:

The buyer power is reasonably strong because they are in a position to shift between your several present rival companies in the industry.

As one may conclude, the VOD industry is ever growing and is thus a very attractive industry to maintain. However, Netflix's success would depend on its exterior factors such as its competitors and how it deals with it.

Positioning Map of the VOD Industry

This tactical group map illustrates Reed Hastings' classification of the three available forms of Internet video along with the market share placed by the various competing areas. This map is an estimate of where each sector stands within the industry. As you can see, traditional retail stores such as Blockbuster, is not successful in the VOD industry as it required them several years to join mother board with this new endeavor. Stand-alone online VOD services aren't providing fierce competition as their consumer platform is relatively small and are limited financially to have the ability to develop. Netflix's main opponents are the Cable and Satellite tv Providers since they posses not only the budget to equip them with high-tech products and services but, also have a strong clientele they can attract

Key Success Factors

Price Composition and Cost: Level monthly charge of $17. 99

Rental composition: Movies at home all the time

Large collection of available Movie Titles

Software that effectively recommends available films to complement customer taste

No overdue fees.

Relationship with Marketers, Studios and Postal Service

Central Syndication Centers: Fewer movie copies needed in inventory to meet demand

Central Distribution Centers: Fast delivery times

Conclusion about the elegance of the industry

The emerging video on demand industry is fairly attractive. The effect of technology to bridge the distance between the television set and the internet will drive industry elegance. However, disruptive solutions have opened the entranceway for entrants with much better technology to deliver video to the consumer within an easy-to-use format direct to their television or PC. Overall, a substantial investment must provide loading of videos on demand, but this risk could lead to a high pay back.

Company's Reference and Competitive Position

Mission: To be the leading provider of personalized in-home entertainment that customer can access at their convenience.

Vision: Netflix focuses on being an early on adapter to new technology that will satisfy customer's specific needs

Supply Chain Management

Netflix offers home delivery of Dvd videos through the mail rather than retail locations.

An agreement with major studios on DVD up-front prices. Pay studios a small cost from the films' total number of accommodations. Lower acquisition cost for popular releases.


The business is dependant on online buying and a quick delivery system. Customers likewise have the decision of watching movies online.

Operate circulation centers from which movies are shipped and repacked DVDs are redistributed.


Netflix is determined by U. S. Postal Services to send out the DVDs

In order to increase delivery quality and reduce delivery time, Netflix exposed circulation centers in many locations.

Sales and Marketing

When Netflix was founded, it targeted Dvd and blu-ray player users. The customers had prepaid registration membership.

Netflix possessed a advice system which helped customers choose the films they liked.

Easy account cancellation- able to cancel memberships online. This increased the pace of go back customers.


Netflix relied on surveys and customer feedback in order to increase client satisfaction. Straight forward cancellation.


Netflix focused on its development in order to increase customer satisfaction. Netflix technicians developed a propriety algorithmic recommendation system that helped customers choose videos easily.

Netflix is seeking to develop and introduce VOD

Competitive Advantages:

Netflix has gained competitive benefit predicated on its way of businesses. Netflix offers video delivery that draws in many customers who enjoy the letting movie without heading to the store.

Netflix's suggestion system, which suggests movie titles to the customers, provides competitive advantage to Netflix looking at to Blockbuster and the other competition which have staff with little understanding of movies.

Netflix also looks forward to the good thing about having variety of videos because the competitors have to deal with shelving space. For instance, Blockbuster offers limited range of videos because they don't have enough racks to keep all videos. Thus, Blockbuster may like not to offer some videos to its customers.

Financial Analysis

Since Netflix was founded in 1997, it appreciated significant growth in revenue and its customer bottom part. By 2006, Netflix enjoyed $1 billion of the approximate $8. 7 billion in profits in the movie local rental industry and experienced accumulated over 6 million customers. This development is depicted in the graph below.

Beginning in 2002, Netflix generated positive cashflow for the very first time and began to hit its stride. Gross margins and marketing costs commenced to stabilize and subscription costs as a percentage of revenue started to decrease. This were, in part, due to Ted Sarandos getting started with the business in 2000 and negotiating handles studios. In 2003, the company produced positive income from functions for the first time.

Other cost benefits measures included working closely with USPS to increase delivery times and increasing the amount of circulation centres. Netflix effectively lowered fulfillment costs as a share of sales in each year from 130% in 1998 to 9% in 2006. These strategies also aided in providing better service. This led to a rise in the amount of customers and the net revenue per customer.

It is clear based on the above that customers are interested in convenience. It is because the business became more profitable and started out to grow more quickly as Netflix sophisticated its online buying system, improved the delivery times and opened more syndication centers. Additionally it is visible that customers are considering unlimited plans no late fees. That is visible by the strong progress that Netflix savored since inception and the effect from competition such as Blockbuster (i. e. , their attempt to copy the business style of Netflix).

The percentage growth in the subscriber base began to decline in 2005 and 2006, recommending that the Movie delivery business was at the early phases of market saturation. In this regard, it could be wise for Netflix to start to provide online loading of films, etc. as a rise strategy. The factors above resulting in Netflix's success (i. e. , convenience, infinite ideas, etc. ) suggest that there is a smart future for Netflix in this field and with fulfilment costs at nearly $100 million in 2006, there would be significant money available for other uses if Netflix chooses this course.

SWOT Analysis


Strong brand and company image.

Lead market show of online rentals.

Largest online catalogue of DVD titles to rent.

Fastest delivery time of any online DVD local rental company with 44 syndication centres across the world.

Over 90% of DVD's are received by customers within one day of placing your order.

Cheap monthly strategies.

Allowing customers the liberty to return films at one's convenience by letting customers keep carefully the DVD until they want to see the next one in their queue.

Netflix rating system implies and advises movie titles for their customers that they in any other case wouldn't have known about or chosen.


Presence in mere DVD segment.

The studios can dictate some serious costing power conditions to Netflix, restricting when various films become accessible or for how long.

Trouble providing enough copies of new, popular videos.

Cost of acquiring new produces is too high for Netflix, which includes the tendency to drive away current and potential clients.

Monthly fee could discourage membership from less recurrent movie watchers.


Product line expansion (such as Video gaming, educational, institutional etc. ).

Expand downloadable movie offerings.

In order to keep growing, the company must internationalize, which may lead to more prices power.

Entering the VOD market through offering streaming videos as opposed to movie downloading will differentiate Netflix from its rivals, and decrease the probability of price competition.


Blockbuster's potential purchase of MovieLink.

Vongo, CinemaNow other stand alone sites already set up in online video recording business.

Competition from cable television companies-traditional cable tv and satellite tv providers provide on demand service, including variety of "free" offerings. . .

By research of the table above, it is quite visible that Netflix has a whole lot of key areas of strength. Their unique and large numbers of DVD choices, as well as their ranking system, has been liked a great deal by users. However, there is still room for improvement by increasing their products into other segments such as Video Games. Also, online video recording streaming is a unique market for Netflix to stand out in, nonetheless they should be aware of potential hazards by companies already established available.

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