Key Facts
| Name | Netflix |
| Industry | Entertainment Industry |
| Founded | August 29,1997 |
| Headquarters | California, US |
| CEO | Reed Hastings |
| Revenues | US $29.7billion,2021 |
| Profit | US$ 5.116 billion, 2021 |
| Competitors | Amazon Prime Video , YouTube |
Company Overview
Headquartered in California, USA Netflix is an internet entertainment services providing company present in 190 countries. It was established by Reed Hastings and Marc Randolph in 1997 and it is valued at $ 95 billion in 2022.Its reported revenues are $29.7 billion, reaching the 4th place in the Forbe’s World’s The Global 2000 Companies list. Its brand value is estimated at $ 29.41 billion in 2022.
Porter’s Five Forces Analysis
The five competitive forces defined by Harvard Business School Professor Micheal E. Porter in 1979 for organizations to understand the structure of their industry and better strategies their business for more profits and less exposure to competition.
It is one of the most widely used model for analyzing industry’s structure and competitive environment for the business.
Netflix Rivalry among Existing Competitors
- This is the first force of the Five Forces to analyze the competitive position of the company and it’s strategies to charge high prices, earn high sales and covering it’s fixed cost.
- Netflix started as DVD sales and rental in 1997, later in 2007 Netflix started online media streaming and succeeded in getting its profit tripled by 2010.Netflix is facing strong competition from the new digital media content service provider’s including Amazon Prime Videos ,Hulu, ,Disney +,HBO Max ,Apple TV+ and YouTube.
- Netflix have around 223 million paid subscribers globally as of end of third quarter of Year 2022.The 32% subscriber base of Netflix is from USA and Canada is over 73 million subscribers. Netflix also recorded a 2.5 million increase in its subscriber’s base in comparison with the recent quarter which is 1.12% quarterly and 4.5% annual increasing rate in the subscriber base.
- Amazon Prime has 200 million paid subscribers report by Statista as of early 2022 and expected to cross 240 million by 2026 which is a 20% expected growth means 5% annual increase in the subscriber’s base. In March 2022 Amazon finalized a merger with MGM studios which already has a collection of more than 4000 movies with above 17000 TV shows.
- Disney+ only recorded a paid subscriber’s milestone of 164.2 million in the fourth quarter of Year 2022 as reported by Statista. While Walt Disney combines the subscriber count of Disney, Hulu and ESPN+ which is almost 235.7 million which is 12.7 and 5.34% million more subscribers than the subscriber base of Netflix.
- Walt Disney reported Hulu has 46.2 million paid subscriber base by Statista as of 3rd quarter of 2022 for USA only which is 63.28% of Netflix’s USA and Canada’s subscriber’s base. While it reported a record of 43.8 million subscribers for the fourth quarter of Year 2021 and 47.2 million paid subscribers for Year 2022 for USA only which is 7.76% annual growth rate which is highest among Netflix, Amazon Prime Videos and Hulu.
- Solution: The strategy to handle Rivalry should be adopted by Netflix is to analyze existing customer’s needs and future expectations for long term customer retention, research in identifying new customer’s segments ,redesign pricing and subscriptions models with more ease of adaptability, mergers and acquisitions with competitorsand in the long run consider to redesign the complete business model.
Netflix Threat of New Entrants
- Basic Idea: This the second force to analyze possibilities of the new entrants in the market as strong barriers and heavy cost structure present in the Industry for the new entrants will neutralize the competition or vice versa. Easy entry of new entrants will not allow economies of scale, encouraging switching cost and distributed investment of capital.
- High Capital Investment: In the scenario of Netflix as it is entertainment media industry the entry of new service providers is subject to high capital investment, substantial resource allocation, long term loyal customer base portfolio and availability of distribution network.
- Established Tech Companies: New entrants from low capital investment are least expected, but the existing giant Companies like Apple, Google and Microsoft with high capital investment and specialized tech structure can be a prospective threat of new entrant as streaming industry has good potential for growth.
- Local Circumstances: Local Service Providescan be a potential threat like for example Crave TV, founded in 2014, leading company in Canada’s telecommunication industry, entered the Canadian market and providing streaming services with a much lower cost than Netflix. Crave TV offered 2 months free subscription with the annual plan while Netflix have no annual plan offer.
- Solution: Strategy for neutralizing the threat from new entrants is that Netflix should keep maintaining its position of original content creator. Netflix also earned a lot of customer’s trust over the years so it should have the advantage of brand loyalty which the new entrants will take a longer time to earn.
Netflix Bargaining Power of Suppliers
- Basic Idea: The next element in Porter’s model to analyze the Supplier’s bargain power which is a constitution of number of Supplier’s available in the market and the number of key inputs required to make the final product or deliver the service. It may also impact the pricing and availability of the final product or service in the market. Bargaining Power of Suppliers also develops a threat of possible forward integration.
- Content: In digital media stream content is the most important factor in the success of the business. In Netflix scenario Netflix is acquiring content from multiple sources including producing new content including TV shows, purchasing exclusive rights for distribution from third party content creators and also getting license for old contents.
- Originals: Netflix produced 1500 originals since it started content producing 2013.Arround 58% of Netflix subscriber’s say access to original content is the reason for the subscription.
- Infrastructure: As Netflix is streaming digitally which is possible with internet availability through Smart TVs, Fire TV sticks and other mobile devices.
- Solution: As Netflix is mostly responsible for producing it’s own content and the availability of suppliers is not in scarcity so the current practices are enough for a smooth flow of Netflix.
Netflix Bargaining Power of Buyers
- Basic Idea: The next force is bargaining power of buyers which is deciding by the present number of buyers and substantial purchase by one buyer, also switching cost or finding a new buyer is worth considering. The large number of small and non-influencing buyers portfolio is more profitable with less negotiation power .Bargaining Power of Buyers also develops a threat of possible backward integration.
- Monthly Subscription: Netflix’s revenue is highly dependent on monthly subscriptions from its customers who have the freedom to discontinue the subscription without any hurdles. Increasing competition and number of other digital media streaming providers giving a substantial bargain power to the buyers.
- Customer’s Price Sensitivity: The monthly subscription ranges from $9.99 to $ 19.99.As per Deloitte’s Digital Media Trends survey 49% of the subscribers respond that their subscription decision is price sensitive in case of price increase they will discontinue the subscription.
- Content Originality&Churn Rate: In 2021 Oscar announced 7 awards to Netflix which is highest for any single distributor proves it originality of it’s contents.As per recent research study by Antenna Netflix is maintaining a low churn rate which is 2.4% and comparatively low in comparison of it’s competitor’s like Hulu with 4.1%.Netflix is facing a less subscription cancel from its customers and even maintaining a high re-subscription. It means Netflix is getting successful in winning it’s customers back.
- Solution: The bargain power in the customer base is creating a pressure to produce high quality original content which is in return keep retaining the customers and one of the contributing factors in the success of Netflix.
Netflix Threat of Substitute Products or Services
- Basic Idea: The last contributing factoris threat from the substitute products or services which can affect the Company’s bargaining position, price strategy and other terms.
- Substitute Products: Deloitte’s survey for 2021 Digital Media Trends says that watching movies is getting old in fashion while using Social Media, playing video games and listening music is more in trend. For example in Year 2021 Spotify has 232 million users which is almost equivalent to Netflix subscribers base.
- YouTube: One of the most important and noticeable alternate of viewing Industry is YouTube which alone accounts 12% of the total video viewing. YouTube also offers content viewing and live streaming.
- Other Leisure Activities: Social Media and Gaming can be the potential threat as substitute leisure activities. As digital media streaming industry is evolving with the technological advancement all digital leisure activity and entertainment channels are going to give in direct competition to Netflix.
- Solution: Netflix need to keep an eye on the changing trends and keep evolving with the current requirements of the era.
References:
Forbes, (2020).Netflix [online]. www.forbes.com. Available at:https://www.forbes.com/profile/reed-hastings/?sh=50c1d2da2782[Accessed12November.2020]
Statista (Oct,20,2022).Netflix Statistics and Facts | Statista. [online] Statista.Availableat:https://www.statista.com/topics/842/netflix/#dossierKeyfigures
Statista (August,3,,2022). Brand value of Netflix worldwide from 2020 to 2022| Statista. [online] Statista.Availableat:https://www.statista.com/statistics/1324428/netflix-brand-value/.
Forbes, (2022). The Global 2000 2022 .The World’s Largest Media Companies 2022: Netflix Falls In The Ranks After Subscriber Loss,Disney Climbs To No.2 Netflix [online]. www.forbes.com. Available at:https://www.forbes.com/sites/abigailfreeman/2022/05/12/the-worlds-largest-media-companies-2022-netflix-falls-in-the-ranks-after-subscriber-loss-disney-climbs-to-no-2/?sh=6adc8df37442
Harvard Business Review (January 2008), The Five Competitive Forces That Shape Strategy, Available at:
https://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy
Harvard Business Review (January 2018), To See the Future of Competition, Look at Netflix, Available at:
https://hbr.org/2018/07/to-see-the-future-of-competition-look-at-netflix
Statista (March,2022).Amazon Prime Video Statistics and Facts | Statista. [online] Statista.Availableat
https://www.statista.com/topics/4740/amazon-prime-video/#topicHeader__wrapper
Statista (Oct,2022).Number of Netflix paid subscribers worldwide from 1st quarter 2013 to 3rd quarter 2022 | Statista. [online] Statista.Availableat
Statista (Nov,2022).Number of Hulu’s paying subscriber in the United States from 1st quarter 2019 to 4th quarter 2022 | Statista. [online] Statista.Availableat
https://www.statista.com/statistics/258014/number-of-hulus-paying-subscribers/
Statista (Nov,2022).Number of Disney Plus subscribers worldwide from 1st quarter 2020 to 4th quarter 2022 | Statista. [online] Statista.Availableat
https://www.statista.com/statistics/1095372/disney-plus-number-of-subscribers-us/
Hubspot (September,2021).How Netflix Maintains Low Churn & High Customer Retention
https://blog.hubspot.com/service/netflix-customer-service-and-churn-rate