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Netflix
Analyzed via the Value Framework™
by Mitchell Levy, Author, E-Volve-or-Die.com,
Author, the Value Framework™
and Bob Cormia, Faculty Member Foothill Community College and E-Business Consultant
Summary
Netflix, a pioneer in Internet DVD rentals, used a clearly defined strategy to
achieve its goal to be the largest DVD rental company in the U.S.A. This was accomplished
with three key initiatives: - Building a robust Web architecture that
supported the ideal selection and fulfillment experience of discerning Internet
patrons
- Developing key business alliances with content providers in film
and television sectors, and with merchandisers of DVD hardware
- Leveraging
best practice skills in direct and database marketing, and creating a fluid means
to blend discovery processes with transaction models into transparent cross-sell
and up-sale strategies
Netflix began its quest by blending the consumer's
desire to gain access to first run movie content without the traditional 9 to
12 month delay into traditional rental sectors, specifically by building alliances
with major film producers. Netflix would offer its subscribers access to first
run movies in 90 days, edging out traditional rental brands, and Blockbuster in
particular. Using the same strategy, Netflix cut a key deal with HBO to merchandize
the most popular seasonal entertainment in DVD format, splitting the additional
revenues with producers. Both these deals extended the participant chain in the
PTP value framework from original producer to end user, capturing the purchase
interest while the affinity for the entertainment was the highest. Another
significant move was to strategically time the extension of its brand from film
to precut CD-ROM and DVD-ROM music, blending a Napster-like discovery of music
content with high fidelity and legal ownership. Even more significant was Netflix
timing its alliance with broadband provider AOL-Time Warner to integrate its own
customer base with other users of hybrid digital and DVD formats that were being
targeted by AOL. This deal leveraged the Netflix expertise for proprietary predictive
data mining technologies in entertainment. Extending movie and music labels into
the household through hybrid physical and digital media caused explosive growth
in profits by extending revenues into value added archival media. Not surprisingly,
Netflix recognized the opportunity of smaller artists to self-publish in DVDR
format, leveraging the heuristic search engine technology that recognized musical
patterns in database formats. Netflix extended their competency one last step
by creating a publishing format for "books on disk" using natural text
to speech technology. More critical was their ability to condense full length
news print material to snippets using RDF technology, delivering business and
technology news content in condensed formats, again not only through its weekly
subscription model, but also in hybrid digital / DVD delivery format. The
process of building brand, technology, and user base was carefully if not cautiously
timed, as the lessons of over zealous Internet mergers, such as, Excite@home and
AT&T, were rushed well ahead of user awareness and market development. Netflix
became recognized as a leader in pioneering personalized content delivery by building
on household brand recognition and trust. This was the cornerstone of their database
mining and marketing effort, which blended personalization and data mining technology
with entertainment delivery. Netflix Wins:
- Netflix wins in 'discovery' and negotiation, and streamlines 'process'
- Netflix developed multiple modes of transactions, as you can hold and
buy a DVD (spot purchase), have them sent weekly (recurring), or put in an advance
order to have one arrive as soon as it's released (dynamic).
- The
'participant' component of the value framework was a key element of success, with
the B2B2C value chain including movie labels and television content.
The
Winning Strategies (Advertising, Marketing, and Distribution/Delivery):
- The alliances with Best Buy were critical to launching their portal,
as new DVD users were the most likely consumers to try a new rental service.
- Blockbuster, which lacked a click and mortar strategy, could not compete
with ease of selection, delivery, and opportunity to up-sell to a purchase.
- Internet selection was more than a convenient shopping tool. It allowed
personalized presentation based on user preferences and data mining technology.
- Using the post office infrastructure for delivery provided an inexpensive
and reliable shipping method for Netflix, and added convenience for the customer.
- Transaction models that included recurring monthly delivery, with the
opportunity of a "spot buy" with no pressure, created a "passive
shopping" model.
- Relationships with film producers created a
model for direct distribution of first run movies much sooner than current rentals.
This helped Netflix edge out other rental brands, and additional revenues for
film producers.
- Theatres became a preferred method of advertising
the Netflix service, and added revenue to a film from avid movie patrons, rather
than cannibalizing ticket sales.
- Netflix built a strong base for
broadband delivery in selected markets, and possibly direct view on subscription
model, becoming a true "Netflix" brand.
- Database mining
and direct email marketing was based on a much better view of the customer, and
predictive trends based on aggregate rental and purchase trends.
- Customers
enjoyed the privacy of ordering films in genre that they might not order in a
physical setting, including gay and lesbian and adult film material.
- Sample
trailers burned on CD with built in order codes allowed customers to effortlessly
preorder videos. Trailers were targeted based on user preferences.
- Netflix
extended DVD material to repackage first run television, especially HBO, which
extended revenues for content producers, and virtually wiped out VHS.
- Netflix
built relationships with music labels to extend their brand into music and custom-burned
CDs, bringing final resolution to the Napster phenomenon.
- Careful
analysis of hybrid buying patterns showed that kiosks in retail outlets, partnering
with BestBuy, allowed for in store selection of films with a value added service
of physical browsing but having delayed home delivery.
Strategy
Evolved
Having successfully launched a new Internet service and brand,
the vision of Netflix was to offer both personalized and standard content through
broadband or physical medium, and evolve from movies to music and then to syndicate
text content. This strategy leveraged the value proposition of convenience and
selection with the natural extension from film to music and then books as entertainment.
Launching "books on disk" as a subscription model was coupled with personalizing
and encapsulating news content in technology and other fields where consumers
wanted to stay current in a field, had little time to read, but had time to listen.
Alliances with ebooks were important here as well. Staying ahead of the
competition proved to be a difficult task, as pure play music on disk and ebook
entrants made extension of the Netflix brand particularly risky. Similar to Amazon.com,
Netflix would need to focus on the core competency of convenience, efficiency,
performance,reliability, and personalization to continue to bolster their brand.
Finding new revenue streams was key. Using the Value Framework™ to analyze
strategy, the key to company growth was a focus on all aspects of PTP, and careful
growth into other areas of "household entertainment".
Netflix Evolution:
- Streaming and downloadable movie
and film content: Using a combination of broadband and multicast backbone infrastructure,
Netflix provided files for storage or single play. Downloadable movie trailers
linked to direct ordering the problematic issue of consumer storage continued
to lag behind file content size. However, movie trailers can capture consumer
intereste and promote DVD rental, increasing the total number of movies rented
and revenue as well.
- Distribution of online trailers: This can also
be a cost that studios bear, but use of the Netflix brand adds value to a third
party Internet distribution channel. Netflix will recapture the customer after
they have viewed the film live in a theatre.
- Partnerships: Negotiating
contracts with movie studios was key to owning a content channel, if only to lessen
the delay from the debut of a first-run film to its availability in DVD format.
For some users willing to pay a premium, this was even a preferred consumer format
once copyright technology was enhanced.
- Adult and mature content:
Since the entire system of ordering and fulfillment was private from end-to-end,
a significant fraction of consumers who watched adult, gay and lesbian films migrated
to the service. Content was always kept tasteful to ensure that the Netflix brand
was never confused with a pure-play adult channel.
- Serve Businesses:
Training videos, inspirational videos and other business-oriented videos were
added to the stock of material, and a business category was created that also
included technical training and online educational material.
- E-learning
for schools: Many teachers realized that renting DVDs for class lessons, or renting
to own the more successful material, was both a cost-effective and more efficient
method of staying current with instructional and educational material.
- Foreign
markets: Both non-US markets and domestic appetites for foreign film were served
by a larger inventory. Given the ability of DVDs to play in multilingual format,
this was both a natural extension and growth focus. Asia Pacific and European
markets added significant growth revenues to Netflix.
Strategy Managed
Launching an Internet brand is difficult enough, but
as Netflix deployed their new service, both the Web and the physical competition
shifted to adjust to their presence.
On debut, a number of daily challenges
and other issues surfaced and were dealt with effectively. Additional reality
checks followed with fine-tuning of operations to help keep Netflix ahead of the
competition and on track with the long-term vision of personalized content sent
through hybrid broadband and physical media. Critical infrastructure had
to be managed to keep customer service and expectations at "Internet levels"
congruent with Amazon.com. Most importantly, Netflix managed their strategy to
evolve from an effective solution for video rentals, to music, and finally to
syndicated text content delivered in digital formats. Netflix extended the value
chain marginally from the original producer of the content to the end user with
only Netflix in between. Managing the operations infrastructure, and more
importantly, data mining of customer information, was key to a successful business.
Product development was also critical to growth and evolution. In conjunction
with HBO, Netflix introduced DVD formats for first run television series within
90 days of season endings, capturing interest while it was strongest, and replacing
"repeats". This allowed forward continual development on new series
and segments, often short run series, as distribution of DVDs proved more appealing
to consumers than waiting to see a missed or enjoyed episode. All through
this, Netflix managed the three components of their business namely, Producer,
Content, and Consumer, in a fluid synergy that created additional and extended
value for first run content. Netflix also created formats for small producers
that lacked access to networks, and promoted them through Napster-like discovery
and search algorithms. The adaptive Netflix focus:
- Reliability: A focus on reliability of operations was essential to
building an "experience brand" like Amazon.com did. With so many users
accessing the Website, and the Internet architecture being a delivery platform
itself, a focus on building and maintaining a robust architecture was a key metric.
- Compatibility: Netflix needed to keep presentation formats accessible
to users of AOL and other portal presence, a key business alliance, and for all
kinds of browsers, including PDAs, where movie selections became more frequent.
- New features: Customized direct email-personalized based on what the
user has rented in the past-helped consumers know what new movies were available.
- Distribution center: Dealing with the challenges of a huge distribution
center and logistics with the USPS were the most important factor in developing
economies of scale. Managing shipping costs in particular affected bottom line
profits.
- Pricing packages: Instead of forcing all customers to rent
only three DVDs simultaneously, Netflix would create tiers based on usage levels
ranging from $13 a month for two simultaneous movies to $40 a month for eight.
This helped build adoption by hardcore movie buffs as well as casual users.
- Call center: In the physical world, unanticipated situations would arise
all the time for video rental firms. People might return movies in the wrong envelope,
product might get lost in the mail etc. A well-staffed call center could intercede
in these problems, and double as a phone order service for purchasing DVDs as
well.
- Database marketing as a vehicle to understand individual customers,
aggregate and predictive behaviors, and direct email marketing to consumers was
critical to creating personalized messaging in a growing permission marketing
audience.
- New content formats grew beyond film. As a strategic turning
point for Netflix, the relationship with the consumer became a relationship with
the household, where entertainment in digital formats was the common denominator.
- Music and ebooks became the next target, as the former was useful for
delivery of legal "single track" audio, and ebooks were custom built
from syndicated content. Each represented natural extensions of video content
where convenience was a driver in selection, formatting, delivery, and predictive
trends based on global user data.
Strategy Deployed
The initial strategy of Netflix was to take the convenience of renting movies
to the next level using the Internet as a selection tool, and adding convenience
to delivery and return. Netflix addressed multiple "pain points" common
in the physical space, including lack of inventory, pressure of time in both selection
and logistics, and having to return films to avoid late fees. Additionally, Netflix
offered a much richer selection experience, using Internet technologies to add
reviews, personalization, and "consensus" selection; where the pressure
to pick the right film is removed. In strategy deployed Netflix first addressed
consumer needs by identifying where the current system was and where it was lacking.
Problem issues vs. Netflix solutions:
- Late fees: A
lawsuit has been filed against Blockbuster for the amount they charge in late
fees. These late fees often exceed the cost of purchasing the movie. Obviously
customers were displeased with their monopolistic strategy and were willing to
shift to an entirely new experience of video rental.
- Due dates: Rushing
to drop movies off just in time to avoid late fees was an all too common experience
with physical presence rentals. Often consumers would return movies they haven't
yet had the chance to watch just to avoid being late. Eliminating due dates would
be a unique feature of the Netflix strategy.
- Delivery Mechanism:
Going out of the way to a video store on a Friday evening to pick up two or more
movies for the weekend wasn't a pleasant activity. Renting films earlier only
added to late charges. Consumers were looking for a more convenient selection
and delivery mechanism.
- Return Mechanism: Drop off boxes were a significant
improvement over returning movies at the counter, but usually required driving
further on an already rushed Monday morning. Why not let customers mail movies
back?
- Netflix could absorb the cost of pre-paid return envelopes
since many films were purchased. Long term contracts with USPS allowed for economies
of scale.
- Volume users: In most businesses, volume users pay less
and less the more they buy, but not so with movie rentals. The more movies that
were rented, the more consumers paid.
- Netflix addressed the issue
of volume users with a flat monthly fee.
- Movie studios wanted you
to watch more movies without being at a significant disadvantage in loss of revenue.
- Netflix increased purchases of film content through the preferred
DVD medium, adding more profits to successful films.
- Real estate
costs are a significant cost in video rental.
- By having a central
warehouse and office Netflix reduced real estate costs associated with running
hundred of stores, including high costs associated with utilities and labor.
- Netflix could outsource much of the DVD warehousing and shipping logistics,
building carefully the infrastructure as the market grew with brand awareness.
- Selection of videos is limited to "stock on hand" or currency
of titles. Browsing through a store is easy for retail, but people's tastes in
entertainment are varied, and not easily categorized for personal selection or
inventory of obscure films.
- The centralized location reduced the
inventory, increased earnings per DVD and also provided a large selection of obscure
works.
Netflix Marketing Strategies:
- Marketing
was key in the early adoption and success of Netflix. By getting the word out
through major portals, Yahoo, MSN, and AOL, and through its relationship with
BestBuy, consumers were deluged with information about the Netflix service.
- Free trials addressed the skeptics of a radically new service, and resulted
in high conversion rates to continuing customers. The recurring transaction model
helped consumers adopt the discipline of selecting films each week but without
pressure.
- Ordering through a centralized and regional warehouse mechanism
created efficiencies similar to what Amazon developed. Mail order catalog systems
would be difficult for movies, but using the Internet let people both order and
pay online.
- Customization and personalization allowed Netflix users
to save lists of preferred movies. As they became available, those films were
delivered based on priority.
- Partnerships were a key strategic focus
for Netflix. It was clear that paying upfront and buying movies at market cost
would tie up both cash and inventory. Alliances with movie studios would give
them a share of profits and equity, and a new distribution channel for film content
throughout the product lifecycle.
About the
Authors: Mitchell
Levy, is President and CEO of ECnow.com (http://ecnow.com),
an e-commerce management consulting company helping start-up, medium and large
enterprises transition its employees, partners and customers to the Internet age
through strategy, marketing, and off-the-shelf and customized on-line and on-ground
training. He is the author of E-Volve-or-Die.com (http://e-volve-or-die.com),
author of the Value Framework™
(http://ecnow.com/value), Executive Producer
of VMS3.info (http://VMS3.info), an on-line E-Commerce
Management (ECM) eZine, Chair of comdex.biz at Comdex Fall and the Founder and
Program Consultant of the premier San Jose State E-Commerce Management Certificate
Program (http://ecmtraining.com/sjsu),
Chairman of the Pay-per-Performance PR Agency Media Attention Now TM (http://ecnow.com/mediaattention),
the on-line learning content production company Transition Learning (http://transitionlearning.com)
and the CEO Networking organization CEOnetworking (http://ceonetworking.com).
Mitchell was at Sun Microsystems for 9 years, the last 4 of which he managed the
e-commerce component of Sun's $3.5 billion supply chain. Mitchell is a popular
speaker, lecturing on ECM issues throughout the U.S. and around the world.
Read more about Mr. Levy: http://ecnow.com/ml_bio.htm
Public speaking appearances I've given: http://ecnow.com/speaking.htm
Read about ECnow.com's media coverage: http://ecnow.com/media Bob
Cormia, is an Internet technologist and e-business consultant. Working
at SuperBusiness NET, Bob developed strategic positioning, product definition,
and account management. Bob developed the e-commerce curriculum at Foothill College
while working as a market analyst for G2R, specializing in IT strategy development
for Fortune 5000 enterprises. Bob joined eCongo.com in Fall 1998, developing corporate
strategy, product development, and launching FreeCommerce on the Internet. In
March 2000, Bob joined Calkey.com as an advisor in training and education development
in using UML (Unified Modeling Language). In Fall 2001, Bob will join Foothill
College as a full-time instructor in the Computer Technology Information Systems
division, where he will teach e-commerce, Web strategy, Internet projects, and
XML. Lindsey
Cross contributed to this article. To
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