Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade

Study online at https://quizlet.com/_912uv2

1. By Arthur A Thompson Throughout 2018 and the first three

The University of Alabama months of 2019 Netflix was on a roll.
Movie and TV show enthusiasts across
the world were flocking to become Net-
flix subscribers in unprecedented num-
bers, and shareholders were exceptional-
ly pleased with Netflix's fast rising stock
prices. Over the past eight years, the
company had successfully transformed
its business model from one where sub-
scribers paid a monthly fee to receive an
unlimited number of DVDs each month
(delivered and returned by mail with one
title out at a time) to a model where
subscribers paid a monthly fee to watch
an unlimited number of movies and TV
episodes streamed over the Internet. In
April 2019, Netflix was the world's leading
Internet television network with 149 mil-
lion paid streaming memberships in over
190 countries enjoying more than 165 mil-
lion hours of TV shows and movies per
day, including original series, documen-
taries, and feature films. Netflix members
not only could watch as much streamed
content as they wanted - anytime, any-
where, on nearly any Internet connected
screen - but could also play, pause, and
resume watching, all without commer-
cials. In the United States, Netflix still had
nearly 2.5 million members in May 2019
who, because of limited Internet service
or just personal preference, continued to
receive DVDs solely by mail (but the num-
bers of mail-only subscribers were declin-
ing monthly).

2. Netflix's swift growth to 60 mil- Financial statement data for Netflix for
lion paid subscribers in the 2005 through 2018 are shown in Exhibit
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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United States and its promis- 1 and 2. Netflix had never paid a dividend
ing potential for rapidly grow- to its shareholders and the company had
ing its base of international sub- declared it had no present intention of
scribers past 90 million pushed paying any cash dividends in the foresee-
the company's stock price to able future.
$360 per share in mid-May 2019
(and an all-time high of $423 in
July 2018). Already solidly en-
trenched as the world's biggest
and best-known Internet sub-
scription service for watching
TV shows and movies, the only
two questions for Netflix in 2019
seemed to be how big Netflix's
service might one day become in
the world market for on-demand
streaming of movies and TV
episodes and whether the com-
pany had the competitive and fi-
nancial strength to combat the
efforts of larger, resource-rich ri-
vals looking to steal subscribers
away from Netflix.

3. Exhibit 2 Selected balance sheet and cash flow

data for Netflix, 2005-2018 (in millions of
$).

4. Netflix's Drive to Globalize Its The United States government had in-
Operations stituted restrictions precluding all Unit-
ed States based companies from hav-
Exhibit 3 shows the remarkably ing operations in North Korea, Syria, and
short time frame it took for Net- Crimea.
flix to expand its operations from
a U.S. only subscriber base to Netflix estimated that it usually took about
a global subscriber base. But two years after the initial launch in a new
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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in 2019, Netflix was still strug- country or geographic region to attract
gling to surmount the barriers sufficient subscribers to generate a pos-
erected by the Chinese govern- itive "contribution profit" - Netflix defined
ment in allowing Netflix to enter "contribution profit (loss)" as revenues
the People's Republic of China, less cost of revenues (which consisted
the world's most massive mar- of amortization of content assets and ex-
ket for entertainment. The Chi- penses directly related to the acquisition,
nese government had for sev- licensing, and production/delivery of such
eral years refused to issue Net- content) and marketing expenses associ-
flix a license to operate in Chi- ated with its domestic streaming and in-
na, preferring instead to control ternational streaming business segments
the content its citizens were al- (the company had ceased all marketing
lowed to see - government cen- activities related to its domestic DVD busi-
sors required that an entire se- ness).
ries of a TV show had to be ap-
proved before it could begin to
be shown on an online platform.
Aside from the censorship issue,
most observers believed the Chi-
nese government also wished to
protect aspiring local providers
of Internet-based entertainment
content from foreign competi-
tors. As a consequence of its
dim prospects for getting an op-
erating license from the Chinese
government any time soon, in
2017 Netflix had negotiated a li-
censing arrangement to exclu-
sively provide some of its orig-
inal content to a fast-growing
Chinese company named iQiyi
(pronounced Q wee), the leading
provider of online entertainment
services in China with some 90
million subscribers (as of early
2019). Use of a licensing strategy
was attractive to Netflix because
it provided a means of gaining
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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content distribution in China and
building awareness of the Net-
flix brand and Netflix content,
but the licensing arrangement
was expected to generate only
small revenues for some years to
come.

5. The Fast-Changing Market for People could watch streamed entertain-

Entertainment Video ment on smartphones, all types of com-
puters (tablets, laptops, and desktops),
In 2018, the world market for in-home TVs with either built-in Inter-
entertainment video (movies, net access, and recent versions of video
TV episodes, and live-streamed game consoles. During the past, five
events) was undergoing rapid to eight years, most households with
and disruptive change being dri- high-speed Internet service and/or In-
ven by: ternet-connected TVs or DVD players
had shifted from renting or buying phys-
1. Increasingly pervasive con- ical DVDs with the desired content to
sumer access to high-speed In- almost exclusively watching streaming
ternet connections, movies and TV episodes. This was be-
cause streaming had the advantage of al-
2. The variety of devices and lowing household members to order and
downloadable apps that con- instantly watch the movies and TV pro-
sumers could use to access both grams they wanted to see and was much
broadcast and streamed enter- more convenient than patronizing a near-
tainment programs. by rent-or-purchase location.

3. The mounting intensity with This shift had permanently undercut the
which well-known, resource-rich once-thriving businesses selling movie
companies were competing for and music DVDs and/or renting DVDs
viewers of entertainment pro- at local brick-and-mortar locations and
grams. standalone rental kiosks (like Redbox
in the United States) or delivering/re-
As of March 31, 2019, almost turning DVDs by mail (as at Netflix)
4.4 billion of the world's popu- and unleashed a fierce battle among
lation of 7.7 billion people (56.8 the providers of streamed content in
percent) used the Internet; the countries across the world to become
number of people with broad- the preferred streamed content provider
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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band Internet access was mov- (or, at worst, a frequently used content
ing rapidly toward 1 billion - a provider).
number that Netflix viewed as
its near-term market opportu-
nity. YouTube and Facebook al-
ready had 2 billion monthly ac-
tive users, a number that Net-
flix viewed as its long-term mar-
ket opportunity for accessing
and attracting more subscribers.
Surveys conducted in December
2018 indicated that the average
amount of time individuals spent
using the Internet on any de-
vice was 6 hours and 42 minutes,
equal to more than 100 days of
online time per year. The world-
wide average fixed Internet con-
nection speed was 54.3 million
bits per second (mbps) and the
worldwide average mobile Inter-
net connection speed was 25.1
mbps. These speeds were ex-
pected to climb steadily toward
75 mbps (or more) by 2025.

6. Consumers could view streamed Competitors offering pay-per-view and

entertainment from growing VOD rentals were popular options for
numbers and types of providers, households and individuals who rent-
and the options include: ed movies occasionally (once or maybe
twice per month), since the rental costs
* Using a TV remote to or- tended to be less than the monthly sub-
der movies and popular TV scription prices for unlimited streaming
shows instantly streamed direct- from the various streaming providers.
ly to a TV (or other connect- However, competitors offering unlimited
ed devices) on a pay-per-view Internet streaming plans tended to be
basis (generally referred to the most economical and convenient
as "video-on-demand" or VOD). choice for individuals and households
Most all traditional cable and who watched an average of three or more
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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satellite providers of multichan- titles per month and for individuals who
nel TV packages were promot- wanted to be able to watch movies or TV
ing a library of several hun- shows or special live events streaming on
dred movie titles (and often pri- mobile devices.
or episodes of top TV shows,
as well as other content, most Netflix was by far the global leader in In-
recently including live sports) ternet streaming. It faced numerous com-
available on-demand to reg- petitors of varying competitive strength,
ular subscribers have a ca- geographic coverage, and content offer-
ble or satellite box; the rental ings; currently, none could match Netflix's
prices for pay-per-view and VOD global scope or the size of its content
movies from such providers library. In North America, Netflix's four
ranged from $1 to $6, but the biggest Internet streaming competitors in
rental price for popular recent- 2019 were Amazon Prime, Hulu, HBO
ly released movies was usu- (with its HBO NOW and HBO GO service
ally $3.99 to $5.99. However, options), and Walt Disney (beginning in
most every traditional cable and late 2019 and going forward):
satellite provider had recent-
ly begun offering a growing * Amazon Prime Video:
variety of content-viewing op- Amazon competed with Netflix via its
tions that were streamed di- Amazon Prime membership service. In-
rectly to a single location (and dividuals and households could become
viewable simultaneously on up an Amazon Prime member for a fee of
to as many as eight compat- $119 per year or $11.99 per month (after
ible WiFi-enabled devices) via a one-month free trial); there was a dis-
a special downloadable stream- counted price for students. In April 2018,
ing application that eliminated Amazon announced that it had over 100
the need for a cable/satellite million Amazon Prime members global-
box. These streaming options ly. In January 2019, Amazon announced
allowed subscribers to cus- that it had over 100 million members
tomize their own service pack- in the United States alone. While Ama-
age (number of channels, In- zon had originally created its Amazon
ternet speed, telephone service, Prime membership program as a means
and home security service). Re- of providing unlimited two-day shipping to
cently, in the United States, wire- customers who frequently ordered mer-
less phone providers like AT&T chandise from Amazon and liked to re-
and Verizon had also begun ceive their orders quickly, 2012 Ama-
installing thousands of miles zon began including movie and music
of fiber-optic cable annually in streaming as a standard benefit of Prime
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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their service areas that enabled membership - Amazon's video streaming
them to simultaneously pro- service was called "Prime Video." Ama-
vide residences and apartments zon's Prime Video content library con-
with multiple content-viewing tained thousands of movies that could be
options (including VOID), per- streamed to members, over 40 original
haps bundled with telephone series and movies, and some two million
service, ultra-high-speed Inter- songs.
net service, and/or home securi-
ty at an attractive monthly price In 2017 and 2018, Amazon made Prime
(for a specified period, usually Video more attractive to Prime members
one or two years). by

* There were many sub- 1. adding Prime Originals to its offerings,

scription-based providers of like The Marvelous Mrs. Maisel and the
streamed video content across Oscar-nominated movie The Big Stick
the world in 2019, and more
new entrants were expected in 2. Debuting NFL Thursday Night Football
upcoming years. In the Unit- on Prime Video (which attracted more
ed States, in early 2019, the than 18 million total viewers over 11
clear market leader was Net- games)
flix, followed by Amazon Prime
and Hulu; others included Vudu, 3. Expanding its slate of programming
Sling TV, HBO NOW, Starz, MAX across the globe - launching new seasons
GO (Cinemax), Showtime, Di- of Bosch, Sneaky Pete, and The Man in
rect TV Now, and Play Station the High Castle from the United States,
Vue. Disney had announced it The Grand Tour from the United Kingdom,
would initiate streaming serve You Are Wanted from Germany, while
in late 2019. An estimated 37 adding new Sentosha shows from Japan,
percent of TV viewers in the along with Breathe and the award-win-
United States used subscrip- ning Inside Edge from India. In April 2018,
tion-based streaming services Amazon announced it had agreed to pay
in 2017 to watch digital video the National Football League $65 million
content on their TVs. Howev- a year to stream NFL Thursday Night
er, YouTube videos could be Football globally to its Amazon Prime
accessed for free, and many members in 2018 and 2019. Also in 2018,
were videos uploaded by peo- Prime Channels offerings were expanded
ple or brands. The number of to include CBS All Access in the Unit-
video viewers using mobile de- ed States and newly launched channels
vices, such as smartphones and in the United Kingdom and Germany. In
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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tablets, was exploding all across 2017, Prime Video Direct secured sub-
the world. In the United States scription video rights for more than 3,000
alone, the number using mo- feature films and committed over $18 mil-
bile devices to watch videos was lion in royalties to independent filmmak-
projected to reach 179 million ers and other rights holders. Going for-
by 2020, and an additional 57 ward, the Prime original series pipeline
million were expected to watch include Tom Clancy's Jack Ryan starring
videos on computers and In- John Krasinski; The Romanoffs, starring
ternet-connected TVs. Exhibit 4 Aaron Ekhart and Diane Lane; Carnival
shows the percentage of Internet Row starring Orlando Bloom and Cara
users, by country, who wanted Delevingne; Good Omens starring Jon
online video content on any de- Hamm; and Homecoming, starring Julia
vice as of January 2018. Roberts in her first television series. In
addition, Prime Video had acquired the
global television rights for a multi-season
production of The Lord of the Rings, as
well as Cortes, a miniseries based on
the epic saga of Hernan Cortes from ex-
ecutive producer Steven Spielberg and
Starring Javier Bardem. Amazon's budget
for Prime Video original content additions
and enhancement was reportedly $5 bil-
lion in 2018 and $7 billion in 2019.

Other 2019 benefits of becoming an Ama-

zon Prime member included discounted
prices on Kindle eBooks, free reading of
designated digital editions of books and
magazines, special deals/coups on pur-
chases of selected products that Ama-
zon sold, one-click ordering via a "dash
button," shopping with Alexa, cloud stor-
age and sharing of personal photos and
videos, and an opt-in DVD rental ser-
vice (for an extra fee). In addition, Ama-
zon competed with Netflix's DVDs-by-mail
subscription service by allowing people
to rent any streamed or downloadable
movie, TV program, or other digital con-
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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tent for a limited time (for viewing on a per-
sonal computer, portable media player, or
other compatible devices), or to purchase
such content in the form of a download-
able file.

7. * HULU * HBO NOW and HBO GO-HBO NOW

Hulu had 28 million subscribers
as of May 2019, up from 12 mil- was an option to receive unlimited
lion in May 2017. The subscrip- streaming of content in HBO's library that
tion fee for Hulu was $6 per included movies, documentaries, sports
month for regular streaming (in- programs, and original series (Game of
terspersed with ads) and $12 Thrones, Westworld, Silicon Valley, True
per month for commercial-free Detective, Big Little Lies, Sharp Objects)
streaming, and new subscribers for a cancel-anytime monthly subscription
got a one-month free trial. The price of $14.99 (as of 2019). HBO NOW
regular streaming option includ- content was viewable on mobile phones,
ed advertisements as a means tablets, computers, and Internet-connect-
of helping keep the monthly sub- ed TVs. HBO NOW, offered only in the
scription price low. Hulu also United States and a few territories, had a
offered plans that included not reported 8 million subscribers as of Feb-
only its video streaming service, ruary 2019, but it was expected to be hit
but also packages that includ- with thousands of cancellations when its
ed 60+ live TV and cable chan- flagship Game of Thrones series ended in
nels (that included sports, news, May 2019. A 2019 study found that HBO
and entertainment) for a month- subscribers were far less loyal than those
ly fee of $44.95 and options to subscribing to other streaming services;
add on HBO, Showtime, Starz, only 26 percent of HBO subscribers who
and Cinemax. The Hulu library made their first payment during season 7
of offerings included all current of Game of Thrones was still subscribers
season episodes of popular TV six months later. HBO GO was a bonus
shows (available for next-day air- offering only for people who subscribed to
ing of network TV shows from HBO through a cable or satellite provider;
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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ABC, NBC, and Fox), over 15,000 such subscribers used a downloadable
back season episodes of 380+ app to access the HBO GO website, en-
TV shows, over 2,300 movies, tered their user name and password of
most in high-definition, and a their cable provider to authenticate their
growing selection of Hulu-pro- subscription, and then clicked on the de-
duced original content. sired HBO content that was viewable on
mobile phones, laptops, and computers.
Going into 2018, Hulu was a joint HBO had no interest in offering its HBO
venture co-owned by Walt Dis- GO option to people who were not cable
ney (30 percent), Fox (30 per- subscribers because its principal revenue
cent), Comcast (30 percent), and source was a percentage of the month-
Time Warner (10 percent), but in ly fees that some 142 million cable sub-
late 2018 Disney put a deal in scribers across the world paid their cable
place to buy Fox's 30 percent company for HBO as part of their cable
share of Hulu and then, months package-HBO was typically the most ex-
later, AT&T sold its 10 percent pensive of the premium cable channels
of Hulu to the Disney-Comcast offered by cable/satellite providers. How-
owners of the Hulu joint ben- ever, as of 2018, HBO was offering a di-
ture for $1.43 billion. In May 2019, rect streaming service akin to HBO NOW
Comcast and Disney announced in several countries that had low cable
an agreement whereby Disney subscriber rates (namely Spain, Colom-
would have full 100-percent con- bia, and four Nordic countries- Norway,
trol of Hulu, starting immedi- Denmark, Sweden, and Finland). HBO
ately; the agreement also spec- was a division of Time Warner, which had
ified that Comcast would con- recently merged with AT&T.
tinue to allow Hulu to carry all
NBCUniversal content as well as
live-stream NBCUniversal chan-
nels for Hulu's live TV service un-
til late 2024 (Comcast was the
100-percent owner of NBCUni-
versal). The deal called for Com-
cast's ownership stake in Hulu to
be officially sold to Disney start-
ing in January 2024.

8. * Walt Disney Netflix's Business Model and Strategy

In early 2019, Disney announced
it would initiate a streaming ser- Since launching the company's online
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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vice on November 12, 2019, at movie rental service in 1999, Reed
a monthly subscription price of Hastings, founder and CEO of Netflix,
$6.99. The service included con- had been the chief architect of Netflix's
tent from all of Disney's library subscription-based business model and
of previously released Disney strategy that had transformed Netflix into
movies, the content of all 21st the world's largest online entertainment
Century Fox's media library (pur- subscription service. Hastings's goals for
chased from Fox for $71.3 bil- Netflix were simple-build the world's best
lion in early 2019), and the li- Internet service for entertainment con-
censed content of Hulu, which tent, keep improving Netflix's content of-
Disney gained full control over ferings and services faster than rivals,
in May 2019. Disney had licens- attract growing numbers of subscribers
ing deals with AT&T and Com- every year, and grow long-term earnings
cast for Hulu's current content to per share. Hastings was a strong believer
appear on their services until the in moving early and fast to initiate strate-
time the existing licenses for the gic changes that would help Netflix out-
content expired. compete rivals, strengthen its brand im-
age and reputation, and fortify its position
In April 2018, Comcast, one of as the industry leader.
the largest cable operators in
the United States announced it
had expanded its partnership
with Netflix and would begin in-
cluding a Netflix subscription in
new and existing packages of-
fered to its cable subscribers.
In July 2018, The Wall Street
Journal reported that Walmart
was likely to enter the video
streaming market and establish
a subscription service with pro-
gramming that targeted "Middle
America" and that would likely
involve a subscription price be-
low what Netflix charged. Wal-
mart was working with a vet-
eran television executive with
experience in pay-television on
plans for the service. However, in
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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2019 AT&T, Apple, and Comcast
announced plans for launch-
ing their own video-streaming
service-WarnerMedia consisted
of HBO, Turner Broadcasting
(which consisted of cable chan-
nels CNN, TBS, and TNT), and
Warner Bros. Studio, and came
under AT&T's ownership when
its $85.4 billion mergers with
Time Warner was finalized in
2019 (HBO NOW was continued
as a standalone service to inter-
ested consumers). In 2019 AT&T
had over 153 million wireless
phone subscribers and was also
the owner of satellite TV service
DirecTV. Disney, in preparation
for launching its streaming ser-
vice in late 2019, had notified
Netflix of its intent to withdraw
its movies and shows from Net-
flix as existing licenses expired.
In June 2019, it was unclear what
bundle of content Apple would
use to underpin its streaming
service.

9. Netflix's Subscription-Based Netflix had organized its operations into

Business Model three business segments:

Netflix employed a subscrip- Segment 1: Domestic Streaming

tion-based business model.
Members could choose from a Segment 2: International Streaming.
variety of subscription plans
whose prices and terms had var- Segment 3: Domestic DVD
ied over the years. Originally, all
of the subscription plans were The Domestic streaming segment de-
based on obtaining and return- rived revenues from monthly member-
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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ing DVDs by mail, with month- ship fees for services consisting solely
ly prices dependent on the num- of streaming content to members in the
ber of titles out at a time. But United States.
as more and more households
began to have high-speed In- The International streaming segment de-
ternet connections, Netflix be- rived revenues from monthly member-
gan bundling unlimited stream- ship fees for services consisting solely
ing with each of its DVD-by-mail of streaming content to members outside
subscription options, with the the United States' The sizes of the title li-
long-term intent of encouraging braries (movies + episodes of TV Shows)
subscribers to switch to watch- offered in each country were typically in
ing instantly streamed content the 2,000 to 6,000 range, but offerings
rather than using DVD discs de- in the native languages of countries like
livered and returned by mail. The Sweden, Norway, Poland, Italy, and most
DVDs-by-mail part of the busi- Arab-speaking countries were more lim-
ness had order fulfillment costs ited (2,200 to 3,700). The domestic DVD
and postage costs that were by- segment derived revenues from month-
passed when members opted for ly membership fees for services consist-
an instant streaming member- ing solely of DVD-by-mail. Recent per-
ship subscription. formance of Netflix's three business seg-
ments in sown exhibit 5.
In 2018, Netflix offered three
types of streaming membership
plans. Its basic plan, currently
priced at $8.99 per month in the
United States, Included access
to standard definition quality
streaming on a single screen at a
time. Its standard plan, currently
priced at $12.99 per month, was
the most popular streaming plan
and included access to high-def-
inition quality streaming on two
screens concurrently. The com-
pany's premium plan, currently
priced at $15.99 per month, in-
cluded access to high-definition
and ultra-high-definition quality
content on four screens concur-
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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rently (subject to Internet ser-
vice and device capabilities). As
of April 2019, international pric-
ing for the three plans ranged
from approximately $3 to $20 per
month per U.S. dollar equivalent;
in many countries, the month-
ly prices of popular international
plans were in the range of $7 to
$10 per U.S. dollar equivalent.

Netflix executives expected that

the prices of the various sub-
scription plans in each coun-
try would likely rise over time,
thereby helping boost the glob-
al monthly average revenue the
company received per paying
subscriber above the 2018 aver-
age of $10.31 ($11.40 per month
in the United States and $9.43
per month internationally).

10. International Streaming Seg-

ment Exhibit 5

11. Domestic DVD Segment Exhibit

5

12. Global Totals Exhibit 5

13. The DVD-by-Mail Option The Domestic and International Stream-

ing Options
Subscribers who opted to re-
ceive movies and TV episode Netflix launched its Internet stream-
DVDs by mail went to Netflix's ing service in January 2007 with in-
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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website, selected one or more stant-watching capability for 2,000 titles
movies from its DVD library, and on personal computers. Very quickly, Net-
received the movie DVDs by flix invested aggressively to enable its
first-class mail generally within software to instantly stream content to
one business day. Subscribers a growing number of "Netflix-ready" de-
could keep a DVD for as long as vices, including video game consoles
they wished, with no due dates, (made by Sony, Microsoft, and Nintendo),
no late fees, no shipping fees, Internet-connected DVD and Blu-ray play-
and no pay-per-view fees. Sub- ers, Internet-connected TVs, TiVo DVRs,
scribers returned DVDs via the and special Netflix players made by Roku
U.S. Postal Service in a prepaid and several other electronics manufactur-
return envelope that came with ers.
each movie order.
At the same time, it began licensing
increasing amounts of digital content
that could be instantly streamed to sub-
scribers. Initially, Netflix took a "metered"
approached to streaming, in essence of-
fering an hour per month of instant watch-
ing on a PC for every dollar of a sub-
scriber's monthly subscription plan, In
2010, Netflix switched to an unlimited
streaming option on all of its monthly sub-
scription plans. According to one source,
Netflix had an estimated 6,800 movie
titles and 530 TV shows available for
streaming as of 2010.

14. In recent years, however, Net- information found Outside of Case Study
flix had gradually shrunk the
number of movie titles in its https://www.statista.com/statis-
streaming library to approxi- tics/882490/netflix-original-con-
mately 4,000 as of early 2019 tent-hours/
and dramatically increased its
number of episodes of TV shows By Amy Waston 11/10/2020
to approximately 4,700 in early
2019. Netflix had increased the From relatively humble beginnings as a
number of new original content DVD-by-mail service, Netflix has grown
offerings in each of the past six into one of the most influential video
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
Study online at https://quizlet.com/_912uv2
years. There were two reasons streaming services in the world. The com-
for the shift in the makeup of pany was one of the first to see the
Netflix's streaming content. One potential of video streaming technology
reason was internal data show- and began to transition to a subscrip-
ing that subscribers spent only tion video-on-demand model in 2007.
about one-third of their time on Since this transition, Netflix's revenue has
Netflix watching movies; the sec- grown from 1.36 billion to around 15.8
ond reason was a conviction billion in just ten years. The number of
on the part of Netflix's content Netflix subscribers has followed a similar
executives that if viewers were trend, growing from less than 22 million in
passionate about a movie, they 2011 to nearly 150 million in 2019.
would have already seen it in the-
aters by the time it ended up on Total number of subscription video-on-de-
Netflix. mand households worldwide in 2018: 250
Million.
To make the company's movie
library more valuable for its Netflix Annual Revenue in 2019: 20.15
subscribers, Netflix had begun Billion USD.
releasing a progressively larg-
er number of original movies Number of Netflix paying subscribers
(80 movies were released in worldwide as of Q3 2020: 195.15 Million
2018-the number for 2019 had
not been announced as of May DVD section has declined. At the end of
2019) and creating more mul- 2019, there were just 2.15 million sub-
ti-episode original TV series like scribers to Netflix's DVD rental service
past hits House of Cards, The in the United States, a drop from 11.17
Crown, Orange Is the New Black, million in 2011.
and Stranger Things. Going for-
ward, Netflix was expected to
continue to place greater em- How many paid subscribers does Netflix
phasis on its own original con- have?
tent- both movies and original Netflix had 195.15 million paid sub-
TV series- chiefly as a way to scribers worldwide as of the third quar-
more strongly differentiate itself ter of 2020. Most Netflix subscribers are
from competitors; top manage- based in the United States, with the U.S.
ment had announced its inten- accounting for over 73 million of Netflix's
tion to spend $9.1 billion on orig- total global subscriber base. While the
inal content in 2019, up from popularity of Netflix's streaming service
$6 billion in 2017. Netflix spent has been increasing, the company's DVD
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
Study online at https://quizlet.com/_912uv2
more than $12 billion on original section has declined. At the end of 2019,
content production and licens- there were just 2.15 million subscribers to
es to show content produced Netflix's DVD rental service in the United
by outside sources; according States, a drop from 11.17 million in 2011.
to a report byVariety magazine, Who is Netflix's audience?
Netflix's budget for new content Netflix subscribers are a loyal bunch,
(original production plus licens- with the majority reporting that they would
es) was expected to hit $15 bil- keep Netflix even if the monthly subscrip-
lion in 2019 and $17.8 billion in tion price increased, and subscribers also
2020. stated that they would continue using the
service with ads. With a wealth of content
information found Outside of spanning multiple genres and a diverse
Case Study catalogue of TV shows, movies and doc-
https://www.cheatsheet.com/en- umentaries, Netflix appeals to a wide au-
tertainment/you-wont-be- dience and consistently impresses users
lieve-how-many-origi- with its often binge-worthy original con-
nal-movies-and-shows-netflix-re- tent. Subscribers are from diverse ethnic
leased-in-2019.html/ backgrounds - data on Netflix subscribers
by ethnicity found that more Hispanic
Netflix's total output for 2019 is and African Americans watch Netflix than
greater than what the entire U.S. their White counterparts. Netflix consid-
TV industry put out in 2005, ac- ers diversity important and featured al-
cording to an analysis by Va- most five times the number of LGBTQ
riety. 371 new TV shows and characters in its TV series than Hulu in
movies. The nearly 400 Netflix the 2018-19 season. Additionally, openly
originals released this year is a published data on the gender of Netflix
54.6% increase over 2018, when employees in early 2019 revealed that
the streamer released 240 shows the company performs extremely well in
and movies. terms of achieving an even split. Perhaps
unsurprisingly, Netflix appeals to all age
groups and a survey showed that the ma-
jority of adults aged 18 to 54 years old
subscribed to the service.
Netflix viewer habits
Interestingly, a survey exploring the be-
havior of Netflix viewers with pets found
that a total of 12 percent of respondents
admitted that they had stopped viewing
a show because their pet did not like it,
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
Study online at https://quizlet.com/_912uv2
and 22 percent had bribed their pet with
treats in a bid to encourage the animal to
watch the show or movie for longer. Such
behavior may seem strange to some, but
with Netflix available to watch on multiple
devices and in any location, consumers
inevitably have and will continue to tailor
their viewing experience to their prefer-
ences, needs, and lifestyles. Some U.S.
adults have even admitted to watching TV
and movies in public restrooms, and with
Netflix retaining its title as the undisputed
market leader when it comes to video
streaming it's safe to assume that some of
these bathroom binge viewers are Netflix
customers, too.

15. Netflix's Strategy: Subscriber Growth

Netflix's strategy in 2019 was fo- Netflix executives were keenly aware that
cused squarely on: rapid subscriber growth was the key to
boosting the company's profitability and
* Growing the number of domes- justifying the company's lofty stock price
tic and international streaming of $360 (as of May 22, 2019 and as of
subscribers. November 11th 2020: $485.68 at 10:42
AM PST), which was 134 times the com-
* Enhancing the appeal of its li- pany's 2018 diluted earnings per share of
brary of streaming content, with $2.68 and 61 times the consensus EPS of
an increasing emphasis on ex- $5.88 that Wall Street analysts and Netflix
clusive original movies and TV investors were anticipating the company
series produced in-house. would earn in 2019. Netflix executives ex-
pected that close to 80 percent of the
* Spending aggressively on mar- gains in subscriber growth in 2019 and
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
Study online at https://quizlet.com/_912uv2
keting and advertising in all of beyond would come in the international
the countries and geographic re- arena- in 2018 the growth in international
gions the company had recent- subscribers was 81.2 percent of total sub-
ly entered to broaden awareness scriber growth (including free trials).
of the Netflix brand and service
and thereby support the compa-
ny's strategic objective to rapid-
ly grow its base of streaming
subscribers.

* Expanding the number of titles

that members could download
for offline viewing.

* Continuously enhancing its

user interface.

16. New Content Acquisition Marketing and Advertising

Over the years, Netflix had Netflix used multiple marketing approach-
spent considerable time and en- es to attract subscribers, but especially
ergy establishing strong ties online advertising (paid search listings,
with various entertainment video banner ads on social media sites, and
providers to both expand its con- permission-based emails) and ads on re-
tent library and gain access to gional and national television. To spur
new releases as soon as possi- subscriber growth, Netflix had boosted
ble after they were released for marketing expenditures of all kinds from
first-run showing in movie the- $25.7 million in 2000 (16.8 percent of
aters. Prior to the recent push by revenues) to $142.0 million in 2005 (20.8
Amazon Prime and Hulu to at- percent of revenues) to $298.8 million in
tract streaming subscribers, Net- 2010 (13.8 percent of revenues) to $1.1
flix had successfully negotiated billion in 2016 (12.4 percent of revenues)
exclusive rights to show titles to $1.44 billion in 2017 (12.3 percent of
produced by a few studios. revenues) and to 2.37 billion in 2018 (15.0
percent of revenues).
In August 2011, Netflix intro-
duced a new "Just for Kids" These Expenditures Related To:
section on its website that
contained a large selection * Online and television advertising in the
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
Study online at https://quizlet.com/_912uv2
of kid-friendly movies and TV United States and newly entered coun-
shows. By March 2012, over one tries. Advertising campaigns of one type
billion hours of Just for Kids pro- or another were under way more or less
gramming had been streamed to continuously, with the lure of one-month
Netflix members. free trials and announcements of new
and forthcoming original titles usually be-
New content was acquired from ing the prominent ad features. Netflix's ex-
movie studios and distributors penditures for digital and television adver-
through direct purchases, rev- tising were $1.8 billion in 2018, $1.09 in
enue-sharing agreements, and li- 2017, $842.4 million in 2016, and $714.3
censing agreements to stream million in 2015.
content. Netflix acquired many
of its new-release movie DVDs * Costs pertaining to free trial subscrip-
from studios for a low upfront fee tions.
in exchange for a commitment
for a defined period of time either * Payments to the company's partners.
to share a percentage of sub- These partners consisted of mainly of:
scription revenues or to pay a
fee based on content utilization. 1. Consumer products manufacturers
After the revenue-sharing period who produced and distributed devices
expired for a title, Netflix gener- (particularly remote controls) that facili-
ally had the option of returning tated connecting TVs and other media
the title to the studio, purchasing equipment to Netflix.
the title, or destroying its copies
of the title. On occasion, Netflix 2. Certain cable providers and other mul-
also purchased DVDs for a fixed tichannel video programming distributors,
fee per disc from various stu- mobile operators, and Internet service
dios, distributors, and other sup- providers who had begun collaborating
pliers. with Netflix to make it easy for their cus-
tomers to connect to Netflix. For exam-
In the case of movie titles and TV ple, most all brands of Internet-connected
episodes that were streamed to TVs now came with a preinstalled Net-
subscribers via the Internet for flix app that was easily accessed via the
instant viewing, Netflix generally TV remote; some TV remotes even had
paid a fee to license the content Netflix buttons that provided Netflix sub-
for a defined period of time, with scribers with a a one-click connection to
the total fees spread out over the their watchlist.
term of the license agreement
(so as to better match up con- In 2018, multi-channel TV providers like
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
Study online at https://quizlet.com/_912uv2
tent payments with the stream of Comcast and Sky were offering cus-
subscription revenues coming tomers the option to bundel a subscrip-
in for that content). Following the tion to Netflix in with their preferred chan-
expiration of the license term, nel packages. Netflix believed collabo-
Netflix either removed the con- ration with a host of cable and moble
tent from its library of streamed phone operators across all geographic
offerings or negotiated an exten- markets would likely become common
sion or renewal of the license practice very quaickly. Management was
agreement when management particularly interested in partnering with
believed there was still enough mobile operators to create quick and
subscriber interest in the con- easy-to-use procedures for mobile phone
tent to justify the renewal fees. users across the world to access Netflix
streamed or downloadable programming.
Over the past five years, Net- Netflix believed it was particularly impor-
flix's rapidly growing subscriber tant to make mobile streaming from Net-
base (as well as the stream- flix instantly accessible to those people
ing subscriber growth at Ama- who basically only wanted to have their
zon Prime Video, Hulu, and oth- relationship with Netflix on a mobile de-
er providers) gave movie studios vice.
and the network broadcasters of
popular TV shows considerably In 2019, Netflix expected its growth in
more bargaining power to com- marketing expenditures to outpace rev-
mand higher prices for their con- enue growth, partly because it had start-
tent. Netflix management was ed investing in more extensive marketing
acutely aware of its diminish- campaigns for new original titles to create
ing bargaining power in acquir- more density of viewing and conversa-
ing content that would be espe- tion around each title. Netflix CEO Reed
cially appealing to subscribers, Hastings explained the logic behind trying
and the substantial negative im- to make certain new titles a bigger hit in
pact of that paying higher prices a particular nation or among a particular
for streaming content had on demographic segment"
the company's current and fu-
ture profit margins. Nonetheless, "We believe this density off viewing helps
Netflix executives believed there on both retention and acquisition, be-
was still room for the company to cause it makes our original titles even less
earn attractive profits on stream- substitutable. Because we operate in so
ing if it could grow its subscriber many countries, we are able to try dif-
base fast enough to more than ferent [marketing] approaches in different
cover the rising costs of content markets and continue to learn [how best
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
Study online at https://quizlet.com/_912uv2
acquisition. to market Netflix's original content and
differentiate Netflix from rival streaming
As indicated earlier, Netflix had providers].
recently begun devoting the ma-
jority of its new content acqui-
sition budget to producing its
own original movies and TV se-
ries in-house. Several of these
shows were being launched in
local languages with local pro-
ducers to appeal directly, if
not exclusively, to subscribers
in a particular country or re-
gion. A new 2017 Brazilian sci-
ence-fiction show had scored
well with audiences around the
world, even though it had been
produced in Portuguese for
Brazil-Netflix's first instance of
a local-language program work-
ing well in locations where oth-
er languages dominated. In the
second half of 2018, Netflix in-
troduced a new original series
produced in Denmark, called The
Rain, that Netflix executives be-
lieved would have broad glob-
al appeal, along with the sec-
ond season of the Brazilian pro-
gram (called 3%). Other new
original content scheduled for
2018 included the second sea-
son of 13 Reasons Why (one
of Netflix's most watched tele-
vision shows around the world
in 2017), returning seasons of
hits like Luke Cage, GLOW, Dear
White People, Unbreakable Kim-
my Schmidt, Santa Clarita Diet,
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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Series of Unfortunate Events,
and a comedy feature film with
Adam Sandler and Chris Rock,
called The Week Of.

17. Netflix's Title Selection Software The Financial Strain of Netflix's Grow-
and Efforts to Enhance Its Inter- ing Expenditures for Original Content and
face With Users. Other Content Acquisitions

Netflix had developed propri- The company's heightened strategic em-

etary software technology that phasis on original content produced
allowed members to easily scan in-house had resulted in multi-billion-dol-
a movie's length, appropriate- lar annual increases in Netflix's financial
ness for various types of au- obligations to pay for streaming content
diences (G, PG, or R), Prima- and sharply higher negative cash flows
ry cast members, genre, and an from operations (see exhibit 6).
average of the ratings submit-
ted by other subscribers (based Netflix was covering these obligations
on 1 to 5 stars). With one with new issues of common stock and
click, members could watch a new issues of senior notes (Exhibit 6); de-
short preview of a movie or TV tails of Netflix's outstanding senior notes
show if they wished. Most im- are shown in exhibit 7
portantly, perhaps, were algo-
rithms that created a personal-
ized 1- to 5-star recommendation
for each title that was a com-
posite of a subscribers' own rat-
ings of movies/TV shows previ-
ously viewed, movies/TV shows
that the member had placed on
a "watchlist" for future view-
ing and/or mail delivery, and the
overall or average rating of all
subscribers (several billion rat-
ings had been provided by sub-
scribers over the years).

Subscribers often began their

search for titles by viewing a
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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list of several hundred personal-
ized movie/TV show recommen-
dations that Netflix's software
automatically generated for each
member. Each member's list of
recommended movie was the
product of Netflix-created algo-
rithms that organized the com-
pany's entire content library into
clusters of similar movies/TV
shows and then sorted the ti-
tles in each cluster from most
liked to least liked based on
subscriber ratings. Those sub-
scribers who favorably or unfa-
vorably rated similar movies/TV
shows in similar clusters were
categorized as like-minded view-
ers. When a subscriber was on-
line and browsing through the
selections, the software was pro-
grammed to check the clusters
the subscribers had previously
viewed, determine which selec-
tions in each cluster the cus-
tomer had yet to view or place
on watchlist, and then display
those titles in each cluster in
an order that started with the ti-
tle that Netflix's algorithms pre-
dicted the subscriber was most
likely to enjoy down to the ti-
tle the subscriber was predict-
ed to least enjoy. In other words,
the subscriber's ratings of titles
viewed, the titles on the sub-
scriber's watchlist, and the title
ratings of all Netflix subscribers
determined the order in which
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
Study online at https://quizlet.com/_912uv2
the available titles in each clus-
ter or genre were displayed to
a subscriber-with one click, sub-
scribers could see a brief pro-
file of each title and Netflix's pre-
dicted rating (from 1 to 5 stars)
for the subscriber. When sub-
scribers came upon a title they
wanted to view, that title could
be watch-listed for future view-
ing with a single click. A mem-
ber's complete watchlist of titles
was immediately viewable with
one click whenever the member
went to Netflix's website. With
one additional click, any title on
a member's watchlist could be
activated for immediate viewing.
Netflix management saw its title
recommendation software as a
quick and personalized means of
helping subscribers identify and
then watch titles they were likely
to enjoy.

In 2018, Netflix's strategic initia-

tives in the user interface are-
na were focused on enahncing
the accessibility of Netflix con-
tent for subscribers by:

1. Offering more programs in lo-

cal languages.

2. Improving the streaming

and download speeds for sub-
scribers with suboptimal Inter-
net connections-by making pro-
gram encoding much more ef-
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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ficient so content selections
would load more quickly and
provide mobile users with a
"really incredible video experi-
ence."

More efficient encoding also en-

abled subscribers with spotty
Internet connections to quick-
ly download some programs for
later viewing when offline.

18. Exhibit 7: Netflix's Outstanding Netflix management forecasted that the

Long-Term Debt as of May 2019 company would have a negative free cash
flow deficit of about $3.5 billion in 2019
and that the company would continue
to experience negative, but progressive-
ly smaller, cash flow deficits, for sever-
al more years due to growing expendi-
tures for original content. However, ex-
ecutive management was confident that
the company's expected growth in sub-
scribers, subscription revenues, and op-
erating profit margins would in the near
future result in positive and growing cash
flows from operations, enabling the com-
pany to reduce borrowing and begin to
pay down its long-term debt. In April 2018,
CEO Reed Hastings said:

"We will continue to raise debt as needed

to fund our increase in original content.
Our debt levels are quite modest as a
percentage of our enterprise values, and
we believe [issuing] debt is [a] lower cost
of capital compared to equity."

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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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19. QUESTION TIME: Skipped.. Professor unable to delete or

change question due to system glitch.
Netflix in 2019: Striving to So-
lidify Its Position as the Global
Leader

We feel that the Netflix in 2019:

Striving to Solidify Its Position
as the Global Leader case pairs
particularly well with the materi-
al covered in Chapter 7, in which
the five primary reasons that
companies choose to enter for-
eign markets are identified:

To gain access to new cus-

tomers.
To achieve lower costs through
economies of scale, experience,
and increased purchasing pow-
er.
To gain access to low-cost in-
puts of production.
To further exploit its core compe-
tencies.
To gain access to resources and
capabilities located in foreign
markets.

Before beginning this exercise,

you will need to read the Netflix
case.

How strong are the competitive

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Study online at https://quizlet.com/_912uv2
forces confronting Netflix in the
market for subscription video on
demand? The next several ques-
tions will walk you through a
five-forces analysis to support
your answer.

20. What factors are acting to inten- a. Amazon Prime, YouTube, and Hulu are
sify/weaken rivalry in the sub- exerting tremendous competitive pres-
scription video-on-demand in- sure on Netflix to maintain its pace as
dustry? the creator of "must-watch" on-demand
content. YES
Select "yes" for those state-
ments below that are accurate b. Local providers in both developed and
and choose "no" for those that emerging markets are also rivals with
are not. possibly lower cost structures and more
localized content. YES
a. Amazon Prime, YouTube, and
Hulu are exerting tremendous c. Rivalry is centered on two main factors:
competitive pressure on Netflix price and breadth of selection; providers
to maintain its pace as the cre- with the largest content library will most
ator of "must-watch" on-demand likely have the most subscribers. NO
content.
d. The competitive pressures associated
b. Local providers in both devel- with rivalry among providers of subscrip-
oped and emerging markets are tion video on demand is intense due to
also rivals with possibly lower price competition and price wars. YES
cost structures and more local-
ized content. e. Rivalry among subscription-based
providers of streamed video content is a
c. Rivalry is centered on two moderate competitive force that is likely to
main factors: price and breadth intensify in the years ahead. NO
of selection; providers with the
largest content library will most f. Deep-pocketed newer entrants such
likely have the most subscribers. as Apple, Disney, and Warner Media will
ratchet up that pressure. YES
d. The competitive pressures
associated with rivalry among
providers of subscription video
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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on demand is intense due to
price competition and price
wars.

e. Rivalry among sub-

scription-based providers of
streamed video content is a
moderate competitive force that
is likely to intensify in the years
ahead.

f. Deep-pocketed newer entrants

such as Apple, Disney, and Warn-
er Media will ratchet up that pres-
sure.

21. What factors are acting to inten- a. The cost of licensing studio-produced
sify/weaken the bargaining pow- content involving top writers, location
er and leverage of suppliers shooting, and actors with box-office ap-
in the subscription video-on-de- peal will rise as competitors emerge and
mand industry? bid for content and talent that Netflix de-
sires. YES
Select "yes" for those state-
ments below that are accurate b. The competitive pressures associated
and choose "no" for those that with the bargaining power of suppliers
are not. to providers of subscription video on de-
mand is weak to moderate. YES
a. The cost of licensing stu-
dio-produced content involving c. All streaming/VOD providers will un-
top writers, location shooting, doubtedly have to compete on the basis
and actors with box-office ap- of having a large library of titles available
peal will rise as competitors for streaming. NO
emerge and bid for content and
talent that Netflix desires. d. As technology improves and decreas-
es in cost, more consumers will be able
b. The competitive pressures as- to create as well as download content
sociated with the bargaining quickly via the web and play it on their
power of suppliers to providers televisions or alternative devices. YES
of subscription video on de-
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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mand is weak to moderate. e. The bargaining power and leverage of
suppliers is a moderate to very strong
c. All streaming/VOD providers competitive force, depending on the type
will undoubtedly have to com- of supplier. NO
pete on the basis of having a
large library of titles available for f. The cost to deliver content over broad-
streaming. band and cellular networks provided by
third parties could increase, and the need
d. As technology improves and to pay for fast-lane network access could
decreases in cost, more con- drag on margins. YES
sumers will be able to create as
well as download content quick-
ly via the web and play it on
their televisions or alternative
devices.

e. The bargaining power and

leverage of suppliers is a mod-
erate to very strong competitive
force, depending on the type of
supplier.

f. The cost to deliver content

over broadband and cellular net-
works provided by third parties
could increase, and the need to
pay for fast-lane network access
could drag on margins.

OPTIONS:
YES OR NO

22. What factors are acting to a. Competition from substitutes is a mod-

intensify/weaken the competi- erate to strong competitive force, depend-
tive pressures associated with ing on the extent to which consumers
substitutes in the subscription prefer to watch content on-demand ver-
video-on-demand industry? sus watching movies at movie theaters or
buying movie DVDs for their own personal
library. NO
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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a. Competition from substitutes
is a moderate to strong compet- b. Other than labor-intensive work to
itive force, depending on the ex- create and stream personal videos via
tent to which consumers prefer YouTube and other social media outlets
to watch content on demand ver- such as Twitter, Facebook, Instagram,
sus watching movies at movie and Snapchat, there are few powerful
theaters or buying movie DVDs substitutes for subscription video-on-de-
for their own personal library. mand services. YES

b. Other than labor-intensive c. Acceptable substitutes are readily

work to create and stream per- available and competitively priced (in
sonal videos via YouTube and some cases). NO
other social media outlets such
as Twitter, Facebook, Instagram, d. The slow demise of movie theaters as
and Snapchat, there are few pow- well as cable and broadcast television
erful substitutes for subscrip- also exacerbate the decreasing power of
tion video-on-demand services. substitutes. YES

c. Acceptable substitutes are e. The competitive pressures associated

readily available and competi- with the threat of substitutes in the market
tively priced (in some cases). for subscription video on demand is weak.
YES
d. The slow demise of movie the-
aters as well as cable and broad-
cast television also exacerbate
the decreasing power of substi-
tutes.

e. The competitive pressures as-

sociated with the threat of sub-
stitutes in the market for sub-
scription video on demand is
weak.

OPTIONS:YES OR NO

23. What factors are acting to inten- a. Individual subscribers/viewers may opt
sify/weaken the bargaining pow- to switch to a different provider and nego-
er of buyers in the subscription tiate for a better rate at any time. NO
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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video-on-demand industry?
b. The competitive pressures associated
Select "yes" for those state- with the bargaining power of buyers of
ments below that are accurate subscription video on demand is moder-
and choose "no" for those that ate. YES
are not.
c. Buyers have a variety of streaming ser-
a. Individual subscribers/view- vices from which to choose (Amazon, Ap-
ers may opt to switch to a differ- ple TV, Hulu, Netflix, Roku, etc.). YES
ent provider and negotiate for a
better rate at any time. d. Switching costs for buyers are moder-
ately low compared to switching among
b. The competitive pressures as- cable and satellite TV providers. YES
sociated with the bargaining
power of buyers of subscription e. Consumers in most markets have mul-
video on demand is moderate. tiple ways to view archival and new con-
tent, either via traditional broadcast TV or
c. Buyers have a variety of via rentals of DVD/Blue-Ray media. YES
streaming services from which
to choose (Amazon, Apple TV, f. Most consumers already possess a
Hulu, Netflix, Roku, etc.). tablet, mobile device, or smart TV, there
is no need to purchase add-on boxes or
d. Switching costs for buyers purpose-specific viewing equipment. YES
are moderately low compared
to switching among cable and
satellite TV providers.

e. Consumers in most mar-

kets have multiple ways to view
archival and new content, either
via traditional broadcast TV or
via rentals of DVD/Blue-Ray me-
dia.

f. Most consumers already pos-

sess a tablet, mobile device,
or smart TV, there is no need
to purchase add-on boxes or
purpose-specific viewing equip-
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ment.

OPTIONS:YES OR NO

24. What factors are acting to in- a. The competitive pressures associated
tensify/weaken the threat of new with the threat of new entry into the mar-
entrants into the subscription ket for subscription video on demand is
video-on-demand industry? weak to moderate. YES

Select "yes" for those state- b. Some markets, such as China, Crimea,
ments below that are accurate North Korea, and Syria, remain closed
and choose "no" for those that to external providers of streaming media
are not. services (or do not allow such services to
exist). YES
a. The competitive pressures as-
sociated with the threat of new c. The entry threat into the market for
entry into the market for sub- subscription video on demand should be
scription video on demand is viewed as moderate to strong. NO
weak to moderate.
d. The entry into the subscription video
b. Some markets, such as Chi- on demand has become prohibitively high
na, Crimea, North Korea, and and is rising. YES
Syria, remain closed to exter-
nal providers of streaming media
services (or do not allow such
services to exist).

c. The entry threat into the mar-

ket for subscription video on de-
mand should be viewed as mod-
erate to strong.

d. The entry into the subscription

video on demand has become
prohibitively high and is rising.

OPTIONS:YES OR NO

25.

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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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What do you see as the key dri- a. Social/Demographic—global popula-
vers impacting growth and key tion growth and increasing urbanization,
success factors for rivals com- accompanied by rising standards of living
peting in the market for sub- and technology adoption YES
scription video on demand?
b. Economic—changes in per capita dis-
Select "yes" for those state- posable income in emerging economies,
ments below that are accurate some of which are located in the Southern
and choose "no" for those that Hemisphere, offsetting economic slow-
are not. downs in countries in the Northern Hemi-
sphere YES
a. Social/Demographic—global
population growth and increas- c. Increased competition—low barriers to
ing urbanization, accompanied entry will increase the number of competi-
by rising standards of living and tors NO
technology adoption
d. Government/Political/Legal—absence
b. Economic—changes in per or presence of subsidies, low-interest
capita disposable income in rates, barriers to trade, presence or ab-
emerging economies, some of sence of high-speed Internet, cellphone
which are located in the South- and tablet adoption rates, and currency
ern Hemisphere, offsetting eco- exchange rates YES
nomic slowdowns in countries in
the Northern Hemisphere e. Technology—increasing reliance on
innovation and R&D to develop new
c. Increased competition—low programming content, increase video
barriers to entry will increase the streaming throughput, differentiate prod-
number of competitors ucts, and mine or analyze customer data
YES
d. Government/Political/Le-
gal—absence or presence of f. Industry growth—the mass entry
subsidies, low-interest rates, of video-on-demand competitors has
barriers to trade, presence or caused growth to slow down at least for
absence of high-speed Internet, a short period NO
cellphone and tablet adoption
rates, and currency exchange
rates

e. Technology—increasing re-
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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liance on innovation and R&D to
develop new programming con-
tent, increase video streaming
throughput, differentiate prod-
ucts, and mine or analyze cus-
tomer data

f. Industry growth—the mass en-

try of video-on-demand competi-
tors has caused growth to slow
down at least for a short period

OPTIONS:
YES OR NO

26. What does a SWOT analysis re- SKIPPED... ERROR IN SYSTEM

veal about the overall attractive-
ness of Netflix's situation? The
next several questions will walk
you through this analysis.

27. Which of the following accurate- a. Netflix enjoys an international presence

ly characterize Netflix's resource YES
strengths and competitive capa-
bilities? b. Netflix was not a first mover but was
certainly successful in following the strat-
egy of other streaming providers NO
a. Netflix enjoys an international
presence c. differentiated, cutting-edge, critically
acclaimed content YES
b. Netflix was not a first mover
but was certainly successful in d. Netflix has the capability to track and
following the strategy of other query customer analytical data YES
streaming providers

c. differentiated, cutting-edge,
critically acclaimed content

d. Netflix has the capability to

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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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track and query customer analyt-
ical data

OPTIONS:
YES OR NO

28. Which of the following accurate- a. the financial strains of producing a

ly characterize Netflix's resource greater number of original, in-house pro-
weaknesses and competitive lia- duced content has left Netflix financially
bilities? drained NO

a. the financial strains of produc- b. inability to enter Chinese market YES

ing a greater number of original,
in-house produced content has c. Netflix is vulnerable to the bargaining
left Netflix financially drained power of movie studios and other content
suppliers to extract higher license fees
b. inability to enter Chinese mar- from Netflix NO
ket
d. diversion of cash flows to service debt
c. Netflix is vulnerable to the bar- YES
gaining power of movie studios
and other content suppliers to e. high financial leverage YES
extract higher license fees from
Netflix

d. diversion of cash flows to ser-

vice debt

e. high financial leverage

OPTIONS:YES OR NO

29. Which of the following accurate- a. increasing global availability of broad-

ly characterize Netflix's market band and high-speed cellular networks
opportunities? YES

a. increasing global availabili- b. increasing installed base of devices ca-

ty of broadband and high-speed pable of showing streaming content YES
cellular networks

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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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c. vast potential in world's second largest
b. increasing installed base of economy (China), and second most pop-
devices capable of showing ulous market (India and Southeast Asia)
streaming content YES

c. vast potential in world's sec- d. partner with smaller streaming

ond largest economy (China), providers such as Redbox NO
and second most populous mar-
ket (India and Southeast Asia) e. partner with movie studios to negotiate
lower license fees NO
d. partner with smaller streaming
providers such as Redbox

e. partner with movie studios to

negotiate lower license fees

OPTIONS:
YES OR NO

30. Which of the following represent a. hacking of consumer data and illegal
external threats to Netflix's fu- reproduction of proprietary content YES
ture well-being?
b. continued political and legal barriers to
a. hacking of consumer data and enter China and other emerging markets
illegal reproduction of propri- YES
etary content
c. continued jockeying for position among
b. continued political and legal existing rivals plus entry of Apple, Disney,
barriers to enter China and other and Warner Media that will change the
emerging markets game for subscription services YES

c. continued jockeying for posi- d. government regulations that can pre-

tion among existing rivals plus vent them from producing their own
entry of Apple, Disney, and Warn- in-house content NO
er Media that will change the
game for subscription services

d. government regulations that

can prevent them from produc-
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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ing their own in-house content

OPTIONS:YES OR NO

31. Considering all four SWOT lists, C. Netflix's overall situation is strong and
which of the following accurately its long-term outlook is promising.
characterize the attractiveness
of Netflix's overall situation?Se-
lect the best response from the
options provided.

A. Netflix's situation is threat-

ened by movie studios with high
licensing fees, adding to Net-
flix's financial burden.

B. Netflix should address its

weaknesses very closely as it
continues to lose subscribers to
Amazon.

C. Netflix's overall situation is

strong and its long-term outlook
is promising.

32. How have Netflix's business a. CEO Reed Hastings has, over time,
strategy choices strengthened successfully transitioned Netflix from a
or weakened its competitive po- DVD rental service to the premier stream-
sition in the streaming video ing video on demand service. YES
on-demand industry?
b. Netflix's internal recommendation soft-
Discuss how the company's se- ware and large subscriber base have af-
nior management has chosen to forded the company an edge when de-
increase the horizontal or verti- ciding which content to acquire in future
cal scope of the firm. years. YES

a. CEO Reed Hastings has, over c. Netflix is not the current market leader;
time, successfully transitioned this increases the bargaining power of
Netflix from a DVD rental service suppliers. NO

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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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to the premier streaming video
on demand service. d. Netflix has built a substantial content
library that will benefit the firm over the
b. Netflix's internal recommen- long term. YES
dation software and large sub-
scriber base have afforded the e. Rivalry has been moderate between
company an edge when deciding Amazon Prime, Hulu, YouTube, and Net-
which content to acquire in fu- flix. NO
ture years.
f. Netflix incurs a cost to localize con-
c. Netflix is not the current mar- tent and production of content to sustain
ket leader; this increases the access to global markets and grow sub-
bargaining power of suppliers. scriber base in those markets. YES

d. Netflix has built a substantial g. Netflix is highly dependent on favorable

content library that will benefit reception from foreign governments and
the firm over the long term. consumers' acceptance of content as well
as access to high-speed Internet services
e. Rivalry has been moderate for streaming that content. YES
between Amazon Prime, Hulu,
YouTube, and Netflix.

f. Netflix incurs a cost to localize

content and production of con-
tent to sustain access to glob-
al markets and grow subscriber
base in those markets.

g. Netflix is highly dependent on

favorable reception from foreign
governments and consumers'
acceptance of content as well
as access to high-speed Internet
services for streaming that con-
tent.

OPTIONS:YES OR NO

33.
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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Has Netflix's increase in scope a. It is expected that Netflix will expand
also been a part of its interna- further into local-language programming
tional strategy? Is the interna- to offset the weakness of its relatively
tional strategy best character- more modest offerings in many countries.
ized as a multidomestic strate- YES
gy, global strategy, or transna-
tional strategy? Which strategy b. Netflix's expansion outside the United
for entering international mar- States could continue to drag on cash
kets should be selected for Chi- flow due to different tastes and lower
na? video consumption. YES

a. It is expected that Netflix c. It is expected that Netflix will success-

will expand further into local-lan- fully enter international markets with a
guage programming to offset the multidomestic strategy. NO
weakness of its relatively more
modest offerings in many coun- d. A transnational strategy allows Netflix
tries. the ability to exploit experience-curve ef-
fects and location economies and to cus-
b. Netflix's expansion outside tomize product offerings in accordance
the United States could contin- with local response. YES
ue to drag on cash flow due to
different tastes and lower video e. It is highly probable that Netflix's in-
consumption. ternational expansion will disappoint, par-
ticularly in terms of the speed of margin
c. It is expected that Netflix will expansion and compounded by its current
successfully enter internation- inability to enter the Chinese market. YES
al markets with a multidomestic
strategy. f. A global/international strategy allows
Netflix the opportunity to customize prod-
d. A transnational strategy al- uct offerings and marketing in accor-
lows Netflix the ability to exploit dance with local responsiveness. NO
experience-curve effects and lo-
cation economies and to cus- g. The disadvantages of a multidomestic
tomize product offerings in ac- strategy for Netflix are the inability to real-
cordance with local response. ize location economies, experience-curve
effects, and be able to transfer distinctive
e. It is highly probable that competencies to foreign markets. YES
Netflix's international expansion
will disappoint, particularly in
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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terms of the speed of margin ex-
pansion and compounded by its
current inability to enter the Chi-
nese market.

f. A global/international strategy
allows Netflix the opportunity to
customize product offerings and
marketing in accordance with lo-
cal responsiveness.

g. The disadvantages of a mul-

tidomestic strategy for Net-
flix are the inability to real-
ize location economies, experi-
ence-curve effects, and be able
to transfer distinctive competen-
cies to foreign markets.

OPTIONS:YES OR NO

34. What do the data in case Exhibits a. Netflix's year-on-year and Compound
1, 2, and 5 reveal about Netflix's Annual Growth Rates (CAGR) are ex-
financial and operating perfor- tremely robust. YES
mance?
b. Total operating expenses have re-
a. Netflix's year-on-year and mained steady between 2016 and 2018.
Compound Annual Growth YES
Rates (CAGR) are extremely ro-
bust. c. Operating income declined dramatical-
ly between 2017 and 2018. NO
b. Total operating expenses have
remained steady between 2016 d. Net income has almost doubled year
and 2018. after year from 2016 to 2018. YES

c. Operating income declined e. Netflix's improved profitability and phe-

dramatically between 2017 and nomenal growth rates have come at the
2018. cost of high debt leverage. YES

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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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d. Net income has almost dou-
bled year after year from 2016 to
2018.

e. Netflix's improved profitabili-

ty and phenomenal growth rates
have come at the cost of high
debt leverage.

OPTIONS:YES OR NO

35. What three to four top priority is-a1. Action Recommendation:

sues do CEO Reed Hastings and Reduce expenses by cutting Marketing
Netflix management need to ad- and advertising!
dress? The best recommendation to earn a larg-
er customer base is by word of mouth.
There are spaces for up to six top Could offer a tiered base incentive plan to
priority issues that should be ad- recommending new customers to Netflix
dressed by CEO Reed Hastings will reduce subscription price on x amount
and Netflix Management. Draw of time new client completes.
conclusions from your analyses NEVER allow Expenditures to outpace
of the case and the industry. revenue growth!
Each top priority issue must be
supported with convincing jus- a2. Supporting Justification:
tifications using relevant con- The best recommendation to earn a larg-
cepts and tools and set the stage er customer base is by word of mouth.
for what actions/recommenda- This provides trustworthy recommenda-
tions need to be taken. tions to a larger customer base. Could
offer a tiered base incentive plan to rec-
To gain access to new cus- ommending new customers to Netflix will
tomers. reduce subscription price on x amount of
To achieve lower costs through time new client completes.
economies of scale, experience,
and increased purchasing pow- b1. Action Recommendation:
er. Offer better rates if signing up for 1 year, 2
To gain access to low-cost in- years, 3 years, or whatever years. This will
puts of production. help reduce churn and begin a retention
To further exploit its core compe- element.
tencies.
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 Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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To gain access to resources and b2. Supporting Justification:
capabilities located in foreign Every month consumers have the ability
markets. to opt out of service with Netflix. It might
be worth offering a better plan with a price
a1. Action Recommendation: reduction if signing up for a longer period
a2. Supporting Justification: of time. Offer a large library of content
(which is already doing) and original con-
b1. Action Recommendation: tent.
b2. Supporting Justification:
c1. Action Recommendation:
c1. Action Recommendation: Increase package pricing! It is already
c2. Supporting Justification: one of the lowest-priced options. Let's
bring up the cost just a little bit. Maybe
d1. Action Recommendation: throw in some commercials to increase
d2. Supporting Justification: profits. Keep the commercials less than
cable television to continue competitive
e1. Action Recommendation: advantage over others. Make the high-
e2. Supporting Justification: est-priced plans commercial-free.

f1. Action Recommendation: c2. Supporting Justification:

f2. Supporting Justification: Hulu was $6 per month for regu-
lar streaming (interspersed with ads)
and $12 per month for commercial-free
streaming, plans that included not only its
video streaming service, but also pack-
ages that included 60+ live TV and cable
channels (that included sports, news, and
entertainment) for a monthly fee of $44.95
and options to add on HBO, Showtime,
Starz, and Cinemax.

d1. Action Recommendation:

Pay off senior debts and stop with the
mentality of it being okay to continue go-
ing deeper into debt to fund the increase
of original content. This is ludicrous.

d2. Supporting Justification:

Netflix management forecasted that the
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Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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company would have a negative free cash
flow deficit of about $3.5 billion in 2019
and that the company would continue
to experience negative, but progressive-
ly smaller, cash flow deficits, for sever-
al more years due to growing expendi-
tures for original content. However, ex-
ecutive management was confident that
the company's expected growth in sub-
scribers, subscription revenues, and op-
erating profit margins would in the near
future result in positive and growing cash
flows from operations, enabling the com-
pany to reduce borrowing and begin to
pay down its long-term debt. In April 2018,
CEO Reed Hastings said:
"We will continue to raise debt as needed
to fund our increase in original content.
Our debt levels are quite modest as a
percentage of our enterprise values, and
we believe [issuing] debt is [a] lower cost
of capital compared to equity."

e1. Action Recommendation:

Offer more options for viewers by offering
HBO, Showtime, Cinemax, etc. Look at
Hulu for example.

e2. Supporting Justification:

People want options. Hulu offers a plan for
a little under $45 a month to have access
to HBO, Cinemax, etc. They are doing just
fine in business.
Focus on appealing to international coun-
tries as the markets over there are not sat-
urated. Find local networks that appeal to
the countries audience, make a contract,
build into Netflix. Use these networks to
help create original content for the coun-
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Case 6: Netflix in 2019: Striving to Solidify Its Position as the Global Leade
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try in question. Allow worldwide access
to content. Work on figuring out China's
details later due to censorship issues. Fo-
cus on countries that do not have strict
censorship.

f1. Action Recommendation:

Become more Green: Cut DVD distribu-
tion centers down, make them all green
with renewable energy

f2. Supporting Justification:

People are worried about climate change,
are drawn more to the green responsibil-
ity of a company. Could reduce costs of
operations.

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