Introduction
Netflix is a leading international online movie and TV services provider. It is a USA based company, founded in 1997 with its headquarters in Los Gatos. Currently, the firm operates in America, Canada and Ireland. The firm’s core business activity involves providing internet based entertainment products, such as movies and TV programs, through various internet enabled devices.
Netflix’s entertainment products are accessed through monthly subscriptions. The company’s mission is to increase its “streaming subscription business domestically and globally”. In order to achieve this mission, Netflix began joining international markets in 2010. Currently, the firm plans to join the UK market with its two main products, streaming content and DVD-by-mail.
The rationale for the global strategy is based on the fact that the US online entertainment industry is mature and, thus, has little opportunities for growth. Additionally, the UK market is not fully exploited. Thus, joining it will enable the firm to increase its market share and revenues. Through internal and external environmental analysis, this paper seeks to identify the best entry mode for Netflix.
PESTEL Analysis
Political
Political factors refer to the government policies that affect the operation of businesses in a given country. The political stability in UK promotes investments since it lowers political risks such as wars that might affect businesses negatively. In order to promote rapid economic growth, the government of UK remains committed to open trade. The government aims at eliminating trade barriers so that foreign firms can invest in UK.
Additionally, the government intervenes in the economy by supporting UK-based firms in times of distress. For instance, the taxes charged on firms were reduced in 2010 to a single corporate tax in order to promote growth of local firms. Besides, bureaucracy has been reduced significantly, especially, in licensing new firms.
Economic
UK is the world sixth largest economy according to nominal GDP measures. It is also the world seventh largest economy according to purchasing power parity measures. UK is one of the few countries that have successfully recovered from the effects of the 2008/2009 financial crisis. In particular, UK recovered from recession in January 2010. In 2011, UK’s GDP grew by 0.8% and is expected to expand by 1.2% in 2012.
This means that UK’s business cycle is at the recovery stage. GDP per capita was estimated at $39,604 in 2011. Approximately, 60% of the population consists of median income earners. However, 14% of the population still leaves below the poverty line.
Inflation rate has since reduced from 4.2% in December 2011 to 3.6% in January 2012. In a bid to stimulate economic growth, the Bank of England reduced its interest rate to 0.5% in 2011. The economic recovery efforts have enabled the country to reduce unemployment rate from 11.9% in 2009 to 8.1% in 2011. Currently, UK’s labor force is estimated at 31.45 million, with an average salary of 2,749 Euros per month.
These statistics show that UK has a large market with a high purchasing power. Thus, demand for entertainment services is likely to be high (Backman, 2007, p. 97). Besides, the low interest rate is an opportunity for accessing cheap capital for expansion. Additionally, human capital is in high supply.
Social
Leisure time in UK is spent in activities such as sports, going for holidays and watching movies. Given the high purchasing power in UK, nearly every home has a TV, and a computer. Additionally, the penetration of mobile phones and other internet enabled devices continues to grow in UK (Elliot and Simmers, 2011, pp. 4461-4468). The movie-watching habits have also changed, with more citizens preferring movies on demand.
Since most citizens spend more time at work, they prefer to watch movies and TV programs over the internet at their workplaces. Consequently, demand for internet based movie and TV services continues to grow. For instance, in 2010 Google’s movie sites grew by 17% with over 2.5 billion movies watched per month. Movie quality and subscription fees are the main factors that determine expenditure on online entertainment.
Technology
As an industrialized country, UK leads in research and development (R&D) in Europe. The telecommunication industry leads in R&D with expenditure growing by 11% in the last five years. Research and development initiatives are promoted by the government through incentives such as direct funding, as well as, R&D tax credits. Technological transfer is also very high in UK.
Over the last five years, access to technology developed by UK universities has increased in terms of “invention disclosures, patents issued and licenses executed”. Additionally, the Technology Strategy Board (TSB) has established the Knowledge Transfer Network (KTN) to enhance innovation through sharing of knowledge.
Access to emerging technologies such as broadband and fiber optic internet connection continues to grow in UK. Thus, Netflix has the opportunity to access new technologies in order to develop and distribute new products at relatively low costs.
Environment
Environmental factors such as weather patterns impact leisure activities. The Eastern part of UK is characterized by a cool, dry but less windy weather. The Northern part is, however, wetter and cooler than other parts of the country.
Citizens are more likely to watch movies at home during the wet and cool weather. UK is also less susceptible to natural disasters such as earthquakes which can severely affect supply of internet based entertainment services.
Legal
The business environment in UK is based on an effective legal framework and judicial system. The competition law ensures that competitors do not engage in any anti-competition practices such as predatory pricing and cartels. The competition laws also oversee mergers, acquisitions and joint ventures to ensure success and mutual benefits for all parties.
The consumer laws are aimed at protecting consumer rights (Micheli and Manzoni, 2010, pp. 477-497). Thus, there is high regulation on streaming content. Access to internet and the TV industry, however, is liberalized. Effective copyright and intellectual laws help TV and movie industries to protect their products from piracy. However, high patent and license costs for movies may limit Netflix’s access to desired content.
Competitive Environment
The threat attributed to competitive rivalry is high in UK’s video entertainment market. The high competition is mainly attributed to the large number of movie entertainment providers, and the slow growth of the market. The low cost of joining the industry makes it attractive for new entrants. Hence, competition is likely to increase in future.
The suppliers of movies have a high bargaining power. There is a small number of movie producers compared to movie buyers. Besides, patents and copyright fees make it expensive to purchase movies. The buyers in the industry (TV and online entertainment companies) have a low bargaining power due to their large number (Kottler and Kelle, 2009, p. 89).
Additionally, license contracts between suppliers and buyers increase the switching costs of the later. The threat attributed to substitute products also increases competition in the industry. Demand for traditional TV services and theater based entertainment continues to rise. Finally, high competition is attributed to the fact that subscribers have low switching costs, and thus, can easily change from one provider to the other.
Currently, Netflix’s main competitors include MVPDs who provide free TV. BBC iPlayer is likely to be the main competitor in UK. In the internet movie segment, the leading competitors include Apple’s iTune, Google’s YouTube, as well as, Amazon.com’s Prime Video. Most of these competitors boast of longer operating history and high proprietary knowledge. Firms such as Google and Amazon already have larger customer bases.
The strong brand image associated with these firms makes it difficult to attract their customers (Gamble and Thompson, 2010, p.70). The lager firms such as Apple have great financial and marketing resources which they use to hold significant market shares. Additionally, the large firms can use their resources to obtain better business terms from supplies and invest in superior products.
SWOT Analysis
Strength
Netflix’s main strengths include the following. First, the firm has built a strong brand known for outstanding value. This has enabled the firm to ensure high levels of customer satisfaction. The satisfied customers have become advocates of Netflix’s products. Second, Netflix has a robust selection of content that reflects the subscribers’ preferences.
The right selection of movies or content has enabled Netflix to enhance customer loyalty. Third, Netflix’s large subscriber base has enabled it to achieve high operating efficiency. Finally, the firm has developed a “personalized and adaptive user interface that enables its customers to find their preferred movies”.
Weaknesses
Netflix has the following weaknesses. First, it is engaged in legal suites with its suppliers and employees. Legal suites facing the company over patent infringement continues to rise, thereby increasing operating expenses. Second, Netflix has a high debt-equity ratio.
Thus, most of its revenues go into payment of debts rather than investments. Third, the agreements governing Netflix’s debts restrict its operations. Such restrictions include, disposal of assets, borrowing funds, entering new markets and investing in unrelated businesses. Finally, Netflix’s move to rebrand its DVD-by-Mail product has resulted into significant lose of customers.
Opportunities
The opportunities available to Netflix include a stable political environment which encourages investment in UK. The large and wealthy population in UK represents a large market for Netflix’s products (Brandet and Rawski, 2008, p. 67).
The rising preference for online videos in UK is also an opportunity for Netflix to realize high sales. Ease of accessing technology in UK will enhance Netflix’s product development and distribution initiatives.
Threats
The main threat in the UK market is the intense competition associated with it. If Netflix is not able to compete effectively, it will not be able to penetrate the market (Dunning and Lundan, 2008, p. 89).
Market Entry Mode
Given the threats and opportunities identified in UK’s market, as well as, the strengths and weaknesses of Netflix, a joint venture will be the most suitable entry mode.
A joint venture refers to “an enterprise in which two or more investors share ownership and control over property rights and operation”. Thus, Netflix will enter the UK market by partnering with an already operating firm. A joint venture will benefit Netflix in the following ways.
First, a joint venture requires little investment or less financial resources as compared to foreign direct investment. Currently, Netflix has a weak financial position and, thus, can not afford to make significant investments on its own. Besides, the agreements governing Netflix’s debts restrict it from borrowing additional funds. Thus, a joint venture will enable the firm to benefit from the financial resources of its partner.
Second, a joint venture promotes quick market penetration (Kyle and Nyland, 2011, pp. 143-154). Given the intense competition in the UK market, it will not be easy for Netflix to penetrate the market on its own. A joint venture, however, will enable Netflix to have immediate access to a large customer base.
Besides, it will benefit from proprietary knowledge and market information held by its partner (Brooks, Weatherston and Wilkinson, 2004, p. 78). This will enable Netflix to increase its market share in UK over a relatively short period of time (Bryson, 2004, p. 88).
Third, unlike licensing and franchise, a joint venture will enable Netflix to have greater control over its operations and products in UK (Dess, 2010, p. 67). Control over activities such as marketing is needed in UK in order to overcome competition.
Fourth, a joint venture will enable Netflix to share risks with its partner. This will help investors to avoid losing significant capital in the event of an unforeseeable risk. Finally, a joint venture will enable Netflix and its partner to achieve financial strength (Sitkin and Bowen, 2010, p. 65). By pooling resources, the venture partners will be able to effectively finance their expansion and product development initiatives.
Risks Associated with a Joint Venture
First, a joint venture brings together two firms. Consequently, there are high chances of cultural clashes (Adekola and Sergi, 2007, p. 90). This is attributed to the fact that Netflix and its partner might have different organizational cultures. Second, joint ventures, some times, exist for a limited period of time.
In such cases, a legal tussle might arise if the agreement between the venture partners does not clearly specify when and how to terminate the venture. Third, a joint venture can lead to performance ambiguity. The partners might disagree on the strategy to follow, the markets to join and how to share profits. Such disagreements can adversely affect the performance of Netflix.
Fourth, each partner in the venture agreement will have limited control over the business. Thus, Netflix might not have the authority to implement some decisions which it considers beneficial for its growth and profitability. Finally, “mistrust over proprietary knowledge” may limit the two firms’ ability to share knowledge and technology.
How to avoid the Risks
Netflix and its partner must set common objectives for the venture. Besides, the objectives must be clearly communicated to both parties, especially, the management team. This will help in avoiding disagreements concerning strategy, investment and expansion plans. The terms and conditions of the venture must be negotiated before commencement of operations.
The negotiations will define the rules for sharing the benefits, the responsibilities of each partner and how to terminate the venture. A conflict resolution party can be appointed to facilitate non-partisan settlement of disputes. Such a party can be the industry regulator.
Finally, Netflix should consider partnering with a firm whose organizational culture is comparable to its own. Additionally, the two firms should make a commitment to build a common organizational culture in order to promote cooperation and integration.
Conclusion
Netflix is a leading US based online entertainment service provider. The firm is, currently, considering joining the UK market with its internet based movie and TV products. This move is meant to help the firm achieve its strategic goal of increasing its market share and profitability.
The opportunities in UK include a large market size, a rising preference for online videos, ease of access to new technology and a stable political environment. The intense competition in UK is the main threat facing Netflix. Netflix’s main strengths include a strong brand identity and a large customer base.
A weak financial position characterized with a high debt-equity ratio is the firm’s main weakness. Given these conditions, a joint venture would be the best strategy for joining the UK market.
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