Netflix, Inc. (Netflix) is an American company whose area of specialization includes providing on-demand film, video, and TV shows streaming, as well as renting DVDs and Blue-Ray discs per mail. The video service was created by Marc Randolph and the current CEO Reed Hastings back in 1997. A year later the company’s website was launched, and soon the traditional video rental system was exchanged for the subscription model.
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Another typical feature of the service is the highly detailed system of genre division of the content that facilitates the recommendation for the users based on their personal ratings. Apart from providing film content, in the recent decade Netflix, Inc. signed contracts with some major TV networks to show their original TV shows at the Netflix website. The company also started to produce their own original content, including film, video and TV series of different genres.
The objective of this report is to evaluate the Netflix, Inc. from the perspective of its business strategies, presence in the general marketplace, and financial standings. In order to analyze the specifics of the business strategies, we are to evaluate the expanded business model that includes the policy of advertisement-free content, flat-rate mailing service, and the system of genres based on the algorithm of customer recommendations. The evaluation of the product presence in the general marketplace is to include discussing the topics of the market of on-demand entertainment and the company’s global presence. Finally, the financial standings of the Netflix, Inc. are to be assessed on the basis of the company’s profitability and operating margin.
The development of the business model
Today Netflix operates on the classical business model due to the fact that Netflix users are directly provided with the service they pay for without any third parties. It facilitates the process of subscribing and gives users amount of mobility and opportunity to stop or renew their subscription to the service.
The company started with the flat rate model of renting and mailing DVDs and Blue-Ray discs. Such approach to the rental service presupposes that the users only pay for the subscription in this case as well, and they do not have any due date for the discs return. Such policies guaranteed Netflix a certain advantage comparing to the other video rental companies. However, there were doubts, whether they would be able to preserve that advantage when they decided to establish the online video streaming website with the similar policy and the same content.
Despite, the skepticism, the video streaming service proved itself to be an even bigger success. Given the facilitated access and subscription process, there are now 40 millions of subscribers for the entertainment content. In order, to appeal to the wider audience, Netflix, Inc. constantly establishes new partnerships with different television networks in the US and worldwide. Among the networks that signed licensing contracts with Netflix between 2010 and 2016, there are British BBC, CBS Corporation, NBC, AMC, Disney’s ABC and many other smaller networks (“Netflix: Financial Statements Charts” par.1).
Thus, the content that Netflix provides to customers consists of the materials from American and worldwide television studios, cable and broadcast networks and of the database of films that the company managed to obtain during its early years as the video rental service. Apart from that, Netflix in the last years invests in the production of original content based on the preferences of the subscribers and rating. The on-demand nature of the service guarantees both more freedom for the filmmakers and wider range of choice for the users.
Policy of advertisement-free content
The variety of content provided by Netflix is their main appeal to the audience. However, another significant aspect is that the service has positioned itself as advertisement-free. Therefore, the main source of the company’s revenues is the subscription fee. The main strength of such business model is the control both for the managers and for the customers. The customer appeal is that users feel less committed since they can cancel the subscription anytime or oppositely set up the system to renew it automatically. Meanwhile, the subscription model is easier to manage because it can be operated online, and provides an opportunity to respond immediately to the users’ actions.
However, the potential weakness lies in the financial side of the strategy. The advertisement is the most certain way to guarantee the financial flow, whereas in the Netflix’s model, in order to grow, the company needs to engage new subscribers. Netflix’s policy stays firm on the issue of advertisement-free content; that is why to increase the willingness of the users to renew their subscriptions and appeal to new users, the company created an advanced algorithm of content recommendation.
The genres Netflix offers on its website are very specific and detailed. In fact, the Netflix algorithm created over 76,000 customized genres. This strategy is a combination of customer-based approach (since there is an account for the analysis of the customers’ preferences) and databased approach. In order to create all the micro-genres, every piece of content in the Netflix database was analyzed and tagged. Given the fact that amount of both TV shows and films produced is constantly increasing, this knowledge gives the company an advantage in creating their original content and in satisfying the customers’ demand for some specific category.
Product presence in the general marketplace
The market of on-demand entertainment
The major appeal of the Internet streaming services is, of course, the fact that the content can be accessed on demand. The company keeps on improving the platforms on which the website operates in order to keep it accessible from all devices, and at the same time, to refine the algorithms for genres and recommendations. Nevertheless, it leaves the door open for other companies to use Netflix’s experience for creating their own platforms.
On the other hand, it is convenient to manage the service online as well. These two factors create an environment for the highly competitive market. The first aspect of the competition is the sphere of on-demand video streaming itself; however, the second characteristic of Netflix’s competitors is that the majority of them is US-based as well. Thus, with the database as large as Netflix possesses the advantages of winning the audience over the other services, including Amazon.com, Inc., and cable and subscription-based channels like HBO and Showtime. However, it has to be achieved due to, first of all, producing original content based on customers’ preferences, and secondly, improving the international presence of the company.
Global presence: counterargument
The counterargument is that some of the Netflix’s competitors, at the moment, are geographically more widespread than Netflix itself. The reason for that is that companies, such as Amazon.com, Inc, started as the retailers. Therefore, they have a bigger operational capacity and geographical diversification. Video streaming services are the secondary source of their revenues. However, the international presence is the major option of how to increase the company’s profits. For now, the service is available almost worldwide, excluding the mainland of China, North Korea, and the zones of international conflicts. Also, Netflix’s database should permit to access the more geographically accurate picture of the users’ preferences.
Netflix’s gross profit at the end of 2015 was $2,188,035, comparing with the number of $957,224 at the end of 2012 (“NTFL Company Financials” par.1). Its main market rival Amazon.com, Inc. finished 2015 with the gross profit of $35,355,000 (“AMZN Company Financials” par.1). Table 1 shows the profitability of Netflix compared to its main competitor.
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Table 1 Compared gross profit of Netflix and Amazon.com, Inc.
|Compared Gross Profit|
Thus, according to the table, the data suggest that the main competitors of Netflix in the industry of video streaming are much larger companies that proved its place on the international market through the retail services. However, another consideration should concern the fact that retail companies on a par with Amazon.com, Inc, develop their streaming services as the secondary resources of revenue, often inspired by the Netflix’s success. Meanwhile, Netflix’s own increase in the gross profits can only be attributed to the revenues from the video streaming, DVDs, and Blue-Ray discs rental services.
The revenue reported by the company was $6,779,511 during the 2015 fiscal year. In comparison to the $3,609,282 revenue in 2012, the number almost doubled. The operating income was $305,826 at the end of 2015, which is 61% more than $49,992 revenue reported in 2012 (“NTFL Company Financials” par.1).
The data suggest the significant increase in operating income between 2012 and 2015, which can be attributed to the Netflix engagement in producing their own content. However, the indicators of reported revenues show the slower pace of growth, especially when compared to Netflix’s industry competitors.
The current liquidity ratio increased from 134% in 2012 to 154% at the end of 2015. The 20%-increase suggests a stable development. The net income reported in 2012 was $17,152, whereas, at the end of the previous fiscal year, it increased to $122,641. However, there is no evidence suggesting that Netflix, Inc pays any cash dividends to the shareholders, which may be an obstacle for potential investment (“NTFL Company Financials” par.3).
As the result of the evaluation of the business strategies, product presence in the general marketplace, and financial standings of Netflix, Inc, the company may be considered for the investment. The business strategies used by the company, which include flat-rate rental service, advertisement-free content and customized genres, were proved to be one of its strength. One of the company’s weaknesses is the disadvantage in the global presence in comparison to the Netflix’s competitors. However, the possible solution to that can be drawn from using algorithms of micro-genres for developing the new original content based on the geographically accurate preferences of the subscribers.
From the perspective of financial standings, the company was proved to have financial viability, and growth in terms of the revenues, gross profit and net income over the last three fiscal years. However, the potential weakness of investing into Netflix is that the company has a policy of not paying cash dividends to the shareholders. Therefore, the potential investment in Netflix should be considered as obtaining an asset in a growing video streaming industry rather than a solid profit source.
AMZN Company Financials 2016. Web.
Netflix: Financial Statements Charts 2016. Web.
NTFL Company Financials 2016. Web.