This is the detailed Porter’s five forces of Netflix that would allow to gain insight into the industry , identifying the magnitude of each of the five forces which affect the company’s business strategy and profitability.
Netflix Background and Introduction
Netflix is an American streaming service company that was founded in 1997 by Reed Hastings and Marc Randolph in California. Initially, the company was focused on providing DVD rental-by-mail services, where customers could rent DVDs online and have them delivered to their homes via mail. In 2007, Netflix introduced streaming services, allowing customers to stream movies and TV shows online.
Netflix has since grown to become one of the largest streaming services in the world, with over 200 million subscribers in more than 190 countries. The company produces and distributes its original content, including TV shows, documentaries, and movies, as well as licensed content from other studios and networks.
In recent years, Netflix has expanded its offerings to include interactive content, such as the hit movie Bandersnatch, and has also been investing heavily in international content to cater to its growing global audience.
In addition to its streaming services, Netflix has also become a major player in the film industry, producing and distributing critically acclaimed movies such as Roma, The Irishman, and Marriage Story. The company has also received numerous awards for its original content, including Emmy Awards, Golden Globe Awards, and Academy Awards.
Company Information
| mpany Name: | Netflix, Inc. |
|---|---|
| Year Founded: | 1997 |
| Founders: | Reed Hastings and Marc Randolph |
| Headquarters: | Los Gatos, California, United States |
| Industry: | Streaming media and entertainment |
| Products/Services: | Streaming services, original content production and distribution, DVD rental-by-mail (US only) |
| Subscribers: | Over 200 million worldwide |
| Operating Countries: | More than 190 countries |
| Original Content: | TV shows, documentaries, movies, interactive content |
| Awards: | Emmy Awards, Golden Globe Awards, Academy Awards |
| Major Competitors: | Amazon Prime Video, Hulu, Disney+, HBO Max |
| Revenue (2021 Q2): | $7.34 billion USD |
| Net Income (2021 Q2): | $1.35 billion USD |
Threat of New Entrants
The presence of new entrants becomes a threat when the industry has dynamics that support the business to become well-established and profitable. Netflix is a part of the media and entertainment industry, where the threat of new entrants is moderate. The moderate level of threat is created due to the evolving technology and changes that emerge as a result of technology up gradation.
Netflix has been able to adapt with the changing technology and trends in the media industry by shifting its focus from in store DVD rentals to online streaming and dispatching the rented DVDs through post, increasing the ease of gaining access of the customers. This business model is easier to replicate, but what provides an edge to Netflix is the range of content available at the company and convenience (Sonenshine, 2018). Developing this competitive advantage requires capital investment, supplier contracts and networking in the industry which can be difficult to follow by a new entrant.
Bargaining Power of Buyers
The media and entertainment industry dynamics allow the customers to have a high level of bargaining power over the service providers. The sales and revenue generated by the company is dependent on the subscribers who are located in different regions across the globe. Within the US, the company also caters to the need of the customers getting rented DVDs through mail, adding to the customer base (Netflix, Inc., 2018).
However, the low switching cost allows the customers with the option to cancel their subscription with Netflix and seek other media providers increasing the business threat to the company. Due to this pressure, Netflix can’t charge high prices from the customers and needs to keep the pricing strategy according to the demand of the customers, with minimal price increase. Moreover, high bargaining power from customers results in maintaining service quality that is in accordance to the customer needs and preference.
Bargaining Power of Suppliers
The suppliers of Netflix can be viewed as holding high bargaining power. This high degree of influence on pricing is due to the few numbers of entities producing media and entertainment-based content. Obtaining a contract and acquiring the license to distribute the content involves negotiation on pricing, where the suppliers have an edge.
Since Netflix is competing against traditional media distributors, it has to show greater flexibility in agreement than the traditional businesses. Likewise, the suppliers have a weaker bargaining power while dealing with the traditional broadcasting businesses, but online distributors like Netflix face a higher degree of influence from the suppliers (Netflix, Inc., 2018). Shuen (2018) has examined how Netflix had to lower its profits to maintain contract with the suppliers in order to establish customer base, highlighting the high bargaining power of its suppliers.
Threat of Substitute Products
The substitute products pose moderate level of risk in the media and entertainment industry. Netflix faces threat from substitute service which are offering similar products through rental DVDs and online streaming. In addition, the traditional media content providers constitute another example of substitute product.
Customers can also engage in other sources of entertainment and leisure activities than online streaming and watching media content. To handle the high level of threat from these substitutes, Netflix has to update its content library by adding the TV shows, movies etc. which are in demand by the customer base. The company also has to engage in marketing to maintain the profitability and further expand the customer base.
Competitive Rivalry
The media and entertainment industry has intense level of competitive rivalry, pressurizing the companies to strive to retain customers through offering affordable prices. Netflix is facing severe competition from traditional broadcasters, rival companies providing videos on demand and retailers selling DVDs (Netflix, Inc., 2018).
Amazon is the main direct competitor of Netflix as both of the companies are providing DVDs on rent, thus competing for the similar target market in this domain. Apart from Amazon, there are alternate online channels that provide access to media content such as Hulu, creating stiff competition for acquiring right to display the content (Williams, 2015).
References
- Netflix, Inc., (2018). Annual Report. Retrieved from http://www.annualreports.com/HostedData/AnnualReports/PDF/NASDAQ_NFLX_2017.pdf
- Shuen, A. (2018). Web 2.0: A Strategy Guide: Business thinking and strategies behind successful Web 2.0 implementations. Canada: O’Reilly Media.
- Sonenshine, J. (March 1, 2018). Netflix is creating a ‘competitive advantage’ by adding 700 new and original shows this year. Business Insider. Retrieved from https://www.businessinsider.com/netflix-stock-price-creating-a-competitive-advantage-adding-700-shows-2018-2
Williams, C. (2015). Effective management. USA: South-Western Cengage Learning.