Netflix Leading with Data: The Emergence of Data-Driven Video

1. Netflix Leading with Data: The Emergence of Data-Driven Video Jason C. H. Chen, Ph.D. Professor of MIS School of Business Administration Gonzaga University Spokane, WA 99258 chen@jepson.gonzaga.edu

2. The Case • Learning Objective: To examine the benefits and risks of investment in analytical technology as a means for mining customer data for business insights. Students will develop a strategy position for Netflix's investment in technology and its digital media business. Students must also consider how new corporate partnerships and changes to the customer channel model will allow the company to prosper in the highly competitive digital space. • Subjects Covered: Analytics; Data mining; Databases; Marketing; Strategy; Technology • Setting: • Geographic: United States (2000s) • Industry: Media & telecommunications

3. The Case Synopsis • Description: By 2009 Netflix had all but trounced its traditional bricks-and-mortar competitors in the video rental industry. Since its founding in the late 1990s, the company had changed the face of the industry and threatened the existence of such entrenched giants as Blockbuster, in large part because of its easy-to-understand subscription model, policy of no late fees, and use of analytics to leverage customer data to provide a superior customer experience and grow its e-commerce media platform. • Netflix's investment in data collection, IT systems, and advanced analytics such as proprietary data mining techniques and algorithms for customer and product matching played a crucial role in both its strategy and success. However, the explosive growth of the digital media market presents a serious challenge for Netflix's business going forward. • How will its analytics, customer data, and customer interaction models play a role in the future of the digital media space? Will it be able to stand up to competition from more seasoned players in the digital market, such as Amazon and Apple? What position must Netflix take in order to successfully compete in this digital arena?

4. Information System Strategy Triangle • ~Become premier videos rental store • ~Differentiation: Convenient service (quickly delivered movies and no late fee) • ~Innovation: Web-based home delivered video rental business Business (Firm) Strategy Organizational Strategy IS/IT Strategy ~ Internet (technology-based) ~ Using technology to harness data and thereby better serve customers and vendors ~ Analytics (BI) ~ Long-tail selection and variety ~ Relationship with movie houses ~ Employee management ~ Compete in physical DVD rentals and digital streaming service market N

5. Case Questions (for Leading Data case) • In its competition with Netflix, where did Blockbuster go wrong? How was the use of customer data a key differentiator? How might Blockbuster have better positioned itself against Netflix? • What are the core competencies/capabilities of Netflix’s current business model (primarily DVD-by-mail with an online component)? Assess the value of Netflix’s business as described in the case. • What effects will the rise of the VOD market likely have on Netflix’s business model? How does VOD threaten Netflix’s business? What opportunities does it present? • Which of Netflix’s current competencies can it best leverage as a competitive advantage in VOD? Which might be liabilities? (For this question, refer to the “Comparing Value Drivers in the Video Rental Market” section.) • What kind of partnerships should Netflix prioritize: partnerships with content providers or with hardware/device manufacturers? • What factors led to Redbox’s growth? How and why was it able to capture market already dominated by big players such as Blockbuster and Netflix? (extra from the case , you need to do research for this question, especially, if you do not know “Redbox”)

6. #1 & #2 • 1. In its competition with Netflix, where did Blockbuster go wrong? How was the use of customer data a key differentiator? How might Blockbuster have better positioned itself against Netflix? • 2. What are the core competencies of Netflix’s current business model (primarily DVD-by-mail with an online component)? Assess the value of Netflix’s business as described in the case.

7. Movie Rental Business: Blockbuster, Netflix, and Redbox • Jim Keyes, CEO of Dallas-based Blockbuster Inc., was facing the biggest challenge of his career. In March 2010 Keyes was meeting with Hollywood studios in an effort to negotiate better terms for the $1 billion worth of merchandise Blockbuster had purchased the year before. In recent years, Blockbuster's share of the video rental market had been sharply decreasing in the face of competitors such as the low-cost, convenient Redbox vending machines and mail-order and video-on-demand service Netflix. • While Blockbuster's market capitalization had dropped 47 percent to $62 million in 2009, Netflix's had shot up 55 percent to $3.9 billion that year. The only hope for Blockbuster, as Keyes saw it, was to shift its business model from primarily brick-and-mortar physical DVD rentals to increased digital and mail-order video delivery.

8. Why Blockbuster Lost 1 • Slow & Inadequate Response • “No Late Fees” program was misleading • “Total Access” program was not well integrated – customers had to maintain separate accounts for the Web-based system and the store • Debuted in 2006! • Structural Issues • Stores were franchise-based and Web site was maintained by corporate • Capex requirements for starting a separate Web-based logistics system to deliver DVDs by mail • Lack of Information Systems • Lack of knowledge about its customers’ preferences and behaviors • Lack of an appropriate CRM system 2 3

9. Why Netflix Won Netflix’s core capabilities • Flexibility • Selection / Logistics • Convenience • Customer Insights • Subscription model – no late fees! • Customers could rent and watch movies on their own schedules • No physical stores allowed deep selection in a wide variety of genres • Focus on logistics allowed Netflix to not only have a broad selection across genres and deep selection among popular movies, but also to efficiently get films to customers • Mail delivery obviated the need to drive to bricks-and-mortar stores (new way: delivery by Broadband digital streams) • Queuing system on Web site allowed customers to have a constant flow of movies • Cinematch collaborative filtering algorithms aided the discovery process – better customer experience • Recommendation system and analytics allowed deeper understanding of customer trends, which let Netflix adapt better and more quickly

10. #3 & #4 • 3. What effects will the rise of the VOD market likely have on Netflix’s business model? How does VOD threaten Netflix’s business? What opportunities does it present? • 4. Which of Netflix’s current competencies can it best leverage as a competitive advantage in VOD? Which might be liabilities?

11. Impact of VOD Market Growth on Netflix Business Model Impact on Netflix business model Opportunities • Ability to license its platform • Be the benchmark in movie streaming • Higher impact of Netflix’s existing CRM system • Shift organizational focus from logistic efficiency to technology excellence • Need to invest in owning a platform to provide the service Growthof VODmarket Threats • Shift investment from logistics to technology • Continue to build the Netflix brand as an instant provider of movies from studios to customers’ homes • Continue to invest in customer loyalty and CRM solutions • Current physical distribution channel will become a liability • Competitors like Apple, which has the know-how to sell online and holds a huge customer database and brand equity, will become a threat

12. Netflix Competitive Advantages for VOD Market Netflix’s core competencies to succeed in VOD market Netflix’s weaknesses for VOD market • Wide selections • Brand equity and customer relationships Warehouse / facilities • Recommendation tool and customer knowledge Employee overhead • Value in VODmarket

13. #5 • 5. What kind of partnerships should Netflix prioritize: partnerships with content providers or with hardware/device manufacturers?

14. Partnership Prioritization: Parallel Tracking • Netflix should not limit itself; goal is to be a service provider, not a content producer or a hardware manufacturer. • Don’t compete in areas where Netflix is at point of parity; compete where Netflix has advantages (i.e., recommendation algorithm, user community). Amazon and Apple are strong in delivery and devices but weak in recommendations and user community. • Roll up Roku effort under umbrella of device partnerships; devote resources across all initiatives evenly. • Becoming the service provider and content recommender on all cable platforms is a top priority. • Assume that movie studios and other content producers will want to distribute via Netflix; it is in their best interest. • Google needs to monetize and distribute YouTube; opportunity for strategic partnership. Priority

15. Partnership Prioritization: Parallel Tracking • Netflix should not limit itself; goal is to be a service provider, not a content producer or a hardware manufacturer. • Don’t compete in areas where Netflix is at point of parity; compete where Netflix has advantages (i.e., recommendation algorithm, user community). Amazon and Apple are strong in delivery and devices but weak in recommendations and user community. • Roll up Roku effort under umbrella of device partnerships; devote resources across all initiatives evenly. • Becoming the service provider and content recommender on all cable platforms is a top priority. • Assume that movie studios and other content producers will want to distribute via Netflix; it is in their best interest. • Google needs to monetize and distribute YouTube; opportunity for strategic partnership. Priority

16. The days of the set-top box are surely numbered – with more televisions than ever either on walls or so slim that they sit practically next to them, there simply isn’t the space that there used to be. But there’s still a burgeoning demand for boxes we plug in to TVs so that we can all get access to more TV, films and games., from Sky and Virgin Media to a host of boxes such as Apple TV. Roku is the most popular in America and finally it’s launched in the UK. At just 84mm x 84mm x 23mm, it’s tiny and only 85g – but there’s still plenty of room for an HDMI connection and a wireless adapter to connect to the web. There’s an Ethernet port, AV out and a USB port too.

17. #6 • 6. What factors led to Redbox’s growth? How and why was it able to capture market already dominated by big players such as Blockbuster and Netflix? (extra from the case , you need to do research for this question, especially, if you do not know “Redbox”)

18. More on Blockbuster … • The only hope for Blockbuster was to shift its business model from primarily brick-and-mortar physical DVD rentals to increased digital and mail-order video delivery. • Consumers still made frequent purchases of DVDs at its stores-purchases which were much more profitable for studios than the rentals that remained Blockbuster's primary business. Blockbuster had made efforts at making its business model more nimble, but the results had been disappointing, and its debt continued to skyrocket. • By the end of 2009, the company's debt had climbed to $856 million, its share of the $6.5 billion video rental business had fallen to 27 percent, and its revenues had tumbled 23 percent to $4.1 billion.

19. Three Essentials for a Successful Enterprise • a. Customers could rent and watch movies on their own schedules • b. Subscription model – friendly and no late fees! • Business model • Core Competency 3. Execution • a. Wide selections • b. Brand equity and customer relationships • c. Recommendation tool and customer knowledge a. Reed Hastings, a visionary leader. b. Understand that they should meet potential challenges while maintaining Netflix’s profitable core business.

20. Conclusion • The key to successful business on the Internet is not the formulation of a conceptual strategy but the __________ of that strategy. • To execute effectively, content ownership has to be exploited.. execution