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
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

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

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

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?
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

Information System Strategy Triangle

~Become premier videos rental store ~Web-based home delivered video rental business ~Convenient service (quickly delivered movies and no late fee)

Business (Firm) Strategy

Organizational Strategy
~ Long-tail selection and variety ~ Relationship with movie houses ~ Employee management ~ Compete in physical DVD rentals and digital streaming service market
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

IS/IT Strategy
~ Internet (technology-based) ~ Using technology to harness data and thereby better serve customers and vendors N ~ Analytics (BI)

Case Questions (for Leading Data case)

1. 2. 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 Netflixs current business model (primarily DVD-by-mail with an online component)? Assess the value of Netflixs business as described in the case. What effects will the rise of the VOD market likely have on Netflixs business model? How does VOD threaten Netflixs business? What opportunities does it present? Which of Netflixs 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 Redboxs 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)
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John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

#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 Netflixs current business model (primarily DVD-by-mail with an online component)? Assess the value of Netflixs business as described in the case.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

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.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

Why Blockbuster Lost

Slow & Inadequate Response 1 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 2
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 3

Lack of knowledge about its customers preferences and behaviors Lack of an appropriate CRM system

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

Why Netflix Won

Netflixs 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 bricksand-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

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

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

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Impact of VOD Market Growth on Netflix Business Model

Impact on Netflix business model
Ability to license its platform Be the benchmark in movie streaming Higher impact of Netflixs existing CRM system Shift organizational focus from logistic efficiency to technology excellence Need to invest in owning a platform to provide the service

Opportunities

Growth of VOD market

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

Threats

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

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 11

Netflix Competitive Advantages for VOD Market

Netflixs core competencies to succeed in VOD market Netflixs weaknesses for VOD market

Wide selections

Brand equity and customer relationships Recommend ation tool and customer knowledge

Warehouse / facilities

Employee overhead

Value in VOD market

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

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Partnership Prioritization: Parallel Tracking

Netflix should not limit itself; goal is to be a service provider, not a content producer or a hardware manufacturer. Dont 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. Hardware Partnerships Software/Platform Partnerships Content Producer Partnerships

Roku

Comcast and other cable operators / ISPs

Movie studios

Priority

Smart phone ecosystems

Google (as a YouTube syndicator)

Television studios / networks

TV manufacturers

Hotels, airlines, venues, and events

Independent producers (perhaps via YouTube fulfillment / syndication partnership with Google)
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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 isnt the space that there used to be. But theres 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 its launched in the UK. At just 84mm x 84mm x 23mm, its tiny and only 85g but theres still plenty of room for an HDMI connection and a wireless adapter to connect to the web. Theres an Ethernet port, AV out and a USB port too.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

#6
6. What factors led to Redboxs 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)

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

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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.
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Three Essentials for a Successful Enterprise

1. Business model
a. Customers could rent and watch movies on their own schedules b. Subscription model friendly and no late fees!

2. Core Competency
a. Wide selections b. Brand equity and customer relationships c. Recommendation tool and customer knowledge

3. Execution
a. Reed Hastings, a visionary leader. b. Understand that they should meet potential challenges while maintaining Netflixs profitable core business.

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

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

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