© 2004, The New Inklings

THE GREATEST CHALLENGE TO NETFLIX EXPANSION IS INEXPENSEIVE, FAST, AND

RELIABLE SERVICE TO RURAL AREAS OF THE COUNTRY. SHORT OF BUILDING
NEW DISTRIBUTION CENTERS, COSTLY AND INEFFICENT, THE QUICKEST
ENTRANCE INTO NEW MARKETS IS PROMISING PARTNERSHIP, COMPLEMENTARY
NOT COMPETITIVE.

INTERSECT: McDONALD’s
Q1: What company has stores in most of the rural areas of the country?
Other than Wal-Mart (competitor), the next best thing is McDonald’s
(complementary). With over 25,000 stores nationwide, McDonald’s has
influence and representation throughout the largely-rural areas of
America.

Q2: What goes with all good movies?

Food. Surveys, in recent years, show an
Complementary
increased number of households viewing
television or rental movies during meals. For
verses Competitive:
many households, meals regularly take place in Complementary co-
front of some entertainment medium. Whether operative
it’s meal time or snack time, people want to agreements allow
eat with their movies. So, what should come for increased
with good food? How about a good movie. growth at reduced
overhead,
Brand Protective / Market Expansive benefiting both
Partnership. parties without
A partnership with McDonald’s provides Netflix sacrifice of
with a complementary service provider, and the opportunity to minimize
expense while breaking into new markets. Such a partnership would allow
every McDonald’s to become a “collection center” for Netflix returns,
offering the incentive of convenience to customers, expediting video
turn-around at the minimization of shipping costs for Netflix, reducing
overhead while simultaneously increasing visibility among a currently-
unreached customer base.

Beneficial Cooperative Agreement

What is it worth for McDonald’s to guarantee that the majority of the
majority of the Netflix customer base will be inclined to eat at its
establishments? For McDonald’s, soft drinks are the single most profitable
sales item, with the lease overhead and investment expenditures. “ONE
free small fry” coupon included with every Netflix DVD is an opportunity for
McDonald’s to increase its soft-drink sales exponentially. Add with that the
increased productivity of drive-thru,1 and McDonald’s stands to gain
increased return of a reliable customer base that costs the company less
in overhead expense.

What is it worth for Netflix to be able to have large numbers of its customer
base be able to return rentals at pre-existing, secure locations, having
these video’s returned bulk rather than on a video-by-video basis?
Consider the example:

In the small town of X, Y miles from the closest Netflix distribution center, a
population of Z continue. Movie Gallery and Hollywood video have
representation in the surrounding areas, but Netflix has a low customer
base in this area. Increased visibility to this area can only come through
increased advertisement, either through referral or through paid
campaigns. The latter is an income-taxing expense. The former is a
problem of circular logic (e.g. in order to increase a customer base, one
must first increase the customer base in order to refer others in market).

But now, all Z residents have heard of Netflix through cross-advertisement

campaigning with their local McDonald’s. Many have torn off the coupon
and requested a free trial membership, delighted to find that each DVD
order comes with a coupon for “ONE free small fry.” This is an incentive to
visit McDonald’s since the establishment also serves as a return, collection
station for Netflix rentals. A customer may drive-thru, insert their labeled
red DVD sleeve into a collection box which immediately weighs the
contents (i.e. in order to verify the correct weight for the return),
employees McDonald’s T1 line to communicate receipt of that disk to the
nearest distribution center—where another computer triggers the release
of the customer’s next DVD—only then to finish by going through the
drive-thru for a free order of fries and a small drink.

Full DVD holding stations can be collected via UPS/USPS and shipped
back at a cheaper rate pound for pound.

Market Analysis: Court (?)

The little Utah town of CourtX is located in Carbon County, a population
of 19,764, with households numbering in 7,413. Average income is $34,000.

1 Amotorization occurs at a much lower level at drive-thru due to less depreciation of

concrete assets. One of the highest cost in the fast food industry is paper napkins. Drive-
thru consumers are not in a position to use/take more napkins than are
needed/necessary, reducing McDonald’s net gain on drive-thru, same-item sales verses
sit-down.
The city itself is 400 miles from the nearest Netflix distribution center,
currently located in Las Vegas, Nevada2.
Average turn around time for mailing to and from Las Vegas is about 3
or 4 business days. A 8 ounce package runs $1.98 media mail from 00000
to 00000.3 Two ways, this is about $4 an order. Even supposing a reduction
of this by 25%, and the net expense is still $3 per DVD round trip. While few
in CourtX may know about Netflix currently, a cross partnership with
McDonald’s would immediately increase awareness for nearly 20,000
individuals. McDonald’s sits at 123 Main Street in downtown CourtX.
Increased awareness brought about through a cross promotion between
Netflix and McDonald’s could increase a customer base at a margin of
the cost.
By developing a base of 2% in the CourtX community, or 148
households, Netflix brings in $15.99 per month per household. Customer
satisfaction is increased with increased turnaround.
Netflix receptacles located at McDonald’s not only receive the
DVD but register it as returned, reducing the turn around time for
customers. Meanwhile, a 30 lb. box may be shipped from CourtX to Las
Vegas, NV for $13.50, offering a savings of $80,4 or nearly half the
overhead for shipping.
Assuming a consistent $15.99 per subscription, an increase of
customer base by 148 households, assuming even an unbelievably seep
overhead expense of 40% still increases gross income by $17,000 in one
county representing less than a fraction of 1% of the national, even rural,
population.

Summary: The Bottom Line

In conclusion, a cross-advertising partnership with McDonald’s would:
• Increase customer awareness in rural areas
• Increase customer base
• Decrease overhead per customer
• Increased customer satisfaction through decreased turn-
around time
• Decreased overall expenditures

I guess the only unanswered question is, “Would you like a movie
subscription with those fries?”

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