Netflix Company and the competencies that give it a competitive factor in the market

Abstract

This submission examines the Netflix Company highlighting the competencies that give it a competitive factor in the market. It includes the author’s interpretations backed up with a line of reasoning and theories to create valid arguments about Netflix’s current and future strategies. The conclusions sum it all.

Introduction

Netflix is a multinational content streaming company; the company was established in 1997 in Delaware and concluded its public offering in 2002. In 2007 the internet television company had started streaming its content online, and now it is one of the leading networks with over 168 million subscribers in over 190 countries (Gomez-Uribe & Hunt, 2015). The company provides over 15,000 titles to its subscribers, making it the most extensive online content streaming service in the world.

The company’s primary strategy is to increase its streaming business. Besides the DVD streaming service, the company has two other segments, including domestic streaming and international streaming. Netflix operates in a competitive environment; some of its competitors include Hulu, HBO, and Amazon Prime. The company’s ability to stay ahead of its competitors depends on its innovativeness since it is the only driving force in disruptive technology. This submission discusses the strategic option Netflix has to stay ahead in the market. Further, it highlights the potential markets that Netflix should expand to increase its market shares.

Main body

Strategic options for future implementation by Netflix

Competitive strategies

As a company in the communications sector, Netflix is undertaking significant transformations in its business model. However, its management is keeping its eye on the financial metrics. For instance, its content costs have increased considerably since 2012, but they are in line with its revenue (see appendix 1).

On the other hand, the company provides compelling exclusive content, exceptional subscriber experience, and a strong brand that is recognized for high-quality service content. These potencies, along with the sector’s extensive forces of refining internet devices and network bandwidth, provide a competitive platform to fuel their expansion globally (Rataul et al., 2018). Netflix looks at a successful future when it registers over two hundred million global subscribers. As every year passes, the company invests in creating new content, and it is building a permanent collection of content for new subscribers to view what has already been paid for by old subscribers. Therefore, the content costs are likely to reduce significantly in the long run, even if its total content costs continue to increase. Coupling up this with a gradually rising revenue for every user, the company will have vast improvements in profits in the long run. This argument relates to the service innovation theory, which focuses on helping new businesses find new revenue streams by meeting customer’s needs (Lusch & Nambisan, 2015).

Innovative technology

Besides, Netflix has been able to employ an Artificial Intelligence concept that collects information from users and relays it to producing managers. The smart software tracks subscribers ‘ watching behaviors and provides them suggestions for further watching. The managers then can tailor the content to match the customer’s needs. For instance, the AI tool gave the idea of producing new content of some old films such as ‘Arrested Development’ (Rataul et al., 2018). In this regard, the team realized that several people were still watching the content prompting them to produce two more seasons for these classic shows. This innovation shows that the revival of old content based on user’s demands has only begun. This strategy connects with Porter’s concept of competitive advantage that explains that an organization acquires an attribute that enables it to outperform its competitors (Bashir & Verma, 2017). According to porter, technology is a leading factor of the modern business that contributes to a competitive advantage. Besides, the diffusion of innovation theory emphasizes that ideas of technology could eventually reach a point of critical mass. At this point, an innovator needs to come with a new invention (Min & Jeong, 2019).

This makeshift market setting provides a contest to the company not only to stay ahead in the dominated DVD service today but also in the prospects in the market (Choy & Park, 2016).

A broader market and tailored products

Netflix today is available in over 190 countries, making it one of the most widespread global brands. In these diverse markets, the customer can select the three current subscription plans and watch their preferred content.

Notably, not all shows are available in all regions since Netflix has to pay licenses for every bit of content that they stream. For instance, in the US, it pays off to provide more subscriber content to USA customers, which is why the USA market has quite a significant library. In other regions that have fewer subscribers such as Australia, they offer fewer TV-shows.

Nevertheless, all these offerings are adapted to a specific region, which improves customer experience. However, Netflix offers the option of getting a virtual private network (VPN) to access content from a different area. Geographical segmentation isn’t the only factor attributing to Netflix’s success; it also has developed content in several languages, including Spanish, German, among other languages. This concept relates to the product positioning theory that highlights that a firm maps its offerings in line with consumer preferences and desires. Therefore, offering tailored products begins with understanding consumer’s mental outlooks of a product (Adina et al., 2015).

Therefore, people from every region, as well as diverse languages, can see and access the content of their interests. Netflix entirely depends on member subscriptions to raise its revenues. Even though its subscription is significant as compared with other competitors, it strives to increase the number of subscriptions, competitive pricing as well as service delivery to keep ahead of the competition. The company also maintains its current membership base by decreasing churn, which represents the proportion of members that terminate their subscriptions every year. Also, Netflix needs to remain ahead, especially in the developing industry innovations and advancements that will serve to weaken their current offering (Choy & Park, 2016).

Q2. Synthesizing of Countries

Netflix is increasing its prospects abroad, and its international segment contributes to approximately 30% of the company’s valuation (Mitra, 2017). Besides, the company is expected to increase in the number of subscriptions in these segments. In January 2015, the company expanded to over 190 countries while it has not been able to establish a presence in China, India, and Africa, which tend to be lucrative markets for its offerings.

India

Market size- The Indian video streaming market is estimated to be $5 billion, and the talks of introducing Netflix can be clear with this market size (Statista, 2020). For instance, the country has the potential to become one of the largest markets in the number of subscribers. With a population of 1.4 billion and a penetration of 5.3%, which is expected to increase up to 10% in 2022, India has a demand-supply prospect that awaits to be met. Besides, the country’s over the top streaming sector is anticipated to increase with the advancement of technology, especially bandwidth technology (Statista, 2020).

Smartphone Usage, and the Need for Personal Entertainment – India is one of the ‘mobile-first’ economies in the world; the majority are internet users on their smartphones, TV sets, among other devices. The country has an estimate of 300 million smartphone users, and the figure is expected to double by 2022 (Forbes, 2018).  The telecom operators are increasing their network bandwidths. For instance, as per now, the 4G services have been rolled out, and data tariffs have been reduced. This environment creates an appetite for internet browsing and video consumption.

The country’s young population is nearly half of the total population; this segment prefers watching content on-the-go, implying an increased market on video content on mobile devices (Statista, 2020). Besides, over 80% of the country’s households have a television set making the smartphone an option of personal entertainment tool. With a population of 650 million internet users, India makes a huge market for video consumption.

Product Positioning – Whereas the country has high prospects in internet penetration and smartphone usage, the majority of the customers are likely to come from tier 1, tier 2 cities, and rural regions. About 52 percent of India’s population represents a middle-class income segment, which could be the right target group for Netflix, especially with its premium shows containing better quality videos and a higher subscription rate. Besides, with the capability of focusing on local content, Netflix has a better chance of being among the top players in the Indian market.

India is the number one preference because of its market attractiveness. For instance, it holds strong potentials for streaming media players and can develop a broad subscriber base in Asia. Secondly, India has stable and friendly regulations for external investment. For instance, foreign investment is allowed in an automatic approach where an external investor does not need the approval of the Government or the Reserve Bank of India as applicable in their laws (Statista, 2020).

Africa

Smartphone Usage, Internet Penetration, Need for Personal Entertainment is Growing Rapidly.

Mobile Phone penetration in Africa is increasing very fast, and, as technology becomes diverse and less expensive, most Africans will have access to technology that was initially inaccessible. At least consumers are ready in Africa. For instance, in Nigeria, smartphone subscriptions are increasing substantially, and the extent of internet usage has rapidly risen over the past two years. More importantly, the Nigerians watch more video content on their smartphones than TV sets. Similarly, in Kenya, which is referred to as the technology hub in Africa, has most of its video content consumers using TV sets; a significant number own Smart TVs (Elliott, 2019).

Additionally, there are questions about the impact of Netflix on local players in the streaming business. For instance, in South Africa, Naspers, an on-demand video service, has already dominated the video streaming market; in Kenya, Viusasa, also a video-on-demand platform, has over two million subscribers (Citizen Digital, 2018). From all these small start-ups, it is clear that entertainment and information video technology is already in the growth stage. Even if it is still tiny, it has the potential of growing big when sufficient opportunities become available.

Market size- Africa has a population of about 1.3 billion people, making it the second-largest populous continent after Asia. Out of this population, 450 million are mobile phone subscribers, and around 250 million own smartphones. The number of mobile internet subscribers has grown steadily in the last ten years. A report done by GSMA Company found out that West Africa has an average internet penetration rate of 27%, and the rate is expected to increase by 5% every year (Elliot, 2019).

Product positioning and fit – Netflix has developed an adaptive streaming technology that can be viewed in the slowest internet connection regions such as Africa. Through compression of data, online content can be relayed in a fast way in any broadband situation. This positioning could provide an advantage to Netflix to expand in sub-Saharan Africa and increase its revenues.

Africa is not a lucrative option as India because pricey data plans are still an issue in Africa. For instance, in Nigeria, a 2-gigabyte data plan costs an average of $20 a month; this is pricey for a middle-income household who earns an average of $500 a month. Besides, regulations in Africa are not stable and robust, especially on content piracy.

China

Smartphone Usage & Need for Personal Entertainment is Growing Rapidly- There were about 700 million mobile phone users in China and about 900 million internet users. By comparison, the USA’s internet user-base is way less than China’s; the USA has an approximation of around 300 million by 2019 (Statista, 2020).  Smartphone users in China account for over 70% of mobile phone users. The smartphone usage is evenly distributed among genders. China’s internet penetration stands at 60%, which shows a sufficient need for personal entertainment.

Market size- Tipping while live streaming video content is a common practice among youths in China. According to Statista (2020), the online live streaming sector is worth 112 Yuan, equivalent to $16 billion. Early this year, iQIYI, one of the leading live streaming service in China, recorded a subscription of 5 million paid-for subscribers for its video-on-demand service. The number continues to grow at an average percentage of 765% (Statista, 2020).

Product positioning and fit – Netflix offers a variety of services, but in china, subscription videos are on demand. Therefore, Netflix should aim at marketing this service. Besides its strong financial capability, Netflix has a significant chance of entering the Chinese live-streaming market.

The biggest challenge in china is, however, the likelihood of Netflix being issued with operating license without severe restrictions. Few foreign businesses enter the Chinese market with regulatory freedom. This is especially relevant in an industry that is politically sensitive as the communication service. Besides, it is the sector that has seen further regulation of existing firms increased. Therefore, it should partner with a local player to expand its opportunities for survival. Accordingly, China ranks last on this list.

Q3a.Evaluation of supplier relationship

Netflix supports its seamless global service with the help of Amazon Web Services (AWS). The AWS enables Netflix to install several servers and terabytes of storage so fast, allowing the users to stream online videos and content from anywhere in the world. From this, we can see that Netflix depends entirely on AWS, and there could be a moderate risk in the international competitiveness of Netflix if the supplier relationship is affected. Besides, Amazon is a competitor in the same industry, and even if it is still struggling to gain subscribers, it still has a goal of having a larger market share just like Netflix. A bad relationship means that Amazon can turn off Netflix and disable its services. However, if Netflix should feel that Amazon is turning to an existential threat to its international attractiveness, then it could quit using the AWS services. It has several options. For instance, Amazon operates in the cloud computing sector, and its competitors include Microsoft, Oracle, and IBM, among others. These players could benefit from Netflix’s fallout with AWS (Ritala et al., 2014).

Netflix is still the leading player in the video streaming service, especially in the number of subscriptions. However, if its supplier relationship with AWS deteriorates and it doesn’t find an immediate solution, it risks losing its business to other emerging providers such as HBO and Hulu (Aguiar & Waldfogel, 2018).

Additionally, Netflix might not wish to get distracted from its core business. Not yet. Besides, if it would have preferred so, then it could have created its distributing content over the internet and maintain it to offer its services.

Nevertheless, it would be a considerable impediment for Amazon if it falls out with Netflix considering that its AWS services are shaping up to become their most critical business since it is increasing and becoming more profitable. For instance, in 2016, the AWS business generated a revenue of $13 billion (see appendix 2). Therefore, both Amazon and Netflix benefit from each other in a significant way, and every player will try to keep a good relationship with each other for now (Aguiar & Waldfogel, 2018).

Q3b. Synthesize future strategies for Netflix

Extending to reality shows- Netflix’s entry into unscripted content could be Netflix’s approach to attracting a new audience. A reality show has a lot of benefits as compared to scripted content. For instance, the shows could cut across all demographics, whereby it could bring everyone in the family to watch (Matrix, 2014). This action could be an approach to positioning its offerings to meet a need in the market. Secondly, unscripted content is relatively inexpensive to produce since the contestants are not unionized and can only get paid what an extra set would be rewarded. Also, the filming doesn’t need high-quality pictures as scripted in a show. Therefore, expanding into reality shows generally means cutting content costs, which could be a competitive advantage for Netflix in the market.

Innovation in new content- Netflix’s idea of creating its content could be the best way of producing new shows that are cheaper than mainstream media (Johnson, 2028). By reducing production costs, Netflix would reduce the user subscription rates, which could provide itself a competitive edge over its customers. Moreover, creating content in original programming enables the company to fashion its production to meet viewer demands. This would, in turn, create a loyal fan base by amplifying appeal.

Adaptation factors – factors driven by international markets such as payment in the local currency, adding a local-language user interface, could be an effective strategy for expanding into global markets (Jenner, 2018). For instance, adding subtitles and dubbing some local content could appeal to customers making it gain a broader market, which would improve profitability.

Conclusion

Netflix has grown from a small tech company to a large organization that has transformed the world through innovation. The organization’s generic strategy focuses on making the best use of its competitive advantages of high operational efficiencies and cost-effectiveness of information technologies. In efforts to expand its market share, Netflix should look into expanding internationally in countries such as India and Africa. In China, it should focus on partnering with local players to operate effectively. Lastly, Netflix’s future expansion strategies, including the creation of original content, venturing into reality shows, and being keen on adaptation factors, could create further competitive advantages that could increase its returns in the long run.

References

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Appendices

Appendix 1

Source: (Statista, 2020)

Appendix 2

Appendix 3

Appendix 4