Netflix Case Analysis

Netflix Case Analysis

6. EXTERNAL ENVIRONMENT ANALYSIS:
7. Introduction and industry identification

The external environment of Netflix consists of seven different crucial aspects that can be responsible for influencing the industry. Some aspects will affect the industry passively, while others will affect it negatively (Oliveira & Ribeiro, 2019). For instance, the factors include the general environment, economic aspect, the demographical environment, socio-cultural environment, the global aspect, technological aspects, political and legal environment, and the physical environment.

1. General Environment

The general environment is going to affect all the movie companies depending on their conditions in the future. For instance, the economic environment is a general aspect that will affect the movie industry. At the beginning of this year, all the companies were focused on their profit-maximizing objectives. Still, the economy has negatively influenced the outbreak of COVID-19, whereby the US economy declined by 33% according to the World Bank Data (Majumder & SenGupta, 2020). the economy has been pushed to the recession, causing all the companies, including Netflix, to record significant losses. While some companies were busy closing down, Netflix was also affected since people ought to save than subscribe to movies. Factors such as inflation rate, interest rates, and economic cycle also play a significant role in determining aggregate demand and the aggregate investment of Netflix in the economy.

Generally, taking the issue of COVID-19 aside, Netflix has been well in the economy, contributing quite a reasonable percentage to the US GDP. This is a result of its increased subscribers. The company had expanded its operations in different parts of the world. The graph below shows how Netflix was earning due to the payments from streaming subscribers at the end of 2019 before the Coronavirus outbreak. Most of the subscribers come from other countries apart from the US, and that is why it had to experience such a loss (Desjardins-Proulx, Laigle, Poisot & Gravel, 2017).

According to a research carried out by Ampere Analysis, it shows that the Netflix’s global market share has fallen from a high end of 91% to a low end of 19% and it is also expected to drop further to 18 by the end of 2020 due to the economic crisis that has faced the US. This because Netflix was a lone wolf back in 2007. It used to offer a streaming component that was only limited compared to the DVD services that it used to offer. The market shares have reduced due to the emergence of other streaming competitors who have taken a bite out of the market share, but that does not mean the company is not growing. It has more than 183 subscribers being in the number spot ahead of its competitors, such as Disney, Hulu, among others.

Additionally, the federal reserve makes adjustments to the current interest rates to control inflation in various ways. It increases the federal fund’s rates in an attempt to shrink the money supply available for making purchases, which in return has made money more expansive to obtain. The table below indicates the fluctuations in interest rates.

The unemployed level is another macroeconomic indicator that has affected Netflix. When many people are unemployed, they do not have adequate money to subscribe to movies; instead, they strive to get themselves basic needs such as food and shelter AS AT April 2020, the unemployment rate has reached 14.7%. The graph below shows the unemployment rate in the US.

The Demographic Environment

The target market for Netflix involves males as well as the females between the age group of 17 years to 60 years. The household income levels range from $30,000 going upwards. According to the data provided by Nielson data, as from Feb 2020, between 18 to 34-year-old Americans are the ones who are most likely to have subscribed to several services with more than 48% of the same age group subscribing to three services.

The online service has attracted a better population to subscribe to Netflix services, with the averaged aged adults being the main customers, as shown below.

Demographically, the house income matters when it comes to revenue recognition by Netflix. With millions of people subscribing to Netflix, the graph below shows the relationship between the revenue earned in correspondent to the household income (Oliveira & Ribeiro, 2019). It also shows the projected revenue of the company until 2023.

For the sociocultural environment, we are going to mention aspects of lifestyle and trends in the United States, some of which have made a spark of innovation in 2020. Some of these include personalized health care, care for the environment, a healthy lifestyle, and a change in financial habits. These trends and lifestyle habits affect the way it utilizes Netflix services and other related services (Majumder & SenGupta, 2020). Further, language also matters, like English (79%) is the most spoken language in the US, so most services are supposed to be in English. But the company has to cater to other language-speaking people such as Spanish (13%), Asian and European, which makes a percentage of 7.1%. Failure to which they might quit using the services (Nair, Auerbach & Skerlos, 2019).

The newly industrialized countries will comprise the global environment. They will have developed products and services that people can use to stream and enjoy services offered by Netflix, such as fast network connection and better electronic devices like digital TVs, laptops, and mobile phones. Such environments will affect Netflix and related companies such as Disney positively.

In recent years, technology has taken over the world, and almost 40% of worldly activities are carried online. As for the case of Education, students have their classes online due to Coronavirus’s pandemic, eCommerce on the hand is working perfectly well. This is after the spending on research and development became more than 551518 million (2.826%) of the total GDP at the end of 2019. The spending on research and development in this year only is 147946 million dollars. This has brought an emergency of new communication technologies with 5G included. As a result, streaming services are not fast and efficient. Therefore, the technology environment has affected Netflix positively (Brennan, 2018).

For political and legal environments, we will focus on political stability and regulations that influence the entire industry (Nair, Auerbach & Skerlos, 2019). For instance, the Federal Trade Commission webpage allows for fair competition. With favorable political conditions, businesses can prosper well. Like the case of Netflix, it will achieve great profits if subscribers are under a peaceful environment to stream their desired services.

Generally, the physical environment that affects the progress of Netflix is human resources to produce the movie and video services required to entertain its customers. If they are in absence, then there will be fewer services to offers. But with the advanced world, there are a million talents in the film industry that are responsible for producing and delivering the kind of services required by customers, hence affecting the company positively.

III. Industry Environment

Netflix is one of the American technologies and media services providers, as well as a production company. It has been the most significant leading internet entertainment service, provider. It possesses more than 157 million memberships fully paid in over 189 countries that enjoy TV series, movies, documentaries, and many other services (Brennan, 2018).

Generally, the Five Forces are favorable to the entertainment industry. For instance, the threat of new entries is moderate because the existing companies have already dominated the industry. In order for other companies to enter the industry, they have to satisfy all the customers’ needs, which is a real sense, they have already been catered for. Therefore, there are no barriers to entry, but stabilizing is the greatest challenge. On the other hand, the competition is very stiff for the existing companies, with Netflix dominating the industry (Chung, 2014). The competition has brought greater results since every company has strived to offer quality entertainment services.

The threat of suppliers’ bargaining power is shallow because resources are entertainment services provided by different artists in the industry. The power of artists and entertainment service providers differ with the level of their talents and ability to entertain people. Therefore, every company in the entertainment industry only requires talented and skill actors, comedians, producers, scriptwriters, directors, and others to provide quality and commercial services to the customers.

Like any other products and services, entertainment, and media services have two types of buyers, distributors consisting of series and series sites and TV channels as well as end-users (Oliveira & Ribeiro, 2019). The distributors pay for rights to air programs produced by companies such as Netflix, Disney, and others. Such programs include TV series. On the other end, the end-user is the final consumer of media and entertainment services such as TV viewers and subscribers. The threat of buyers’ bargaining power is moderate because they have broad access to the services at the comfort of their homes by subscribing to enjoying the services.

The threat of substitute services is moderate since various companies are participating in an offering of entertainment services. Some individuals have opened their YouTube channels to entertain people through their innovations and creativity. For example, comedians such as Kelvin Harts are producing and uploading their content online, which serves as substitute services to the services provided by the case of Netflix and related companies. Therefore, they will encourage competition in the industry.

Finally, among Porter’s five forces is the rivalry among firms. The threat is very high since the competition is very stiff due to different production quality among the firms. Each firm strives to deliver unique content to its customers, causing a lot of diversity in the industry. The competition sometimes is very healthy since it makes the firms discover new services that are very entertaining, causing the industry to grow. Netflix has been the leading company among other firms, with more than 160 million subscribers (Chung, 2014).

The stage of the product life cycle of Netflix is the maturity stage. The company appears to be in the maturity stage. This is because most of its streaming media and film and television production are in the product life cycle. Netflix has a very low cost that is fixed, and the revenue covers that it records within each financial year, which amounts to about $20.2 billion. The company has already developed a very strong relationship with its customers.

The Media and entertainment industry entails films, radio, print, and television. Their main segments include TV shows, movies, radio shows, and music, as shown in the pie chart below. The major media and entrainment companies include Netflix, the Walt Warner Disney, NBC Universal, TEGNA Inc, FOX, Viacom Inc, HBO, among others. The media and entertainment industry have been responsible for contributing more than $635 billion to the economy hence presenting a third of the global industry.

The firms that tend to cluster together in the persuasion of similar strategies include Netflix, Amazon Prime Video, HBO Max, Disney Plus, Hulu, Crackle, CBS All Access as well as Acorn TV (Chung, 2014). The dimensions used in classifying these clusters are the key elements used by the companies in developing high-speed internet services to their customers. They are also focused on reducing content costs since they are producing their content. The majority of the companies are also expanding their territories globally to take advantage of the new emerging markets as well as offering their quality television series. The graph below shows the conceptualization of the strategic groups’ analysis;

1. Competitive Environment

The major competitors of Netflix include Amazon Prime Video, HBO Max, Disney Plus, and Hulu. They are the main competitors because they lie on the same line of production and the focus on producing entertaining content such as films and TV series. Below is a competitor analysis covering the primary competitors of Netflix: Amazon Prime Video, Hulu, and YouTube Premium (Netflix Kim, 2018).

Among the entertaining companies, Netflix is doing quite well because of its significant market share as well as its vast capabilities to deliver unique and services.

8. SWOT/TOWS – Analysis of Key Strategic Factors:
9. A 3×3 TOWS table of Netflix (Muzumdar, 2018).

9. Identification of Key Problem Areas

Netflix’s biggest problem is that it is paying more and more to acquire new subscribers. The company’s spending is not adding the required number of subscribers. The spending on marketing and streaming content has increased to $581 per new subscriber from $308 per new subscriber TTM. As a result, the company has faced a significant threat from Amazon (Brenner, & Maxwell, 2019). For instance, as at the end of 2019, Amazon Prime Video had managed to record over 150m subscribers, meaning that its subscribers have been increasing very fast over the last three years since the company has increased its original content compared to Netflix.

Additionally, Netflix has had long-term debt of $10.4bn, but as in the last quarter of 2019. Netflix managed to be owed an additional obligation of $19bn as well as having an addition of between $2 – 5bn used in unknown expenditure believed to be committed for the next five years to cater for new shows. The company has also committed a lot of money in licensing the rights to the TV shows that existed before and movies over a multi-year contract.

10. Defining One Critical Problem

Reliance on media companies is one critical problem faced by Netflix. A considerable part of the company’s value comes from the content of other companies. Most of those companies are in the race to compete against Netflix for viewers and subscribers. This makes them wary of selling their content to the streaming service of Netflix. The problems come when Netflix tries to get popular since its job and operations start to get harder (Brenner, & Maxwell, 2019). As much as it gets more popular, its content becomes more expensive, and on the other hand, the media companies are not willing to pay more. Therefore, that creates very clear evidence of why Netflix’s content obligations are ballooning (Elgohary, 2019). They have reached more than $12bn.

11. Recommendation, Justification and Implementation plan
12. The three distinct recommendations that will address Netflix’s critical problem include;
13. a) the first recommendation is to take control of its spending. The company should focus on the most important operations that will have high returns. Even if the credit companies increased the credit limit, the company should minimize its debt. Through the management, the company should track all expenses and cut the unnecessary one to ensure no money is being misused.
14. b) production of its original content. This is the key recommendation to the critical problem of Netflix. It should consider producing its contents. This will help the company reduce the dependency rate from other companies for content (Netflix Kim, 2018). Given its strength of having the highest number of subscribers, it will have a broad market for its content.
15. c) Since the company does not require commercials to go global, it can invite other companies to do commercials on their channels. This will channel a new source of income to the company, which can be used to finance new and original content. This will help the company solve its debt problems.
16. Producing its original content is the best recommendation for solving its critical problem. The reason is that it will depend on its content and have a more significant advantage over its competitors, such as Amazon Prime Video, HBO, among others. This is one of its strength since it can assess various resources responsible for producing original and quality content.
17. The implementation plan will ensure that all key stakeholders are involved. The management will react positively to the plan, and they will be will to spend their time and resources to make it a success. The plan will have no resistance. The employees as well they will like to plan and participate in implementing since it will help in generating revenues that will make their pay rise. The kind of investment required by my plan is that the company should focus on investing in its content that will limit dependent on other companies. I expect the customer to love the plan since they will enjoy fresh content from Netflix that has not been produced by any other company. On the other hand, the competitors will feel challenged, and they decide to copy the plan to be in a better position to compete with.

References

Brennan, L. (2018). How Netflix expanded to 190 countries in 7 years. Harvard Business Review. https://www. tbsp. Harvard. edu/product/H04LEY-PDF-ENG.

Majumder, S., & SenGupta, A. (2020). The Political Economy of Digital Automation: Measuring its Impact on Productivity, Economic Growth, and Consumption. Routledge.

Oliveira, C., & Ribeiro, M. I. (2019). Netflix-entertainment services (Doctoral dissertation).

Chung, Y. K. (2014). Analysis of Netflix and Hulu for Online Video Content Distributors’ Business Model Comparison in the N-Screen Era. The Journal of the Korea Contents Association, 14(5), 30-43.

Nair, A., Auerbach, G., & Skerlos, S. J. (2019). Environmental Impacts of Shifting from Movie Disc Media to Movie Streaming: Case Study and Sensitivity Analysis. Procedia CIRP, 80, 393-398.

Desjardins-Proulx, P., Laigle, I., Poisot, T., & Gravel, D. (2017). Ecological interactions and the Netflix problem. PeerJ, 5, e3644.

Brenner, D. L., & Maxwell, W. (2019). The network neutrality and the Netflix dispute: upcoming challenges for content providers in Europe and the United States. Intellectual Property & Technology Law Journal, 23(3), 3.

Elgohary, W. R. (2019). Online technology and organization challenge: An examination of Netflix and customer satisfaction. Capella University.

Muzumdar, P. (2018). From Streaming Vendor to Production House: NETFLIX SWOT Analysis. Available at SSRN 2377151.

Kim, H. J. (2018). Analysis of the Effectiveness of Application of Content Quota System for On-Demand Video Streaming Platform: Focusing on the European Union Response to Netflix. Journal of the Korea Institute of Information and Communication Engineering, 22(9), 1191-1198.