Case 15 Lecture Notes
Netflix Fights to Stay Ahead of a Rapidly Changing Market
While Netflix has always been the number one DVD-by-mail rental company, the market
continues to evolve. As streaming becomes the preferred format, the company finds itself in an
ever-changing market. The onset of competitors in both the DVD rental industry and the online
streaming industry has created new challenges for Netflix to address. Redbox, for example, now
dominates the traditional bricks-and-mortar DVD rental market once owned by Blockbuster. And
while Netflix currently leads the streaming market, its lack of new releases puts it at a distinct
disadvantage to rivals such as Apple, Amazon, and on-demand movies from cable and satellite
operators.
As Netflix looks toward the future, the decline of the DVD will continue to present a challenge.
Although Qwikster was an instant flop, the company will eventually have to phase out its DVD–
by-mail business when it is no longer profitable. The continued growth of streaming options,
from Amazon Instant Video to Google Play, and rental kiosk giant Redbox offer increases in
movie-renting convenience for consumers. Netflix will also have to foster various content
provider relationships and proactively search for newer, better opportunities. The heart of this
challenge is simple in concept but difficult to execute in practice: Will Netflix remain innovative
enough to compete in such a highly saturated market?
Teaching Overview
Many students will be familiar with, and possibly customers of, the key players in the industry.
This case describes the history of Netflix and the movie rental industry. The case analysis and
discussion can revolve around the specific strategic actions that Netflix should follow in this
rapidly evolving industry. Many students will argue that there is little Netflix can do to stem the
decline of the DVD market and that streaming is the obvious future of the industry. Astute
students will see that Netflix is at the mercy of content owners, namely movie studios, for its
livelihood. When content owners decide to distribute themselves (as many studios are now
doing), intermediaries such as Netflix face the grim reality of disintermediation in the channel.
However, if the history of the Internet has taught us anything, it is that market conditions always
change.
As a part of the discussion surrounding this case, encourage your students to consider these
questions about their own movie-watching behaviors:
• How many have been to a movie theatre in the past month?
• How many have watched a full-length movie, other than at a movie theatre, in the past
month?
▪ Was the movie on a cable channel? If yes, was this a premium movie channel or
regular channel?
▪ Was the movie watched using an “on–demand” service?
▪ Was the movie physically rented? If yes, from where (Redbox, Netflix, etc.)?
▪ Was the movie physically purchased?
• How many watch movies on a laptop or desktop computer?
• How many watch movies on mobile devices such as the iPad?
Case 15 Lecture Notes
Netflix Fights to Stay Ahead of a Rapidly Changing Market
These questions can help students understand the current and potential customer base for Netflix.
Encourage students to use this information in developing strategic alternatives.
SWOT Analysis
Internal Strengths
• Size of the company: Netflix is #1 in the industry
• Working to add original programming
Internal Weaknesses
• Dependent on a declining technology (DVDs) for a significant portion of revenue
External Opportunities
• Continuing growth in home theater and watching movies at home
• Rapid advancement of broadband technology and its delivery capabilities, especially in
External Threats
• Competition is strong and aggressive, especially Apple and Amazon (the right strategic
Problem/Decision Statement
The heart of Netflix’s challenge is simple in concept but difficult to execute in practice: How can
Netflix remain innovative enough to compete in such a highly saturated market?
Strategy Alternatives
1. Slowly abandon DVD distribution in favor of a 100 percent streaming operation. This
will reduce the company’s expenses with respect to distribution centers, postage, and
other costs of storing/distributing millions of DVDs. The recouped funds can then be put
into developing original content.
Case 15 Lecture Notes
Netflix Fights to Stay Ahead of a Rapidly Changing Market
Strategy Recommendations
Implementation Issues
Teaching Questions
1. What role will Redbox play in the development of Netflix’s strategic plans? How
threatening is Redbox to Netflix’s future?
Based on the information presented in the case, it appears that Redbox’s actions have
2. How will new competition from digital content providers force Netflix to alter its
strategy?
Case 15 Lecture Notes
Netflix Fights to Stay Ahead of a Rapidly Changing Market
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better (see Question 5). Also, how should Netflix approach this problem if it tries to spin
off DVDs in the future?
3. What new opportunities do you see in the movie streaming business, or the entertainment
industry as a whole?
This is a challenging question as it asks students to predict the future to some extent.
4. Do you think Netflix will remain the dominant force in both streaming and movie
rentals? Why or why not?
This depends on now far downstream the content providers want to take their operations.
Currently, movie studios—especially smaller studios—do not have the infrastructure to
5. What could Netflix have done differently to ensure Qwikster’s success?
It is important to have students separate the two issues related to Qwikster: price and