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CASE 15
Netflix, Inc.: The 2011 Rebranding/Price Increase Debacle
I. CASE ABSTRACT
In 2011 Netflix was the world‘s largest online movie rental service.
Its subscribers paid to have DVDs delivered to their homes through the U.S.
mail, or to access and watch unlimited TV shows and movies streamed over the
Internet to their TVs, mobile devices, or computers. On September 18, 2011,
Netflix CEO and Co–Founder Reed Hastings announced on the Netflix blog that
the company was splitting its DVD delivery service from its online streaming
service, rebranding its DVD delivery service Qwikster as a way to
differentiate it from its online streaming service, and creating a new
website for it. Three weeks later, in response to customer outrage and
confusion, Hastings rescinded the rebranding of the DVD delivery service
Qwikster and re–integrating it into Netflix. Nevertheless, by October 24,
Decision Date: 2012 FY Sales: $3.24 billion
FY Net Income: $226 million
II. CASE SUBJECTS AND ISSUES
Strategy Formulation Competitive Advantage
Strategy Implementation Pricing
Core Competencies Market Segmentation
III. STEPS COVERED IN STRATEGIC DECISION–MAKING PROCESS
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Netflix, Inc.: The 2011 Rebranding/Price Increase Debacle
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IV. CASE OBJECTIVES
1. To discuss the merits of the rebranding decision at Netflix.
2. To discuss Netflix‘s new pricing structure.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
1. This is an excellent case for instructor–led discussion.
2. This is an excellent case for an exam or written case analysis.
VI. DISCUSSION QUESTIONS
1. Did Netflix underestimate the pushback from their price increase?
2. Did Netflix underestimate the bad publicity from their new pricing
structure?
3. Did Netflix underestimate the number of subscription cancellations
that resulted from their new pricing structure?
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Netflix, Inc.: The 2011 Rebranding/Price Increase Debacle
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VII. CASE AUTHOR’S TEACHING NOTE—not available
VIII. STUDENT STRATEGIC AUDIT
I. CURRENT SITUATION
A. Current Performance
1. Netflix has performed quite well over the past year, despite the
split branding debacle. Their user base and earnings have
increased, while their margin has slipped due to increasing
content costs.
2. In FY2011 the ROI was .22.
3. Netflix also experienced a 31 percent increase in net profit in
B. Strategic Posture
1. Corporation mission, objectives, strategies, and policies are all
derived from the performance and not explicitly stated in the
case.
2. Mission
a. Netflix is in the entertainment business to provide users
with the greatest value in media entertainment. The mission
to 1) become the best global entertainment service, 2)
competencies.
3. Objectives:
a. Profitability
4. Strategies:
a. Domestic and international expansion
i. Low startup costs allow for organic expansion,
without need for mergers or acquisitions.
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Netflix, Inc.: The 2011 Rebranding/Price Increase Debacle
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5. Policies—N/A
II. CORPORATE GOVERNANCE
A. Board of Directors
1. Netflix board consists of seven directors
2. Compensation
a. Internal members compensation is heavily dependent on stock
options, with base salaries of $500,000 and $800,000.
b. External members have $361,418 of stock option monthly.
3. Stock is publicly traded.
4. Board members:
a. Two women, five men
5. Oldest members of board started in 1998; newest started in 2010,
6. Involvement in strategic management—N/A
B. Top Management:
1. Top management consists of seven C–level employees, six of which
are men.
2. Members of management:
a. Members have heavy experience in the media and technology
industry.
b. Most have international experience.
c. Most members were recruited rather than acquired.
3. Two members have joined top management in the past three years.
III. EXTERNAL ENVIRONMENT: OPPORTUNITIES AND THREATS
A. Social Environment
1. Economic
a. The economic decline of 2008–2010.
CASE 15
Netflix, Inc.: The 2011 Rebranding/Price Increase Debacle
i. People will tend to spend less on nonessential goods and
services, such as movie rentals (T).
ii. At the same time this could potentially be an
rentals (O).
b. Netflix is dependent upon major movie studios’ pricing
structure, as suppliers (major movie studios) control the
c. Utilizing their size and market share to their advantage, they
have the ability to negotiate better terms and pricing with
suppliers (O).
d. U.S. Postal Service is under tremendous pressure to minimize
losses, and in turn could potentially increase mailing costs
(O).
2. Technological
a. Online streaming
i. Ease of streaming—Internet speeds are getting faster and
faster and bandwidth is increasing (O).
3. Political—legal
a. Internet Capacity
i. It is unknown what controls or direction the government
beneficial to the company (O).
4. Sociocultural
a. The mobility of Internet access has increased with the use of
tablets, smartphones, laptops, and e–readers, in addition to
televisions and desktops (O).
i. Will the movie streaming industry follow this same
trend?
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Netflix, Inc.: The 2011 Rebranding/Price Increase Debacle
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The world can be split into three different categories: developed
countries, developing countries, and undeveloped countries. Within
B. Task Environment
1. Threat of New Entrants—High
a. There is not a high technological barrier of entry to the
industry; however, there is a high barrier in terms of
2. Bargaining power of buyers
a. Low— customers act individually and don’t make purchasing
decisions in a group.
i. However, the customers can react to public
perception.
3. Threat of substitute products or services
a. Low—there are many substitute products in the
4. Bargaining power of suppliers
a. High—due to the low number of major movie production
companies who license their products to Netflix, they have
relatively high bargaining power to set pricing and contact
terms.
5. Rivalry among competing firms
C. Summary of External Factors—see EFAS table
a. The opportunities that are most important currently are the
economic downturn, as it will eventually recover; the size of the
company in keeping an established presence; and the ease of
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Netflix, Inc.: The 2011 Rebranding/Price Increase Debacle
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are going to be pricing, the power of suppliers, and vertical
integration.
IV. INTERNAL ENVIRONMENT: STRENGTHS AND WEAKNESSES
A. Corporate Structure
1. Board of Directors—consisting of seven members. Reed Hastings
serves as both the CEO and chairman of the board (S).
a. The Board of Directors Consists of four standing
committees:
i. (1) Compensation Committee
iv. (4) Stock Option Committee
• The Compensation Committee reviews and approves
all forms of compensation to be provided to the
executive officers and directors of the
company.
• The Audit Committee engages the company’s
independent registered public accounting firm;
reviews the company’s financial controls;
• The Nominating and Governance Committee reviews
and approves candidates for election and to
fill vacancies on the board.
b. The structure is organized on the basis of functions as
described above (S).
2. Structure is clearly understood by everyone within the company
(implied by case) (S).
3. Structure is consistent with current objective and strategies.
Although while Netflix is targeting the international market, a
B. Corporate Culture
1. Values (S)
a. Customer needs
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Netflix, Inc.: The 2011 Rebranding/Price Increase Debacle
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2. Cultural Consistency—N/A
C. Corporate Resources
1. Marketing
a. The corporations current marketing objectives are as
follows: (1) repair the PR damage from the rebranding and
the 2011 price increases, (2) focus on its growing
subscriber base, (3) maintain a healthy cash position to
• The company has begun to develop more of an
expansion overseas, with developing Canada as
its first international market in 2010 and then
followed by Latin America in 2011. Netflix has
planned to expand to both the UK and Ireland in
2012 (S).
and expanding internationally are all vital to Netflix
strategy.
i. Generation Y’s preferences change, unlike those of
the older demographics, very quickly and their brand
loyalty and perception differ as well, due to growing
up in the age of social media. Therefore Netflix
c. Advertising
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Netflix, Inc.: The 2011 Rebranding/Price Increase Debacle
i. Mainly television, radio, and online advertising.
(S/W).
ii. Netflix also started a campaign to increase customer
e. International marketing conditions
i. With international expansion becoming more of a
priority for Netflix they are beginning to broaden
their content portfolio abroad in order to cater to
the specific needs of the international audience
2. Finance
a. Marketing was 12.6 percent of total revenue (S).
b. Domestic revenue accounts for 97 percent of total revenue,
while international accounted for just 3 percent for FY2011
(W).
c. International revenue grew by over 2,000 percent from
FY2010 (S).
3. Research and Development
a. R&D objectives, strategies, policies, and programs:
i. Netflix has currently stepped up its R&D efforts in
order to try and keep a competitive advantage over a
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Netflix, Inc.: The 2011 Rebranding/Price Increase Debacle
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ii. The large amount spent in R&D meshes very will with
three of the four points that make up Netflix’s
mission statement: 1) becoming the best global
entertainment distribution service; to become the
“best“ distribution service globally, the company
iii. The role of technology in corporate performance is
getting more and more important for Netflix every
moment. They are seeing increased competition in the
iv. Netflix currently has a competitive advantage over
its competition due to their early mover status, but
competitors are quickly closing that gap and making
the company’s competitive advantage less valuable
each day (W).
b. The return that Netflix is receiving on its investment in
R&D and technology isn’t necessarily quantifiable. The
c. Netflix is competent in technology transfer, as their
technology can be easily replicated to access global
markets (S).
d. Technology discontinuity has not played a major role in
Netflix’s operations to date. The original technology used
CASE 15
Netflix, Inc.: The 2011 Rebranding/Price Increase Debacle
optimization and new features, without completely scrapping
and replacing existing technology (S).
e. The company has a significant advantage over competitors
relating to its investment in R&D. Netflix’s home delivery
and online streaming services have transformed the
entertainment industry to the point where traditional
f. R&D does not significantly differ based on the country that
Netflix is operating in. Its physical and digital
when operating internationally (S).
g. The role of the R&D manager is very important to the
strategic process in that this manager at the forefront of
developing and upgrading technologies for Netflix that will
help it maintain its current competitive advantage, and
even create new ones (S).
4. Operations and Logistics
a. The organization‘s current service objectives are, as
defined by their mission statement, “to become the best
(S).
b. Netflix is in a unique position for its expansion into the
international market that most other industries cannot take
advantage of.
i. Their movement into foreign markets has been
dominated by their online streaming services. This
allows them to expand their operations without
spending significant capital on physical distribution
networks and assets (S).
ii. Instead, they have had to negotiate additional rates