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The popularity of Netflix’s business model

The popularity of Netflix’s business model quickly resulted in the obsolescence of the model that Blockbuster had so successfully utilized. Ironically, the video-rental store chain was offered the opportunity to purchase Netflix in 2000 for $50 million, but Blockbuster declined the offer.8 On September 23, 2010, amidst the rising demand for streaming services and declining demand for DVD rentals and sales, Blockbuster, facing declining market share and $900 million in debt, filed for bankruptcy protection.9 Move to Internet Streaming and VOD In 2007, Netflix began to reengineer its core business model away from mail-order DVD rentals to Internet streaming and video-on-demand (VOD), accurately predicting that the volume of DVD sales and rentals would eventually fall.10 By 2010, its streaming service had experienced substantial growth and expansion in the U.S. market (see Exhibit 2), a change that soon became reflected in a shift of corporate strategy in 2011. In the same year, Netflix announced its intentions to separate and rebrand its DVD-rental service as the stand-alone subsidiary company Qwikster, effectively dividing its two core services and focusing its existing brand and activities on its streaming service. The intended strategy was never implemented, largely due to subscriber backlash that resulted in the company’s first-ever decline in subscribers.11 Since 2011, the company had experienced steady periods of growth in both subscriber numbers and total revenue. In 2014, the company hit a subscriber milestone when it surpassed 50 million worldwide subscribers, 36 million of whom were in the United States.12 Netflix had supplemented its role as a content provider by providing original content, acting as a developer of popular TV programs such as Orange Is the New Black and House of Cards. Netflix concluded the 2015 fiscal year with a market value of $32.9 billion, making it more financially valuable than established television networks such as CBS.13 Business Model Netflix’s business model was dependent upon the full integration of the Internet — its successful incorporation and utilization of the Internet were critical in competing against, and eventually overtaking, Blockbuster in the home entertainment industry.

Netflix generated revenue primarily through its subscription system, through which subscribers paid a flat monthly fee to have access to its digital library of movies, television shows, and other original content. Although Netflix moved away from its roots as a primarily DVD-by-mail service, the company continued to generate significant cash flow from its business in the DVD-by-mail sector. 14 Its DVD-by-mail business, Authorized for use only in the course Marketing 3300 at Douglas College taught by Arif Mulji from Apr 06, 2016 to Sep 06, 2016. Use outside these parameters is a copyright violation. which operated only in the United States, generated $80 million in contribution profit in the last quarter of 2015, with about 4.9 million members.15 However, the company did not generate any revenue from providing advertising services. In June 2015, Hastings restated his decision on this topic: “No advertising coming onto Netflix. Period.”16 INDUSTRY OVERVIEW The Internet television and video-streaming industry revolutionized the way people accessed entertainment. The VOD business model contributed to the demise of video-rental stores like Blockbuster by offering a wide selection of new releases in a content delivery system that was faster and more convenient for the consumer. The industry benefited from the improvement of streaming technology and in the further development of mobile devices, from which viewers could access streamed content. With the widespread adoption of mobile viewing platforms like tablets, large-screen smartphones, and laptops, VOD capitalized on the business opportunities available by streaming through the Internet. The Internet was an indispensable tool in launching the content-streaming service, but companies in the industry found themselves competing with video file sharing websites like the Pirate Bay and Megaupload, which offered viewers the same, if lower- quality, content for free by avoiding expensive licensing agreements with content providers. Competition The industry was traditionally dominated by a small number of firms, but a diverse range of companies had been looking to expand into the Internet video-streaming business. Many firms operating in the Internet streaming industry sought exclusive licensing agreements with content providers, whether they were cable television networks or production studios. Although Netflix retained a significant portion of market share in the industry, an increasing number of new entrants had changed the competitive landscape with unique competitive advantages. One such firm was Hulu, a subsidiary of Hulu LLC, which was a joint venture between The Walt Disney Company, NBC Universal Television Group, and 21st Century Fox Inc. Conceived and launched in 2006, Hulu offered streaming services to subscribers in the United States and Japan and delivered a wide range of content from its content partners for a monthly subscription fee ranging from $7.99 to $11.99 — the higher fee removing advertisements. By 2015, Hulu had an estimated 9 million subscribers and had managed to secure exclusive streaming rights to a number of popular television programs.17 New entrants to the industry also came in the form of multinational information technology companies that expanded their business interests into the Internet video-streaming sector. An example of such a company was e-commerce giant Amazon, which took advantage of its enormous global customer base, strong brand, and powerful computing infrastructure to launch its Amazon Video service. Launched in 2006, Amazon Video was available in a number of countries, including the United States, the United Kingdom, and Japan, and had an estimated 44 million users, second only to Netflix in market share in the streaming industry. Unlike its competitors, Amazon Video offered users the option to rent or buy movies and television shows without purchasing a subscription. The service was also accessible on a wide range of viewing platforms and streaming devices, from the standard web browser to game consoles such as Xbox and PlayStation.18 Authorized for use only in the course Marketing 3300 at Douglas College taught by Arif Mulji from Apr 06, 2016 to Sep 06, 2016. Use outside these parameters is a copyright violation. NEW STRATEGIC INITIATIVES To overcome competition, and to provide unique content to customers, Hastings decided to pursue exclusive licensing agreements and partnerships to develop original content. Netflix also began pursuing an aggressive international expansion strategy, which further helped it achieve its goals. Developing Exclusive Content In 2013, the political drama House of Cards, starring Kevin Spacey and Kate Mara, was released on Netflix, making it the first content available exclusively on the streaming service. Netflix had begun the process of securing exclusive rights to content in March of 2011, and the success of House of Cards quickly spurned further exclusive partnership deals with content providers, which laid the foundation for Netflix to develop its own content in-house.19 Netflix had exclusive distribution rights to television projects from established Hollywood producers such as Lana and Andy Wachowski (Sense8) and Judd Apatow (Love) and had also secured partnerships with Hollywood studios such as The Walt Disney Company and its associated subsidiaries to gain exclusive streaming rights.20 Netflix had ambitious goals for the future of its exclusive content; Hastings stated that the company wanted its original content to be “as broad as human experience.”21 The company’s decision to secure exclusive rights to content was fruitful.

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