FIN 4340 Finance Netflix Swot Analysis Case Study

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W16236
NETFLIX: INTERNATIONAL EXPANSION1
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Won-Yong Oh and Duane Myer wrote this case solely to provide material for class discussion. The authors do not intend to illustrate
either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying
information to protect confidentiality.
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Copyright © 2016, Richard Ivey School of Business Foundation
Version: 2016-04-26
tC
In October 2015, Netflix released its report on its third-quarter earnings. Although growth in the United
States was weak, with profits dropping 50 per cent compared with the year before, the number of
international subscribers was nonetheless increasing at a rapid pace. However, not all international
subscribers were satisfied with Netflix’s service.2 Global expansion was strategically important for the
company to offset the financial impact of its slow growth in the domestic market. Reed Hastings, the chief
executive officer (CEO) of Netflix, stated that accelerating the company’s international expansion would
put it on the right track and would offer resources for reinvestment in its service, as well as developing and
licensing more content.3 However, U.S. operations still represented about two-thirds of Netflix’s revenues,
and the company faced challenges ahead in its push to expand internationally.
COMPANY OVERVIEW
No
Netflix was a publicly traded company that offered subscription video streaming and online digital video
disc (DVD) and Blu-ray Disc rental services, all for a flat fee of US$7.99 a month.4 By January 2016, the
company had an estimated 74 million subscribers worldwide, ranging from its domestic market of the
United States to markets as geographically diverse as South Korea and Poland. As of 2015, Netflix
employed more than 3,500 full-time employees and reported revenues upwards of $6.78 billion (see Exhibit
1). Its plans for 2016 included further expansions targeting a worldwide market (barring selected countries
with stringent regulatory restrictions).5
Do
The company’s status as a dominant power in the Internet streaming services industry found its roots in
relatively humble beginnings. Netflix was conceived as the solution to the common, but annoying, problem
of overdue fees on video rentals. Founded in 1997 in California by current CEO Hastings and entrepreneur
Marc Randolph, the idea for Netflix came about after Hastings faced a $40 late fee on a video he rented and
forgot to return for six weeks.6
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The Rise of Netflix and the Demise of Blockbuster
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At the time of Netflix’s conception and launch, the video-rental industry was dominated by Blockbuster, a
video-rental company that relied on multiple locations in suburban centres and the willingness of customers
to patronize its locations. Randolph and Hastings launched the Netflix website on April 14, 1998, as a payper-rental DVD-mailing service, charging $0.50 per rental. They introduced the concept of a subscriptionbased service in 1999, moving away from the idea of stand-alone rental stores that Blockbuster had
popularized.7
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Netflix experienced substantial growth at the turn of the new millennium. In 2002, it launched an initial
public offering (IPO) to sell shares of its common stock, selling 5.5 million shares at $15 per share. 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
tC
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
No
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
Do
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,
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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
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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 lowerquality, content for free by avoiding expensive licensing agreements with content providers.
Competition
tC
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.
No
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
Do
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
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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. This move helped Netflix
decrease its reliance on content providers. Netflix also began pursuing an aggressive international
expansion strategy, which further helped it achieve its goals.
Developing Exclusive Content
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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
tC
The company’s decision to secure exclusive rights to content was fruitful. As of 2015, the most-watched
series on Netflix was Orange Is the New Black — one of its exclusive content dramas. The show had been
streaming exclusively on Netflix since 2013 and had generated a loyal following and critical acclaim since
its debut.22
Netflix also ventured into securing the licensing of feature films, which diversified its exclusive content
beyond television shows. In 2015, Netflix purchased exclusive global distribution rights to the film Beasts
of No Nation, which was released to its subscribers on October 16, 2015, the same day that it was distributed
to movie theatres.23 The film was met with critical acclaim and won numerous awards upon its release.
No
Despite the critical and commercial success of the film, Netflix’s venture into the film industry was met
with backlash by established stalwarts in the industry. The film’s simultaneous release through online
streaming was viewed by American movie theatres as a violation of the industry’s 90-day release exclusivity.
That rule restricted films from being made available online within 90 days of being released to conventional
movie theatres. Netflix’s actions resulted in a boycott of the film from major movie theatre chains.24
Do
Netflix planned to continue securing exclusive licensing deals from content providers in the future but was
also looking towards further reducing its dependence on content providers by solely producing its own
content. The decision to produce its own shows came amidst increasing resistance from content providers
such as 21st Century Fox Inc., who were becoming reluctant to license their content to third-party streaming
services. By creating its own television shows, Netflix would increase financial commitment and risk.
Nonetheless, as of late 2015, the company had leased studio space in Hollywood to begin filming episodes
of television shows. In 2016, the company expected to provide 600 hours of original programming,
compared with 450 hours in 2015.25
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International Expansion
Since 2010, Netflix had adopted an aggressive expansion strategy into the global market to offset slow
domestic growth in its U.S. market. It also stated its target to expand into 200 countries and establish itself as a
global force by 2016. This desire for international expansion had been fuelled by slow growth in a saturated
domestic market and by positive results from past entrances into global markets such as Canada.
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Before it adopted this international expansion strategy, Netflix reported subscriber growth rates of around
2.4 million people per year. The subscriber growth rate jumped to an average of 7 million subscribers per
year following its entrance into the streaming markets of Canada, Europe, and Latin America.26 Netflix
reported a record growth of 2.74 million subscribers in its international segment in the third quarter of 2015
and projected subscriber growth in this business segment to increase substantially in the future.27
Netflix tried to establish a successful business model for minimizing the risks associated with entering a
new market. The company accounted for the cultural differences among regional audiences by entering the
markets with limited-time offers, which minimized the financial involvement and potential risks of rolling
out the full service in an untested market. It utilized the data gained from these initial subscribers — mostly
the types of programming they streamed — to more effectively create region-specific business models that
took into account subscriber behaviour in the given market.28
tC
Netflix had also recently implemented elements of its new domestic strategic direction — the exclusive
licensing of content and developing its own content for streaming — into its international expansion
strategy. For example, in preparation for its launch into the Japanese market in the fall of 2015, Netflix
partnered with Japanese talent agency Yoshimoto Kogyo to produce exclusive local programs. The deal
between Netflix and Kogyo involved Netflix providing funding for the development of a number of programs
by the talent agency in exchange for exclusive streaming rights to the programs for a set amount of time.29
In January 2016, Netflix made clear its intentions to further its international growth when it announced that
its service would be made available in 130 new countries, which expanded its reach to over 190 countries
worldwide. The decision meant that Netflix became available in nearly every country in the world, except
those that had sanctions imposed upon them by the U.S. government. Notably absent from the list of 130
countries was China, a significant streaming market.30
No
CHALLENGES
Do
Netflix’s implementation of its expansion strategy was not without issues. The company was subject to
both U.S. and host country regulations, and it needed to adapt its content offerings to serve the local
customers’ needs. In spite of its high brand recognition in the United States, Netflix faced severe
competition from local pay television operators and VOD service providers in many countries. Due to these
factors, Netflix was expecting to have to make a substantial investment to implement its ambitious
international expansion plan.
Regulatory Restrictions
As an American company, Netflix was still subject to regulatory restrictions imposed by the U.S.
government. The impact of these restrictions was apparent in its January 2016 expansion announcement,
with countries like Syria absent from its line-up.
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More concerning for the future of its expansion strategy, however, were the regulatory restrictions imposed
by the governments of the countries that Netflix chose for expansion. For example, Indonesia’s censorship
agency claimed that much of Netflix’s content was unsuitable for local audiences. Vietnamese regulators
were also cautious on similar grounds, and Malaysia was likely to require that Netflix follow its censorship
policy, largely due to religious reasons.31
China, in spite of its highly attractive market with its enormous, broadband-capable population, was very
difficult to operate in because of regulatory challenges. More specifically, entering the Chinese market had
proven challenging for Netflix due to strict regulations imposed on the country’s media and entertainment
industries. However, Netflix was still exploring possible ways to launch its services in China.32
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Local Adaptation
The adaptation of content to suit regional markets was another critical challenge in Netflix’s international
expansion. Netflix’s aggressive growth strategy came under criticism from industry analysts. They claimed
that Netflix was outpacing its ability to provide area-specific, modified content to international subscribers
and to develop market penetration strategies that were specific to the host country. David Sidebottom, an
analyst at Futuresource Consultancy, pointed out that “people are also more reluctant to pay for a monthly
subscription to a video service in France and Germany.”33
tC
In addition, despite its presence in more than 190 countries, Netflix only had service available in 20
languages, which put it at a severe disadvantage when competing with the domestic content providers that
were present in each country. For example, analysts noted that in India, where only 5 to 7 per cent of
households watched television in English, Netflix offered its service only in English. Netflix was also
compromised in its ability to stream licensed content when providing access to international subscribers,
resulting in severely limited content availability in comparison to that offered to American subscribers.
To mitigate restrictions on content availability and the lack of region-specific programming, which was
often preferred by domestic television audiences, Netflix explored partnerships and joint ventures with
content providers in these markets. This proved to be an expensive strategy. Estimates for Netflix’s
spending on international content creation were around $5 billion for 2016.34
No
Competition in the Global Markets35
Do
Netflix faced severe competition from incumbent pay television operators and established subscription
VOD service providers in local markets. In some countries, Netflix managed the local competition
successfully. For example, in September 2010, Netflix launched in Canada and recorded a higher
percentage of penetration than it had recorded in the United States (about 45 per cent). Two major domestic
service providers already existed in Canada. Shomi was co-owned by Shaw Communications and Rogers
Communications, and CraveTV was owned by BCE Bell Canada. However, both of these services had a
much lower market share than Netflix.
Netflix was unable to repeat such success in many other countries. For example, India already had four
major service providers (Eros Now, Ditto TV, Spuul, and Hotstar) that had substantial customer bases and
content. Eros Now had 30 million registered users and rights to over 3,000 Bollywood movies. Ditto TV,
owned by Zee Entertainment Enterprises, launched in February 2012 with over 20 million customers.
Netflix also faced the problem of relatively underdeveloped infrastructure. Network quality was generally
poor, and 4G wireless technology was only starting to gain momentum.
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In some countries, Netflix was also facing competitors from both home and host countries. Netflix entered
the Japanese market in September 2015, where Rakuten Showtime, one of the strongest local competitors,
had over 100,000 movies, dramas, animations, and sports programs. In addition to the local players, Netflix
was competing with Hulu Japan, which offered access to 13,000 movies, TV dramas, and anime shows.
Financial Costs
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The investment costs of Netflix’s international expansion were formidable. These included not only costs
that the company incurred directly through licensing and development but also costs that the company could
not control. The cost of broadband and Internet availability in a given market could have a great impact on
the company. In fact, Netflix’s profitability in a given market depended upon its availability of the Internet
in a country, as well as the ability of the country’s infrastructure to support widespread streaming services.
Only 31 per cent of households in developing countries had access to the Internet.36
Direct costs incurred by the company included partnerships with domestic content providers for exclusive
access to original programming, as well as marketing, distribution, and technology costs associated with
rolling out the service. A significant cost for international expansion had been the fees that Netflix paid for
global licensing deals. This was a necessary expense for addressing issues with restricted access to
American content in regional licensing deals.
WHAT’S NEXT?
tC
In order to compete with both global and domestic competitors, Netflix paid significant premiums for these
global licensing deals, which resulted in very high costs for its international business segment.37 In the third
quarter of 2015, outside of the United States, Netflix reported losses of $68 million, more than double the
$31 million loss it reported the year before for its international business segment.38 Although Netflix’s
international expansion aimed to be profitable in the long term, the high costs of undertaking its ambitious
strategy resulted in it operating at a significant loss in the short term.
No
Netflix had been pursuing aggressive international expansion in Europe, Asia-Pacific, and all around the
world, mainly through organic growth initiatives. Hastings believed that the novelty of the strategic plan
and the company’s constant efforts to improve the services would pay off in the long run. However, in many
countries, the market environment was often very different from the environment in the United States.
Do
Netflix was facing substantial uncertainties and challenges as it moved into the global arena. Audiences
had strong preferences for local-language and local-content service offerings. The pricing strategy was
comparable to its North America and Europe plans, which made local competitors more affordable, leaving
piracy as an attractive option in developing countries. Regulatory risk was another challenge in many
countries. Could Netflix be as successful in the global markets as it had been in the United States?
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EXHIBIT 1: FINANCIAL DATA OF NETFLIX (2011–2015)
2015
2014
2013
2012
2011
Cash flow
1.65
0.04
0.07
0.05
0.86
Earnings
0.28
0.62
0.26
0.04
0.59
Book Value
5.06
4.08
2.89
1.91
1.00
Revenue
6,780
5,505
4,375
3,609
3,205
Gross Profit
2,188
1,752
1,291
983
1,165
Total Operating Expense
1,882
1,349
1,063
933
789
306
403
228
50
376
133
53
29
20
20
142
349
171
30
360
123
267
112
17
226
337
3,184
249
96
423
2,311
1,608
1,200
748
798
5,432
3,940
3,059
2,421
1,831
10,203
7,057
5,413
3,968
3,069
3,530
2663
2,154
1,676
1,225
4,450
2,536
1,925
1,547
1,201
Total Liabilities
7,979
5,199
4,079
3,223
2,426
Long-Term Debt
2,371
900
500
400
400
Total Stockholders’ Equity
2,223
1,858
1,334
745
643
749
16
98
23
318
Free Cash Flow (Million $)
841
128
44
19
268
Current Ratio
1.54
1.48
1.42
1.34
1.49
Quick Ratio
0.65
0.60
0.56
0.45
0.65
Debt-to-Equity Ratio
1.07
0.48
0.37
0.54
0.62
Asset Turnover
0.79
0.88
0.93
1.03
1.58
Gross Margin (%)
32.3
31.8
29.5
27.2
36.3
Operating Margin (%)
4.5
7.3
5.2
1.4
11.7
Return on Assets (%)
1.42
4.28
2.40
0.49
11.16
Return on Equity (%)
6.01
16.72
10.82
2.47
48.47
Return on Invested Capital (%)
6.46
13.39
8.83
2.73
30.10
Per Share Data ($)
Operating income
Interest Expense
Income Before Taxes
Net Income
EBITDA
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Income Statement Summary (Million $)
Balance Sheet Summary (Million $)
Cash
Current Assets
Total Assets
Current Liabilities
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Non-Current Liabilities
Financials and Key Ratio Analysis
Do
No
Operating Cash Flow (Million $)
Note: EBITDA = Earnings before interest, taxes, depreciation, and amortization. Fiscal year ends in December.
Source: Morningstar financials and company annual reports.
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136.4
140
145.3
141
130.7
120.7
115
106.2
100.9
100
108.2
91.4
79.7
80
79.7
60
40
20
0
2012
2013*
Digital TV Viewers
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EXHIBIT 2: ESTIMATED NUMBER OF DIGITAL TELEVISION AND MOVIE VIEWERS IN THE UNITED
STATES (IN MILLIONS)
2014*
2015*
2016*
Digital Movie Viewers
2017*
Do
No
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Note: * indicates estimated numbers.
Source: “Number of Digital TV and Movie Viewers in the U.S. 2012–2017 (Forecast),” Statista, accessed February 15, 2016
www.statista.com/statistics/255958/digital-tv-and-movie-viewers-in-the-us/.
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ENDNOTES
1
Do
No
tC
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This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
presented in this case are not necessarily those of Netflix or any of its employees.
2
Mark Scott and Elian Peltier, “Netflix Faces Challengers in Its Push to Expand Globally,” New York Times, October 18, 2015,
accessed January 17, 2016, www.nytimes.com/2015/10/19/technology/netflix-faces-challengers-in-its-push-to-expandglobally.html?_r=0.
3
Emily Steel, “Netflix Accelerates Ambitious Global Expansion as U.S. Growth Slows,” New York Times, January 20, 2015,
accessed January 17, 2016, www.nytimes.com/2015/01/21/business/media/netflix-earnings.html.
4
All currency amounts are in US$ unless otherwise specified.
5
Reed Hastings and David Wells, “Q4 15 Letter to Shareholders,” Netflix, January 19, 2016, accessed January 29, 2016,
http://files.shareholder.com/downloads/NFLX/1298564620x0x870685/C6213FF9-5498-4084-A0FF74363CEE35A1/Q4_15_Letter_to_Shareholders_-_COMBINED.pdf.
6
Amy Zipkin, “Out of Africa, Onto the Web,” New York Times, December 17, 2006, accessed January 29, 2016,
www.nytimes.com/2006/12/17/jobs/17boss.html?_r=0.
7
Jeffrey M. O’Brien, “The Netflix Effect,” Wired, December 1, 2002, accessed January 29, 2016,
www.wired.com/2002/12/netflix-6/?pg=2.
8
Celena Chong, “Blockbuster’s CEO Once Passed Up a Chance to Buy Netflix for Only $50 Million,” Business Insider, July
17, 2015, accessed April 8, 2016, www.businessinsider.com/blockbuster-ceo-passed-up-chance-to-buy-netflix-for-50-million2015-7.
9
Mike Spector, “Blockbuster to Remake Itself Under Creditors,” The Wall Street Journal, September 24, 2010, accessed
January 29, 2016, www.wsj.com/articles/SB10001424052748703384204575509331302481448.
10
Matt Peckham, “DVD Sales Plunge in U.S., Digital Sales on the Rise,” Time, May 4, 2011, accessed January 29, 2016,
http://techland.time.com/2011/05/04/dvd-sales-plunge-in-u-s-digital-sales-on-the-rise/.
11
Mark Milian, “Netflix Renames DVD-by-Mail Service, Adds Video Games,” CNN, September 19, 2011, accessed January
29, 2016, www.cnn.com/2011/09/19/tech/web/netflix-qwikster/.
12
Richard Lawler, “Netflix Crosses 50 Million Subscribers Worldwide and Takes Aim at Comcast/TWC,” Engadget, July 21,
2014, accessed January 29, 2016, www.engadget.com/2014/07/21/netflix-50-million/.
13
Joseph Baxter, “Netflix Is Now Worth More Than CBS,” Cinemablend, April 1, 2015, accessed January 29, 2016,
www.cinemablend.com/television/Netflix-Now-Worth-More-Than-CBS-71382.html.
14
Bill McColl, “Netflix’s Business Model: It’s No House of Cards,” Yahoo! Finance, April 16, 2015, accessed February 13,
2016, http://finance.yahoo.com/news/netflix-s-business-model—it-s-no-house-of-cards-173628471.html.
15
Todd Spangler, “Netflix Hits 75 Million Streaming Subscribers on Strong Overseas Growth,” Variety, January 19, 2016,
accessed February 13, 2016, http://variety.com/2016/digital/news/netflix-hits-75-million-streaming-subscribers-stock-jumps1201683114/.
16
Todd Spangler, “Why Netflix Adoption of Video Advertising Would Be a Total Disaster,” Variety, June 8, 2015, accessed
February 13, 2016, http://variety.com/2015/digital/news/netflix-video-advertising-1201513201/.
17
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20
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21
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22
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23
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24
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This document is authorized for educator review use only by Cezhan Ambrose, California State University – Los Angeles until Aug 2022. Copying or posting is an infringement of copyright.
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Case Study
Netflix: International Expansion
FIN 4340
Learning Objectives of this Case Study:
• Understand a company’s motivation to expand internationally
• Assess the structure and technological development of the videostreaming industry
• Identify a firm’s competitive advantages
• Evaluate the benefits and costs of international expansion
Summary of the Case
• In October 2015, U.S. growth for Netflix was weak but number of
international subscribers was increasing at a rapid pace
• Not all International subscribers were happy with the service
• Reed Hastings (CEO) stated that international expansion would put the
company back on track and would offer resources for reinvestment in its
service
• U.S. operations still represented 2/3 of revenue and company faced
challenges with international expansion
Company Overview
• Netflix is a publicly traded company that offers subscription video
streaming and online digital video disc (DVD) and Blu-ray Disc rental
services at a flat fee of US $7.99 per month
• By January 2016 company had estimated 74 million subscribers
worldwide
• As of 2015 Netflix employed more than 3,500 full-time employees
and reported revenues of $6.78 billion
• Plans in 2016 included further global expansion
Rise of Netflix and Demise of Blockbuster
• At the time that Netflix was launched in 1998, Blockbuster dominated the
video-rental industry
• In 1999 Marc Randolph and Reed Hastings introduced a subscription
service
• In 2002 Netflix launched an Initial Public Offering (IPO) selling 5.5 million
shares of stock at $15 per share
• The popularity of Netflix quickly led to the obsolescence of the
Blockbuster model
• Ironically Blockbuster had the opportunity to purchase Netflix for $50
million in 2000, and Blockbuster declined the offer
• On September 23 2010, amidst rising demand for streaming and declining
demand for DVD rentals, and facing $900 million in debt, Blockbuster filed
for bankruptcy
Business Model
• The success of Netflix was dependent on dominating the internet
• Netflix generated revenue primarily through a subscription model
• Hastings reiterated his position on generating revenue through
advertising on the platform in 2015 when he stated “No advertising
coming onto Netflix. Period.”
Industry Overview
• Internet television and video-streaming revolutionized the way
people accessed entertainment
• Video-on-demand (VOD) business model contributed to demise of
video rental stores like Blockbuster by offering wide selection of new
releases in a faster and more convenient content delivery system
• Industry benefitted from improvement of streaming technology and
further development of mobile devices
• VOD faced competition from file sharing websites that offered lowerquality content for free
Competition
• Industry was dominated by small number of firms but a large number
of competitors were looking to enter the VOD streaming business
• Many firms sought exclusive licensing agreements with production
studios and television networks
• Netflix controlled significant market share but increasing number of
entrants with unique competitive advantages were changing the
competitive landscape including Hulu, Amazon, and others
• To overcome competitive pressures Hastings decided to pursue
exclusive licensing agreements and partnerships to develop original
content
Netflix’s strategy
• By developing original content Netflix was able to decrease reliance
on content providers
• Netflix also pursued an aggressive international growth strategy
• As of 2015 Netflix planned to continue partnerships with content
providers but was also looking to reduce reliance on these
partnerships by developing its own content
• This decision would increase financial commitment and risk but in
late 2015 they opened their own content studio in Hollywood
• Since 2010 Netflix had dealt with slow domestic growth by expanding
internationally with plans for expansion into 200 countries
Challenges in Global Markets
• Company was subject to both U.S. and host country regulations
• Needed to adapt its content offerings to serve local customers’ needs
• In spite of high brand recognition in the U.S., Netflix faced severe
competition from local pay television operators and VOD service
providers in many countries
• Netflix was expected to have to make a significant investment to execute its
international expansion plan
• Netflix was entering markets like India where English was not the
main spoken language and Netflix was only offered in English
Challenges in the Global Markets (cont.)
• Netflix faced severe competition from incumbent pay television
operators and established subscription VOD service providers in local
markets
• The investment costs of Netflix’s expansion efforts were formidable
• Included costs incurred directly through licensing and development but also
costs that were out of company’s control
• Cost of broadband and Internet availability in a given market could have
significant impact
• Netflix’s profitability in a given market depended on availability of Internet in
a country and country’s infrastructure to support widespread streaming
• Although Netflix’s international expansion aimed to be profitable in
the long-term it was operating at a significant loss in the short-term
What should Netflix do next?
• Netflix had been pursuing aggressive international expansion in Europe,
Asia-Pacific, and all around the world and Hastings believed it would pay
off in the long-run
• However market environment was often very different than in the U.S. and
Netflix was facing substantial uncertainties and challenges as it moved into
these global markets
• Audiences had strong preferences for local-language and local-content
service offerings
• Pricing was similar to North American and Europe plans which made local
competitors more affordable and piracy was an attractive option in
developing countries
• Regulatory risk was another issue
• Could Netflix be as successful in the global markets as it had in the U.S.?
Suggested Frameworks for Analysis
• Porter’s Five Forces
• Strengths, Weaknesses, Opportunities, Threats (SWOT) Analysis
• Valuable, Rare, Inimitable, Non-Substitutable, (VRIN) Framework
Porter’s Five Forces
Porter’s Five Forces
1. Analyze profitability of industry in which Netflix is operating using
Porter’s Five Forces
a)
b)
c)
d)
e)
Intensity of competitive rivalry
Bargaining power of suppliers
Bargaining power of buyers
Threat of new entrants
Threat of substitutes
SWOT Analysis
SWOT Analysis
2. Conduct a SWOT analysis on Netflix and provide strategic suggestions
based on that analysis
a) Combine the four elements of S-W-O-T to help identify strategic suggestions
1.
2.
3.
4.
S-O Strategy: Strategic options that use strengths to maximize opportunities
S-T Strategy: Strategic options that use strengths to minimize threats
W-O Strategy: Strategic options that minimize weaknesses by taking advantage of opportunities
W-T Strategy: Strategic options that minimize weaknesses by avoiding threats
VRIN Framework
VRIN Framework
3. Define Netflix’s competitive advantage. What makes Netflix so
successful?
• Valuable: Does Netflix have attributes that are of value that allow it to
neutralize threats or exploit opportunities?
• Rare: Are these attributes rare enough that these resources and capabilities
are not possessed by many others
• Inimitable: Are these attributes difficult to imitate?
• Non-Substitutable: There are no strategically equivalent valuable resources
or capabilities available to competitors

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