CASE 2.2 – Netflix uses technology to change how we watch videos
Article – When Netflix was founded in 1997, the movie rental giant Blockbuster had thousands of stores from coast to coast, filled to the rafters with videocassettes ready for immediate rental to customers. Netflix had a different vision from this well-established, well-financed competitor. Looking at the recent development of DVD technology, Netflix saw an opportunity to change the way consumers rent movies. The entrepreneurial firm built its marketing strategy around the convenience and low cost of renting DVDs by mail, for one low monthly subscription fee.
Instead of going to a local store to pick out a movie on videocassette, subscribers logged onto the Netflix website to browse the DVD offerings and click to rent. Within a day or two, the DVD would arrive in the customer’s mailbox, complete with a self-mailer to return the DVD. And, unlike any other movie rental service, Netflix customers were invited to rate each movie, after which they’d see recommendations tailored to their individual interests.
Fast-forward to the 21st century. Videocassettes are all but obsolete, and Blockbuster, once the dominant brand in movie rentals, is no longer in business. By eliminating the need for brick-and-mortar stores, Netflix has minimized its costs and extended its reach to any place that has postal service and Internet access. The company still rents DVDs by mail, but it has also taken advantage of changes in technology to add video streaming on demand. Now customers can stream movies and television programs to computers, television sets, videogame consoles, DVD players, smartphones, and other web-enabled devices. One plus: Streaming a movie costs Netflix less per customer than paying the postage to deliver and return a DVD to that customer.
Netflix made technology a core competency from the very beginning. Because the business has always been web-based, it can electronically monitor customer activity and analyze everything that customers view or click on. With this data, it can fine-tune the website, determine which movies are most popular among which segments, prepare for peak periods of online activity, and refine the recommendations it makes based on each individual’s viewing history and interests. The company also uses its technical know-how to be sure the website looks good on any size screen, from a tiny smartphone to a large-screen television.
A few years ago, planning for a significant rise in demand for streaming entertainment, Netflix decided against investing in expanded systems for this purpose. Instead, it arranged for Amazon Web Services to provide the networking power for streaming. Now, on a typical night, Netflix streaming occupies up to 20,000 servers in Amazon data centers. Demand is so strong, in fact, that Netflix streaming accounts for about one-third of allInternet traffic to North American homes during the evening.
Although Blockbuster is no longer a competitive threat, Netflix does face competition from Amazon’s own video streaming service, as well as from Hulu, YouTube, and others that stream entertainment content. It also competes with other entertainment providers, including cable, satellite, and broadcast television. To differentiate itself, Netflix has commissioned exclusive programming such as House of Cards, Arrested Development, and Orange Is the New Black. The cost to produce such programs runs to hundreds of millions of dollars. Yet Netflix plans to continue pouring money into exclusive content because of the payoff in positioning, positive publicity, and customer retention.
In addition, the way Netflix releases its exclusive programming reflects its in-depth knowledge of customer behavior. The company found, through data analysis, that customers often indulge in “binge watching” for a series they like, viewing episodes one after another in a short time. Based on this research, Netflix launched all 13 episodes of the inaugural season of House of Cards at one time, an industry first. Executives gathered at headquarters to monitor the introduction, cheering as thousands of customers streamed episode after episode. By the end of the first weekend, many customers had watched the entire series and shared their excitement via social media, encouraging others to subscribe and watch. When Netflix won multiple Emmy Awards for House of Cards later that year, it was another first—the first time any Internet company had been honored for the quality of its original programming.
One key measure of Netflix’s growth is change in the number of monthly subscribers. At the end of 2010, it had 20 million monthly subscribers. These days, it serves more than 75 million subscribers in 190 countries, many of whom only stream entertainment on demand. Looking ahead, the company is expanding the amount of original programming it offers and exploring opportunities to market its services in China.
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