Case Memo Netflix 2 - Grade: A PDF

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Case Response about Netflix's Competitive Advantage and Strategy...

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CASE MEMORANDUM – NETFLIX: INTERNATIONAL EXPANSION

Netflix’s success in the heavily saturated market of television and video streaming can be attributed to several key strategies. While the company triumphed over competitors in the mail-order DVD industry through robust infrastructure and pro-active timing of market entry, new approaches were needed to achieve competitive advantage in the emerging sphere of virtual entertainment. Specifically, Netflix leveraged their resources to increase switching costs, utilize their brand, and provide diverse content for viewers. As the company expands into the international marketplace, these positions will need to be leveraged in order for the company to overcome challenges that have arisen. Switching costs, the expense incurred to move from one product to another 1, have steadily increased for Netflix customers, although the investment is not monetary. Netflix instead leverages user data and exclusive content to increase customer loyalty. Netflix’s exclusive Cinematch software excels in collecting invaluable data from customers. By gathering viewers’ content preferences through monitoring consumption habits such as what shows were watched, re-watched, or not completed; Cinematch is then able to analyze this data to recommend new shows, as well as advise future content investments for the company2. The case mentions that Netflix has already employed data collection in the initial entering of international markets: “It [Netflix] 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 behavior in the given market”. This strategy should further be implemented by Netflix to overcome the investment challenges the company faces in purchasing licenses for international content. By limiting license acquisitions to the highest viewed programs found via the data collected from these initial tests, Netflix can invest in lineups that will attract the most customers initially and later enlarge the available content library once profits have increased. Furthermore, Netflix’s switching costs are grounded in the exclusive content the service is able to offer to its customers. The company has experienced success with this tactic domestically, as the case observes, the most-watched program in 2015 was the Netflix exclusive Orange is the New Black. Internationally, Netflix has begun to acquire exclusive streaming rights as well by partnering with local content developers 3. This 1

John Gallaugher, Information Systems: A Manager’s Guide to Harnessing Technology, (Massachusetts, FlatWorld, 2017), 32 2

Gallaugher, Information Systems, 70 3 The case notes Netflix’s partnership with Yoshimoto Kogyo for exclusive streaming rights in exchange for funding program development (Page 5)

expounds on the idea of switching costs because not only does the exclusive content attract new customers, but it also retains customers who wish to follow the series as its developed and released. Exclusive content can also lead to brand recognition, which is the next area of focus for Netflix in overcoming international challenges. Netflix’s brand was developed domestically through superb customer service, first entry into the mail-order DVD program, and of course, maintaining a quality product. Although Netflix did flounder during what is known as the “Qwikster debacle”, which can partially be attributed to the attempt to rebrand the mail-order DVD business; Netflix has consistently been able to acquire and maintain customers domestically by providing an excellent customer experience. However, in order to leverage brand strength as a source of competitive advantage internationally, Netflix will need to utilize strategic positioning, or the ability to perform differently than rivals4. One way Netflix could achieve this objective is by strictly investing in exclusive, locally developed content by partnering with established, reputable brands; however, developing exclusive content abroad is a very expensive endeavor5. While global licensing for U.S. created content is expensive as well, Netflix has begun to purchase full ownership of original content from production studios, thus alleviating the need for continuous licensing costs6. Although ownership requires a more significant initial investment, as the customer base expands internationally, the cost will be offset by the increasing units of production (Economics of Scale). Utilizing U.S. developed content in international markets will also help Netflix compete in countries such as India and Japan, where rival service providers already possess thousands of local viewing options. Thus, Netflix can position themselves as providing a customer experience geared towards never-before-seen content instead of competing for traditional material already provided by existing companies. Finding this balance between locally and U.S. produced exclusive content will be a challenge for Netflix, but in time, it will strengthen the brand while also managing investment costs. When Netflix tackles content creation, local or international, it must be 4

Gallaugher, Information Systems, 26 5 The case provides an estimate that Netflix spent $5 billion in international content creation in 2016, mostly through partnerships and joint ventures with local content providers (Page 6) 6

Gallaugher, Information Systems, 69

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cognoscente of the need to produce diverse content. Netflix has employed this strategy as a source of competitive advantage in the United States by providing programs in hundreds of genres for all age groups. Although Netflix’s streaming service cannot provide as dense of a library as its mail-order DVD service, the content is dense enough that domestic users should not have an issue finding a new program to enjoy. However, internationally Netflix’s content is struggling to become truly diverse due to language barriers. The case mentions that Netflix is only available in 20 languages despite the service’s presence in more than 190 countries. Indian dialects specifically are not being incorporated into the platform7. Although requiring significant investment, Netflix will need to address the lack of language diversity by dubbing their original content and also acquiring licensing for the dubbed version of non-Netflix content they wish to provide to international customers. Requiring that sub-titles be available to all customers’ in their native language could be a first goal for Netflix in the transition to truly making their content diverse. In summary, Netflix achieves competitive advantage domestically through strategies such as high switching costs, brand strength, and diverse content. These approaches can be utilized in the global market as well, but must be implemented in new and creative ways in order to produce success. While the international arena is full of new challenges and uncertainties, Netflix’s core strengths will play a starring role in its efforts to pioneer a new frontier for the company.

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Case Page 6, Local Adaption

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