ECO 201 Final Project PDF

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Final project submission for ECO 201...

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Netflix 1

Netflix Justin Brazier Southern New Hampshire University ECO 201 December 13, 2020

Netflix 2 Introduction Technology has really come such a long way just in the past twenty years. A good example of this progression and success is Netflix. I will be conducting an analysis of Netflix and researching what exactly has made the company as successful as it is. Also, to talk about the future of the company and how they can maintain this success and continue to grow and adapt to what the future holds. I will talk about their competition and how they manage to be competitive themselves now that streaming services have become so popular and more and more companies

are utilizing the benefits of using a streaming platform. I will analyze the market and business data to explain how the core microeconomic principles impact the sustainability of Netflix. History Netflix is an American based technology and media service provider and production company, essentially a service that you pay a subscription premium for to have access to their goods and services. Netflix started out in 1997. Marc Randolph and Reed Hastings came up with the idea to start a movie rental service based on renting and mailing out a DVD to someone and then mailing it back when you were finished. The reason this became so appealing to people is because it cut out the middleman and it was very convenient. You just picked a movie you wanted to rent, and it would be sent to you and you would return it when you were finished. No fees or extras, no limit on rentals. Within just five years Netflix had one million memberships. After two more years they hit 5 million memberships. In 2007 Netflix introduced streaming which would allow members to instantly watch movies and TV shows. One of the company’s big milestones was teaming up with consumer electronic companies like Microsoft and Sony so their service could be downloaded and used on their products. Basically, making Netflix a multiplatform service. Netflix continued to grow and grow and now they are one of the biggest names

Netflix 3 in the industry. The service is available all over the world and with it you can pretty much watch anything, except some newly released movies, on almost any device that will support the streaming application. They even started releasing their own movies and shows as Netflix Originals. Supply and Demand Conditions Streaming services are still on the rise with more and more companies creating platforms and offering the service with competitive pricing. Netflix is available all over the world and offers a variety of different languages making it a very versatile service. When we take a look at the trends of Netflix you will notice the service they offer is in constant demand. The chart below depicts the world’s most popular video streaming services as of 2019 with Netflix being number one (Armstrong, 2020).

Netflix 4 Each year more and more consumers are cutting ties with their cable services and switching to either one or multiple streaming services. The Unites States holds the majority of subscribers for Netflix. With the company’s expansions, the numbers are starting to grow in other countries as well. The figure below show’s Netflix revenue from Q1 2011 to Q4 2019 (Statista, 2020).

You can see by their growth in revenue, the demand for the service Netflix has to offer is still continuing to grow. Netflix offers multiple different packages to choose from when becoming a subscriber. This allows the company to reach different needs of the consumers. A family might purchase the option that allows them to stream on multiple devices which would allow multiple people to stream at the same time while a single college student might choose the cheaper option of one device for just their use. These types of options allow Netflix to remain competitive in the market with their pricing. Netflix has increased their prices over the years but

Netflix 5 that has not stopped people from becoming subscribers to their product. I believe, in order to maintain the constant growth and demand for their product, Netflix needs to continue to offer competitive pricing and continue to add features to their product. They need to keep up with the growth of technology and offer services that other companies might not be able to. I think that Netflix does so well because of the pricing they offer and with that pricing a customer can have multiple streaming services, but Netflix will always be an option. There might be a certain show or movie that is only offered through Netflix rather than one of the competitors which makes this

company more appealing. Lastly the image below shows financial data from Netflix. Price Elasticity of Demand When Netflix first started, they had a flat rate for a subscription to their company. The reason Netflix increased their prices was due to the belief that their product was in higher demand or inelastic. This means that an increase in price would not have a major effect in the demand of their service. The image below shows the increase in price with the type of subscription you have (Molla, 2019).

Netflix 6 Although the prices have increased, there has not been much change in subscribers because the change has been mostly minimal. Netflix is a luxury and not a necessity. You do not need to pay a monthly subscription to watch shows and movies. The market has become more and more competitive over the years and Netflix will need to keep their prices lower in order to show growth. Netflix will need to continue to provide a quality product in order to maintain success. Now that there are more and more companies competing with Netflix, this will increase the elasticity of the company because customers will take their money elsewhere if they keep increasing the price. Customers will be able to find the same quality product for cheaper elsewhere which would result in a huge loss for the company. If you take a look in other areas of the industry you will notice more people are moving away from tradition cable and subscribing to streaming services because of how much cheaper it is. You can have multiple streaming subscriptions for less than it would cost to have cable television. If the cable companies don’t compete well with streaming services, this will also increase the elasticity of Netflix because more people will subtribe to them. Cost of Production Netflix has shown a large amount of growth since they started as a company. With a

higher demand for their product, they need to keep up with the supply which means higher costs to operate and more expenses for the company. Netflix’s highest cost is marketing followed by technology and development. Advertising is the biggest and easiest way Netflix can get consumers to recognize the company. Technology and research would apply to how they develop their product and continue to make it viable in the industry. Netflix needs to be able to be available on multiple different devices and platforms with support and upgrades and added features to keep up with competition from other companies. Because Netflix is mostly a digital

Netflix 7 service their material cost is almost nothing. The company started out with purchases of DVD and Blu-ray but with way the technology advanced they were able to move away from that and go mostly digital with the exception of some account holders being grandfathered in to still be able to rent DVD and Blu-ray by mail. They still offer the option to have DVD or Blu-ray sent to you by mail, but it is much less convenient than using their digital application. Below is a chart showing the financials of Netflix over the past five years (Dybek, 2020).

By studying the chart above you can see that Netflix generates a lot of revenue and a lot less cost which allows them to make large profits every year. As mentioned above, Netflix has increased their subscription costs over the years which has resulted in a lot less profit. They will most likely need to increase their subscription cost in the future to keep up with costs to operate but will most likely continue to make larger profits. Another profitable option for Netflix is to continue releasing shows and movies under their brand. These shows and movies can be quite costly for the company but can generate a lot of revenue. Overall Market When Netflix first became a company, their only competition was the chain and local video stores. Since then, many companies have turned to streaming services to compete with

Netflix 8 Netflix. Some of their biggest competitors being Amazon, Hulu, HBO, and Disney. The biggest threats to Netflix are going to be companies that can outpace them or outbid them for their marketing and technology....