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Chapter 4 Netflix in Two Acts: The Making of an E-commerce Giant and the Uncertain Future of Atoms to Bits

True/False Questions 1. Once Netflix became a public company, financial rules forced the firm to reveal it was on a moneyminting growth tear. True; Easy 2. Netflix was forced to increase advertising due to price wars with Wal-Mart and Blockbuster. True; Easy 3. Netflix’s decision to unbundle the single fee for its $10 base service into two separate $8 plans for DVD-by-mail and streaming over the Internet proved to be beneficial to the firm. False; Easy 4. Netflix’s attempt to rebrand its DVD-by-mail service as Qwikster was moderately successful. False; Easy 5. Even though Netflix is now mainly focused on digital distribution, it continues to offer the DVD-bymail service in its base-price product. False; Easy 6. Netflix’s initial revenue model was based on a flat-rate monthly subscription fee rather than a per-disc rental fee. True; Easy 7. Although sometimes referred to as “rental,” Netflix’s model is really a substitute good for conventional use-based media rental. True; Easy 8. Physical retailers are limited by shelf space and geography. True; Easy 9. At Netflix, the majority of the DVD titles shipped are from back-catalog titles, not new releases. True; Easy 10. For Netflix, the cost to stock and ship an obscure foreign film is greater than that for sending out the latest blockbuster movie. False; Easy 11. Netflix gets to retain the entire subscription revenue for every disk sent out to a customer. False; Easy 12. Netflix’s clout has earned it strong-arm bullying power comparable to Wal-Mart’s. False; Moderate 13. Cinematch develops a map of user ratings and steers users toward titles preferred by people with tastes that are most like theirs.

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True; Easy 14. The collaborative filtering software developed by Netflix is not a source of competitive advantage to the firm. True; Moderate 15. Firms target high churn rates to boost their profitability. False; Easy 16. With an increasing subscriber base, Netflix has been forced to up the number of customer representatives. False; Easy 17. Within the DVD-by-mail segment, Netflix is now bigger than both Wal-Mart and Blockbuster. True; Easy 18. By shifting to a streaming model, Netflix stands to eliminate shipping and handling costs. True; Easy 19. Netflix’s expenditure on postage accounts for nearly a third of the firm’s costs. True; Easy 20. As Netflix is concerned with digital distribution, its marginal cost is zero. False; Moderate 21. The costs associated with streaming digital content largely remain fixed. False; Easy 22. With the death of the DVD, the high-tech shipping and handling infrastructure that Netflix has relentlessly built will be rendered worthless. True; Easy 23. In order to fully exploit the audience-finding and revenue-sharing advantages of Netflix, studios are offering DVD titles that are immediately available to customers after coming on sale. False; Moderate 24. Studios have granted Netflix more favorable digital distribution terms than Blockbuster and Wal-Mart to counter the negotiating leverage held by these two firms. False; Moderate 25. The shift from atoms to bits does not stand to impact content creators, middlemen, and retailers. False; Easy

Multiple Choice Questions 1. An initial public stock offering (IPO) refers to the: a. price at which a firm’s stock is bought. b. first time a firm sells stock to the public. c. minimum value at which a firm’s stock is sold. d. payments made by a firm to its shareholders.

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e. value of stock, excluding any commission or fees. b; Easy 2. Which of the following events prompted firms such as Wal-Mart and Blockbuster to enter into direct competition with Netflix? a. Netflix’s increased bargaining power with movie studios b. Netflix’s diversification into the Blu-ray disc movie market c. The introduction of movie streaming to customer PCs d. Netflix’s initial public stock offering e. Netflix’s merger with Vudu d; Easy 3. By going public, Netflix encountered stiff competition from firms such as Wal-Mart and Blockbuster. What aspect of Netflix going public lured these firms into the market? a. Financial disclosure laws revealed the profitability of Netflix’s business model. b. By going public, Netflix was forced to reveal the Cinematch algorithm used to classify user ratings. c. Netflix’s model of flat-rate monthly subscriptions was found to be more profitable than a per-disc rental fee model. d. Netflix’s plan to enter the online movie streaming market alerted rivals to the possibility of losing their market share. e. The migration of Netflix services to cover the Blu-ray disc market opened up opportunities for rivals. a; Moderate 4. With the entry of Wal-Mart and Blockbuster into the DVD-by-mail market, Netflix was forced to: a. cut spending on advertising and marketing campaigns. b. issue an initial public stock offering to generate funds for expansion. c. raise the prices of its services to generate more revenue. d. switch from flat-rate subscription to a per-disc rental fee model. e. cut prices and increase spending on advertising. e; Moderate 5. Netflix attempted to rebrand its DVD-by-mail service under the name _____. a. Qwikster b. Cinematch c. Starz d. PurePlay e. Epix a; Easy 6. Netflix offers its subscribers a selection of over one hundred thousand titles, while other video rental firms can only offer as much as three thousand. This presents a significant _____ for Netflix over its rivals. a. marginal cost b. price advantage c. variable cost d. studio preference e. scale advantage e; Easy

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7. Which of the following represents an advantage enjoyed by Netflix over traditional video stores? a. Lower technology overhead b. Lower shipping expenses c. Smaller warehousing facilities d. Lower energy costs e. Higher churn rates d; Moderate 8. Offering a nearly limitless selection results in an interesting phenomenon where: a. customers are willing to pay more for inferior goods. b. more money is made selling obscure goods than popular ones. c. firms with physical storefronts are more profitable than pure-plays. d. it is less profitable to sell physical products than otherwise. e. maintenance overheads are slashed contrary to conventional wisdom. b; Easy 9. At traditional brick and mortar retailers, _____ is the biggest constraint limiting a firm’s ability to offer customers what they want when they want it. a. shelf space b. video piracy c. shipping costs d. distribution rights e. disintermediation a; Easy 10. Internet retailers serve a larger geographic area with comparably smaller infrastructure and staff. This fact suggests that Internet businesses are more _____. a. centralized b. decentralized c. capitalized d. vertically integrated e. scalable e; Easy 11. The long tail is a phenomenon whereby firms can make money by: a. selling the same product at different prices with only minor tweaks in their design. b. leveraging customers to promote their products or services. c. reselling multiple versions of a single product under different brand names. d. offering a near-limitless selection of products or services. e. performing different tasks than rivals or the same tasks in a different way. d; Easy 12. While the size of the tail in the long tail phenomenon is disputable, one fact that is critical to remain above this debate is that: a. traditional brick and mortar retailers offer selections that cannot be rivaled by Internet pure-plays. b. energy costs and worker wages drive up the costs of running stores like Netflix. c. customers are primarily attracted to the stores which offer a larger selection of titles. d. the turnover rate of obscure titles in traditional video rental stores is only slightly higher than those for Internet pure-plays. e. the cost of store maintenance and real estate makes stores such as Netflix unattractive. c; Moderate

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13. Netflix has used the long tail to its advantage, crafting a business model that creates close ties with film studios. What do film studios stand to gain from these ties with Netflix? a. Discounted fees for marketing some of the less-popular titles from the studios b. A cut of the subscription revenue from every disk sent out by Netflix c. Greater bargaining power with movie rental firms such as Netflix, Blockbuster, and Wal-Mart d. Lower costs related to screening movies in cinemas by releasing them straight on DVD e. An equal share of revenue from the digital distribution model through online streaming b; Easy 14. In exchange for a percentage of the subscription revenue for every disk sent out by Netflix, movie studios offer Netflix: a. online streaming rights free of cost. b. higher fees for marketing less-popular movies. c. DVDs at a very low cost. d. distribution rights to certain movies free of cost. e. strong bargaining power in negotiations for digital distribution rights. c; Easy 15. The biggest inefficiency in the movie industry is: a. maintaining the production costs of big movies. b. the high personnel costs. c. the low screens-to-movies ratio. d. justifying expenses on technology. e. matching content with customers. e; Moderate 16. The term _____ refers to matching content with customers. a. audience finding b. windowing c. customer filtering d. disintermediation e. viral marketing a; Easy 17. Why doesn’t Cinematch offer a gross average user rating? a. Customer preferences are peculiar to certain geographical regions. b. User tastes are too varied and the gross average rating data is too coarse to offer any value. c. Most users do not use the Cinematch feature and a gross average user rating is often incorrect. d. Certain movies polarize user opinion and are difficult to rate. e. Cinematch algorithms are configured to use random user ratings, which are statistically unsuitable to provide a gross average user rating. b; Moderate 18. Collaborative filtering is a classification of software that: a. is used to gather user ratings and calculate a gross average user rating for each movie. b. provides Netflix users with parental controls and other options while streaming movies online. c. selectively sorts movies based on their censor ratings and delivers age-appropriate search results. d. monitors trends among customers to personalize an individual customer’s experience. e. collates user ratings for a movie and creates a ranked list of movies most liked by users. d; Moderate

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19. How does the Cinematch recommendation system work? a. Cinematch develops a map of user ratings and steers users toward titles preferred by people with similar tastes. b. Cinematch gathers user ratings to calculate a gross average user rating which is continually updated with each subsequent user rating. c. Cinematch requests users to create profiles detailing their interests and preferences and serves recommendations accordingly. d. Cinematch uses a team of professional movie critics to create a comprehensive ranking system for each movie in its inventory. e. Cinematch ranks movies in two separate lists based on their critical and box office ratings, and subsequently alters user preferences. a; Moderate 20. How is the collaborative filtering software used by Netflix advantageous to the firm? a. The superior coding technique used in the software provides Netflix with a competitive advantage over its rivals. b. The collaborative filtering software used by Netflix is truly platform-independent and can be reliably used by all users. c. The open source nature of the collaborative filtering software ensures that users can constantly incorporate changes in the code to make it more accurate. d. The software automates the process of sorting and queuing movie titles requested by users as they move in and out of the warehouses. e. The software has created an enormous data advantage, that is valuable, results yielding, and impossible for newcomers to match. e; Moderate 21. Even if Netflix gave Cinematch away to its rivals, they would still not be able to make the same kind of accurate recommendations as Netflix. This is because of Netflix’s _____. a. technological superiority b. customer loyalty c. movie expertise d. data advantage e. large inventory d; Moderate 22. _____ is a term that can be used to refer to the extent to which recommended titles form a part of the content users place in their queues. a. Market share b. Penetration rate c. Marginal factor d. Churn rate e. Queue turns b; Easy 23. User ratings act as _____ for Netflix’s customers. a. marginal costs b. fixed costs c. switching costs d. variable costs e. barriers to entry c; Easy

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24. Churn rate is a term that refers to the: a. average number of recommended titles in a user’s queue. b. rate at which the demand for a product or service fluctuates with price change. c. number of movie titles that are difficult to assign reliable user ratings. d. rate at which customers leave a product or service. e. number of user ratings accrued per movie. d; Easy 25. A low _____ is usually key to a firm’s profitability because acquiring a customer is more expensive than keeping one. a. subscription fee b. inventory size c. churn rate d. switching cost e. opportunity cost c; Easy 26. During Netflix’s high-growth period, the DVD-by mail business enjoyed lower marketing costs due to the: a. word-of-mouth publicity generated by its users. b. high switching costs for its users. c. improved advertising campaigns for its services. d. switch from a per-disc rental fee to a flat rate scheme. e. introduction of its online streaming model. a; Easy 27. Netflix gets the lowest possible postal rates for first-class mail delivery because: a. it has a network of distribution centers that are all within driving distance of at least one USPS processing and distribution facility. b. its value chain is vertically integrated, with a division handling delivery and pickup from customers’ homes. c. the postal service is based on a model in which customers pay a part of the postal fee. d. it picks up and drops off the DVDs at the USPS hubs and presorts all outgoing mail for faster delivery. e. its scale advantage affords it the bargaining power to arm-twist the USPS into providing postal services at discounted rates. d; Moderate 28. How does Cinematch offer Netflix additional operational advantages? a. Cinematch offers alternate recommendations of movies based on critical acclaim and box office performance parameters. b. Cinematch is linked to warehouses and recommends movies that are likely to be in stock. c. Cinematch is often used by movie studios to plan movie scripts based on user preferences. d. Cinematch is a source of additional revenue to Netflix as a marketing tool for recommending newly-released movies. e. Netflix leases the Cinematch collaborative filtering software to smaller firms at a fee, withholding the valuable user ratings. b; Easy 29. By paying attention to process improvements and designing technology to smooth operations, Netflix has slashed its _____ even as subscriptions ballooned.

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a. number of customer representatives b. switching costs c. per-disc rental fees d. inventory size e. churn rate a; Easy 30. When firms enjoy economies of scale they: a. have a greater share of liquid assets than rivals. b. have bigger production facilities than their competitors. c. have a wider employee base than their competitors. d. leverage the cost of an investment across increasing units of production. e. leverage investment costs to decrease their subscriber acquisition costs. d; Easy 31. How do Netflix’s scale economies affect competition from established firms? a. The yearly cost to run a Netflix-comparable nationwide operation is too high for established firms to derive profits from. b. Netflix’s subscriber acquisition costs are the highest in the industry and unmatchable for established firms. c. Established firms that challenge Netflix straddle markets, unable to gain full efficiencies from their efforts. d. Established firms are unable to generate the kind of funding required to match Netflix by way of IPOs. e. Established firms are weighed down by the costs of servicing more customers than Netflix. c; Moderate 32. Netflix enjoys the triple scale advantage of the largest customer base, the largest selection, and the largest network of distribution centers. This can be attributed to: a. Netflix’s specialized focus on advertising and marketing. b. Netflix’s first-mover advantage. c. Netflix going public to generate funds for expansion. d. Netflix’s effective and aggressive pricing strategy. e. the bargaining clout it exercises over movie studios and the government. b; Moderate 33. The idea that many media products are digital files of ones and zeros sold in physical containers, is known as: a. information integration. b. metaphysical assimilation. c. data congruence. d. atoms to bits. e. technology restructuring. d; Easy 34. Which of the following will be rendered worthless for Netflix when the inevitable shift from atoms to bits takes place? a. Its high-tech shipping and handling infrastructure b. Its huge database of user ratings through Cinematch c. The formidable user base it has built over the years d. Its investment in developing a peerless user recommendation system

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e. The bargaining power it enjoys with movie studios a; Easy 35. Costs that do not vary according to production volume are called _____. a. total costs b. marginal costs c. switching costs d. variable costs e. fixed costs e; Easy 36. Marginal costs: a. are minor, insignificant costs. b. are associated with each additional unit produced. c. are the costs incurred as a result of choosing one option over another. d. are constant and do not vary according to production volume. e. are also known as overheads. b; Easy 37. Netflix can send out any DVD it buys because of a Supreme Court ruling known as the _____. a. clickwrap agreement b. Betamax ruling c. fair use law d. First Sale Doctrine e. Copyright Directive d; Easy 38. Which of the following factors is responsible for the prevention of certain titles from being available for streaming? a. Expensive broadband connectivity b. Complications in securing digital distribution rights c. Lack of Netflix-specific hardware to stream to user PCs d. The switch to Blu-ray video formats e. The discontinuation of the windowing practice b; Moderate 39. The practice of windowing involves: a. making content available to a distribution channel for a specified time period under a different revenue model. b. scheduling movies to be streamed online at primetime periods to pull in more revenue from advertising. c. relaying advertisements for limited time periods during online movie steaming, as opposed to frequent ad breaks. d. delaying the sending of DVDs to customers until 28 days after titles go on sale. e. streaming movies to customers’ computers beforehand and then relaying them on television. a; Moderate 40. Microsoft acquired the video streaming outfit called _____. a. Hulu b. Vudu c. Voddler

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d. Spotify e. Grooveshark b; Easy 41. Studios have granted Blockbuster distribution terms that enable it to distribute DVDs the day they release. The objective behind this move is to: a. cut down the increasing power Netflix has over product distribution. b. ease fears over piracy that could potentially eat into the studios’ profits. c. improve the penetration of movies in areas without adequate screening facilities. d. ensure that independent movies gain equal opportunity to compete with studio releases. e. replace the loss-making screening model with a sustainable and profitable model. a; Moderate 42. Which of the following is true about Netflix? a. Its marginal cost is zero as it is currently focusing on distributing digital content. b. It has the support of major studios such as Fox and Warner...