Netflixed: The Epic Battle for America’s Eyeballs

Gina Keating is the author of the book being discussed, Netflixed: The Epic Battle for America's Eyeballs, which was released in 2012. It focuses on the battles that the two companies, Blockbuster and Netflix, have fought over the years. Blockbuster had up to 9000 locations and held a stranglehold on the video rental market until 2003. Prior to going completely bankrupt in 2010, it was making an astonishing $6 billion in commerce. Blockbuster's resistance to the shifting market dynamics, while Netflix capitalized on the chance by expanding their DVD-by-mail business, was one of the primary causes of this bankruptcy. The book centered the issue of Blockbuster’s downfall on two major reasons:

Blockbuster’s delayed response in bringing an alternative choice in the market against Netflix

Blockbuster’s sever dysfunction at the store managerial cadre

These themes are discussed in two major chunks. The first part talks about the evolution of the company Netflix as well as all the stakeholders involved in making the company what it is today. The other part focuses on the real fight that happened between Netflix and Blockbuster years after years. It concludes by highlighting the fact that how the animosity ended with the fall of Blockbuster and the success of Netflix. People who have specific interest on the marketing, brand and growth strategies and the business models adopted by the two companies would be thrilled to give it a read as it has numerous amounts of interesting facts as well as details on business model evolution and development. The books summarizes how Netflix managed to make strategic investments and how the right timings played a major role in bringing them up the ladder. It also highlights they very facts that they were seen as a company that is going entirely against the expectations of the industry and diving into a blue ocean by taking bold and unheard of decisions at a time when Blockbuster was already at its peak. Of course, nobody then predicted for home internet speeds to be reliable for streaming of movies. Nevertheless, Netflix brought about a change and lead it against all conventional methods only to come out successful.

Netflix was launched in 1997. Upon its launch, Blockbuster did not take them as a competitor and overestimated their monopoly in the market. They assumed that the market Netflix is catering too is quite niche and thus, they will not be able to attract masses that already are Blockbuster’s loyal customers. At that time, the online delivery model was viewed as a niche audience model.

Nevertheless, as the years passed by Netflix’s popularity continued to grow so much so that by 2004 they had multiplied their market share numerous times. It was the same year when Blockbuster realized that they misjudged the success of an online delivery solution providing model. Moreover, by this time customers had started to get indulged in the extended menu that Netflix offered to them without any later charges that they were once paying as Blockbuster’s customers. Analyzing this trend, Blockbuster launched a competing service called Blockbuster Online; however, only that they were too late in realization and the ship had sailed already.

The CEO of Netflix, Reed Hastings views this move as a delayed response to technological change and says that this led to the demise of Blockbuster. He also claims that if the company had taken these right steps a couple of years before they actually did – they would have made a perfect competitor to Netflix or even they would have been successful in killing the brand Netflix altogether.

Now, why did the author claim that the second major reason of Blockbuster’s demise was the dysfunction seen at the store manager level! One response that the book talks about is because nearly 20% of the stores of Blockbuster were franchisees owned. These franchisees pressured Blockbuster on killing their Blockbuster Online services for obvious reasons because once the online business would make its way into the market, customers would stop visiting retail stores and this would definitely threaten the profit margins of these franchisees. Rest of the store managers, again threatened by the promotion of the online services, began to hide computer systems where customers were supposed to sign up and spoke badly about the online platform.

Another major reason was the ongoing difference of opinion and discomfort that was happening between the CEO John Antioco and the person who then owned a huge part of the business; Carl Icahn. These board-level disagreements proved to be a major distraction for the CEO to focus on the business in taking the right decisions at the right time.

Gradually when the disagreements only grew rather than being dusted away, the CEO was eventually replaced in 2007 and Jim Keyes took over the position. Keyes had quite different views about the business and thought that online business is not a good strategy for the business. He kept the company focus on retail growth rather than building on the Blockbuster Online platform.

In the book, the author has given a major prominence to Carl Icahn describing him as an important figure in the whole fiasco. In the whole Blockbuster history, Icahn has been seen suggesting the board of strategies and plans that do not make sense let alone leading the company to growth. It is also said that the eventual demise of the company is majorly on the shoulders of Icahn since he always got on the way of the CEO’s action plans.

Netflixed also maintains a stance that Keyes’ vision was utterly distorted when he thought that people would actually come and visit the store just to load movies on their drives and then go back home to watch it rather than using their home broadband services for the same. His understanding of video technology was indeed absolutely limited and flawed. The book also emphasized on the fact that as soon as Keyes announced his anti-online business strategy, there were a number of senior stakeholders and shareholders who immediately wanted to sell off their shares because they understood that the company is taking a few steps back rather than taking a step forward. Despite of all this happenings, it looks absolutely shocking as to why Icahn would still bless the anti-online business strategy that Keyes had proposed.

All in all, the book also highlights some of the important statistics in this story of bankruptcy. The author shares that the market cap of Blockbuster dropped from 2003 to 2005 and thus figures dropped from $5 billion to $700 million. This was mainly because of the customers’ shift from retail outlets to Netflix’s DVD by mail setup. As quoted by Icahn, he says that even Redbox’s vending machine model had a major role to play in the downfall of market cap. This model let the customers to rent DVDs from kiosks – which according to Icahn offered convenience to customers rather than them queuing up in the stores. Icahn had been seen, on multiple occasions, talking highly of online business models and how it was the need of the hour, however in the book it only looks like that Icahn proposed and suggested everything that went against the technological advancement. Though, it’s been seen on different occasions that Icahn did realize that it might have been a mistake on his part to choose Keyes as the successor of Antioco. However, it has to be maintained that Keyes did have quite an interesting knowledge on the retail business but had no acumen for digital business. Businessmen and strategists still wonder what made Icahn take this decision even when he saw losing his shareholders’ money; the people who had stuck with the company for so long were all of a sudden losing interest in the business should have rung an alarm to Icahn that something is majorly flawed in the business strategy.

The book doesn’t include, though, geeky details about how the infrastructure of Netflix came about and technically how it evolved but it does focus on bits and pieces of the systems they had built and the shipping systems they had in place in collaboration with the US Posta Service. The best part is about the challenges that Netflix had faced along its way as mentioned above that they going against all the conventional methods that were tried and tested at that time and they were all geared up to embrace technological transformation that Blockbuster was fearing.

Keating has, here and there, shared risks and benefits of embracing a modern business model and going ahead with the intuition of anything that is anything remote to conventional wisdom. Towards the end, the author has suggested, backed the facts and compelling details, how Netflix had changed the way we think. It has not brought to the table what the customers needed, however, it created a need that was non-existent and then brought the product to the homes of millions of consumers.

During this battle, the author points out from the customers’ point of view that they were quite fascinated by the idea of overnight delivery offered by Netflix and the richness and availability of content as well as a personalized interface. All these factors were on their own very compelling and through word-of-mouth drove a great deal of growth and customer traction for the brand.

Analysis

How the company's competitive advantages have changed over time?

Netflix, very timely, brought about the idea of optical media storage format in the shape of a DVD. This, of course was a competitive advantage in a market that still had to be introduced to digital revolution in movies. Though, initially, Reed Hastings along with his cofounder Marc Randolph were to introduce the same model but operationally it was being too costly and thus they both mutually rejected the idea. However, at the same time electronics manufacturers were already researching and testing DVD formats in the market. Netflix got the grip on the idea and tested by mailing a disk to Hasting’s home address that got delivered unscratched and this is how their competitive advantage worked for them. Convenience, here, is the key. People didn’t have to go out to retail stores and stand in long queues just to get or return a movie. They also were not charged anything for late submissions; what more did the customer want!

How do you think its history has affected its current position?

The author has shared quite interesting details on the history of the video rental industry altogether and how the idea of renting movie was loathed by the movie studios. Many a times movie studios had tried to sue the movie renting store owners as they were trying to barge in the industry and make profits while contributing nothing. It was for the first time in 1988 that the annual revenue of the video rental industry surpassed the annual revenue of the box office. Thus, history tells us that the demand for home entertainment was already there. Only the idea of convenience and bringing the entertainment at the doorstep of the consumer was to be added. And this was rightly added by Netflix. The current positioning of offering convenient home entertainment has evolved from the very basic demand of enjoying shows at home with families.

Its strengths and weaknesses

One of the most talked about strengths of Netflix is its most accurate time in bringing change in the industry as well as changing its business models as per the industry dynamics of that era. Either a brand is too early to bring change or it is too late; the one that survives is the one that makes changes an revolution exactly when required. While this was strength for Netflix, at the same time a weakness for Blockbuster.

However, Netflix too had its weaknesses. Hastings, in 2011, made a separate entity for Netflix’s DVD business and called is Qwikster. This shift was not appreciated by the public and thus Hastings had to revert his decision. This shift created a huge impact on the Netflix business and it lost somewhere around fourteen points on the Satisfaction Index. However, there was no big impact on their stock price and it continued to grow soaring high.

How CEOs have influenced the values, philosophy and culture of the company?

Hastings had made sure to create a culture of responsible attitude among employees from administration to sales. He made sure that they know they owned the brand name and have a responsibility to promoting the company culture. He also highlighted the fact that the vision has to be shared by each individual working for Netflix and only then they can be passionate enough about the duties they perform in the company. There is another cultural value that can be explicitly seen in the company and that is constant performance measurement. The company keeps on having formal and informal reviews to ensure that not a single deviance occur at any point in time in any realm of the business.

Leadership characteristics of the founder/CEO

When it comes to leadership characteristics of the cofounder and CEO of Netflix, Reed Hastings, we can surely say that he made as few decisions in his professional life about the company as possible and this is perhaps what he likes to highlight about his leadership trait as well. Another characteristic is to be not afraid of change and embracing the technological shift and enhancement that you foresee the industry is to make. As much as he used to give an open hand and freedom to his employees, he also made sure that they act responsibly and take steps in a calculated manner.

Link with strategic management concepts

Below we’ll be applying various strategic management concepts to the Netflix business. Let’s begin with a PEST analysis.

Political Factor

Changing laws that concern the copyrights as well as intellectual property issues might influence Netflix to publish certain kinds of content; be it movie show or television series. This would impact the distribution of content and thus may become a threat in revenue generation as the content might be a large chunk of the company’s service offerings.

Economic Factor

Netflix major revenue depends on the disposable income of its consumers. This means that if the economy goes down, the power of the consumers to buy their service offerings would indeed go down. Thus, Netflix has to maintain a competitive advantage over pricing.

Social Factor

The average age of the targeted and potential audience keeps on growing, which means that the expenditure among the older population would become costlier and less popular. This might influence the revenue generation of the business.

Technological Factor

There are lesser barriers to entry in the industry and now that the technological arena is available and accessible to everyone, an increasing number of competitors are entering the industry. To keep their market share consistent, Netflix has to keep abreast with the changing technology with regard to internet rates and the need to continuously innovate as the technology improves.

Porter’s Five Forces Model

Internal Rivalry

Amazon and Redbox pose definite threats and competition to Netflix. The amount of marketing and advertising costs incurred by each of them is a clear indication of this rivalry. In 2008, Netflix spent as much as $200 million to advertise its deals and service offerings to the market.

Substitute Products and Services

Digital Cable has always been there and is an easy access as well as cost effective option for the masses. These people already have a movie collection from the cable operators that they enjoy while at time there are also on demand services given by these cable operators. Though, they are not a complete substitute to Netflix but if they may increase their richness of content and begin offering a diverse range of shows, it won’t fail to succeed.

Entry of New Competitors

As mentioned above, the accessibility and availability of technology in the hands of millions has made it easier for more competitors to enter the market. The only way for Netflix to maintain its popularity and dominance is by keep enhancing and increasing the inventory of content that they offer to their consumers. The interface for customers has to be friendly and easy and the content has to be enriched!

Bargaining Power of the Consumers

As pointed out earlier, entertainment industry is on the disposal of the customer’s disposable income. So, if the economy is doing great, the customers would have more money to spend over entertainment avenues but on the other hand if economy is not doing pretty, the consumers would have less money to spend on this. Thus, the bargaining power surely lies in the hands of the consumers as they can decide when to deviate and user their entertainment money elsewhere.

Bargaining Power of the Suppliers

The bargaining power of suppliers is perhaps the most in this industry since Netflix itself is not producing any content and is completely dependent on the studios to provide content so that they can distribute it further. This means that the suppliers have full power and leverage on deciding on the contract conditions and pricing.

SWOT Analysis

Strengths

Netflix has been the first competitive mover

This means they have a strong brand image in the industry as well s knowledge base

Online and flexible interface allows for less operating costs Consumer satisfaction and strong customer referrals

It is a household brand

Expertise in Ecommerce

Humongous catalogue

Weaknesses

Customers are to wait at least a couple of days for films

Little or no expansion in different parts of the world

Limited financial resources Dependability on the USPS for mailing

Dependability on technological changes

Opportunity

Potential for growth in terms of subscription

Better internet speeds are being launched and this means better movie downloadable and streaming power among customers

Understanding and acceptance of ecommerce among consumers

More entertainment content is produced every year

Threats

It is an overall highly competitive market and thus offering the same content in cheaper prices is always a threat to the brand

Incase cheaper brands are able to sell their offerings in a better streaming environment, Netflix might just lose its share

Formatting and technological advancements are continuously happening and so are customer preferences when it comes to choosing a technology

When it comes to understanding strategic management and models adopted by Netflix, we see a few flaws in their processes and systems. For instance, though recently Netflix has made attempts to expand internationally and found growth in this expansion market, however, this has also increased the complexity in its management structure. The same impact has happened on its global contracting while international expansion also means more competitors in the industry that had already been running the show within their regions. All these and some other factors have recently weakened the customer base of Netflix within the US market and in order to respond to this strategically, Netflix began to enter into international markets. More so, it was also the need of the hour because a brand like Netflix was at an ideal position to come out of its home grounds and compete in new markets under new laws and conditions.