Strategic Analysis of Netflix

Netflix; Image — YouTube.

An Introduction to Netflix:

External analysis of the online streaming industry:

Main Competitors of Netflix:

Amazon Prime:

Hulu:

YouTube:

Disney+:

Voot:

SWOT analysis of Netflix

STRENGTHS:

Largest Online streaming site:

High Profitability:

Global presence:

Original Content:

Focus on Innovation:

The company also makes good use of data and analytics to save big on user retention and beat competitive pressure. According to sources, the company saves big on user retention by using data to understand customers’ preferences better and serve them the content they prefer. It drives higher user engagement and stronger retention rates compared to rivals. Netflix uses the data collected from users and processes it using its advanced algorithms to provide the most suitable recommendations. Its recommendation system is believed to be more advanced than any of its rivals. According to Netflix:

“In addition to choosing which titles to include in the rows on your Netflix homepage, our system also ranks each title within the row, and then ranks the rows themselves, using algorithms and complex systems to provide a personalized experience. To put this another way, when you look at your Netflix homepage, our systems have ranked titles in a way that is designed to present the best possible ordering of titles that you may enjoy.”

Apart from that,

“We take feedback from every visit to the Netflix service and continually re-train our algorithms with those signals to improve the accuracy of their prediction of what you’re most likely to watch. Our data, algorithms, and computation systems continue to feed into each other to produce fresh recommendations to provide you with a product that brings you joy.”

Marketing:

WEAKNESSES:

Heavy operating expenses:

Mainly dependent on the US market:

Substantial long term debt:

WallStreet Journal wrote about its debt in 2019, that an entertainment company’s cash obligations, and audience whims, make the profile of a content provider riskier. Moreover, Netflix’s debt levels understate its full obligations. Apart from its credit borrowings, the company has made contractual agreements for some of its content that it hasn’t yet paid. Like a company having signed leases, Netflix is still responsible for those payments.

OPPORTUNITIES:

Diversification:

Penetration of emerging markets:

More competitive Pricing:

For example, all users do not access all kinds of content on the platform during a month. The company can introduce limited plans that allow users to watch only a limited number of programs every month. Such plans will grow the company’s subscriber base among the lower middle class in the emerging markets.

THREATS:

Competitive pressure:

Regulatory threats :

Growing costs of content creation:

Pestel Analysis of Netflix

Political:

Netflix operates worldwide in 190 countries but its core markets are the US and Canada which account for the largest part of its net revenue. Until now, Netflix has faced fewer political barriers compared to other large internet businesses like Google and Facebook. However, increased regulations related to user data and privacy affect Netflix just like the leading players in the internet industry.

Moreover, while the regulatory environment is currently evolving in most regions around the world, tax systems also vary from country to country. So, when operating overseas, companies like Netflix have to keep in mind the local political environment to avoid facing action from the government and the local government agencies.

Economic :

The pandemic hurt demand, sales, and profitability of businesses in many industries. The industries most severely affected by the pandemic’s economic impact included retail, manufacturing, and travel as well as several more. However, there were also some industries that remained nearly unscathed despite the decline in economic activity that the pandemic caused. The cloud industry and the tech as well as e-commerce industries remained nearly unscathed despite the pandemic since people’s reliance on digital services grew. More people were buying online since prolonged lockdowns forced them to remain indoors while restaurants, pubs, and cinema halls stayed closed. Netflix also experienced fierce growth in its memberships in the second quarter. The main reason was that while the pandemic had a really strong impact on the lower end of the market, it had a relatively lower or no impact on the higher end which was evident from the sales of premium smartphones. A larger number of people worldwide now access digital services including Netflix through their smartphones compared to some years ago.

During the pandemic, while the sales of the entry-level smartphones were severely hurt, premium brands experienced impressive sales. Unemployment rose across various industries as companies were forced to layoff due to the lockdowns and the fast decline in demand and sales that followed. So, the pandemic has affected industries, regions, and classes of people to varying degrees. Netflix is an entirely digital business and while physical businesses were hurt the most by the pandemic and lockdowns including the cinemas that remained closed worldwide, Netflix emerged as the most attractive option for people missing their dose of entertainment in the meantime. Overall, while the economic impact of the pandemic will remain for some time, the world economy was in very good shape before the pandemic. So, in many parts of the world, people and businesses found it easy to bear the pandemic’s negative impact.

Moreover, people have grown used to digital lifestyles and using digital channels to obtain products and services. All these factors have worked in the favor of Netflix and despite the economic decline since the pandemic, its business has continued to flourish. The impact of the pandemic is expected to last. It has affected consumer behavior worldwide and these trends mark a lasting shift towards digital technology.

Social:

Technological:

Netflix invests a huge sum each year in research and development. The higher focus on innovation gives it an extra competitive edge. Netflix attracts new subscribers in larger numbers compared to the other providers of online streaming content. Technology has proved to be a key driver of popularity and profitability for the company that delivers content online in all corners of the world. Its advanced algorithms help optimize the user experience for nearly all types of viewers. Its penetration of international markets has also grown driven by the seamless user experience the platform provides. In 2019, the company spent around $1.7 billion on research and development compared to $1.2 billion in 2018. The company’s growing technological expenses reflect its higher focus on innovation and user experience, and on the other hand, they also reflect the growing competition in the industry.

Environmental:

Netflix is mainly a digital business with low to zero net environmental impact. However, large businesses, whether they have an environmental impact or not, still are responsible for protecting and investing in the environment. While businesses like Netflix can have a zero direct impact on the environment, they may still indirectly impact the environment. For example, the electricity that Netflix uses is not entirely derived from renewable sources. Netflix matches its electricity consumption (generated from non-renewable sources) with regional renewable energy certificates and carbon offsets. The company also invests in renewable energy projects in several of the US states. Apart from that, the company also ensures sustainable operations and has continued to improve in this area over time. The company has also adopted practices that minimize wastage in its offices worldwide. The company takes its environmental impact seriously and has adopted practices that help it become more sustainable.

Legal:

There are several laws addressing data privacy, and some of them are sector-specific, addressing data collection practices in various sectors of the industry. In contrast, the others are channel-specific laws governing data collection via various channels. One Federal law with broad jurisdiction in this area is the FTC Act. Still, several more laws address data collection practices in specific areas like the Children’s Online Privacy Protection Act, The Gramm-Leach-Bliley Act, and the Fair Credit Reporting Act. Apart from the Federal laws, there are hundreds of data protection and privacy laws among the US states and territories. Another important privacy legislation is the California Consumers Privacy Protection Act (CCPA), signed into law in 2018. The GDPR or the General Data Privacy Regulation is an important international Data protection law governing the collection, transmission, and use of data collected from any of the European Union’s 28 member states. You can read about the data collection practices of Netflix here.

However, it is not just the data protection-related laws that affect Netflix. Still, there are other applicable laws, including labor and environment laws, that the company needs to comply with. Overall, compliance is essential for businesses like Netflix, since noncompliance can often result in hefty fines. The fine can be a large part of its annual revenue.

Five Forces Analysis of Netflix

Bargaining power of buyers:

Bargaining power of suppliers:

“Since 2013, DreamWorks Animation Television and Netflix have released 12 original series including DreamWorks Trollhunters, Dragons: Race to the Edge, DreamWorks Voltron Legendary Defender, All Hail King Julien, DreamWorks Spirit: Riding Free, Dinotrux and more, winning 17 Daytime Creative Arts Emmys and six Annie Awards.”

Netflix Newsroom 2018.

Its leading suppliers of content and services hold some strong bargaining power. AWS is the main supplier in terms of technology since Netflix employs its cloud computing services to make its shows and movies available worldwide to its viewers. However, several factors moderate the bargaining power of Netflix suppliers. First of all, Netflix’s sheer size as the leading online streaming provider in the world makes it one of the biggest buyers of its suppliers’ services. Apart from that, Netflix creates most of its own technology and content, which reduces its dependence on the suppliers and controls their bargaining power. Overall, the bargaining power of Netflix suppliers is moderate.

The threat of substitutes:

Netflix also enjoys the highest penetration among the Over The Top video providers. It also shows that Netflix enjoys the highest popularity of all the players in the online streaming industry. The threat of substitutes gets minimized by several factors including the strong brand image of Netflix, its vast array of content (larger than the competing players), as well as original content and its focus on customer experience.

The threat of new entrants:

The Intensity of competitive rivalry in the industry:

VRIO Analysis of Netflix

The VRIO framework helps managers when they are analyzing their company’s resources and capabilities. VRIO is an acronym for Valuable, Rare, Inimitable, and Organized. These are the four bricks of VRIO. They represent the four properties that core competencies must have to give rise to sustainable competitive advantage. When the core competency arising from a combination of resources and capabilities satisfies the four requirements, the competitive advantage thus generated will be sustainable. If it meets fewer standards, the competitive advantage will be temporary.

Core Competencies of Netflix:

Technological Innovation:

Brand Equity:

Large user base:

Moreover, YouTube’s core product is not movies and shows despite its large collection of movies. With the growth in its user base, the revenue and operating margins of the company have expanded. Another major factor that favors Netflix is the higher user engagement and retention rate. Overall, it has achieved a sustainable competitive advantage which will grow stronger as the company produces more localized content to engage users worldwide in various regions.

Global presence:

Product Mix:

Until now, the company has invested most of its revenues and profits in producing original content. However, that has helped it draw people from all over the world to its platform in larger numbers. During the pandemic, the number of subscribers of Netflix grew sharply. However, quality content plays a central role in driving memberships and user loyalty. Overall, the competitive advantage it has gained by focusing on producing original content has helped it take a substantial lead over the rivals.

User experience:

HR Management:

Financial Performance of Netflix:

However, while the company’s net revenue has grown substantially in recent years, Netflix has also accumulated massive debt. It can be a cause of worry for the company in the future. Still, its growing operating margin is a positive sign, and the company could successfully service its debt in the future. Netflix has invested most of its revenues and profits in creating original content. This will only improve its competitive moat. While Netflix has accumulated a lot of debt to create original content, it is still a smart move. Its debt to equity ratio has improved since 2015. With an audience size of close to 200 million, its profitability is poised to improve significantly in 2020. So, even if the company accumulates more debt to create more original content, it has strong leverage in its subscriber base. Content costs are fixed costs, and an enormous audience size guarantees enormous returns. So, the chances are thin that its debt could become a major burden in the future. While Netflix can exercise some caution in this area, by 2020–2021, its operating margins can be expected to grow more impressive. Overall, Netflix is in a financially strong position. More than its debt, its competition is a cause of worry for Netflix.

A few last words:

For Netflix, member satisfaction is above everything else. It is serving an audience of around 195 million from 190 countries. This audience is highly diverse, and from France to India and the US, Netflix has to worry about the taste of people from all regions and cultures. The company invests in projects that are good enough to please its diverse membership base. Its investment has successfully drawn subscribers. For Netflix, there is no reason to stop spending on original content, even at the cost of accumulating more debt. The company expects to start generating positive cash flow by 2021. Its operating margins are expanding, and its leverage is growing. In emerging economies like India and Brazil, it could draw more subscribers using more competitive plans. However, Netflix is investing in strengthening its competitive moat and investing where it matters the most. From now and before the end of 2020, it plans to bring around 150 more original titles, and then more original content will follow in 2021. Even if its debt is large, with the current growth rate, there is reason to expect that it will not remain a worry in the future.

Originally published at https://notesmatic.com on October 20, 2020.

Blog editor and founder notesmatic.com