What makes CineMatch valuable?
• Netflix offers 125,000+ DVD titles • Blockbuster carried ~3000…Why?
• Prior to July 2011 what did Netflix consider one of it’s biggest regrets?
MIS 301 
INTRODUCTION TO 
INFORMATION TECHNOLOGY MANAGEMENT NETFLIX IN TWO ACTS The Streaming business 
“We named the company Netflix for a reason; we didn’t name it DVDs-by-Mail” - Reed Hastings (Netflix founder and CEO) Netflix members in 2011 
Since 2011 Less than 10% of revenue comes from DVD 
DVD by Mail Streaming Moving From Atoms to Bits: Opportunity or Threat? • Many media products created as bits (digital files with 1s and 0s) • When we buy a CD, DVD, book, or newspaper, we’re buying physical atoms that are a container for the bits • Advantages of moving from atoms to bits – Netflix will eliminate a huge chunk of shipping and handling costs – Bandwidth costs are minimal • $0.84 per DVD mailed vs $0.05 per streamed movie Let’s compare Netflix to YouTube Netflix YouTube 
• 60 high tech Distribution Centers • Larger inventory of DVD’s • Cinematch technology • Low cost of membership • No cost of Distribution Centers • No cost of physical inventory • YouTube has similar feature • No cost of membership • No cost of shipping • Free shipping Background • Since its IPO in 2002, Netflix survived big incumbent competitors, low cost newcomers, and price wars 
Blockbuster used to have: 
• 40 million U.S. customers • 7,800 stores • Net revenue (revenue – cost) is $4.36 billion in 2004 • Blockbuster filed bankruptcy in Sep. 2010 • Was acquired in April, 2011 • The acquisition value is <$400 million • Prior to July 2011 what did Netflix consider one of it’s biggest regrets? • Rivals such as Blockbuster and Wal-Mart showed up. – Wal-mart within a year decides to get out – Blockbuster copied Netflix exactly and… • Competitors underestimated Netflix because: – Internet pure play without a storefront • Give me an example please How Netflix Works 
• Innovative Business Process & Pricing Model • Strategic Positioning • Pay as a service • Superior IT • Operational Systems (order processing) • Business Intelligence Systems (movie recommendations • Flexible Business Model…that is executed properlyHow does the Netflix High Tech process work? • 58 ultra high-tech distribution centers (DCs) • DCs located close to USPS facilities • Trucks collect shipments from USPS hubs and return the DVDs to nearest Netflix DC • Scanners pick out incoming titles • Pre-sort mail before dropping it off at USPS • DVDs hand-inspected for cracks/smudges • Processes linked to CineMatch The Long Tail ![]()
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The Long Tail in Action • Netflix offers 125,000+ DVD titles • Blockbuster carried ~3000…Why? • Traditional retailers determine breakeven point by considering: – # of customers that can reach a location – Store size – Store inventory – Payback from inventory – Cost to own and operate the store How Longtail makes more $$ Blockbuster 3000 * 52 rentals a year = 156,000 rentals Netflix 125,000 titles 122,000 * 4 rentals a year = 488,000 rentals 3,000 * 52 rentals a year = 156,000 rentals 644,000 rentals ![]()
http://www.wired.com/wired/images.html?issue=12.10&topic=tail&img=2Blockbuster ![]()
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Sourcing from Pure Play Model ![]()
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The Long Tail in Action • Limited by shelf space? Then what? – Having one title means there’s less space for other titles ???? opportunity cost – Opportunity cost = The value of what you give up to choose something else – The best strategy is to keep the most popular ones in stock – Ignore the long tail and you ignore movies like…![]()
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The Long Tail in Action • One more title does not cost much for NF ![]()
• According to others, if you liked Godfather, you’ll love this movie • “My finest film ever” – Coppola • Not big in the box office but ranked 13th amongst movies from its era. Independent movie Crash still ranked ![]()
#2 on Netflix Top 100 movies The Long Tail in Action • The long tail works because: – It gives the firm a selection advantage that traditional stores cannot match – Geographic constraints go away and untapped markets open up 4-2![]()
Cinematch: Profitable Data Asset • Netflix’s proprietary ![]()
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recommendation system • Crowdsourced for $1,000,000 prize • Each time a DVD is returned, Cinematch asks customer to rate it • Goal is to learn what you like and drive you to less popular movies in the long tail Recommendations = Positive Feedback Loop ![]()
Netflix – 75% of movies ship from the long tail Amazon – 60% of books sold aren’t carried at Borders Rhapsody – Makes most $$ from songs outside Top 10,000 What makes CineMatch valuable? • CineMatch data creates switching costs…for some • Data accumulated and insights generated in Cinematch was hard to simulate for others • Introduced profiles in recent years to get better data • Examine Netflix’s churn rate: – Churn rate: The rate at which customers leave a product or service – In mid-2008, churn rates for Netflix’s most active regions were below 3 percent • Netflix’s marketing costs benefit from satisfied customers…they can also be severely hurt by unsatisfied customers as we’ve seen Killer Asset Recap: Understanding Scale • Netflix’s size = huge scale advantage • Scale economies allow firms to: – Lower prices – Spend more on customer acquisition, new features, or other efforts • Smaller rivals have an uphill fight • Established firms end up straddling online and brick and mortar markets Economies of Scale = Profit ![]()
Netflix: $300 million / 14 million subscribers = $21 per subscriber Blockbuster: $300 million / 2.2 million subscribers = $136 per subscriber Netflix operations costs ~16% of Blockbuster operation Anything over $21 is PURE profit for Netflix $7.99 monthly fee * 12 months = $96 $96 (R) - $21 (C) = $75 profit ???? 78% margin What are the risks with Pure Play Model? • It’s highly dependent on advanced technology and value chain – Capital to start this up is high – Very complicated and not easy to create • You only have 1 store so brand and customer service is critical Why is customer experience more important for an internet pure play? • Remember when: Rated #1 E-commerce Site – Ranked above Apple, Amazon (Then went on Top 10 hated) • Advertising builds awareness, but brands are built through customer experience • Subscribers expectations from Netflix: – Huge selection* – Ability to find what they want* – Timely arrival – Ease of use and convenience – Fair price* The explanation ![]()
“In a few weeks, we will rename our DVD by mail service to “Qwikster”. We chose the name Qwikster because it refers to quick delivery. We will keep the name “Netflix” for streaming.” Lessons Learned • Pure play has many advantages over traditional model like: – Long Tail – seems like unlimited product line – More opportunity in “non-blockbuster” products – Network Effects can be at play – grow faster • Internet pure plays have advantages but also must be careful about decisions that affect it’s brand. – It’s easy to cancel online subscriptions (low switching cost) – Netflix stock plummets after it lost just 800,000 users – Only accessible via internet (a problem?) • Innovator’s Dilemma – Do we move forward? – Can we move forward too fast or in the wrong way? Lessons Learned • Great lesson in assessing how you compete – Product uniqueness or Process uniqueness – Netflix has focused less on being unique as a streamer and more on a content creator. – Shows are created in streaming format online and have high profit margin that DVD. – Shows could be designed based on all the Cinematch data Netflix has
