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UT / Engineering / MIS 301 / mis 301 ut austin

mis 301 ut austin

mis 301 ut austin


School: University of Texas at Austin
Department: Engineering
Course: Intro to Info Technology Management
Professor: Khoo
Term: Spring 2017
Cost: 50
Name: THE MIS 301 - Intro to Info Technology Management - Study Guide - NETFLIX IN TWO ACTS
Description: MIS 301 NTRODUCTION TO NFORMATITECHNOLOGY MANAGEMENT N ETFLIX 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 u e of rven an 10% D VD Less tmes fom co Moving From Atoms to Bits: Opportunity or Threat? •  Many media products created as bits (digital files with 1
Uploaded: 04/07/2017
30 Pages 83 Views 0 Unlocks

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 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 $$  Blockbuster  3000 * 52 rentals a year = 156,000 rentals  Netflix  125,000 titles   122,000 * 4 rentals a year = 488,000 rentals   3,000 * 52 rentals a year = 156,000 rentals   644,000 rentals http://www.wired.com/wired/images.html?issue=12.10&topic=tail&img=2Blockbuster Sourcing from Pure Play Model The Long Tail in Action  • Limited by shelf space? Then what?  – Having one title means there’s less space for  other titles ???? opportunity cost  – Opportunity cost = The value of what you  give up to choose something else  – The best strategy is to keep the most popular  ones in stock  – Ignore the long tail and you ignore movies  like…The Long Tail in Action  • One more title does not cost much for NF  • According to others, if you liked  Godfather, you’ll love this movie  • “My finest film ever” – Coppola  • Not big in the box office but ranked 13th amongst movies from its era.  Independent movie Crash still ranked  #2 on Netflix Top 100 movies The Long Tail in Action  • The long tail works because:  – It gives the firm a selection advantage that  traditional stores cannot match  – Geographic constraints go away and  untapped markets open up    4-2Cinematch: Profitable Data Asset  • Netflix’s proprietary  recommendation system  • Crowdsourced for  $1,000,000 prize  • Each time a DVD is  returned, Cinematch  asks customer to rate it  • Goal is to learn what you  like and drive you to less  popular movies in the  long tail Recommendations = Positive Feedback Loop  Netflix – 75% of movies ship from the long tail  Amazon – 60% of books sold aren’t carried at Borders  Rhapsody – Makes most $$ 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

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