Netflix's Business Model

Case 4 - Netflix's Business Model and Strategy in Renting Movies and TV Episodes

1. How strong are the competitive forces in the movie rental marketplace? Do a five-forces analysis to support your answer.

Competitive Rivalry within the Movie Rental Industry- Strong to Fierce Competitive Force

-Rivals are actively launching promotional activities ( Netflix's free trial and unlimited streaming) and engaged in marketing tactics (more red kiosks for Redbox, Blockbuster reinventing themselves) to increase movie rental revenues and attract more customers.

-Low switching cost on the part of buyers

-Some rivals have utilized very low subscription and rental fee as means of attracting new customers which intensifies the rivalry.

-All movie rental firms are actively seeking to improve/grow their business.

Rivalry among Netflix, Redbox, Blockbuster and other movie rental competitors (especially those that stream the video via the internet directly to the PC or TV) is strong. The said competitors are clamouring to attract support of individuals/household who rent movies and battling it out to gain a larger part of the market share and sales revenue.

Threat of New Entry in the Movie Renting Industry- weak to moderate competitive force

-Cost of developing a website

-Cost and time needed to develop a fast delivery system offered by Netflix and Blockbuster

-Investment in Movie/ DVD Inventory

- Advertising and Promotion expense to draw in customers (Netflix spends over $200 million annually)

There is a weak to moderate threat of new entry due to the huge capital needed and also due to the already established competitors in the industry.

Bargaining Power of Movie Renters- weak competitive force

Consumers have no bargaining power over firms for them to lower their prices. They can choose to rent or not to rent a movie or switch to another service provider but no one individual can negotiate his/her rental terms.

Threats of Substitute for Movie Renting- moderately strong

There are substitutes readily available over renting DVD's such as buying DVDs, watching in the theatre, watching movies on movie channels like HBO, Star Movies etc. , and just opting for another form of entertainment.

-Acceptable substitutes are easily available and affordable

-Buyers cost to switch is relatively low

-There are many entertainment substitutes available for watching a movie.

Bargaining Power of Suppliers Engage in Movie Renting- moderately strong

Movie studios have a considerable power and leverage over Netflix, Redbox , Blockbuster and other movie renting firms because of their power to heavily influence the price and other terms under which their movie DVDs will be released to movie rental providers.

2. What forces are driving changes in the movie rental industry? Are these driving forces likely have a favourable or unfavourable impact on competitive intensity and future industry profitability?

-Technological changes related to the Internet

-TVs are now internet capable

-The technology of streaming rented movies directly to big screen high definition TVs is improving and getting more popular in the US thus enabling streaming and VOD to become the new trend in delivering movies to consumer.

-Number of households with high speed internet is growing which is broadening the market for VOD and internet streaming of movies.

-Change in how the DVD is used. There has been a switch from watching movies on DVDs to watching internet streamed movies. This switch away from renting a physical DVD will impact

the movie rental marketplace.

-Change in cost

-Drop in the prices for widescreen, high definition TVs with exceptionally good picture quality on increasing number of models. Big-screen TVs improved the movie watching experience at home

The changes mentioned above will have a favourable impact on the industry specifically on the growth of overall demand for movie rentals via Netflix or VOD, since the shift is heading in favor of home movie streaming but as for movie rentals that rent DVDs , they are highly vulnerable to the driving forces.

3. What does your strategic group map