Movie rental business case study solution

Case 14 Netflix Fights to Stay Ahead of a Rapidly Changing Market* Synopsis: In the face of changing technology and shifting customer preferences with respect to movie distribution, video rental giant Blockbuster fell to its competition. Meanwhile, Netflix has grown to become the top rent-by-mail and video streaming company, while other strong competitors have emerged to dominate movie distribution via kiosks (Redbox) and online (Apple, Amazon, Hulu, and others). Looking to the future, Netflix’s survival depends on its ability to adapt to and adopt new technology and marketing practices—issues Blockbuster failed to navigate due to its reactive, rather than proactive, stance toward a rapidly changing market. Netflix faces an uncertain future as the DVD rental sector approaches the end of its life cycle. However, the company is poised to dominate the video streaming sector for the foreseeable future. The problem is that the future changes rapidly in this industry. Themes: Changing technology, changing consumer preferences, competition, competitive advantage, product strategy, product life cycle, services marketing, pricing strategy, distribution strategy, non-store retailing, customer relationships, value, implementation Technology has played a leading role in the evolution of the movie and rental industry. Several of the major movie production companies have now opted to bypass the theater experience and instead promote a selection of their movies directly to the home viewing audience via on-demand services, broadband downloads, or online streaming. Through increasing disintermediation (bypassing theaters and rental chains), movie studios stand to increase profit margins dramatically. Today there are at least 20 major competitors in the sales and rental industry that compete with Netflix. These include major retail firms such as Walmart, Target, Best Buy, Amazon, and Time Warner. In the rental sector, Netflix faces intense competition from Redbox, and a variety of online-only services such as Apple, Amazon, Google, and Hulu. Netflix’s History CEO Reed Hastings told Fortune he got the idea for the DVD-by-mail service after paying a $40 late fee for Apollo 13 in 1997. Although VHS was the popular format at the time, Hastings heard that DVDs were on the way, and he knew there was a big market waiting to be tapped. At first he and fellow software executive Marc Randolph attempted a rent-by-mail service that didn’t require a subscription, but it was very unpopular. The company launched the subscription service on September 23, 1999 with a free trial for the first month and found that 80 percent of customers renewed after the trial ended. Netflix turned its first profit in 2003 in the same quarter that it reached one million subscribers. Hastings said the company was named Netflix because they saw the industry’s future moving from the DVD format to Internet streaming in the long run. Netflix introduced streaming services in 2007 after reaching more than 6.3 million members. Intense competition from Netflix was a main reason that Blockbuster dropped its late-fee program in 2005 (a shift that led to a $400 million loss in revenue for Blockbuster). In 2006, Hastings set a goal of reaching 20 million subscribers by 2012—a goal they would exceed. Its launch in Canada in September 2010 helped them reach the 20 million subscriber goal sooner than expected. Quarterly sales topped $320 million in late 2008, followed by $394 million during the first quarter of 2009. Even more impressive, Netflix managed to increase sales at a time when the entire movie rental industry experienced an 8 percent sales decline. Today, with more than 62 million members, Netflix touts itself as the world’s largest online entertainment subscription service, with operations in more than 50 countries. It also announced it was making its streaming video service available in Cuba in light of the improving relations between the United States and Cuba. Although this is more of a formality since Cubans do not have credit cards and the island has low-quality Internet service, Netflix predicts that Cuban economic conditions will improve and become a viable market for the organization. Early Strategy Netflix built its success around online movie rentals with expedited delivery of DVDs. DVDs were first introduced to the United States in March of 1996.