Digital Marketing – Assignement 2

Netflix Case

Sophie LEROSEY

Pierre JATTEAU

Florian BIDAULT

Léopold DUCLOS-PIETTE

Hanken School of Economics

Helsinki

2019
Part 1

Today, Netflix represents 12 million subscribers worldwide (N. Richaud). However, this

success was not planned.

Netflix's story began in 1997 when its founder, Reed Hastings, decided to create a DVD rental

service that allows people to keep movies for as long as they want. At the time, it was the

beginning of the DVD's success, and the idea of streaming was very distant. Netflix's early

years were not good, as the company offered a subscription service that did not appeal to its

target audience. In 2000, Hastings tried to sell Netflix. However, at the same time, Netflix

launched an innovative service that explained the beginning of its real success: the

personalization of the offer. Customization plays an important role in the operation of Netflix.

The films watched by subscribers are analyzed in order to offer them other content they might

like.

This function has two main consequences. First of all, the offer comes directly to the consumer,

he doesn't have to look for what he wants to look at and given the number of references in the

Netflix catalogue, this point seems very important. The second thing is the ability for Netflix to

analyze consumer trends and anticipate future successes (O. Dumons). It allows Netflix to

identify the type of content it needs to offer to be successful. For the consumer, this allows him

to feel free to look for anything he wants while making his choice easier.

The second main reason for Netflix's success in the 2000s was the dematerialization of its offer.

In 2007, Netflix decided to diversify its offer by offering a streaming service. Today, we can

say that this is the part of Netflix's history that we remember, but at the time, it was really

innovative.

Dematerialization is accompanied by another very central practice in the operation of Netflix,

which is the omnichannel way of managing their services. It is interesting to see how important

the concept of "omnichannel" is in all areas of the Netflix strategy. Since the streaming service
is provided, consumers have the possibility to watch their films on different media such as

television, telephone, computer.... This allows them to keep Netflix with them at all times and

watch their content whenever they want. But in addition, omnichannel content is also used in

Netflix's marketing strategy and is well illustrated by 2016 with an advertising campaign that

allows people to share their faces with their favorite characters (La Réclame). This cross-

channel strategy works very well and seems to be a good way to encourage people to react,

especially on social networks, and fits Netflix's young adult target perfectly (Anne-Cécile

Guillemot).

The last interesting point to emphasize, especially considering the large number of Netflix

subscribers, is the social phenomenon that has become Netflix. As is often well explained with

the concept of "Extended Self" (Belk, R. W.), we are more and more used to identifying

ourselves through our consumption behavior. Today, using Netflix is a way to be part of a

group, a community. The success of the term "Netflix and Chill" for nearly ten years and its

evolution is a clear indication of this. Many journalists have tried to explain this cultural

phenomenon (Kevin Roose), which finally proves that Netflix has succeeded in adopting its

target's codes.

Part 2

Netflix is now the leader in the SVOD segment in terms of customers: it gathers more

than 139 million subscribers worldwide, up almost by 9 million in the last quarter of 2018

(CNN). Since 2016, when it added 130 new countries to its streaming list, it is present in all

countries in the world except China, Crimea, North Korea and Syria. Netflix was a “born

global” company: it extended its diffusion in the whole world very fast because of the important

economies of scale that comes with digital activities. This success is largely due to its early

arrival in the market and its good understanding on how it will evolve, the shifts it will take.
 If Netflix is for now an uncontested leader, many competitors are entering or have

already entered the market. Amazon Prime with its more than 100 million subscriber base -even

though Prime isn’t only about SVOD- is starting to be a threat: it has invested in 2018 $5 billion

on content, not that far from the $8 billion Netflix spent. Hulu, on another hand, already reached

25 million subscribers, increasing by 8 million compared to 2017, invested almost $3 billion

last year in original content. Those two are for now the biggest competitors of Netflix, even

though they are mostly focused on the North American market, which will certainly reach

saturation this year with the launch of new platforms by Disney, Apple and Warner Bros.

But if this emergence of new competitors is a direct threat because of their notoriety and

their large unique programs, it is also an indirect threat for Netflix. As it is well-known,

Netflix’s library is composed of original creations but also of much licensed content: it is

estimated to be around 60% of all the titles on the platform (Parrot Analytics and S&P Global

Market Intelligence), decreasing to 50% by the end of 2019. Among this content, 20 is estimated

to be Disney/Fox content and Disney/Fox and Warner Bros. content might represent more than

40% of all hours spent watching Netflix (Annie Gaus, 2018). With both pulling their content

out of Netflix, Netflix will have to find a way to cope with it. Moreover, this competition

between platforms make the cost of licensed content increase substantially. The example of

Friends is gripping: Netflix spent $100 million to renew its license through the end of 2019,

compared to the $30 million it paid previously. All of these are threatening the rentability on

the local market of Netflix, which is for now the “cash cow” of the brand, the international

activities still being question marks.

These new market threats are combined with environmental threats that could limit the

growth of Netflix, the first one being the end of net neutrality. Because of it, internet providers

could theatrically charge more to consumers or companies that use the biggest part of the
bandwidth. And Netflix consume around 40% of it. The creation of tolls could limit the growth

of Netflix in the US, as well as its competitors’ one.

Netflix also has its own structural problems, the first being its huge debt of around $10

billion that could limit its capacity to invest in content in a close future or reduce its investors’

trust in the company. From October 2017 to September 2018, Netflix spent $11.7 billion in new

contents while earning $14.9 billion revenues (Jeff Sommer), necessitating a $2 billion loan to

cover other expenses. To cope with it, it has increased its subscription prices both in the US and

in Europe, but this could slow down its acquisition of new customers.

This increase shows Netflix doesn’t have a large leeway to improve its rentability. If its

competitors can finance the SVOD with their complementary activities (e-commerce for

Amazon, Box office for Disney…), Netflix only has two ways to improve its profitability:

gain subscribers or increase its prices, which could harm its sales.

But Netflix can count on its multiple strengths. At first, it is the leader on SVOD in the

world, which means it is the one making more economies of scale, allowing it to invest more

on new content. It can also benefit from a strong brand image acquired by a consistency in

the quality of the experience offered to customers: as described in a Piper Jaffray report,

71% of consumers felt the service has improved, even exceeding their expectations (Edward

Helmore, 2019), which explains the 93% renewal rate, the highest of any SVOD services

(Annie Gaus, 2018). Their platform technology gives also Netflix a big advantage on the

market: it helps improving the customer experience via its efficiency but is also a big source of

data that help the company improve its future content and know what consumers want, reducing

the risk of the investment on production.

All of this create new opportunities for Netflix to develop further internationally even

though the American market is saturated, contrary to most of its competitors. It has yet to

explore China, which would be a large opportunity to grow its consumer base. Moreover,
Netflix as always felt the trends coming in this industry. Thanks to its well-advanced

technology, it could explore new ways to broadcast or even more advanced video quality.

Finally, the withdrawal of the Disney/Fox content this year could be an opportunity for Netflix

to ax its strategy even more on its own content: the growth in subscriptions could be a

leverage to invest more on unique content. Then, Netflix would get less dependent on other

studios and thus save money on licensed content in the future: it would still focus on “brand

content” while old own production would make the “complement content”.

Strengths Weaknesses

 Unique quality content  No control of the data centers

 Unique technology  Limited financial capacities (debt)

 Large loyal customer base  Mono-activity make the company

 Strong brand image more at risk

Opportunities Threats

 Still a large room for growth  Arrival of new competitors (3 major)

internationally  American market saturated

 Improve the platform’s technology  Increasing cost and loss of licensed

 Make of Netflix a unique brand with content

its own unique productions  End of Net neutrality

Part 3

Based on our evaluation, we assume two main recommendations for Netflix, that will help the

company to grow in the future: Netflix must try to capture and retain customer’s attention but

also to monetize customer’s attention. We divided those two objectives into three types of

recommendations: about Process, People and Technology.

1) Process

a) Continue to integrate the value chain horizontally and vertically

The issue of the monetize attention remains terribly sensitive in the digital media. With the

upheaval of the value chain and the emergence of new power relations in the sector (between

producers and publishers, etc.), the sharing of value between the different stakeholders is

becoming more and more strategic. Netflix is thus engaged in a real race to size. Acquisition

operations have intensified on the publishing side (horizontal integration) for several years.

Netflix, which has embarked on this path of integration, should continue like this. As Huang et

al. (2017) explain, « digital ventures grow by drawing on and adding to digital infrastructures

and can reach scale much faster than traditional, industrial companies. ».

The acquisition of a competitor would allow Netflix to consolidate its positions in its

market or its segment of intervention. This gives a greater market power and a more favorable

balance of power. By gaining bargaining power against the upstream and / or downstream of

the value chain, Netflix would put itself in the position of becoming a little more price maker -

as opposed to price taker - and therefore of capturing more value. In the future, this solution

would help Netflix remain market leader.

Netflix should redefine its vertical integration strategy. Upstream and downstream of the

value chain are becoming increasingly strategic for digital media, especially because of the

rising content acquisition cost that sheds new light on production. Netflix is already going on

this path and it gives it several advantages. At first, Netflix create a clear editorial line and

control the quality of the contents, to preserve its mark. It is also a way to increase revenues by

selling the broadcasting rights to other media (i.e. HoC to Canal + in France) or by selling

DVDs. By placing itself down the value chain, Netflix can "by-pass" intermediaries and avoid

paying part of their income to third parties. It should thus keep going in this way, creating even

more exclusive content.

Netflix should deepen its vertical integration: by focusing on downstream integration. Some

environmental factors are actually threats for the future distribution of Netflix. The end of net
neutrality, or the fact that the data centers where are storage Netflix’s data belong to Amazon,

could be threats in a close future. That’s why it could be safe to invest in own data centers, as

well as in an internet provider to ensure its customers won’t be charged more because they use

more internet bandwidth.

b) Build a strong brand by being consistent in the content

The brand, because it is inimitable and plays a major role as a benchmark for consumers in an

abundance of offers, is a more strategic asset than ever before. Netflix has every interest in

building a strong brand if it wants to stand out from the competition and attract attention. There

are different ways for them to proceed, that Netflix could borrow:

- Ensure editorial relevance: in this case, the media and the brand are one.

- Acquire or produce "brand-content". It relies on its catalog of content to fuel its brand:

this content raise interest to attract users alone and constitute its "face of appeal."

The strength of "content brands" changes the strategic approach of digital media. When the

assembling contents produced internally and / or produced by third parties, it happens then that

the notoriety of the contents make equal play, even exceeds, that of the media which diffuses

them. This phenomenon is amplified by the cultural globalization which favors the emergence

of world licenses. The objective for Netflix would be to have a few "brand-content" to attract

consumers, who are potential influencers, to its offer, and to make them stay with content

"complement", less expensive, but bigger. Netflix should keep using a mix of content, with

attention-grabbing content brands and several content-enhancing add-ons and develop this path.

Netflix already produce its own proprietary content, but competitors are starting to catch up,

threatening Netflix’s competitive advantage. Netflix must be able to respond to maintain its

brand leadership and keep a strong image. In conclusion, Netflix must be able to deliver content

that is sufficiently regular, exhaustive, addictive and, above all, exclusive.

c) Capitalize on its brand via brand extensions

The ability to monetize attention is also measured by the potential for brand extension. The

brand gives its holder a competitive advantage to win the battle of attention, but it also allows

digital media to extend their territory of influence outside of their core business: it facilitates

the penetration of new markets and generates derived income. It would strengthen the influence

of Netflix and hence its ability to attract attention. Thus, Netflix could explore two paths:

- Media brand extension, the least risky option. Netflix is only declining its mark on other

media where it is currently absent (i.e. music streaming). It requires low investment

thanks to synergies, and so the least expensive option in case of failure.

- Non-media brand extension. Because of the growing sector, SVOD platforms are

essentially blocking their brands to their core business for the moment. Due to business

uncertainty, Netflix would be advised to be a pioneer to expend to non-media sectors.

2) People

Netflix could extend its content from "brand-content" to "person-brands", a similar

strategic logic. What has profoundly changed with digital technology is the ability of

individuals to stage themselves, to promote their editorial or artistic creations through social

networks. The strategic logic is the same as for "content brands": individuals bring the audience

to the platform, which pays them (via advertising). These artists become brands thanks to their

community (i.e. CR7 on Instagram). Netflix could invest in this way that looks promising, just

like YouTube already does: extend its activities to video-sharing. In a way, those individuals

allow the platform to gain audience thanks to what Belk (2013) calls “the extended self in digital

world”: the audience identifies itself to those individuals as a kind of re-embodiment.

Netflix could also extend the process of co-creation of content with its users. The public

can be a content provider. Netflix could ask its customers to participate in the creation, or to

create series and films. As Harmeling, C. et al (2017) explain, it is important to consider the

client's creativity, which provides unique perspectives.

 3) Technology

a) Netflix needs more than ever to signal itself

Netflix must be ubiquitous. It must be visible and accessible everywhere, all the time, and

"scream" louder than its competitors. To do this, three major strategic options are available:

Broadcast on all screens. With the revolution of uses, particularly delinearization and mobile

consumption, it is imperative to publish the content on the various terminals available to users:

it is a way of guaranteeing an optimal quality of navigation to their users. Netflix already offers

a wide choice of distribution but must remain informed of possible advances in this area.

Distribute its offer widely. Thanks to the digital, media have the opportunity to self-distribute,

by distributing their contents on the web and by presenting their subscription offers via their

own website. But if Netflix wants to gain visibility, it must also be distributed by a lot of

intermediaries strongly implanted on the human-machine interface: box of Internet operators,

connected TVs, application stores, game consoles, connected speakers, etc. It is necessary to

go further than the offer developed on the Xbox. Finally, Netflix need a real social media policy.

You have to occupy the ground as much as possible to get attention.. Interact regularly with

users, promote content to the community that will be the first communication channel

(prescriber effect). It is a question of organizing the viral propagation of its editorial offer.

b) Netflix should keep investing in its distribution, which is a key factor of success

If distribution is a key issue to win the battle of attention, it may be even more true on segments

still far from the peak of maturity, such as the SVOD. In these segments, the platforms whose

offers are best (and fastest) distributed are likely to win. Indeed, by being referenced before the

competitors, Netflix would be in a position to touch the early adopters, sensitive to the novelty

and strong prescription power. These early buyers can then relay their perception of the

platform and its offer to their networks of influence, participate in their promotion and provide

reliability and performance to the general public to convert, and feed the effects of networks.
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