Porter’s Five Forces

and PESTEL Analysis

Strategic Business Management

GROUP 13
External Analysis
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Background
Netflix is a media-streaming and video rental company that was founded in 1997 in Los Gatos,
California by Reed Hastings and Marc Randolph. The company used to be a purely video rental
company that operated on the internet and charged its customers on the basis of its online
subscriptions. Customers could pick from a catalogue containing hundreds of DVDs which would
be delivered to them through the hundred plus distribution centres that the company had. In
2007 Netflix began offering its customers the option of streaming some of its shows and
television shows directly to their homes through their online streaming platform. In 2018, the
online streaming service alone brought in more than 130 million subscribers globally. In addition
to partnering with several other media companies in order to stream movies and shows that
other companies produce, Netflix also produces its own movies and shows that have become
fan-favourites and are aired solely on the Netflix streaming service. Netflix has become a major
player in the growing online streaming industry that is quickly changing the way we watch our
favourite shows and movies.

PESTEL Analysis
Political:

Political factors can impact the long-term profitability of Netflix in any country. Netflix uses the
CATV system for transmission of their streaming service throughout the globe. In a country like
Pakistan, the political environment is constantly changing, which poses a certain number of risks
to Netflix. The risk of a Military invasion or a Military coup due to which there is a threat that
Netflix can be banned at any time. Other than this, there are very strict censorship rules in
Pakistan and some of the content that Netflix airs is banned because of its conflicting views with
the interests of the government. Furthermore, Pakistan does not have any proper intellectual
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property or copyright infringement laws and people can download content from Netflix and use
it on other streaming services for public or personal use.

Economical:

Netflix runs its streaming services on a monthly subscription basis. The company has over a
million subscribers in over 100 countries. This is one of the many reasons why the company has
successfully maintained its competitive prices over its more expensive competitors’
subscriptions. The company takes care of its consumers budget and provides high quality
streaming services at an affordable price. However, Netflix has, over the years increased its
prices, but it has balanced that by providing original content that has added to their value
proposition. Many of these shows have become fan favourites such as ‘The Patriot Act’ and
‘Stranger Things’.

There are a lot of different factors that affect Netflix and its profit margins. Since Netflix provides
its services in over 100 countries, they are affected by foreign exchange rates, inflation rates,
interest rates and savings rates that affect their investment in an economy. Netflix executives
have to carefully evaluate the economic repercussions that the company would face as a result
of expanding their services. The economic indicators that they look at include: the type of
economic system in the country of expansion, the amount of government intervention, the
exchange rates and stability of currency, the efficiency of financial markets, the education level
in the economy, the average discretionary income of the population, the unemployment rate,
the inflation rate as well as the interest rates in the country. Pakistan is a developing country that
has an unstable currency. The inflation rates amongst other economic indicators show that the
country is not a suitable candidate for a larger expansion as of yet. However, the streaming
service has been growing ever since Netflix introduced its services in the country which is a
positive indicator for future investment and expansion.
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Socio-Cultural:

There are certain social and cultural factors that affect the adoption of Netflix in most countries.
All of these are applicable to the adoption of the streaming service in Pakistan as well. Firstly, the
demographics and the skill level of the population affect how the streaming service is perceived.
Pakistan is a country with a population of 212,742,631 (according to the 2017 census), and a
literacy rate that is very high in urban areas and very low in rural areas. The majority of Netflix
subscriptions in Pakistan are also in these highly literate major cities i.e Islamabad, Lahore and
Karachi. If we delve deeper into these statistics, we find out that even within this segment, most
Netflix subscriptions are owned by a relatively younger segment. Even though Pakistan is an
Eastern Country, the younger generation has become increasingly inclined towards Western
values and Western Culture. This can be an advantage to Netflix as it produces most of its
content in English. However, Netflix also has Bollywood movies and amongst other eastern
filmography that is available to their audience in the subcontinent. Recent Social trends have
also shown an increased move towards watching video content on smartphones instead of the
traditional large screen. This can also be utilised by Netflix in Pakistan as it is a medium-large
market for smartphones. This means that the growth of Netflix as a streaming service in Pakistan
will be on the rise for the foreseeable future.

Technological:

Technological advances are rapidly disrupting industries across the board. Companies like Uber,
Google, Airbnb and Tesla are examples of firms that have managed to capture huge chunks of
market share due to their ability to respond positively to the changing technological trends. In
today’s markets, it is extremely important for companies to be wary of the opportunities that
changes in technology can have to their business, to analyse the impact of these changes, and to
make decisions accordingly.

In the case of Netflix, technology has a very important role to play given that it is an online
streaming service and is dependent on readily available technology. Netflix has an R&D
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department that is working on finding out ways to reducing the amount of data required to
stream high quality 4K resolution videos. The 4K television market has increased rapidly over the
past few years and Netflix is keen on providing maximum value to their customers by offering
high speed 4K streaming. Furthermore, the R&D department has also developed a software
called Hermes which allows their content to be easily translated to serve their customers in over
190 countries.

Ecological:

Every market has a set of norms or environmental standards that can have an impact on a
company’s performance and profitability in that market. For streaming services like Netflix,
gaining access to data servers puts huge pressure on the environment. Technological companies
have started finding solutions to lower the usage of carbon footprint. Since Netflix has over 130
million subscribers, it has very large internet traffic and accounts for one third of the internet
traffic in North America. The company is under a lot of pressure to start working towards using
renewable energy for their data centres.

Legal:

The major difficulty faced by streaming services like Netflix in developing countries like Pakistan
is the lack of robust Intellectual property and Copyright infringement protection system. Before
entering the market any firm that provides a product or a service will have to revisit a decision
and find ways to protect their Intellectual creations. The lack of E-commerce laws makes it
difficult for a company to operate in the developing world, especially for a company that has a
model like Netflix. Another issue is one of people using technological workarounds to view the
content that is not available in their country. Netflix features movies and shows according to
each country. As each of them has a different set of legal requirements that Netflix has to follow
in order to operate in a particular region. Another legal issue is that of Antitrust laws and laws
regarding CATV systems of every country. These are just some of the considerations that Netflix
executives have to analyse before deciding to expand their services to a region.
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Porter’s Five Forces

1. Threat of New Entrants

There is a medium threat of new entrants in the online streaming market as it is a growing
industry and people still use other alternatives to online streaming. However, it is true that
because this industry is still growing and will likely be the most preferred choice of Television,
the industry size will increase in the future. The industry in which Netflix operates is dynamic and
Netflix has been keeping up with technological changes. New entrants will find it slightly difficult
to break through to loyal Netflix customers. For instance, Netflix can not only be streamed on
laptops/ PCs only but also Smart TVs, tablets and mobile phones. Netflix was also the first mover
in the media industry that tried out the online streaming and subscription business model that
greatly affected the sales of DVDs and DVD rentals. Not only is Netflix cheaper but multiple users
can use one account in different locations.

New Entrants can be threatening to Netflix as they can offer cheaper subscription rates and may
even offer a greater variety of TV shows and movies as compared to Netflix. New entrants that
are not as famous or do not have strong technological or large capital investment abilities are
less likely to enter this market, however, companies like Google and Apple with strong
technological and investment abilities can be a huge threat to Netflix. Examples of new entrants
in this industry are HBO Go and Amazon Prime. A recent new entrant in Pakistan is iFlix (provided
by PTCL) but since PTCL has a reputation of poor service, so people did not switch from Netflix to
iFlix.

2. Rivalry among Existing Competition

There is both direct and indirect competition.

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Direct Competition:

The existing competition in the industry can be considered to be high because of the presence of
other big giants such as Amazon Prime, Hulu, YouTube, HBO Go and iFlix. However, despite the
high existing competition consumers do not just subscribe to only one of these services, they opt
for two or more services at a time thus, the competition does not necessarily reduce the other’s
market share.

Indirect Competition:

Indirect competitors are TV, local cables, DVDs and Dish TV services. Since these are the
traditional services that have been the choice of consumers since so many years, some find it
hard to shift to online streaming networks. Moreover, Fox, BBC and CBS have their own
streaming video options as well on their websites and the loyal customers prefer to switch to
these instead of new services.

3. Threat of new products:

With the continuing advancement in technology, new services can be launched which may
provide similar content with low or maybe no charges. Many filmmakers and studios upload
their films directly to video sharing sites like YouTube for a greater reach and to escape
Copyright infringement. In reference to Pakistan, there are a less number of credit card holders
and in turn there a less number of subscribers for Netflix. Therefore, the company is not
interested yet to start original content making projects in Pakistan. Also, the existing competitors
have started making original content and can innovate or decrease prices in the near future.

4. Bargaining power of suppliers

Streaming as a medium of content dispersion has risen in popularity in recent years. Before this
Netflix dominated the market as it was one of the only providers if the online streaming service.
However, now third parties that Netflix acquired content from are all refusing to supply Netflix
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with that content because they want to offer it on their own streaming services. This has put the
library of content that Netflix has in great jeopardy. Since the rights to the programming belong
to these third-party suppliers such as NBC (National Broadcasting Company) or Disney, they have
a greater claim to them for their streaming service. Companies are entering bidding wars for
content with Netflix. Just recently in July 2019, it was announced that the popular show
“Friends” was moving from Netflix to HBO Max in 2020 following a bid of $425 million in total
from Warner Media, the company that created the show. Netflix’s suppliers are becoming more
self-interested and are making huge changes to its content offerings to benefit themselves which
is why Netflix must rely more on its own original content as that cannot be taken away from
them. Suppliers also become particularly powerful when a series or movie becomes wildly
popular because then the pressure to add that offering to Netflix’s service is very high. Suppliers
can then demand high prices to give the rights of streaming over to Netflix.

5. Bargaining power of customers

In this day and age, customization and personalization are key for the customer in the field of
entertainment. Viewers want captivating content to consume that speaks to them. Therefore,
the type of content that Netflix creates (via Netflix originals) or acquires (via third party creators)
is highly dependent on what the people want to see. Customers are also very price-sensitive in
this industry. There is low switching cost of moving from Netflix to its competitors such as Hulu
or Amazon Prime. After increasing its price between 13 to 18 percent in January 2019, Netflix
reported a drop in their paid subscriptions of 126,000 domestic customers in the second quarter.
This was historic because this was the first time in twelve years that their domestic customer
base had taken a slash. The reason for this price sensitivity links to the high availability of other
streaming platforms and upcoming release of new highly-anticipated streaming services such as
AppleTV and HBOMax. With an abundance of options to choose from, price becomes an
important distinguishing factor. The prevalence of piracy in the continent of Asia also has a role
in giving customers bargaining power. With piracy, content from anywhere is instantly handed
without cost to the consumer. This puts a dent in the exclusivity of Netflix’s content offerings as
well as the market of people willing to pay for content.
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6. Threat of Complements (The sixth force)

The films and series that are present on Netflix can easily be found on restricted torrent sites and
on pirated DVD stores in Pakistan. Also, there is a problem of a few number of continuous high-
speed internet providers in Pakistan so people prefer to use DVDs or download through file
sharing torrent sites. Until, the Pakistani government provides the following two major
compliments to the public, Netflix can suffer in the local market:

1. High speed free internet

2. Implementation on Cybercrime and Copyright infringement laws

Strategic Group
Exhibit 1: A Strategic Group Map for Netflix
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Reasons for Chosen Dimensions:

The criteria used for the strategic group map is Content offered and the Price. Content offered
does not only mean the quantity of available content but also the quality of content being
offered. Content offered was chosen because if the consumer feels the content caters to his/her
taste, only then will they subscribe to a particular option. Price is chosen as the other factor as
the majority of the consumers want to minimize their costs at the maximum utility being offered.
Thus, price or the subscription rate is regarded as a key determining factor for the choice of
medium and service.

Market Size Calculations:

We used secondary internet sources to determine market size of each available option.

According to Josh Biggs, the Subscription Video on Demand services make the most revenue in
the entertainment media channel industry at 80% compared to the Video on Demand which
accounts for only $ 4.1 billion of the revenue. The future depicts growth for Video streaming
industry, and as evident in the report by CAGR, the SVOD will grow by more than 16% for the
next decade. As of 2018, the global video streaming market size was valued at $36.64 billion
which represents a growth of more than $10 billion in a period of 4 years. (Biggs, 2019)

The size of each circle was also evaluated with the help of secondary sources.

“If you can put up with ads, Hulu is actually the cheapest option. But without ads, it's still less
expensive than Netflix's standard HD plan.

HBO and Amazon are the most expensive options with fewer titles than its competition. The
premium cable network has historically favoured quality over quantity, but its parent company
AT&T plans to ramp up the amount of original content it produces.” (clark, 2019)

As the entertainment industry continues to grow, consumers are offered a variety of video-on-
demand services to fulfil their viewing needs. “Netflix, the undisputed leader, boasts a robust
market share, currently operates as a subscription-based service, and offers video streaming at a
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relatively low monthly price. With original content and a robust library, Netflix remains on top of
video-on-demand.” (NATH, 2019)
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Bibliography

Biggs, J. (2019). Size of the video streaming industry market | Meldium. [online] Meldium.com. Available
at: https://www.meldium.com/size-of-the-video-streaming-industry-market/ [Accessed 6 Oct. 2019].

clark, t. (2019). We compared Netflix, Hulu, Amazon, and HBO to find the best service for every kind of
viewer. [online] Business Insider. Available at: https://www.businessinsider.com/netflix-vs-hulu-vs-
amazon-vs-hbo-which-is-better-2019-9 [Accessed 6 Oct. 2019].

NATH, T. (2019). Hulu vs. Netflix vs. Amazon Prime Video: What's the Difference? [online] Investopedia.
Available at: https://www.investopedia.com/articles/personal-finance/121714/hulu-netflix-and-amazon-
instant-video-comparison.asp [Accessed 6 Oct. 2019].