Netflix Leading with Data:

The Emergence of Data-Driven Video

Jason C. H. Chen, Ph.D.

Professor of MIS
School of Business Administration
Gonzaga University
Spokane, WA 99258
chen@jepson.gonzaga.edu
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices
 The Case
Learning Objective: To examine the benefits and risks of
investment in analytical technology as a means for mining
customer data for business insights. Students will develop a
strategy position for Netflix's investment in technology and its
digital media business. Students must also consider how new
corporate partnerships and changes to the customer channel
model will allow the company to prosper in the highly
competitive digital space.
Subjects Covered: Analytics; Data mining; Databases;
Marketing; Strategy; Technology
Setting:
Geographic: United States (2000s)
Industry: Media & telecommunications

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices 2
 The Case Synopsis
Description: By 2009 Netflix had all but trounced its traditional
bricks-and-mortar competitors in the video rental industry. Since
its founding in the late 1990s, the company had changed the face
of the industry and threatened the existence of such entrenched
giants as Blockbuster, in large part because of its easy-to-
understand subscription model, policy of no late fees, and use of
analytics to leverage customer data to provide a superior customer
experience and grow its e-commerce media platform.
Netflix's investment in data collection, IT systems, and advanced
analytics such as proprietary data mining techniques and
algorithms for customer and product matching played a crucial role
in both its strategy and success. However, the explosive growth of
the digital media market presents a serious challenge for Netflix's
business going forward.
How will its analytics, customer data, and customer interaction
models play a role in the future of the digital media space? Will it
be able to stand up to competition from more seasoned players in
the digital market, such as Amazon and Apple? What position must
Netflix take in order to successfully compete in this digital arena?

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices 3
 Information System Strategy Triangle

~Become premier videos rental store

~Web-based home delivered video rental business
~Convenient service (quickly delivered movies and no late fee)
Business (Firm)
Strategy

Organizational Strategy IS/IT Strategy

~ Long-tail selection and variety ~ Internet (technology-
~ Relationship with movie houses based)
~ Employee management ~ Using technology to
~ Compete in physical DVD rentals and harness data and thereby
digital streaming service market better serve customers and N
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices vendors
 Case Questions (for Leading Data case)
1. In its competition with Netflix, where did Blockbuster go wrong? How was the
use of customer data a key differentiator? How might Blockbuster have better
positioned itself against Netflix?
2. What are the core competencies/capabilities of Netflixs current business model
(primarily DVD-by-mail with an online component)? Assess the value of
Netflixs business as described in the case.
3. What effects will the rise of the VOD market likely have on Netflixs business
model? How does VOD threaten Netflixs business? What opportunities does it
present?
4. Which of Netflixs current competencies can it best leverage as a competitive
advantage in VOD? Which might be liabilities? (For this question, refer to the
Comparing Value Drivers in the Video Rental Market section.)
5. What kind of partnerships should Netflix prioritize: partnerships with content
providers or with hardware/device manufacturers?
6. What factors led to Redboxs growth? How and why was it able to capture
market already dominated by big players such as Blockbuster and Netflix?
(extra from the case , you need to do research for this question, especially, if
you do not know Redbox)

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices 5
 #1 & #2
1. In its competition with Netflix, where did
Blockbuster go wrong? How was the use of
customer data a key differentiator? How
might Blockbuster have better positioned
itself against Netflix?
2. What are the core competencies of
Netflixs current business model (primarily
DVD-by-mail with an online component)?
Assess the value of Netflixs business as
described in the case.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices 6
 Movie Rental Business: Blockbuster,
Netflix, and Redbox
Jim Keyes, CEO of Dallas-based Blockbuster Inc., was facing the
biggest challenge of his career. In March 2010 Keyes was
meeting with Hollywood studios in an effort to negotiate better
terms for the $1 billion worth of merchandise Blockbuster had
purchased the year before. In recent years, Blockbuster's share of
the video rental market had been sharply decreasing in the face of
competitors such as the low-cost, convenient Redbox vending
machines and mail-order and video-on-demand service Netflix.
While Blockbuster's market capitalization had dropped 47 percent
to $62 million in 2009, Netflix's had shot up 55 percent to $3.9
billion that year. The only hope for Blockbuster, as Keyes saw it,
was to shift its business model from primarily brick-and-mortar
physical DVD rentals to increased digital and mail-order video
delivery.

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices 7
 Why Blockbuster Lost
1 Slow & Inadequate Response
No Late Fees program was misleading
Total Access program was not well integrated customers had to maintain
separate accounts for the Web-based system and the store
Debuted in 2006!

2
Structural Issues
Stores were franchise-based and Web site was maintained by corporate
Capex requirements for starting a separate Web-based logistics system to
deliver DVDs by mail
3
Lack of Information Systems
Lack of knowledge about its customers preferences and behaviors
Lack of an appropriate CRM system

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices 8
 Why Netflix Won
Netflixs core capabilities

Flexibility Selection / Logistics Convenience Customer Insights

Subscription No physical Mail delivery Cinematch

model no late stores allowed obviated the need collaborative
fees! deep selection in to drive to bricks- filtering
Customers could a wide variety of and-mortar stores algorithms aided
rent and watch genres (new way: the discovery
Focus on logistics delivery by process better
movies on their
allowed Netflix to Broadband digital customer
own schedules streams) experience
not only have a
broad selection Queuing system Recommendation
across genres and on Web site system and
deep selection allowed analytics allowed
among popular customers to have deeper
movies, but also a constant flow of understanding of
to efficiently get movies customer trends,
films to customers which let Netflix
adapt better and
more quickly
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices
 #3 & #4
3. What effects will the rise of the VOD market
likely have on Netflixs business model? How
does VOD threaten Netflixs business? What
opportunities does it present?
4. Which of Netflixs current competencies can
it best leverage as a competitive advantage in
VOD? Which might be liabilities?

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices 10
 Impact of VOD Market Growth on Netflix
Business Model
Impact on Netflix business model
Ability to license its platform
Be the benchmark in movie
Opportunities streaming
Higher impact of Netflixs
existing CRM system
Growth
of VOD
market
Current physical distribution
channel will become a liability
Competitors like Apple, which
Threats
has the know-how to sell online
and holds a huge customer
database and brand equity, will
become a threat
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices
Shift organizational focus
from logistic efficiency to
technology excellence
Need to invest in owning a
platform to provide the
service
Shift investment from
logistics to technology
Continue to build the
Netflix brand as an instant
provider of movies from
studios to customers
homes
Continue to invest in
customer loyalty and CRM
solutions 11
 Netflix Competitive Advantages for VOD Market
Netflixs core competencies to succeed in VOD market Netflixs weaknesses for VOD market

Brand equity
Wide and
selections customer Warehouse
relationships /
facilities
Recommend
ation tool
and
customer
knowledge
Employee
overhead

Value in VOD
market
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices 12
 #5

5. What kind of partnerships should Netflix

prioritize: partnerships with content
providers or with hardware/device
manufacturers?

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices 13
 Partnership Prioritization: Parallel Tracking
Netflix should not limit itself; goal is to be a service provider, not a content producer or a hardware manufacturer.
Dont compete in areas where Netflix is at point of parity; compete where Netflix has advantages (i.e.,
recommendation algorithm, user community). Amazon and Apple are strong in delivery and devices but weak in
recommendations and user community.
Roll up Roku effort under umbrella of device partnerships; devote resources across all initiatives evenly.
Becoming the service provider and content recommender on all cable platforms is a top priority.
Assume that movie studios and other content producers will want to distribute via Netflix; it is in their best interest.
Google needs to monetize and distribute YouTube; opportunity for strategic partnership.

Hardware Software/Platform Content Producer

Partnerships Partnerships Partnerships

Comcast and
Roku other cable Movie studios
operators / ISPs

Google (as a
Priority

Smart phone YouTube

Television
ecosystems syndicator) studios / networks

Independent producers
Hotels, airlines, (perhaps via YouTube
TV venues, and fulfillment / syndication
manufacturers events partnership with
Google)
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices 14
 The days of the set-top box are surely numbered with more televisions than
ever either on walls or so slim that they sit practically next to them, there simply
isnt the space that there used to be. But theres still a burgeoning demand for
boxes we plug in to TVs so that we can all get access to more TV, films and
games., from Sky and Virgin Media to a host of boxes such as Apple TV. Roku is
the most popular in America and finally its launched in the UK.

At just 84mm x 84mm x 23mm, its tiny and only 85g but theres still plenty of
room for an HDMI connection and a wireless adapter to connect to the web.
Theres an Ethernet port, AV out and a USB port too.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices
 #6

6. What factors led to Redboxs growth?

How and why was it able to capture market
already dominated by big players such as
Blockbuster and Netflix? (extra from the
case , you need to do research for this
question, especially, if you do not know
Redbox)

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices 16
 More on Blockbuster
The only hope for Blockbuster was to shift its business model
from primarily brick-and-mortar physical DVD rentals to
increased digital and mail-order video delivery.
Consumers still made frequent purchases of DVDs at its
stores-purchases which were much more profitable for
studios than the rentals that remained Blockbuster's primary
business. Blockbuster had made efforts at making its
business model more nimble, but the results had been
disappointing, and its debt continued to skyrocket.
By the end of 2009, the company's debt had climbed to $856
million, its share of the $6.5 billion video rental business had
fallen to 27 percent, and its revenues had tumbled 23 percent
to $4.1 billion.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices 17
Three Essentials for a Successful Enterprise
1. Business model
a. Customers could rent and watch movies on their own schedules
b. Subscription model friendly and no late fees!

2. Core Competency
a. Wide selections
b. Brand equity and customer relationships
c. Recommendation tool and customer knowledge
3. Execution
a. Reed Hastings, a visionary leader.
b. Understand that they should meet potential challenges while
maintaining Netflixs profitable core business.

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices 18
 Conclusion

The key to successful business on the Internet

is not the formulation of a conceptual strategy
but the execution of that strategy.
To execute effectively, content ownership has
to be exploited..

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices 19