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WIKI ANALYSIS
Netflix (NASDAQ: NFLX) is the world's largest video and television episode rental subscription service, having pioneered the model and charging customers a flat monthly fee for unlimited rentals without due dates, late fees, shipping fees or pay-per-view fees[1]. Their 50 regional shipping centers across the United States help almost 95% of their customers receive their DVDs within a day of shipping, while their rating system gives customers recommendations based on their rental history[2]. In fiscal year 2010, Netflix recorded revenues of $2.1 billion and net income of $161 million.
As of late, Netflix has focused on expanding its content base and international expansion. Netflix obtains content from studios, distributors and other suppliers because a lot of these license agreements give Netflix exclusive rights to a collection of titles. In 2010 it gained exclusive rights to stream Relativity Media movies and formed a five-year streaming deal with pay-TV network Epix[3][4].
Company Overview
Netflix is a subscriber based service that allows customers to rent DVDs via both direct mail and online streaming. A dot-com era creation, it was started in 1997 by Reed Hastings in Los Gatos, California. Through a sophisticated and automated supply chain and an effective customer rating system, it has honed its competitive edge over long-time competitor Blockbuster in the subscription-based online rental space.
Business Features
- Online Streaming: Netflix's core strategy is "to grow [their] streaming subscription business within the United States and globally."[5] Netflix subscribers have the ability to watch over 8,000 movies and TV episodes from the Netflix library directly on their TV via an Xbox 360, PS3, Wii or any other device that streams from Netflix. Subscribers can watch unlimited TV episodes and movies for a monthly fee of $7.99. [6]
- Netflix sends you your movies: Subscribers choose which movies they want to rent at www.netflix.com. They can create a queue of films online and when movies are returned the next movie on their queue is shipped out immediately.
- Free DVD shipping and postage: The cost of sending movies back to Netflix is included in the subscription. Each DVD is sent in a reusable envelope that is addressed to the nearest Netflix facility.
- No late fees: Subscribers can keep DVDs indefinitely. The only disadvantage to doing so is that the next movie in their queue won't be sent until they have fewer DVDs than their plan allows at home.
- Other Viewing Options: In addition to their online viewing service, Netflix released the Netflix box, a set-top unit built by Roku, in early 2008. The unit allows customers to view netflix movies directly on their home television without dealing with the by-mail rental process. In July 2008, Netflix announced that they would also begin streaming videos to Microsoft's Xbox 360 over the Xbox Live platform[7]. It is also possible to watch Netflix on the Nintendo Wii.
Trends and Forces
Opportunities to integrate with broadband-enabled devices allows for stable recurring revenue streams
Netflix has partnered up with different device manufacturers in an effort to integrate its platform into different broadband-enabled devices. Some of these partnerships are with Funai, Panasonic, Sanyo, Sharp, and Toshiba, which will allow Netflix to distribute its thousands of movies and TV episodes through the digital televisions of consumers[8]. Additionally, Apple released a Netflix app for the iPad, allowing mobile access to Netflix's library of movies and tv shows[9].
PPV, on-demand and TiVo undermine demand for the Netflix product
The emergence of new technology in the media industry is a potential obstacle to Netflix. Technologies such as high-definition pay-per-view, video on-demand, and DVR enhance people's options for home movie viewing and lessen the need to rent discs. Cable and satellite companies are continually enhancing these offerings to compete with each other, undermining Netflix's core business as they increase the library of movies that their customers can view for free with an on-demand subscription. Netflix will have to find an answer to the convenience of VOD and TiVo if it hopes to retain its market share in the long term.
The gradual popularity of online movie viewing forces Netflix to shift its focus to online streaming
In 2010, more subscribers watched movies via streaming than by DVD. Netflix has decided that going forward, it will be primarily a global streaming business, with the added feature of DVDs-by-mail in the U.S. [10]
Continued reliance on DVD shipments leaves Netflix at the mercy of the United States Postal Service (USPS)
Because Netflix is one of its largest corporate customers (accounting for approximately 1.3% of all first class mail deliveries), the USPS's pricing and distribution decisions can greatly affect Netflix's margins and customer satisfaction. As the USPS attempts to overcome billions in net losses stemming from the recession, some speculate that the USPS may eliminate mail delivery or raise postage prices[11]. With Saturday being a prime movie watching day and with postage expenses already amounting to $420 million for Netflix, the USPS's operating decisions have a integral role in Netflix's profitability and service.
Competition
The market for entertainment video is intensely competitive and subject to rapid change. New competitors may be able to launch new businesses at relatively low cost. Many consumers maintain simultaneous relationships with multiple entertainment video providers and can easily shift spending from one provider to another.
Principle Competitors
- Multichannel video programming distributors (MVPDs) with free TV Everywhere and VOD (video-on-demand) content including cable providers, such as Time Warner and Comcast; direct broadcast satellite providers, such as DIRECTV and Echostar; and telecommunication providers such as AT&T and Verizon;
- Internet movie and TV content providers, such as Apple’s iTunes, Amazon.com, Hulu.com and Google’s YouTube;
- DVD rental outlets and kiosk services, such as Blockbuster and Redbox;
- Entertainment video retailers, such as Best Buy, Wal-Mart and Amazon.com.
References
- ↑ NFLX 2008 10-K pg. 1
- ↑ "How Netflix Transformed the Home Entertainment Industry" The Epoch Times, 9/30/09
- ↑ "Netflix in talks with pay-TV network Epix to stream films from Paramount, MGM, Lionsgate for $1B," VentureBeat, 09/09/2010
- ↑ "Netflix beats cable networks, gains exclusive rights to stream Relativity Media movies," VentureBeat, 07/06/2010
- ↑ http://www.wikinvest.com/stock/Netflix_(NFLX)/Filing/10-K/2011/F94404643#toc132054_1
- ↑ www.netflix.com
- ↑ "Netflix Brings On-Demand Video to the Xbox: Another PC to TV Bridge", www.seekingalpha.com, July 16, 2008
- ↑ "Netflix Announces Multiple Partners to Instantly Stream Movies and TV Episodes from Netflix to the TV" Netflix Press Release, 01/07/10
- ↑ "Netflix For The iPad Is No Joke. It’s Very Real, And It’s Very Live," Techcrunch, 04/01/2010
- ↑ http://www.wikinvest.com/stock/Netflix_(NFLX)/Filing/10-K/2011/F94404643#toc132054_1
- ↑ "US Postal Service's Woes Impact Netflix," Trefis Investment Research, 05/17/10
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