Netflix: An Analysis

The preparation of the following report is anchored on a detailed analysis and evaluation of multiple data sources which are related to the firm of interest. Some of the preferable data sources include sales reports, annually compiled reports, supply and demand, data on production cost, and most importantly, an analysis of the company’s market share. In other words, this report will consider the past, evaluate the present, and predict the future of Netflix, Inc. The information on elements enlisted above is critical to the future success of any business-oriented firm. In this analysis, sales trends, profitability, and market share are just a few of the topics that will be discussed. All these factors are of importance to any firm which sets its eyes on a reputable business. A firm such as Netflix needs to conduct serious analysis of such factors to ensure continuous growth and sustainability of its business undertakings.

Introduction

Over the last few decades, the emergence of new technology has significantly brought change to the world. The modern technology has significantly impacted how humans do things, especially in a positive way. The entertainment sector has not been left behind by this shift. Before this shift, movies were being made and launched in theatres. They were then released on VHS cassettes shortly after the theatres became outdated. As technology continued to advance, television and movie productions were released using DVD’s and sold to the audience. If this trend continues, the next technological advancement in the entertainment industry will be media streaming. With the availability of various electronic devices like mobile phones and computers, companies like Netflix have made it possible for people to stream entertainment material within seconds and at the comfort of their houses. Netflix Inc. is the most extensive internet television network in the world. The television network has more than 75 million registered streaming members who are located in approximately 190 countries around the globe. The members stream over 125 million hours of movies and TV shoes per day including feature films, documentaries, and original series (Valentin, E. K. 2014). This research paper will aim at studying the costs of production for Netflix Inc. by conducting an analysis of the charges the firm incur, its trends, and how this affects Netflix as a business firm. Also, it will critically analyse and explore the overall markets for the firm such as the market share, barriers of entry in this market and the market structure that Netflix Inc. operates within. Finally, there will be a recommendation and suggestions on how Netflix can manage its future production by combining the data imparted in the article. Recommendations will follow that will be informative as to how the corporation can continue to lead the market of streaming television services successfully. History of Netflix, Inc. Netflix, Inc. provides commercial-free streaming services for TV shows, movies, documentaries, and original series.

However, the company did not start that way. The company began in 1997 when Reed Hastings created an online movie rental service. The corporation became a household name two years later when the popular subscription service started. Users created an account and selected which movies they wanted to be delivered to their doorstep, with no limit being placed on how many DVDs were borrowed for the monthly fee. Netflix began to crush competitors (i. e. Blockbuster) and went public in 2002, at which time had 600,000 users. Three years later, that number skyrocketed to 4. 2 million. And in 2007, Netflix changed the playing field entirely. The notorious streaming service began, providing instant access to titles via a personal computer, from the comfort of one’s home- without having to wait for the arrival of DVDs. In 2010, the firm went international, beginning in Canada. Currently, Netflix has over 104 million-plus users, globally. Though there are numerous perks to utilising this firm’s streaming services, many users are fans of the “no commitment” notion, being able to cancel the service at any time- no questions asked. Three different tiers of membership are offered, and all come with one month free to try the service and ultimately get hooked. While the firm still offers the original DVD subscription, the availability of being able to stream instantly, on virtually any device with internet connection, is appealing to people that have become accustomed to such an instantaneous world. Netflix has also entered into contractual agreements to have their “app” pre-installed on television and smartphones. In November last year, the corporations responded yet again to the demands of its customers- downloadable content, which thus eliminates the required internet connection. This feature can be convenient for travellers, especially in areas where a strong connection isn’t available, as well as when one is not available at all. (Spangler)

Supply and Demand Conditions

Based on the graph below, the trend from the past year shows that sales have increased indicating that demand for the Netflix service is up. Oddly enough, the trend depicts demand to be growing, while Netflix prices keep improving over time. This defies the Law of Demand. However, this correlates with the Law of Supply- considering the costs Netflix incurs for the licenses to use material from major networks, as well as the cost to produce their original content. In 2016 Netflix raised the monthly subscription fee to 11. 99/month for the most expensive service. (Goldman)

In the instance prices continue to rise higher or more often than competitors, Netflix will begin to see a decline in subscribers. If users can find a similar replacement for a lower cost, it would only make sense to switch to the competition’s services. Careful considerations must be made to retain users in the inevitable instance of a price increase, due to the rise of production prices- which will be discussed further later in this report. Governments have not turned a blind eye to the rising demand for streaming services either. Many states and cities are planning to apply sales tax laws to streaming video, as well as e-books, games and mobile apps. The reasoning behind this tax is that the concept is generally the same as plain old cable television. Electricity is still used, and sales are yet being made- and states want a cut of those sales. Pennsylvania implemented this tax in August 2016, and if increasingly more states do the same, Netflix may be forced to raise prices again. (Povich)

Price Elasticity of Demand

The supply and demand for Netflix’s streaming services seem to lean towards inelasticity. Considering that the total revenue continues to increase. Moreover, the firm does not enjoy absolute dominance since there exist other firms such as Amazon and Hulu which offer the same services. Hulu is the most prioritised alternative to Netflix in the provision of the same services. The two firms tend to almost run on the same monthly budget. Trade-offs that exist between the two firms can only be weighed and become significant depending on a customer’s personal preference. For instance, customers would need to recognise that Hulu has originality with some of its contents that it has independently produced, airs more first-run television shows where episodes are made available on the site for a watch for the one-week duration as soon as they are broadcasted on the television. However, they have to live with the fact advertisements are rampant throughout their programs (Bond). Netflix enjoys a broad market for the services they offer with a diverse type of consumers subscribe to the service. Been the most preferred provider of the streaming services, its customers visit its site amid efforts to explore contents that will fulfil their entertainment needs. I know a broad array of people who enjoy both the licensed material, as well as the original shows/movies that the service offers. At the small price of $11. 99/month, the price does not consume a large portion of most consumers’ budget. If Netflix was to raise its service cost again, the increase in price could have an immense effect on service demand depending on how the customers will respond. In the past, Netflix has raised the price of subscription by sixty per cent, and as a result, lost approximately 810,000 customers.

However, a couple of years later, the service had gained over eleven million subscribers following the price increase. Executives at Netflix had misjudged and did a regrettable miscalculation on the elasticity of demand by failing to recognise the availability of other players in the business who would be preferred by customers who felt dissatisfied by their services. According to the concept of price elasticity of demand, the change in price must be in correlation to the amount of demand. If the competing streaming firms continue to gain subscribers, the elasticity of demand will increase since there are more available substitutes. The corporation does have one determinant on its side, more so than others. Streaming television services are not usually considered a necessity, but since Netflix has become known for “binge-watching” and is quite habit forming, it has become a necessity to many users. (quick MBA)

If Netflix announced a dramatic price increase, the corporation might lose subscribers. Relying on information from previous trends there is high confidence that most of the customers will likely remain loyal to the service provider. However, competition is stiff in the market. Customers always choose a service provider who suits their need at the best price. And whenever they subscribe to a particular provider and feels some discomforts, they are still free to switch to other providers depending on the kind of services they prefer. Therefore, it is important for Netflix to maintain price range that is affordable to its customers and that will not compel Netflix users to try out other alternative streaming sites.

As the trends above represent, costs that Netflix, Inc. has to put up with have risen since 2013. Costs of goods sold (COGS) represents services such as exclusively produced content, advertising, employees, and licensing agreements. Given the increased popularity of the firm, the costs of running the business have also heightened. Currently, Netflix has 104 million users which is a tremendous increase compared to the 600,000 subscribers the company had in 2002. Additionally, licensing cost has increased over the past decade due to the ever-growing popularity of the streaming services. In 2018 alone, the firm has set aside a hooping amount of six billion dollars from its annual budget which will be purposefully used in the licensing of its contents both non-exclusive and exclusive ones. As of May 2017, Netflix, Incorporated is worth 61. 6 billion dollars, and according to Forbes, is ranked at number 5 of The World’s Most Innovative Companies. Forbes also highlights that the growth and profitability of Netflix have grown continuously in each year despite a large amount of cost that the firm incurs.

In the June 2017, the total revenue in the second quarter amounted to a total of two million and eight hundred thousand dollars, while the total cost incurred was about one million and nine hundred thousand dollars which indicated a profitable quarter for the firm. Netflix operation incurs fixed costs which are always present in every business year. The firm has fixed costs due to activities such as service marketing and advertising, payments for employees’ salaries, business licensing, warehouse leasing and payment for office space. In 2017, for example, the firm’s marketing budget amounted to $274,000 while in the same year $267,000 was used in technological development. There exists a constant variation of such costs, for instance, varying cost of business licensing agreements. Through an annual report brought forth in February 2014, Netflix indicated that the operating flexibility was hindered by the nature of their content licenses being of long-term and fixed cost which directly affects the liquidity and the expected results of operations. ” It has since been believed that Netflix has decided to maintain a broad scope of their focus on creating original content since the cost of licensing agreements surpasses the expense of the expenses of producing their content. Original content will also help to retain subscribers since it is content that cannot be found with a competitor.

Overall Market

As depicted below, a study compiled by Datasmiths in 2016 delineates that Netflix controls 51. 1% of the overall market space in the provision of streaming services. The closest rival to Netflix is Amazon Prime Video which enjoys a market share of 24. 8%. This statistics indicate that Netflix controls a considerable portion in the marketplace as other competitors in the business struggle to increase their significance in the market. Moreover, this pie chart shows that other competitors of Netflix other than Amazon are struggling for the well-known slice of the chart. Such statistics indicate that Netflix is the most preferred service provider with most customers relying on their services hence creating a high demand for the services.

Barriers to entry into the market of online-based streaming services are quite high, considering a corporation would need an excessive amount of capital to start up, along with the connections with networks to be able to negotiate licensing agreements. (Rossolillo) There would need to be a large IT team, as well as an exceptional marketing team to get the brand off the ground. There are already more than a few competitors in the market, the only one of which even remotely threatens Netflix’s market share is Amazon. The likelihood of a new entrant to the market is low, and the threat would not be imminent to Netflix since it is an established corporation with a high market value. Entry in the streaming business is never easy. Establishing firms providing similar services to Netflix and successfully penetrate the market is never a piece of cake. Therefore, limited competition in the business making Netflix oligopolistic.

There are a limited number of competitors, and thus Netflix can influence potential subscribers quite easily. By focusing on original content, Netflix creates a unique element that cannot be found on Hulu, Amazon Prime, or any of their other competitors’ services. For example, Orange is the New Black had nineteen Emmy nominations this year alone- a show that is a Netflix Original and can only be viewed as a subscriber. (Emmys)With the market for streaming services becoming more popular every year, Netflix needs to remain vigilant to stay ahead of their competitors. In a letter to shareholders dated July 17, 2017, Netflix shared the belief that the answer to this is to continue putting more emphasis on the generation of original content which will not necessarily call for considerable expenses in licensing. By doing so, the firm will reduce the cost incurred in running a business and consequently increase the profitability of services provided. This theory seems to be proving successful. The letter also highlighted a milestone that 27 of their original movies and series has earned them ninety-one Emmy nominations.

Recommendation

Considering the 91 Emmy nods, the Netflix management team made a wise decision to focus on original content. If the company continues to remain focused on an area that is proving to be profitable, profitability is sure to increase. The market share also needs to be monitored, as Amazon Prime can quickly gain a more significant share. In the latest news, it was announced that Disney would be ending their partnership with Netflix in 2019. While Netflix has time to make up for this potentially significant loss, it will be a tricky situation. Disney is attempting to enter the market and has the resources to do so. Netflix must create a following with additional content or new licensing agreements. A watchful eye also needs to be kept on Hulu, which would be the closest available replacement. But when Netflix continue to concentrate on the production of original content, the firm will offer content that competitors are not in a position to provide. Uniqueness in the business will always give Netflix a competitive advantage ahead of its competitors. Most Netflix users will remain loyal with good services even with increased prices. The service is essential to most customers especially given the recent trend “cutting the cable”- which will keep demand for Netflix high, and ensure continued growth of the firm.

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