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Khattab Al Qrarah, Victoria Rosca, Yousra Zaghdoud Bernichi, Ussenov Manas

NETFLIX

Digital Strategy Questions

Question–1. Which actions can you think of to innovate and improve Netflix' market offer and/or the

client experience / satisfaction related to it?

Being a well-known big company with good reputation as the one who made a disruptive innovation in the

movie rent or home video entertainment industry like Netflix will not keep you in the safe side spatially in high

dynamic environment like Netflix has. Unless you always keep searching for new ideas or continuous acts to

improve your capabilities, and here are some actions can Netflix pursue to innovate and improve the market

offer to keep the clients satisfied and also to avoid new comers kick out of the market:

1- We believe if Netflix start to embed a live show programs it would be a great win. Not only a new

window will be opened for the content basket but also it will be attractive for comics and musical acts

with revenue sharing for both Netflix and artists, which can diversify the service that Netflix provide

and also start a brand new market with new audience.

2- Personalization and on-demand viewing and streaming will be really a milestone for Netflix in the way

of future when it comes to entertainment. They are also part of the plan to have Netflix defeat its rivals

in entertainment world. The flexibility of internet TV doesn’t just open the doors to more diverse

programming, but also to the way that the stories are told in terms of length, languages and other

features that can make Netflix’ clients live the experience literally in their style and make them more

satisfied.

3- Until now, Netflix has preferred to rely on third parties such as Rokuand Xbox as hardware providers,

but if Netflix start to think about owning the whole users experience by building or producing its own

hardware device, this device could open the doors for premium Netflix model.“Members could get the

basic experience for the $7.99 per month you're paying now, or you could go all in with a Netflix set-top

box built to handle enhanced features such as bonus content for original shows, eventual live

programming, voice-activated search, and more” SeamusCondron said. Netflix is widely seen as a

disruptive service, therefore, it has the opportunity to move further and revolutionize the cable culture.

4- As Netflix builds its original content offerings, engaging viewers with second-screen experiences will

grow increasingly important in its ongoing strategy. Second-screen experiences from the likes of AMC

and HBO have been a mixed bag so far, but Netflix has an opportunity to learn from those networks and

design something that conforms to its content philosophy of releasing an entire season at once.

5- Netflix should do more efforts to build strong brand identity and improve member satisfaction and

loyalty, Netflix may not be able to attract or retain members, and Netflix operating results may be

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adversely affected. Netflix should believe that strong brand identity will be important in attracting and

retaining members who have a number of choices from which to obtain entertainment video. To build a

strong brand Netflix must continue to offer content and service features that their members value and

enjoy.

6- Netflix shouldutilize moretheir recommendation and merchandising technology or develop user

interfaces that maintain or increase member engagement with their service.

If the recommendation and merchandising technology does not enable them to predict and recommend

titles that members will enjoy or if they are unable to implement meaningful improvements thereto or

otherwise improve their user interfaces, their service may be less useful to the members. Such failures

could lead to member satisfaction may decrease, members may perceive their service to be of lower

value and their ability to attract and retain members may be negatively affected and the ability to

effectively merchandise and utilize our library will be also negatively affected.

Question – 2. Can you foresee Netflix loosing its dominant position? Via what kind of innovations or new

kind of providers / value propositions could this happen?

As the first innovative company in movie renting industry Netflix has been keeping its dominant position for

the last decade. Its dominance mainly was interesting because it sits in an ever-changing ecosystem populated

by old and new economy players. On one side, you have movie and TV studios that produce feature-length

movies , serialized TV shows, and on the other side, you have a rapidly-evolving set of computer-enabled

devices and data transmission systems that allow consumers to access the studios media content in virtually any

location with a power source and a fast Wifi connection. However, its possible that Netflix will probably loose

its dominance over the video-streaming business due the several main reasons:

1. Loosing its main providers. In October 2013 Netflix signed new partnership with Disney. The

partnership deepens the relationship between Netflix and Disney reached a deal to sell its theatrical

movies to Netflix starting in 2016 that is valued at several hundred million dollars. But it won’t be able

to stream new Disney movies until 2016. That includes the wildly popular Pixar titles. Amazon recently

inked a deal with A&E, which will give it access to programming from the A&E channel, the History

Channel, and Lifetime. (Amazon also reached a deal with Epix, giving it access to movies from

Paramount, MGM, and Lionsgate. Netflix has the same deal but anything that boosts a competitor’s

offerings is going to help draw customers away.

2. The new values of the competitors. Competing companies in video streaming industry would likely

add to their business models new values and services to stay more competitive in the market. As the

example, one of the most competing player in the industry cable channel HBO in 2015 will launch an

online service for viewing TV shows. Thus, the channel will cover the online audience and will compete

with the main streaming service US - Netflix. In addition, HBO recently struck a deal with Universal

Pictures that will make it—and its streaming service HBO Go—the exclusive outlet for those movies for

the next 10 years. HBO also has similar deals with other studios including Fox News and Warner Bros.

Which unfortunately for Netflix means that It will never have those movies. And there are rumblings

that HBO might decide to make its Go service available to consumers who don’t have cable. If that

happens, the whole market will go topsy-turvy, and Netflix will be that much less necessary for a lot of

people.

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3. Fast growing Chinese digital companies. Analysts estimate that four of the ten fastest-growing

companies operating in the digital business, represent China. These include the largest Chinese search

engine Baidu, Internet holding Tencent, developer tools in the field of information security and Qihoo

Internet giant Sina Corp. Future dominance of American companies, particularly Netflix, depends on

whether the Chinese companies can be successful outside of China. Chinese Internet companies are little

known in the international arena, but they have made great strides because in China the number of

Internet users is approximately 2.5 times greater than in the United States.

4. Innovative social media. In recent years It has been extremely trendy among the active internet users to

register and have their own social media account. For many years Facebook is dominating the social

landscape worldwide. But there still there are some local networks that don’t want to give up. So, how

the social media sites can be the reason for movie streaming companies like Netflix to loose their

dominance?

“Vkontakte” (VK) is the social network created by Russian IT student Pavel Durov in 2006. Its estimated that

by 2014 VK had 280 millions of users from all around the world (83 millions just from Russia and Ukraine),

but just 28 millions are active every day. The main countries using this social media which is often called

“Russian facebook” are all post soviet countries and Eastern Europe. Another element we should consider is

the massive presence of teenagers, a segment with low buying power; despite VK vice-president Ilya

Perekopskyi stated that more than 60% of users are over 25 and not students, it’s quite hard to believe so by

using the platform on daily basis. And the most important feature of VK, apart from being the first comer in the

tight national market, It offers a file-sharing system that allows users to easily find and download pirated

movies (dubbed in Russian),TV shows, live podcasts, sport shows and illegally download music for free. For

many people this is apparently enough to decide to not switch from VK to other movie streaming company like

Netflix. And if we consider the facts that it is free to register, easy to access, doesn’t need any fee, and covers

huge market (280 millions of costumers) which is growing rapidly, VK could be one of the reasons for Netflix

in loosing its dominance in the market.

Question-3. Can you think of other examples where traditional market leaders (like Blockbuster) were

wiped out by a newcomer (like Netflix) due to innovation of the product or the processes to deliver it to

clients or based on innovation of value capture methods?

Innovation is today’s main hot topic. Whether radical or incremental, more and more companies see this as

an important tool to keep their competitive advantage, be a first mover on the market, or sometime just survive

with today's rapid technological change. Even giants like Apple and IBM have to be careful and make choices

in order to stay on top.

However, there were some companies that no one thought to disappear one day, because of their size, or

thanks to a very strong brand name. For not having being able to take the innovative turning point, they failed,

losing their leading position.

According to Vijay Govindarajan, a professor at Dartmouth's Tuck School of Business and co-author of The

Other Side of Innovation:

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“Successful companies tend to fall into three traps that make the glory days fleeting.

First is the physical trap, in which big investments in old systems or equipment prevent the pursuit of fresher,

more relevant investments. There's a psychological trap, in which company leaders fixate on what made them

successful and fail to notice when something new is displacing it. Then there's the strategic trap, when a

company focuses purely on the marketplace of today and fails to anticipate the future. Some unlucky companies

manage a trifecta and fall into all three traps.”1

Here as some companies that once were innovative leaders in their industries, but had unfortunately lost their

position. Of course, not all of them are in the same situation, but they all have something in common: they had

missed some opportunities to keep on track, leaving their failure as a lesson to never be forgotten by today and

tomorrow’s companies and entrepreneurs.

Dell. While IBM and HP were still selling their product in stores, Dell decided to change this strategy: get rid of

intermediaries and sell its products directly to customers. This idea was a great success, especially when the

Internet arrived; Dell saw its sells increasing dramatically.

But Dell didn’t take into account the industry as a whole: customers wanted end product, not just the hardware,

and they also wanted to pay less. These two needs had been fulfilled by the Asian competition, offering mini-

laptops, smartphones, and other trendy products.

Today’s Dell still exist.

Eastman Kodak. Everyone knows about the unfortunate history of Kodak, which has failed to become digital

on time. For nearly a century, Kodak was the most successful company who was selling cameras (the Brownie

camera in 1900, Kodachrome color film, the handheld movie camera, and the easy-load Instamatic camera). But

Kodak’s missed a big opportunity: digitalization of cameras, but also some software, file sharing and third-

party apps. Since this failure, around the 1980s, Kodak had tried to expand into other industries, such as

pharmaceuticals, memory chips, healthcare imaging, document management, and so on. But it is not as

successful as it used to be, the price of its shares speaking for itself, being 90% lower than it was before the

failure.

Sony. Who does not recall the Sony Walkman, which was as famous as the iPod a few years ago (we won’t say

“today” because people tend to store their music on their smartphones today rather than buying an extra device

dedicated for this). More than this product, Sony dominated the market for a lot of other electronics products,

such as TVs, cameras, and so on. It was famous for its quality products. Sony also thought in terms of

diversification, with its movie and music networks (Sony Entertainments music, television, …) and this

diversification gave the opportunity to Sony to create a large catalogue of music and digital contents for its

devices, long time before Apple with ITunes, that the company didn’t catch. However, the electronic industry

was changing significantly: the shift from hardware to software, which makes the brain of the device for

1NEWMAN R. “10 Great Companies That Lost Their Edge”, U.S. News. Aug. 19, 2010.

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important than the circuitry. Sony did not exploit the opportunity and then, faster-moving competitors like LG,

Samsung, Vizio, Apple, and the various makers of cell phones have outpaced Sony.

Nokia. Nokia was one of the most significant players in the mobile telephony industry. Around 2000, the

company was at its peak of profitability, being a case study of a dynamic, market-leading corporation, with

sophisticated manufacturing process and valuable intellectual property. Although, in the last years, from half of

the global market share, Nokia’s share has surprisingly decreased to only 3%. In 2002, Nokia introduced the

Symbian OS, which at the beginning had a good market response until Apple launched the iOS in 2007 and

Samsung introduced Android in 2008, developed by Google. The two giants have quickly gained market share

and became two major leaders in the industry. Nokia was struggling to improve the Symbian, however, it lacked

of applications and user interface. Therefore, when the decline was unstoppable, Nokia decided to launch a new

product- the Lumia series with a Windows OS. At that time, Windows was new in the field and finally, the

problems that the OS had, led to the collapse of the mobile devices business and ultimately was sold in 2014 to

Microsoft for $5.44 billion. Analysts mention that perhaps, Lumia could have been a hit if it were launched on

Android platform. The main reasons for Nokia’s failure were the lack of innovation, wrong decisions and

powerful competitors. While Samsung and Apple started to focus on innovation as their core competence,

Nokia was still blind and not able to recognise the importance of product innovation like its competitors did,

therefore, it had missed the right opportunities. The company underestimated the importance of software,

paying more attention to hardware but also overestimated the strength of its brand, believing that it would be

able to catch up competitors. Nokia was also late to identify market trends and also to create consumer

anticipation in order to drive demand, like Apple successfully is doing. The failure of Nokia was very well

resumed by Frank Nuovo (former Vice President and Chief of Design at Nokia): “I look back and I think Nokia

was just a very big company that started to maintain its position more than innovate for new opportunities”.2

Cirque de Soleil. Nowadays, the traditional circus is almost gone, while Cirque de Soleil is a massive industry

because it simply has reinvented it by creating a new market or a blue ocean. Lion tamers, dancing elephants

and exotic beasts are eclipsed by the innovative trends of Cirque de Soleil. As the circus industry started to

decline because of the high expenses to keep and train animals and as other forms of entertainment were rising

(cinema, live sport events etc.), Cirque de Soleil took the best elements of the circus, like acrobatics, clowns and

combined them with its creative elements, such as storylines, musicals, opera, Broadway shows and theatre. In

this way, the company not only has changed the traditional vision of the circus, but also have changed its

audience, shifting the customer group from children to more mature and higher spending customers. In this

way, Cirque de Soleil made use of process innovation by implementing new methods through which to deliver

value and increase customer base. The company added new different features to its services and changed it into

something unseen. Thanks to its uniqueness, it also attracts the best talent from local circuses and constantly

reaches new fast-growing markets. Traditional circuses have almost disappeared, while Cirque de Soleil created

an attractive industry and has exploited its potential for growth, building its own market space and making

competition irrelevant.

Yahoo. An actual and relevant example are the search engines before Google, such as Magellan, Infoseek,

Direct Hit, AltaVista and many others. Yahoo was also directly affected after Google appeared, however, the

company has survived thanks to new products like Yahoo Finance, Flickr, Yahoo Answers, Yahoo News etc.

2 SMITH, P. “The Nokia insider who knows why it failed warns Apple it could be next”. Financial Review, 06 Sep 2014.

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Although, if we talk about search and information, Google is in everyone minds. Yahoo and Bing are fighting

hard to keep their visitors, meanwhile Google dominates at least 85% of the total search market. Many users

have changed to Google after using Yahoo, claiming that Google is definitely “smarter”. Yahoo was a directory

more than a search engine and could find less relevant results. Google’s success relies on its breakthrough

technology, through which have changed the paradigm of a search engine, increasing the stickiness of users by

providing a better experience. The loading time reduced significantly and right results were there. Yahoo’s

algorithm was not good enough to understand searches and it also continued to use the directory as alternative

when someone got the wrong results. Google built the brand and its own market first, thanks to the value it

provides: smart search, speed, simplified interface and user experience. After a strong usage was created, it was

easy to monetize and firms recognized unlimited opportunities to develop with Google Adwords.

In the aforementioned examples, it can be seen clearly how traditional leaders on the market were put aside

by new comers simply by deciding to put innovation at their core and focusing on creating a blue ocean, rather

than entering the tough competition race. Companies that once were on the edge, have fallen faster than ever

before due to the inability of keeping the pace with today’s technological change. Just as the conventional

Blockbuster was made obsolete by Netflix thanks to innovative methods of delivering value to customers, in the

same way many market leaders became outdated because of the lack of vision, rigidity and inability to adapt.

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References:

1. https://gigaom.com/2014/12/10/netflix-wants-to-hook-up-with-your-cable-company-in-2015/#

2. http://ir.netflix.com/secfiling.cfm?filingID=1065280-14-6&CIK=1065280

3. http://www.pcmag.com/article2/0,2817,2426451,00.asp

4. http://www.businessinsider.com/netflix-product-officer-neil-hunt-2014-6

5. http://www.techspot.com/news/51003-netflix-signs-movie-deal-with-disney-pixar-marvel.html

6. http://fortune.com/2013/01/22/why-netflix-cant-keep-winning/

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http://www.cbsnews.com/news/kodak-is-reborn-but-will-it-be-renewed/

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Dell-became-yesterdays-tech-giant.html

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15. SMITH, P. “The Nokia insider who knows why it failed warns Apple it could be next”. Financial Review, 06 Sep

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