Netflix’s SWOT Analysis
Netflix has over 93.8 million customers all around the world. Netflix’s gross profit margin for the second quarter in 2018 significantly improved compared to the same time a year ago. Even though their sales and net income increased significantly, the company is unable to grow at a faster pace in comparison to the competition (Seitz, 2018). To remain competitive, Netflix needs to evaluate its current standing as well as the competition. It is important for Netflix to understand where the business is now, which direction the business should go, and who the competitors are. One method the company can use to decide which direction to take the business is by conducting a strengths, weakness, opportunities, and threat (SWOT) analysis.
A SWOT analysis is a planning tool used to plan future projects, highlighting potential problems inside the business, and developing or refocusing advertising and marketing strategies (Schneider, 2015). By showing the business’ ability to carry out its goals; their internal assets such as what Netflix does well; and what advantages the company has over the competition will help the CEO and board members decide which course of action to take. Just as important is being able to find the company’s internal threats and weaknesses. Areas to consider are resources shortages, training requirements or technological requirements. Identifying weaknesses gives Netflix an idea of where the focus their efforts to meet the company’s goals. To determine the opportunities, Netflix Incorporated needs to keep in mind the current and future technological, political, demographic, and environmental changes. The last step is to address external threats that will affect the business.
Netflix is an American entertainment company that has become a leading internet television provider. The company has a member base of about 93.8 million members over 190 countries. In the United States alone, Netflix has over 50 million members, and the numbers keep growing. Founded by Reed Hastings and Marc Randolph in 1997, Netflix quickly rose to the top taking local movie rental establishments out of business. Netflix’s headquarters is located in Los Gatos, California. In the beginning, Netflix profits came from streaming media, and offering DVDs for sale and rent. Since, the company is producing films, and expanding into television (Sharma, 2018).
Netflix’s internal factors SWOT details the strengths, weaknesses, opportunities, and threats of the streaming mogul. The analysis reviews Netflix trajectory from online movie streaming to DVD rentals. It also analyses the company’s current standing and potential in producing their own shows, videos, and now movies. The competition is threatening Netflix continued success. Netflix’s management needs to explore the opportunities and figure out where they need to make changes.
Centralized costs and limited variable costs per geography make up Netflix’s business model. Global distribution provides a data feedback loop that will allow Netflix to invest in content, marketing, and product development more efficiently than key competitors (Seitz, 2016). In order to remain competitive, Netflix needs to research and understand the industry in its entirety, and respond to the new competitor. Netflix’s main competitors are well-financed corporations with proven success in other markets. These competitors include Apple, Amazon, Google, cable networks, and other streaming services.
Netflix does have a huge advantage over their competitors, the fact that it leads the way for the video streaming market. Even though their current online DVD rental services and instant streaming service continues to boom, the company must decide on how they will continue to differentiate the business from the competition.
– Leading video streaming network presence in over 190 countries
– Increased in membership – leads to business growth
– Strong focus on innovation in technology and development
– Produces local content, distributes globally over own network
– Customers Service – Old content suppliers are becoming Netflix’s competitors
– User’s dependency on release of new famous shows
– Decrease in free cash flow
– New content licensing costs far exceed streaming costs
– Original investment content leads to downsizing content library
– Shifting most of the company’s content to the world wide web or internet offers huge opportunity for Netflix
– New projects – acquisitions/mergers
– Global distribution
– Growing international market
– Business expenses are increasing both in the United States and abroad
– DVD demand is decreasing, shipping costs increasing
– Increase in technology, development, and administrative expenses
– Netflix’s dependency on international revenue due to fluctuating rates
– Netflix’s price hikes can lead customers to switch to the competitors services
Strengths. World’s leading video streaming network – in 2017, Netflix had over 93 million subscribers. Netflix provides services to customers in 190 countries (Sharma, 2018). Netflix major strength is their ability to stream online, allowing consumers to access movies directly through smart televisions. Content varies in each country according to the taste and preference of the country. Netflix offers 7,500 videos, which is two times more than its primary rival, Amazon Prime. Rich technologies protect and support Netflix network.
Increase in membership helps the business grow. Netflix is continuing to grow their streaming service both domestically and internationally. In 2017, the company grew 33 percent year-on-year growth in the global subscriber department. Their operating income doubled to $209 million. By the end of fiscal year 2017 third quarter, paid membership increased to 104.2 million from 83.28 million the previous year (Sharma, 2018). The company is working to improve the international market experience in order to increase profitability and enable further investment in potential growth markets.
Netflix consistent focus on innovation and technology helps them provide customers the best user experience. Netflix is innovating to bring the best results to its subscribers by focusing on new languages, payment options and more features to satisfy the needs of different people across the globe. To accomplish this the company is entering into new partnerships with mobile and television operators, as well as device makers. It is also working on improving the mobile experience by investing in network servers and internet service providers (Bajpai, 2016).
Netflix has managed to build a sizeable, sustainable competitive advantage that is contributing to their success. One of the competitive advantage is their breakthrough into movie and show production. Netflix produces some blockbuster television series like Narco and House of Cards as well as original movies. To sustain this competitive advantage, Netflix invested in a couple acquisition/merger projects. In their endeavor to produce original content, Netflix bought Millarworld. A comic book publisher, the purchase of Millarwood gives Netflix access to greater content (Sharma, 2018). In 2016, Netflix partnered with Univision to broadcast the first season of their original show Marcos to test whether airing old seasons on traditional TV will lure people to sign up for Netflix service ahead of next season.
Weaknesses. The competitor’s business models are similar to Netflix. Competitors like Hulu, Amazon, and other similar competitors spend close to what Netflix spends to access content. Having said this, these competitors are not the major concern. The main competitors are brands like Google and Apple; these competitors have the cash and customer base to put Netflix out of business (Jalan, 2016).
In 2015 Netflix’s rate on return (ROA) decreased by nine percent. This implies that Netflix is spending more cash on acquiring content at a rate that is higher than the rate of amortization for their streaming content library (Jalan, 2016). In addition to a decrease in ROA, Netflix available cash has also decreased. The company invested heavily into creating unique content. The company’s investment in producing original content continues to rise. Because of original investment content Netflix had to downsize content library. Netflix let go of its deal with Epix, which means that the company will not stream the latest episodes of the Hunger Games or Transformers (Jalan, 2016).
Netflix Opportunities. The international market is the new engine for Netflix growth. Original content is something subscribers have come to love and expect more of from Netflix. Netflix needs to continue increase the content volume, as well as widening the coverage and offering a range of programs. A focus area for Netflix needs to be on cultivating strategic partners, television manufacturers, mobile device manufacturers, and electronic retailers.
Netflix maintains a level of convenience by its unique distribution model. The lack of brick-and-mortar locations allows Netflix to focus on internet distribution and shipping using the United States Postal Service (Schneider, 2015). Deliver to consumers is quick and reliable. Consumers have a choice of streaming online or order DVDs with overnight delivery. The framework and technology in place enables Netflix to minimize errors, service interruption, and delays. Being that this is not a perfect world, Netflix keeps customers happy by compensating them with free months, reducing billing fees, and other promotions (Seitz, 2016).
Threats to Netflix Operations. Netflix uses warehouses to distribute its inventory of DVDs. The company also uses trucks to deliver DVDs to its customers. The costs of warehouse rentals, truck maintenance, drivers, etc. are high. Netflix does not charge late fees or delivery fees for the DVD service. This is an area Netflix needs to focus to determine if this a service worth the expenses.
As technology changes, Netflix needs to upgrade and maintain the technological infrastructure. In addition, the entertainment industry is experiencing rapid growth and innovation with the introduction of three-dimensional televisions and the rising popularity of streaming content. The content for traditional DVDs is declining, as broadband speeds become faster and cheaper.
Netflix Priority List
One of the priorities for Netflix is the ability to attract new customers and increasing the number of subscribers. The number of people subscribing to Netflix in the United States is approaching saturation and growth is starting to stagnate. As a result, Netflix is investing in expanding abroad. The company has expanded into countries like Japan, and plans to expand into other Asian countries (Jalan, 2016). One market to explore and find a way to penetrate is China and India; two densely populated markets that can lead to significant subscriber growth. A global presence presents an opportunity for growth. New market penetration takes time; the company must learn to adapt and cater to the needs of new markets. Netflix will needs to research and analyze new markets to decide if the return on investment is worth the risks.
Improving and maintaining the infrastructure needs to be a priority for Netflix. In 2012, Netflix suffered a massive infrastructure failure. Since then, the company improved their technology. Netflix operates its own CDN called Open Connect, which allows massive bandwidth costs and improve streaming (Jalan, 2016). Netflix is also investing in a project called Chaos Monkey; it randomly takes virtual machines offline to ensure Netflix can survive network failures without affecting the customers. The company also backs its content on Google Cloud Storage. In the event of a natural disaster or insider threat failure Netflix is able to recover and fix issues (Jalan, 2016).
Focus on customer service will help the company retain current customers and attract new ones. The Data Analytics is a program Netflix uses to figure out what the customer wants. Data mining helps Netflix determine the cost per hour viewed for each piece of licensed content (Jalan, 2016). Data Analytics helps Netflix determine what content viewers pay to see. Netflix compiles the data to estimate the expected hours of viewing for each movie or show. Netflix uses the information during contract negotiations. Another use for the data is to help Netflix determine what type of original content the company should create. This is one of the reasons Netflix is having a high rate of success in creating new, original content.
Creating new opportunities should be at the top of Netflix list. Netflix is working with premier hotels, like Marriot, to provide high speed, free uninterrupted content. The company has a dedicated app to internet-enabled television across hotels. The app allows direct access to Netflix content to hotel guests. Existing customers can use their subscription; otherwise, guests can sign up for a new account. This ensures new customer acquisition for Netflix (Jalan, 2016).
Netflix Readiness for the Future
Netflix business strategy is focuses on the company’s future readiness through advances technology and content vision. To remain the top service provider, Netflix needs to review their two main cost centers to find ways to reduce costs while continuing to provide a high level of service. Creating advanced technology infrastructure to improve video streaming is expensive. Maintaining server space is a high cost commitment. In addition to that, Netflix spent a lot of money in its Data Analytics infrastructure. The Data Analytics infrastructure allows Netflix to collect data on their customer’s content consumption habits. The company uses the data to customize the content and offer customers what they want.
Another factor that affects Netflix’s bottom line is the licensing costs. Content licensing costs with television networks, filmmakers, and other content owners makes up Netflix’s biggest expense (Jalan, 2016). Netflix spends nearly $200 million a year to gain access to Disney films and television programing. Until about 4 years ago, Netflix’s content was, mainly movies and television series the company paid to have streaming rights. Today Netflix’s commitment to original content consists of 24 episodic series, documentaries, comedy specials, and feature films. The company is investing in several more series and movies.
One factor that drives production costs is the costs of rental space. Netflix leases from other production companies the space to film their original content. Netflix is investing in real state to build its own studios. Disney Studio collaborated with Netflix to produce original content for international markets (Jalan, 2016). Making the right decisions is key to continued success. By using data the Data Analytics program gathers, Netflix is able to find the right genres and talent that the audience likes and creates connection – connecting with the shows.
Subscribers love Netflix’s original content. Their original content helps Netflix maintain a competitive advantage in the market by attracting more people to its platform. Netflix is working to increase the sheer volume of content. It is also widening the breadth by bringing in a range of programs. Netflix is innovating to bring the best results to its subscribers by focusing on new language, payment options, and more features to satisfy the needs of different people across the globe. To do this, Netflix is continuing to collaborate with mobile and television operators. Netflix is also working to improve the mobile experience, as mobile devices are the primary medium of accessing the internet in many countries (Jalan, 2018).
The internet and broadband in the United States is changing. Homes that use high-speed internet have significantly decreased in the last few years. Today, most consumers are using their mobile device to access the content online. With free access to video platforms like YouTube and Apple iTunes, competition for viewership has increased; an area Netflix is focusing on to improving their routers and streaming speed. Netflix change in their business model is key to maintaining the readiness of the company. Through innovation in technology and content Netflix will continue to be one of the top streaming service providers both in the United States and abroad.