Netflix Uses Technology to Change How we Watch Videos When Netflix was founded in 1997 in the US, the movie rental giant Blockbuster had thousands of stores from coast to coast, filled to the rafters with video cassettes ready for immediate rental to customers. Netflix had a different vision from this well-established, wellfinanced competitor. Looking at the recent development of DVD technology, Netflix saw an opportunity to change the way consumers rent movies. The entrepreneurial built its marketing strategy around the convenience and low cost of renting DVDs by mail, for one low monthly subscription fee. Instead of going to a local store to pick out a movie, subscribers logged onto the Netflix website to browse the DVD offerings and click to rent. Within a day or two, the DVD would arrive in the customer’s mailbox, complete with a self-mailer to return the DVD. And, unlike any other movie rental service, Netflix customers were invited to rate each movie via the Netflix website, after which they’d see recommendations tailored to their individual interests. Fast-forward to the 21st century. Video cassettes are all but obsolete, and Blockbuster, once the dominant brand in movie rentals, is closing down in the US as consumer demand moves to digital distribution for entertainment. In Australia both Blockbuster and Video Ezy still have a brand presence, but their future is uncertain. Both brands have been prompted to reassess their distribution channels. You may notice more DVD rental ‘kiosks’ such as ‘Video Ezy Express’ popping up in convenient locations including outside supermarkets and shopping complexes, in a bid to improve brand reach and accessibility. DVD rental kiosks, like online services, are accessible around the clock and reduce many store costs including wages. In contrast, by completely eliminating the need for brick-and-mortar stores or kiosks, Netflix has minimised its costs and extended its reach to any place that has postal service and Internet access. The company still rents DVDs by mail, but it has also taken advantage of changes in technology to add video streaming on demand. Now customers can stream movies and television programs to computers, television sets, videogame consoles, DVD players, Smartphones and other web-enabled devices. One advantage to the company is that streaming a movie costs Netflix less per customer than paying the postage to deliver and return a DVD to that customer. Netflix made technology a core competency from the very beginning. Because the business has always been web-based, it can electronically monitor customer activity and analyse everything that customers view or click on. With this data, it can fine-tune the website, determine which movies are most popular among which segments, prepare for peak periods of online activity and refine the recommendations it makes based on each individual’s viewing history and interests. The company also uses its technical know-how to be sure the website looks good on any size screen, from a tiny Smartphone to a large-screen television. A few years ago, planning for a significant rise in demand for streaming entertainment, Netflix decided against investing in expanded systems for this purpose. Instead, it arranged for Amazon Web Services to provide the networking power for streaming. Now, on a typicalnight in the US, Netflix streaming occupies up to 20 000 servers in Amazon data centres. Demand is so strong, in fact, that Netflix streaming accounts for about one-third of all internet traffic to North American homes during the evening. The Australian market, however, may pose technological hurdles, as the National Broadband Network is still being rolled out, meaning that accessibility may not be as straightforward as it is in the US. Although Blockbuster and Video Ezy are no longer a competitive threat in their traditional form, Netflix does face competition from Amazon’s own video streaming service ‘Amazon Prime Video’, which will be heading to Australia and New Zealand’s shores in 2017. Other direct competitors include well-established Hulu, YouTube, Nine Entertainment and Fairfax media’s joint-venture Stan, and Foxtel’s movie streaming service Presto. It also competes with other entertainment providers, including cable, satellite and broadcast television. Foxtel, for example, has dramatically reduced its basic cable packages in an effort to retain its share of the market in face of increasing competition from on-demand services. To differentiate itself, Netflix has commissioned exclusive programming such as House of cards, Arrested development, and Orange is the new black. The cost to produce such programs runs to hundreds of millions of dollars. Yet Netflix plans to continue pouring money into exclusive content because of the payoff in positioning, positive publicity and customer retention. In addition, the way Netflix releases its exclusive programming reflects its in-depth knowledge of customer behaviour. The company found, through data analysis, that customers often indulge in ‘binge watching’ for a series they like, viewing episodes one after another in a short time. Based on this research, Netflix launched all 13 episodes of the inaugural season of House of cards at one time, an industry first. Executives gathered at headquarters to monitor the introduction, cheering as thousands of customers streamed episode after episode. By the end of the first weekend, many customers had watched the entire series and shared their excitement via social media, encouraging others to subscribe and watch. When Netflix won multiple Emmy Awards for House of Cards later that year, it was another first – the first time any Internet company had been honoured for the quality of its original programming. One key measure of Netflix’s growth is change in the number of monthly subscribers. In 2015 Netflix had about 70 million subscribers worldwide, of which 26 million were located outside the US. Netflix estimates that by 2020 there will be over 100 million non-US subscribers. Despite the brand only launching in Australia in March 2015, it already has close to 2 million subscribers. Its closest direct competitor Stan has a little over 300 000 subscribers. Keys to Netflix’s successful launch include offering free-trials and access to stripped-back free versions, as well as continued investment in original programming. It appears that streaming is the new broadcasting and ‘on-demand’ spells the demise of scheduled entertainment. Source: Pride, W. M., Ferrell, O.C., Lukas, B.A., Schembri, S., Niininen, O., and Casidy, R. (2018) Marketing Principles, 3rd Ed. Cengage Learning, Australia. Pgs. 100-101.
1:Prepare SWOT analysis from the information given in the case.
2:What key information did you find in your primary data that could help Netflix make decision about whether they should or should not target demographic ?
3: what do you think might be the special factors that influence Netflix consumers’ decision to buy their new products?
4 which segmentation variables might be most useful in segmenting the market for Netflix ?
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