CASE STUDY: NETFLIX

Introduction

As Netflix heads into 2019, it is showing great promise in the international markets. It has invested in its Indian headquarters – and in February 2019, it announced the intention to open a Toronto hub. However, Netflix investors expressed concern as 2018 Q4 financials revealed revenue was short of estimations. Subscribers were hit head-on with the lower-than-expected revenue as the newly appointed Netflix CFO increased each of its tiered subscription pricing levels. Additionally, due in part to the increased cost of production, Netflix has increasingly discontinued shows that have not received high viewership on the streaming service. While Netflix’s stock was rising and more consumers were turning to eCommerce, questions still lingered in 2018 over the method to the brand’s financial madness. Despite another strong performance in Q4 of 2017, The New York Times TV critic James Poniewozik wondered if Netflix’s business model really has the legs to transform the TV world. “Netflix is getting huge. But can it get great?” he asked. Netflix’s strategy is unlike anything the content world has ever seen. It separates itself from competitors, serving as a cross between networks with their own programming (from NBC to HBO) and online video platforms with digital TV content (YouTube). For the broadest users, Netflix has a massive library of reruns. For the most niche audiences, it conceives original shows that keep people watching. Its success is driven by its customers’ habits — the stuff they want to watch on TV. Does Netflix’s unique value proposition have the long-term ability to keep up with its viewers’ changing interests?

Read the timeline below for more information on Netflix’s history.

Timeline

1997:

DVD players enter the U.S. in March at an initial price of $600. Customers balk at the sticker shock.

Founder Reed Hastings launches Netflix in August, charging $18/month for unlimited DVD rentals.

*Netflix DVD Mailers (Retrieved from NPR)*

1999:

Netflix adopts a monthly subscription model: unlimited rentals for a single monthly rate.

2002:

Netflix goes public, with its stock debuting at $15 per share.

2003:

The price of DVD players drops below $50. As DVDs increasingly replaced VHS cassettes, Netflix achieves its first operating profit in 2003.

2007:

Netflix moves into the streaming business, responding to Amazon’s launch of a similar product the previous year.

2010:

Netflix has more than 20 million subscribers and a DVD library with 100,000 titles.

By comparison, the typical video rental store has only 3,000 titles. Blockbuster is delisted from the New York Stock Exchange when shares hit an all-time low and, shortly after, Blockbuster fills for bankruptcy.

2011:

Netflix announces split between DVD rentals and streaming businesses, increasing monthly subscription fees for customers still wanting to use the former. Longtime subscribers revolt. Netflix lost 805,000 of its 20 million customers.

2012:

Netflix has more than 33 million members in over 40 countries. Its library holds more than one billion hours of movies and TV shows each month, including original programming. Also in 2012, its domestic streaming service adds 5 million subscriptions — a boost of 25% from the previous year.

2013:

Netflix grows its subscriber base to 44 million people. It becomes the first Internet TV network to be nominated for a primetime Emmy. House of Cards takes home three of the prestigious awards. With a presence in Canada and Latin America, as well as parts of Europe, the company anticipates continued expansion into global markets.

2014:

Netflix eclipses 50 million global subscribers. It lands in six new European countries — Austria, Belgium, France, Germany, Luxembourg and Switzerland. House of Cards and Orange is the New Black combine for seven creative Emmy Awards.

2015:

Netflix adds Australia, New Zealand, Japan, Italy, Spain and Portugal to its list of global markets. These moves help the company hit 75 million subscribers.

2016:

Netflix becomes available worldwide. It ends the year with 93 million subscribers viewing more than 125 million hours of TV and movies daily.

2017:

Netflix ends Q3 with 104 million global subscribers. It plans to spend $8 billion on content in 2018.

*Netflix subscriber growth continues to increase (Retrieved from Statista)*

*Netflix stock continues to increase since the release of its streaming services* *(Retrieved from Market Watch)*

2018:

During its 2017 Q4 earnings presentation, Netflix announces its subscriber base is at 117.6 million, which beat analyst estimates. Sales rise to $3.29 billion, which is a 10% jump from the previous quarter. After the good Q4 news, Netflix ups its marketing plans, with a 54% hike in ad spending for its shows. In its letter to investors, Netflix notes Facebook and YouTube as promising vehicles for the investment. In April, Netflix subscriber growth beats analyst expectations –7.41 million new users in Q1. Revenue rises 40% to $3.7 billion, as plans to invest in more original programming take shape.

Over the summer months, there are some disgruntled Netflix subscribers who fear that Netflix is preparing to implement commercials. However, these “commercials” are actually promotional previews for Netflix shows.

2019:

In January, Netflix announces that Spencer Neuman will take over as Chief Financial Officer. Neuman had most recently held positions as CFO of Activision Blizzard and other positions at the Walt Disney Company. Following the unveiling of a new CFO, Netflix announces its biggest price hike since launching. The standard subscription rises from $11 to $13 per month while the premium and basic plans rise from $14 to $16 per month, compared to $8 to $9 per month, respectively. In mid-January, Netflix releases its 2018 Q4 financials, which show promise with subscriber numbers but fails to meet expectations for revenue. Stocks drop following the release of Q4 financials.

In February, Hulu responds to Netflix’s price increase with a promotion of their own, dropping their basic streaming service from $7.99 to $5.99 per month. While there are still ads on Hulu’s basic service, subscribers still have access to all the original content.

Want to learn about how Netflix’s unique value proposition helped to propel the company to be one of the perennial powerhouses in the entertainment industry? To read about this and more, refer to pgs. 107-109 & 121 from The Strategic Digital Media Entrepreneur.

Netflix Timeline Sources:

Company timeline

https://media.netflix.com/en/about-netflix

Annual reports

https://ir.netflix.com/annual-reports

Netflix Again Tops Forecasts for Subscriber Growth

https://www.wsj.com/articles/netflix-again-surpasses-subscriber-growth-estimates-1508186507

CMO Today: Netflix Ups Marketing Spend

https://www.wsj.com/articles/cmo-today-netflix-ups-marketing-spend-murdoch-asks-facebook-to-pay-for-trusted-news-foxs-sky-bid-latest-1516712620

Netflix Earnings in 5 Charts

https://blogs.wsj.com/moneybeat/2018/01/22/netflix-earnings-in-5-charts-2/

Netflix Subscriber Growth Tops Expectations (April 2018)