Harvard Case - Netflix: Valuing a New Business Model
"Netflix: Valuing a New Business Model" Harvard business case study is written by Francois Brochet, Suraj Srinivasan, Michael Norris. It deals with the challenges in the field of Accounting. The case study is 15 page(s) long and it was first published on : Aug 29, 2012
At Fern Fort University, we recommend Netflix to continue its focus on its successful subscription-based streaming model, while strategically expanding into new markets and diversifying its content offerings. This strategy should be underpinned by a robust financial framework that prioritizes long-term growth and profitability, while managing risks associated with content acquisition, competition, and international expansion.
2. Background
This case study explores Netflix's transition from a DVD-by-mail rental business to a leading global streaming platform. The company faced significant challenges, including the rise of online competitors, the need to secure content rights, and the complexities of international expansion. The case highlights the company's strategic decisions, including its shift to a subscription-based model, its investment in original content, and its aggressive expansion into new markets.
The main protagonists of the case study are Reed Hastings, the CEO of Netflix, and the company's management team, who had to navigate the company through a period of rapid change and disruption.
3. Analysis of the Case Study
Netflix's success can be analyzed through the lens of several frameworks:
Strategic Framework:
- Porter's Five Forces: Netflix faced intense competition from traditional media companies, online streaming services, and piracy. However, the company's strong brand, customer loyalty, and innovative business model helped it establish a competitive advantage.
- Blue Ocean Strategy: Netflix created a new market space by offering a convenient, on-demand streaming service, disrupting the traditional DVD rental market.
- Value Chain Analysis: Netflix's value chain focuses on content acquisition, content production, technology infrastructure, customer service, and marketing.
Financial Framework:
- Financial Statement Analysis: Netflix's financial statements reveal its strong revenue growth, increasing subscriber base, and profitability. Key performance indicators include subscriber growth, revenue per subscriber, and operating margin.
- Cost Accounting: Netflix's cost structure is heavily influenced by content acquisition and licensing fees. The company uses activity-based costing to allocate costs to different content categories and understand the profitability of its offerings.
- Capital Budgeting: Netflix's investment in original content and technology infrastructure requires careful capital budgeting decisions. The company needs to evaluate the potential return on investment for each project and ensure that its investments align with its long-term growth strategy.
- Financial Performance Measurement: Netflix uses a variety of metrics to track its financial performance, including revenue growth, subscriber growth, operating margin, and return on equity.
International Business Framework:
- Global Strategy: Netflix has adopted a global expansion strategy, entering new markets through licensing agreements and direct streaming services. The company faces challenges in adapting its content to local audiences and navigating regulatory differences.
- Risk Management: Netflix faces risks associated with currency fluctuations, political instability, and content piracy in international markets. The company needs to develop a robust risk management framework to mitigate these risks.
4. Recommendations
- Continue to invest in original content: Netflix's success is largely attributed to its investment in high-quality original programming. The company should continue to invest in a diverse range of original content that appeals to a global audience.
- Expand into new markets strategically: Netflix should continue its international expansion strategy, but focus on markets with high growth potential and favorable regulatory environments.
- Develop a robust financial framework: Netflix should establish a strong financial framework that prioritizes long-term growth and profitability. This framework should include a clear capital allocation strategy, cost management initiatives, and a robust risk management system.
- Embrace technological innovation: Netflix should continue to invest in technology that enhances the user experience, such as personalized recommendations, improved streaming quality, and new content formats.
- Foster a strong corporate culture: Netflix should maintain its culture of innovation, creativity, and customer focus. This culture is essential for attracting and retaining top talent and driving long-term success.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: Netflix's core competency lies in its ability to acquire and produce high-quality content and deliver it to a global audience through its streaming platform. These recommendations align with the company's mission to entertain the world.
- External customers and internal clients: These recommendations are designed to enhance the customer experience and attract new subscribers while also providing a supportive environment for employees.
- Competitors: Netflix faces intense competition from other streaming services, traditional media companies, and piracy. These recommendations aim to maintain Netflix's competitive advantage by investing in original content, expanding into new markets, and embracing technological innovation.
- Attractiveness ' quantitative measures: These recommendations are expected to drive long-term growth and profitability for Netflix. The company's financial performance will be closely monitored to assess the effectiveness of these recommendations.
- Assumptions: These recommendations are based on the assumption that Netflix can continue to secure high-quality content, manage its costs effectively, and navigate the complexities of international expansion.
6. Conclusion
Netflix's success has been driven by its innovative business model, its investment in original content, and its aggressive expansion into new markets. The company faces significant challenges in the future, including competition from other streaming services, the need to secure content rights, and the complexities of international expansion. By focusing on its core competencies, embracing technological innovation, and developing a robust financial framework, Netflix can continue to grow and thrive in the evolving media landscape.
7. Discussion
Other Alternatives:
- Mergers and Acquisitions: Netflix could consider acquiring other streaming services or content production companies to expand its reach and content library. However, this strategy could be expensive and risky, and it may not be consistent with Netflix's current focus on organic growth.
- Licensing Agreements: Netflix could focus on licensing agreements with other content providers instead of producing its own original content. However, this strategy could limit Netflix's control over its content and its ability to differentiate itself from competitors.
Risks and Key Assumptions:
- Content acquisition costs: The cost of acquiring and licensing content is a major expense for Netflix. The company faces risks associated with rising content costs and the availability of high-quality content.
- Competition: The streaming market is increasingly competitive, with new entrants and established players vying for subscribers. Netflix faces risks associated with losing market share to competitors.
- International expansion: Expanding into new markets presents challenges related to local regulations, cultural differences, and content piracy. Netflix faces risks associated with its ability to successfully navigate these challenges.
8. Next Steps
- Develop a detailed strategic plan: Netflix should develop a detailed strategic plan that outlines its goals, strategies, and key performance indicators for the next 5-10 years.
- Allocate resources effectively: Netflix should allocate its resources strategically to support its growth initiatives, including investments in original content, technology infrastructure, and international expansion.
- Monitor and evaluate performance: Netflix should closely monitor its financial performance and key performance indicators to assess the effectiveness of its strategies and make necessary adjustments.
- Communicate effectively: Netflix should communicate its strategic direction and progress to its stakeholders, including investors, employees, and customers.
By taking these steps, Netflix can continue to build on its success and maintain its position as a leader in the global streaming market.
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Case Description
In autumn 2011, Netflix was working to right the ship after publicly stumbling through a price hike and strategic shift and then retreat. The company was changing its business model to focus on streaming video service rather than the DVDs by mail that had brought the company success and praise. One important wrinkle in this business model shift came in the accounting of streaming content. The case describes the rule, FAS 63, that Netflix used to account for streaming content, and the implications for the future of the company that could be attributed to this accounting shift.
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