Netflix Blue Ocean Strategy

The Blue Ocean Strategy

Addison Lauerman, Anemi Kabbaoudi & Fiona Wong New York University – Strategy Formulation & Decision-Making Dr. Jukka Laitamaki December 2016

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TABLE OF CONTENTS I. Executive Summary…………………………………………………….……………………..2 II. Netflix: SWOT Analysis and Matrix…………………………………....…………………..3 Strengths……………………………………………………………………………....…………..3 Weaknesses……………………………………………………………………………………….6 Opportunities……………………………………………………….……………………………..7 Threats…………………………………………………...……………………………………….10 SWOT Matrix……………………………………...…………………………………………….13 Summary………………………………………….……………………………………………...15 III. Netflix: Blue Ocean Strategy………………………………………………...…………….16 Six Path Framework………………………………………………………………..………...…..16 Three Tier of Noncustomers……………………………………………………………………..18 Four Actions Framework…………………………………………………….………..…………19 Strategy Canvas…………………………………………………………...………………...…...22 Buyer Utility Map and Experience Cycle………………………...……………………………...25 Conclusion……………………………………………………………………………………….29 Resources……………………………………………………………..…………………….……30

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I. EXECUTIVE SUMMARY Netflix is one of the largest multinational entertainment companies. Netflix reportedly has 83 million paid subscribers or members worldwide (present in 190 countries) and continues to expand globally; Netflix “has been leading the way for digital content since 1997” (Netflix). Netflix specializes in streaming media and video on demand globally (available with Internet connection and through mailed DVD rentals), providing unlimited television shows and movies, including original series, documentaries and feature films. The company offers ondemand streaming and the ability for customers to control their own time. Netflix continues to provide digital versatile discs (DVD) rental services, operating with over 50 warehouses, with about 100,000 movie titles (though the subscription service has become more popular than the rental service in recent years). Customers are able to rent the available DVDs with no due dates or late fees.

Netflix allows customers to “watch as much as they want, anytime, anywhere, on nearly any Internet-connected screen” and can “play, pause and resume watching, all without commercials or commitments” (Netflix). The operating segments include domestic streaming, international streaming, and domestic DVD, requiring a monthly membership fee for each segment. The customer utility model includes the following steps: build awareness, trial, purchase, delivery, use, supplements, and customer relationship. Netflix currently offers three unlimited streaming plans, with free cancellation at any time and the first month free of charge (described as a trial option for all payment plans). The free month trial provides customers the opportunity to use and experience the product before a monthly commitment. The plans include the following pricing models (all monthly payments): “Basic” at $7.99, “Standard” at $9.99, and “Premium” at $11.99.

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II. NETFLIX: SWOT ANALYSIS AND MATRIX Netflix’s positioning against competitors (Amazon Prime, Hulu, HBO, Cable TV, YouTube) is based on its strengths and weaknesses (internal factors) and opportunities and threats (external factors). The below SWOT Matrix demonstrates Netflix’s current strengths, weaknesses, opportunities, and threats.

Strengths • Accessibility & Convenience • Brand Recognition • Original Content • Strong Business Operations • Affordable Pricing • Domestic Streaming Revenue

Weaknesses • High Costs Associated with Original Content • Efforts to Raise Prices • Licensing • Unprofitable International Business

Opportunities • Global Expansion • New Services • Offline Content: Podcasts, Live Streaming, Concerts, Books, Discontinued Shows • Airline Partnership • Social Media and Self-Creation

Threats • Competition: Amazon Prime, Hulu, HBO, Cable TV, YouTube • Black Market Downloading Culture

STRENGTHS Accessibility & Convenience: The greatest strength of Netflix is that its services are accessible and convenient for all customers – the product can be used and accessed almost anywhere. Some of the ways to stream and utilize the company services (known as an ecosystem for use) include the company website, Netflix “app” or application on a tablet (iPad), mobile devices, and TV. Netflix can also be used in conjunction with other entertainment systems such as Sony PlayStation Consoles, Microsoft Xbox, and with smart televisions. The first month, as previously described, is free of charge, adding to the accessibility (buyer utility) for new customers or users. Another factor that makes Netflix more accessible and convenient is the idea of providing customers with an entire series (all episodes of a season being released at the same time). Customers then have control over time and their viewing preferences; they can watch the television show or movie at any time. Netflix is also interested in increasing the

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amount of content and improving the customer experience. Netflix customers continue to expand globally and internationally with the convenience of consuming entertainment through the subscription service.

Brand Recognition: Netflix has strong brand recognition – the company is popular in the United States (nationally), as well as globally. Most of the population is familiar with the company the services Netflix specializes in. The company is popular worldwide, including Spain, Italy, Portugal, South Africa, Korea, Hong Kong, Taiwan, and Singapore, thus providing more opportunities. Other than China, the only other two major countries that do not yet offer Netflix are North Korea and Syria, which is due to U.S. government restrictions. In fact, it is in a total of 190 countries worldwide and is available in over 20 languages such as Arabic, Korean, and Chinese (Netflix.com). Its strong global brand recognition can be further emphasized by the fact that some of Netflix’s competitors, such as traditional cable channels and television networks, are restricted to the markets in the United States.

Map indicating countries in which Netflix is currently available (shown in red). (www.netflix.com)

Strong Business Operations: Netflix has strong operations; it has created a large library with a great amount of content and user-functionality; the customer can browse and search for any series or movie for viewing availability. Although not every single media product is available, Netflix continues to update and add to its system by enhancing their recommender system that tailors to individual customer’s preferences. Netflix includes programs that appeal to both mass and niche audiences. The Netflix approach is also user-centric that includes an interface that is user-friendly and simple. There has been significant development of the product, changing for the better (the company listens and cares about the needs and wants of the customer with user

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experience being valuable). The service also has the ability to recommend certain content or make suggestions to each user, based on previous content watched; this is a personalized service factor. It also allows for different users under a single account. Therefore, in a household, a user can be created for each family member's; children can be prohibited from watching PG-13 rated content and monitored on series watched. It will also continually recommend content suitable for a child such as cartoons and animated movies.

Original Content: Original content and series is another asset or strength of Netflix – both movies (including documentaries) and televisions series being high quality, without commercial interruptions. The first original series was in 2013. Some of the content includes Stranger Things, House of Cards, Beast of No Nation (91% rating on Rotten Tomatoes, with $90 million revenue and produced at $6 million), and Orange is the New Black. The complete season is available to customers; there is no weekly wait time.

Affordable Pricing: Netflix also beats out its cable competitors by offering competitive, affordable pricing. As mentioned previously, Netflix subscription and membership options starts as low as $7.99 per month and $11.99 (highest rate) for premium options. Cable subscriptions are usually $60-$100 per month; Netflix is much more affordable for all customers. Cable also often requires that people are pay for multiple unwanted and unwatched channels and inclusions.

Out of the average 189 channels that cable network customers pay for monthly, only seventeen are watched.

Domestic Streaming Revenue: Netflix’s domestic streaming revenue has significantly increased recently. In an October 2016 letter to Netflix shareholders, the company described, “in [Quarter] 3, quarterly global streaming revenue exceeded $2 billion for the first time (up 36% year over year), helped by our strong content slate including Stranger Things and the second season of Narcos. On a constant currency basis, this represents 39% year-over-year revenue growth, a 400 basis point acceleration from the last two quarters” (Netflix Investor Relations). Majority of revenue is from users domestically; United States streaming revenue totaled over $1 billion ($1,304) in Quarter 3 2016, while international streaming revenue totaled $853 million. International and US revenue have continued to increase quarterly.

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WEAKNESSES High Costs Associated with Original Content: Netflix produces many of its own shows; original content is considered a great strength, but can also be a weakness as it there are costs associated with the production and marketing. High quality, original content does not result in added revenue, as there is a lot of competition with great movie and television options.

Efforts to Raise Prices: Much of Netflix’s success is due to its low subscription prices. The company has faced problems (a weakness) dealing with internal costs and successfully raising subscription prices without creating backlash from existing customers. Raising prices can also create negative stigma from its current subscribers, as they have been accustomed so such affordable pricing options, and therefore, must be done with care. The Wall Street Journal explained that the company is “working to shift some of its long-running customers who were paying less for their service under grandfathered subscriptions, to newer and costlier plans” (Gallagher).

The chart below shows that rather than Netflix increasing prices overall, the company can add to the base pricing, in which viewers can choose to pay more for additional options. By adding appealing options for viewers, they may feel more compelled to pay more for Netflix given that they have a choice. Netflix is also still relying on a DVD subscription business to rent DVD and Blu-rays; as digital market continues to strengthen in the customer-mind, there is a loss in the number of subscribers thus a loss if these people do not upgrade to online streaming service offered by Netflix.

Netflix Pricing Options (www.netflix.com)

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Licensing: Licensing poses another threat for Netflix – the reliance on obtaining licenses from producers include negotiation to distribute movies and television series (“rights business”). The company is required to buy the right to TV shows and movies from producers; the prices of these rights vary between company and content. There is a great cost associated with licensing; should this price increase, Netflix may have trouble obtaining these rights in the same manner. If licensors continue to raise prices, Netflix will likely have to do the same. Because Netflix relies on licenses until it can produce a greater strength out of original content.

Unprofitable International Business: While the company has had a great amount of growth in revenue in recent years, Netflix is not currently making profit from international business. The international profit has slowly been increasing each year, but is still not meeting the bottom line needed to great profits. There are also additional laws in certain countries adding new expenses, added tax. Efforts need to be made towards international expansion and decreasing the costs and losses.

OPPORTUNITIES International Expansion: The company started streaming services in the United States in 2007 and in 2010 expanded in Canada, followed by many different areas internationally, On January 9th, 2016, Netflix announced in an event that it had launched expansion to 130 additional countries in a single day; this has Netflix’s total country footprints at 190 countries (Netflix).

The first round of global expansion efforts began in Canada, Latin American countries and Europe of March 2015, causing Netflix to be available in 180 million additional broadband households. Expansion and growth in these international markets continue and the company increases its popularity and brand recognition. The Wall Street Journal reported that “the company added 3.2 million subscribers in the quarter” and that the “better-than-expected performance came mainly in international markets” (Armental and Ramachandran).

The major countries that Netflix is not currently available in are China, Syria, and North Korea.

Netflix is not available in these countries for different reasons such as the significant competition, government regulations and censorship. However, China is large potential market for Netflix, with a potential 56.5 million broadband households (Trefis Team). The largest issue for Netflix’s entry into China is strict censorship regulations. In fact, China imposed strict regulations in July 2016 on a number of foreign inspired-reality shows and many streaming

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channels offering Disney movies and iTunes content has been blocked. Even though, companies such as Alibaba is investing in Netflix which points out to the fact that China might be difficult to penetrate from regulation standpoint but might be welcomed by many fans. For these reasons, Netflix will have difficulty entering into the Chinese market unless the regulations change. With that said, Netflix has recently planned to license their own content to pre-existing Chinese streaming services, rather than operate their own (Poletti). So long as Netflix continues to produce enticing original content, their footprint in China will potentially increase.

Given the international expansion, there are hurdles involved, some of which are reliable highspeed Internet connection, requirement of subtitles and appropriate translations in some regions. There is significantly less reliable Internet and connectivity in rural areas; this continues to be an issue for Netflix. Also, with international expansion, user utility is required in the countries that do not speak or understand English – this includes subtitles and dubbing in many languages.

New Services: Netflix could have an even greater market share as company in the streaming industry through increasing the amount of available content. The “new services” could include the following: attract older generation (include popular, old black and white movies), provide additional young children or youth viewing options, continued production of cancelled shows, streaming new types of content (TED conference videos, live concerts, podcasts, blogs, books), and free and upgrade options.

Offline Content: Another opportunity is to include the option for Netflix customers to download content ahead of time; customers would then have the ability to watch the desired television series or movies without Wi-Fi or Internet connection. This adds to the convenience and accessibility of the service; customers can even watch without having Internet access and increases the ability to watch content according to the customer's availability or personal schedule. This is especially warranted for those customers that want to avoid high LTE/4G costs on smartphones. It is also beneficial to individuals that are travelling or “on the go” and do not have Wi-Fi. Additional opportunities for customers continually travelling will be described below.

Partnerships with Airlines: Amazon Prime has recently partnered with JetBlue airlines to offer streaming services in-flight. Although a partnership with a different airline would not be considered a competitive advantage for Netflix (as there are other streaming services with this

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included), Netflix can still use it to leverage presence because the Netflix brand recognition is currently stronger than Amazon Prime. Netflix has the opportunity to partner with an airline, such as Southwest Airlines, to match the competition. It will also prompt frequent travelers who do not have a Netflix account, to pay for a subscription (increasing customer base) to have access to other content during flights. On September 29, 2015, Netflix partnered with Virgin Airlines.

Passengers are now able to download what is known as Netflix Partnership B-Roll on their iPads, iPhones and computers; this allows passengers to enjoy Netflix content above 35,000 feet free of change in 10 of its aircraft. Since Netflix already established a partnership with Virgin Airlines, there is another potential for a possible partnership with Virgin Hotels (additional opportunity for Netflix).

Partnerships with other methods of transportation can then be considered once the necessary technology is available. For example, cars with television and Wi-Fi capability can include Netflix services, rather than relying on DVD’s. Trains such as Amtrak can also install television screens for passengers; Netflix should be the first to offer their services for these types of transportation methods as an early adopter.

Social Media and Self-Creation: Studies have proven that social media is currently greatly influential to customers and the majority of the global population. Netflix can create advertisements, or “sponsored” posts for Instagram or work with Facebook to create more ads that are visible to users; Facebook alone currently has 1.7 billion users. Instagram and Snapchat have created a small video section in order to provide each subscriber with the freedom to share some moment’s live/streaming to other followers. Personal brands and social media influence creates the opportunity for a partnership with Snapchat. Creating an advertisement that allows people to interact on a platform where acting skills/or emoji can be shared; this is considered be an additional opportunity. Netflix offers and recommends what type of shows a customer should watch, but there is then an even more personalized way of doing things. Netflix can not only be a leader in this customer app/service, but can also obtain more profits by adding premium elements where users need to buy it in order to unlock the item.

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THREATS Competition (Amazon Prime, Hulu, HBO, Cable TV, YouTube): The growing competition (existing and potential new entrants) in the streaming and media space or industry poses the greatest threat to Netflix in upcoming years – there are many streaming options competing for “consumer screen time.” Competitors include Amazon Prime, Hulu, HBO, Cable TV, and YouTube Red. These competitors will continue to improve as Netflix changes and adds services/features.

Amazon Prime: Amazon, like the majority of Netflix’s competitors, has a small library of original content. Amazon Prime does, however, have +40,000 streaming movies and TV Shows; some of the content are award winning and desirable for streaming customers and not currently available for Netflix users.

Hulu: When compared to Netflix, Hulu also has less content available for customers. Hulu’s appeal or attraction is providing current seasons being aired on television to customers online, only a few days after being aired. The shows are, however, limited and only the previous 5 episodes of a certain show are available for customers, not the entire season. Older shows are available in full seasons, unlike Netflix, which does not currently offer TV shows until the next season starts airing. Hulu Plus is being developed any may offer a greater amount of content or collection of available TV Shows online. Hulu does have advertisements, being a large disadvantage for the company Cable Television: Cable television is still considered a main competitor of Netflix, though the popularity of the service continues to decrease. Cable TV does not have a customization or personalization factor and requires that customer pay for many channels that may never be watched. But many people are still used to and enjoy using cable TV. YouTube Red: YouTube Red is a subsidiary of YouTube and includes a free subscription to Google Play music, without requiring customers watch advertisements during streaming. The added value is that the customers have the ability to save content offline; this allows viewing without Internet access. Netflix customers do not currently have this capability or feature. In terms of pricing structure, many may consider YouTube Red a better deal because of the added value when considered that the company is ad-free and includes a subscription to Google Play for $9.99 per month.

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There is a possibility that CBS also has an upcoming launch of a new streaming service.

These competitors offer desirable entertainment services and options, with or without commercials. Google also is entering the market with strong footsteps by introducing Play/Hulu/iTunes being ranked as top 3 streaming tools after Netflix and Amazon. But since Google is a huge company, competition can increase with its more favorable financial resources.

(Statista.com)

In the chart shown above, it shows the results of a study conducted in April of 2016. As you can see, although Netflix has leverage against its direct competitors, Amazon Prime and Hulu, there is a 51% unreached market in which customers do not have any subscription at all.

Nevertheless, Amazon Prime has just released a sole video streaming option in which customers do not have to subscribe to the Amazon Prime 2-day shipping and purchasing feature in order to watch videos. Now, they can subscribe solely to videos, which may convert potential customers who did not need the shipping and purchasing feature.

To further the analysis and to highlight the competitors with pros and cons of each stream tool, 5 factors are selected to provide the main differences between the top competitors.

Netflix Membership Price

Approximately $8 for a monthly streaming membership with additional $8 for access to full digital

Hulu Plus Almost $8 per month, but it offers free version with limited selection and few episodes of

Amazon Prime $99 charge per year, which equals $8.25 per month, which makes it competitive. An

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Netflix: Blue Ocean Strategy library

some shows available

advantage comes with it with 2-day shipping for any purchases made on Amazon, which usually cost about $75 for a subscription.

Plans and Trial Options

30 days trial date, but a credit card need to be included so cancellation needed in case to avoid fees. 3 plans are discussed earlier. Netflix is the only company that offers DVD Rentals. A separate plan for DVD subscription is also available for those who do not want to use streaming.

1-week trial, cancellation is possible but should be done before the week is over. Else, hidden fees such as automatic subscription take place.

But with coupons and special promotion, Hulu Plus offered 3 months free.

30 days trial period automatic subscription can be avoided by clicking “do not upgrade”. Amazon Prime offers ⅓ of pricing and service.

Content Selection

Extensive selection with 25 thousand of titles. It has licensing deals with CBS, ABC, FOX, NBC, Starz, BBC, Sony and DreamWorks.

It has 122 of favorite shows among 250 favorite shows available based on popularity using IMDB as a reference.

Have its own licensing deals and agreements from NBC, Fox, MTV, Disney. It updates the library more often than other competitors.

Which means it is fastest at uploading new shows, which makes it an alternative to Cable with over 10 Thousand titles.

It provides 92 shows listed as favorite by audience.

Similar titles to Netflix and Hulu Plus, however not as many since it is relatively new with only 5 thousand titles. That is why Amazon only provides 58 of the favorite shows only which is about half of what Netflix offers.

Exclusive Content

Award Winners shows like House of cards and Prison Drama. Taking the lead compared to other competitors.

Not much in-house content. The most well known is battleground.

However, its has exclusive rights from some network shows not available within other competitors such as Fresh Meat, the only way is essex

Great content that is as good as real TV shows, comedy drama golden globe award for best series, Alpha House and Bosch

Compatible Devices, App, Interface

Accessible from PC,, Xbox 30, PS3, Nintendo Wii, ereader and iOS devices.

Limited access, only from gaming devices.

But lacks compatibility of the other devices for many internet-ready TVs and Blu-ray players.

Slowly building its network. Unlike Netflix, it cannot be streamed via any gaming device. It is compatible to watch via internet-ready TV, Blu-

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Black Market Downloading Culture: There is a culture of illegal free downloading of TV series, movies, games, and music, which is known as the Black Market or video piracy. This is common among much of the population. It is currently unethical and illegal; if the customer does not pay for a piece of content that has a copyright, downloading is considered a crime – still, it is relevant to the younger generation of consumers because it makes content available free of charge and there is a broad selection. Netflix has leverage against illegal downloading by making experiencing content less stressful by prohibiting ads and the absence of computer viruses.

SWOT MATRIX The below SWOT Matrix includes probability and impact scores (showing importance or significance of each factor). Scores are from 1-3, 1 being least probability or impact and 3 being most profitable or impactful. S. Capability is the strength capability.

Opportunities

Profitability

Impact

Total

S. Capability

Score

International Expansion New Services Offline Content

3

3

9

2

18

3

2

6

3

18

2

3

6

3

18

Airline Partnerships

2

2

4

2

8

Social Media and SelfCreation

2

2

4

2

8

Further worldwide expansion of Netflix yields a probability score of 3, due to the fact that it is already occurring in some countries. Because of its reach, it has a level 3 impact score.

However, the capability is only a two because it is an investment that will take years before clearing Netflix out of the books financially for international profit.

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Netflix: Blue Ocean Strategy As for new services, due to Netflix’s promising innovative nature and their audience’s response to such innovation, the probability core both yields a 3. The impact score lies at a 2 because minor new services may not appeal to all demographics. For example, adding more

young children content will not necessarily benefit millennial population using Netflix, but will appeal with those with children. Also, the strong nature of it will allow Netflix to easily capitalize on it, hence a strength capability score of 3 as well.

Offline content is a relatively new feature provided by few apps. Because Netflix would have to obtain licenses in order for users to download it and then watch it offline, its probability score is 2. The impact score and strength capability score is both a 3 because it is a highly warranted feature that will allow people to watch it when it is difficult to connect to the Internet for long periods of time.

With airline partnerships, it will take time and negotiations until it is feasible, hence a 2 score. It will only affect those who travel, earning it a level 2 impact score. Lastly, the strength capability score is a 2 because it will prompt those two travels to purchase a subscription.

Social media partnership has high probability, but there are large costs involved and may not generate the needed attention. Strength capability is given a 2 just because this requires a high algorithm and better understating of what customers exactly need. This might enter a new competition with the features offered within many other apps and might not be directly correlated with the whole Netflix concept and vision.

The matrix shows that international expansion, new services, and offline content should be emphasized, all respectfully yielding a total score of 18 points each. Therefore, these strategies would be most promising in order to enter the Blue Ocean. Airline partnerships and social media/self-creation both had a score of 8, which is significantly lower than their opportunities. Airline partnerships would only appeal to those who travel, and social media/selfcreation requires more interaction from customers.

Threats

Probability

Impact

Total

W-Risk

Score

Illegal Free Downloading/Streaming

3

2

6

-2

-12

Competition (Other Streaming Options)

3

2

6

-2

-12

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Illegally downloading or streaming content already exists, resulting in a probability score of 3. However, its impact is a score of 2 because there is a hassle associated with such websites due to potential viruses, and many advertisements. Because this is easily accessible by Netflix’s target market, it poses a -2 weakness risk. As with competitive streaming sources such as Hulu, Amazon Prime, CBS’s upcoming application, and more, there is also a score of 3 due to its current presence. Its impact score is only at a 2 because none of the mentioned sources have competitive prices nor as popular and highly rated original content such as Netflix. However, because they are still direct competitors, they pose a -3 weakness risk.

Illegal downloading and streaming, as well as other competitive streaming sources have a score of -12. Both of which are direct competitors in which customers can receive similar content. Therefore, in order to overcome these weaknesses, Netflix must capitalize on the opportunities mentioned above. Only by doing so, can Netflix differentiate themselves further from competition and offer a competitive advantage.

SUMMARY Netflix remains a principal in the Internet subscription service industry; the company can be viewed as a cable replacement. The company has many assets or advantages, including a strong brand loyalty that is over 86% retention rate and an overall increase of five million new subscribers in the fourth quarter of 2016. This is an indication that the company can be considered a Blue Ocean model in the industry. Netflix strengths remain in its range of contents, subscription model, strategic alignment and customer satisfaction. However, like any company in the market, there are still weaknesses in the company model; these include the possible technical issues with its streaming (being reliant on Internet quality), logistical issues and distribution time delay. The market continues to change quickly and there are many opportunities are available to keep Netflix as the leader in the market. There opportunities include streaming to game consoles, new services, and partnering with airlines and can create great expansion globally.

Threats remains the distribution channels increasing the licensing prices, as well the unknown changes created with the advancement in technology (might reshape the industry).

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III. NETFLIX: BLUE OCEAN STRATEGY SIX PATH FRAMEWORK Conventional Logic

Blue Ocean Strategy Logic

Industry

Movies and television shows

Educational videos, live concert streaming, music, virtual reality

Strategic Group

Film licensors, current competitors including Hulu, Amazon Prime, CBS, YouTube, etc.

Publishers, book publishers, concert organizers, virtual reality developers

Buyer Group

Americans from ages 16-24 years old

Seniors (65+), children (12 and under), people who own virtual reality devices, people with music as a hobby, people on the go, people without Internet access

Scope

Streaming film entertainment

Activities, sell educational content, special features

Function

Stream videos

Learn life skills, entertainment through virtual reality

Time

Traditional television services

Portability, new trends in old shows, virtual reality trend

Industry: Netflix and the previously described competitors are in the film industry. They provide on-demand streaming for movies and television shows alike. However, Netflix has the capability to look across other industries such as the educational, music, podcast industry, and more. Although the education industry comprises of smaller segments, it is a $1 trillion industry.

In fact, it is the United State’s second largest GNP at 10% (Education Industry Association). The music industry is a $15 billion industry in 2015 (Rutherford, 2016) and LiveStream indicated that 9 million people alone were watching this year’s Coachella Music Festival online (The Ultimate Guide to Livestreaming Events). In regards to the virtual reality industry, currently considered a new and developing trend, it has been projected by SuperData to be a $40 billion industry by 2020 (Virtual Reality Industry Report 2016).

Strategic Group: Aside from producing original series, Netflix in part largely relies on their licenses from the film industry. Not only is the reliance a large weakness, but licenses are also extremely expensive. Pushing towards other industries, Netflix will have other strategic groups to focus on such as publishers, concert organizers, music producers, and virtual reality developers. Rather than solely relying on one group of individuals, they now have other resources.

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Buyer Group: According to Global Web Index, out of 7,890 people who used Netflix in the past month, approximately 65% of them are between the ages of 16-24. As Netflix shifts towards the blue ocean, the new buyer group will be the older adults such as Baby Boomers, as well as young children under the age of 12, and their parents. Baby Boomers are more susceptible to discontinued and older television shows and movies, whereas younger children will be on the receiving end of educational content. Of course, this would appease their parents as well, who would be the ones purchasing the subscription. People who are always on the go do not have leisure time to watch or utilize Netflix’s services. However, by partnering with airlines and other transportation methods, as well as adding an offline function, those on the go now have more accessible options to watch Netflix once they have a chance to catch a break. Those currently without Internet are also another potential buyer group, but are harder to reach, as mentioned in the three-tiered customer segment below.

Scope: The scope changes to additional features that will complement previous and new content. For example, private access to artist interviews can be featured prior to live-streamed concerts. In regards to educational content, it can be used to supplement pre-existing workbooks and textbooks. Netflix can also expand its scope by complementing cameras on smart TV’s. For example, Netflix can offer fitness videos, and encourage friends to work out together by also webcamming through the television via Netflix. An issue that was presented was the accessibility of the search function. Netflix can increase its scope by allowing pre-meditated searches as one attempts to do so. For example, when searching for a show, once a few letters are entered, all shows that have such continuous letters in their name will display, before the customer even has to type the rest. This algorithm will make Netflix easier to use.

Function: With the potential that Netflix offers, many life skills can be learned through different lifestyle shows. Also, it can cater to the emotional appeal towards people who need it most. One of whom are hospital patients, as they are bedridden from weeks or months at a time. By working with hospitals to provide Netflix services, patients can watch more content to keep their mind off things, as well as be entertained. Netflix can also be more interactive. For example, in the education content world, Khan Academy uses YouTube as a platform to teach students in all different areas and subjects. However, it is limited to just being a video. Netflix can not only provide educational videos similar to those of Khan Academy, but can feature accredited professionals in the educational industry, and can also provide the option for quizzes to be taken

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through Netflix. This way, students can monitor their progress, and test themselves on the screen. This is simply done through clicking on their devices, whether by doing so on their computer or smart phone, or by using remote controls with their televisions. Netflix also has a strong platform of algorithms of which Netflix can then recommend certain videos to review after the results of such quizzes.

Time: Virtual reality is a new device that has been released this year. As the trend emerges, Netflix can take advantage of it by offering virtual reality dimensions for people to experience. People would be able to experience television by an entirely different segment such as “being” in a 3D world with their favorite characters or actors and actresses. Contrastingly and ironically, Netflix can offer more dated shows and movies that are no longer being broadcasted.

This brings a sense of nostalgia to older viewers, which as one can see on social media, is highly enjoyed. As the need for traditional television services diminish, Netflix can potentially enhance the mobile and on the go trend of having the services of a television wherever you go. Although Netflix is already accessible through its mobile and tablet applications, it can enhance portability through offline content made possible with downloaded, but non-transferrable shows. Offline content will therefore complement the trend of the fast paced world today.

THREE TIERS OF NONCUSTOMERS First Tier: Potential customers who do not have their interests reflected on the shows that Netflix provides, are considered “soon to be” customers. These customers, although have heard and are interested in Netflix, simply do not find the content interesting enough. As shown in the six-path framework, there is potential in educational content, more than two decades old content, avid music lovers and concert/festival attendees, as well as even virtual reality content to match the demand. Once Netflix produces content related to the above, the potential customers mentioned would be more enticed and have a reason to use Netflix since their interests are now aligned.

Second Tier: People who do not have the time to leisurely watch television at home are the second-tier of noncustomers. Many people own entertainment outlets such as televisions, computers, and more. However, due to their lifestyle, they may not necessarily have the time to enjoy it. By offering offline services, Netflix can adapt to their lifestyle by offering it to go on their application. Also, by partnering with airlines and other means of transportations, there will

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also be more opportunities of when a potential customer can watch Netflix. It will then allow more options of when and where the customer has free time to watch Netflix, making it more easily accessible.

Third Tier: Third tier customers are the population that does not have access to the Internet or other devices that support Netflix. According to Pew Research Center, the lowest Interest access rates are found in countries such as Nigeria (39%), Indonesia (30%), India (22%), Burkina Faso (18%), Pakistan (15%), Uganda (11%) and Ethiopia (8%). There has been a great amount of success in “buy one, give one” promotions, being implemented by companies like TOMS Shoes, Warby Parker, and others; Netflix can use a similar approach. For example, with each new customer and subscription, Netflix can donate towards providing Internet in schools and other developing areas. Once there is enough funds to provide Internet in one area, Netflix can also donate its streaming services to the school. The goodwill nature will not only make a good impression on current, but also in hopes where internet access is more widespread in the future, will prompt future subscribers in developing areas.

FOUR ACTIONS FRAMEWORK The four actions framework includes the following: eliminate, raise, create, and reduce. Seventeen factors were implemented in the four actions framework, which is related to the SWOT analysis, but also looks at different features that competitors of Netflix have not explored yet.

Eliminate Phase: Although advertising is a good tool for streaming video services to operate and generate profits, studies show that the audience does not prefer it. Channel surfing, which is often referred to as zapping, is a tremendous problem. Therefore, advertisement needs to be eliminated. Despite rumors saying that Netflix will be using sponsored ads, the firm confirmed that the advertisements were being used for testing purposes, and only affected a few users.

However, if this is a temporary research and development method, Netflix will need to take into account the effect of such trials on the consumer’s point of view.

What consumers may refer to as “hidden fees” are actually subscription fees after the month-long trial period is over. Although it does generate revenue, it does leave a negative impression on the subscriber, as they do not prefer to automatically be charged. This is an element that not only

Netflix: Blue Ocean Strategy

20

Netflix, but its competitors as well, need to pay attention to in order to avoid forcing many subscribers to pay for a full month after their trial.

Raise Phase: There are five elements identified to raise. Original content is an advantage that is becoming more attractive for all main competitors. However, cable television remains the biggest beneficiary because it avoids licensing. Licensing is a heavy burden and requirement for streaming providers, such as Netflix, in order to include these secondary shows. Exclusive content is progressing, and although Netflix remains the leader in this sector, Amazon has been awarded a Golden Globe for one of its shows. Netflix also has a few shows that are award winners, such as “House of Cards” and “Orange is the New Black.” Because this is not a yellow tail for Netflix, and since all competitors have been early adapters, Netflix strengths remains in the diversity of its own content and its wider audience appeal. In fact, this sector increased by 26% from last year, despite its cost increasing by 53%.

Partnership with airlines is also a great way to gain more customers, as many might like the idea of enjoying the shows they love on a long flight. Netflix has been a pioneer in this element, already have a partnership with Virgin Airlines. This can further lead to a potential expansion to be featured in the rising hotel brand, Virgin.

Library selection is another limit that most of the competitors are suffering from.

Although Netflix, again, is on top, more titles and shows can lead to more customers. Netflix’s reservation system is a good tool to helping customers discover new shows that match their preferences. It also goes back to the same point that a viewer has stopped watching a show, so they can easily resume back at that point, rather than searching for it. However, the recommendation algorithm needs to be more refined so that it is more accurate when suggesting new content.

Reduce Phase: Different packages offered by Netflix should be reduced in order to gain more revenue and a competitive leverage in the market. By reducing the options, the customer will be forced to engage in one subscription plan in order to increase its revenue. Netflix can then charge a price slightly higher than its competitors.

As for the unprofitable markets, Netflix’s step to go global might be a great idea to position itself as an international brand. However, it does need to know the local market before expanding. As mentioned earlier in the report, a reevaluation of certain markets in terms of languages, which are limited, as well as the acceptance of content is needed. This is taking into

21

Netflix: Blue Ocean Strategy

account China censorships, as well as Middle Eastern audience. As a matter of fact, the growth in international market is expected to surpass U.S market with an increase of 133% from last year. However, HBO remains a big competitor with its better integration and tailoring tools entering other global market.

Create Phase: The technology industry is continually shifting and changing; finding new ways to retain and bring new customers is a key to keep the business working for longer term without the fear in being trapped in a red ocean. A “self-creation app” such as Snapchat or Instagram is a successful concept. The concept is attractive to the millennial generation and can be a good investment for customers to be fully engaged. This can potentially become a trend because it gives customer a more experimental experience, rather than just being a user. Children shows, educational shows, as well as live concerts might be appealing to a different segment of potential customers. Virtual reality streaming is another component that Netflix can create and emerge with this feature. This can position Netflix as a leader among competitors. Offline content is another element that is employed by competitors, but not yet by Netflix.

Eliminate • •

Exclusive Content Related-Ads Late Cancellation Fees

Raise • • • • •

Reduce • •

Subscription Options International Unprofitable Market

Original Content Partnership with Airlines Library Selection Movies Rental Length Recommendation System

Create • • • • •

Self-Creation Application Kids Shows Live Concert Educational Shows (Food/Daily Life) Virtual Reality Streaming Offline Content

Netflix: Blue Ocean Strategy

22

STRATEGY CANVAS The Strategy Canvas is a significant component for a Blue Ocean strategy; 14 factors are classified and three competitors are identified, as seen in the below chart. The following chart shows the elements that Netflix has to implement in order to eliminate, raise, reduce and create different factors for Netflix to win over competitors. It is important to highlight that Netflix is still the leader in many categories, even though the market share is shrinking from 58% to 36% of household subscribers in the United States. Below is the rating system (from 0 to 4) of the likeness of meeting the factors. To start with the raising phase, original content has the highest score of 4 points with CBS, as it has more powerful access to actual production of original content, while Netflix is the dominant between other live streaming sources (3). As for partnership with airlines, Netflix has established a partnership with Virgin Airlines which makes it qualify for a 4 score. As for library selection, Netflix is the leader with thousands of titles while CBS tops all. In addition, movies rental length should exceed 30 days to allow customers to enjoy the experience without being limited by time. According to a NY Times article, the reason why Netflix is letting movie lovers down, is because “the film selection on Netflix is much worse than your average blockbuster. It is like a gas station DVD collection.” Thus, it is also related to the late fees concerning its cancellation policy, which should to be eliminated from Netflix. Also, in global markets, such as India, which exceeded the volume of production of Hollywood, it can be a profitable market but with a longer term of rental, customers might be more eager to subscribe to Netflix.

As for the recommendation system, Netflix have a recommendation system. However, it is not as good as Amazon Prime, which is why a 2 is assigned for the “as is canvas.”

Interestingly enough, Netflix is considered the best alternative to pirating since it is has the lowest monthly fees, as well as a safer platform to watch movies and television shows from.

As for the reduction section, subscription options or packages need to be reduced. This technique can force the client into one choice rather than giving them full control. As for reducing the unprofitable market, it is a smart way to eliminate certain markets if the performance is not well. Going global can be risky, but a place like India, which is one of the fastest growing international markets; it remains a challenge. Without a deep understanding of local culture, a limited language selection, and a limited amount of accepted credit cards, it cannot tailor its service to the local market.

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Netflix: Blue Ocean Strategy

As for creation, Netflix can be a leader in producing self-created content. Offline content is another competitive advantage that Netflix has over its competitors. However, CBS remains the biggest provider of exclusive content.

The table below, explains the grading for “as is strategy� and its ranking allocation.

Netflix HBO Plus Amazon CBS Original Content

3

2

1

4

Partnership with Airlines

4

0

0

0

Library Selection

3

2

2

4

Movies Rental Length

4

0

0

0

Recommendation System

2

3

2

1

Subscription Package

4

2

2

3

International Unprofitable Market 3

2

1

1

Exclusive Content related-Ads

0

2

1

4

Late Cancellation Fees

3

4

3

3

Self-Creation App

3

2

1

0

Kids Shows

3

0

0

1

Live Concert

3

0

1

1

Educational Shows

4

1

0

0

Virtual Reality Streaming

4

1

0

0

Offline Content

4

2

1

0

Netflix: Blue Ocean Strategy

24

As for the “To Become” canvas, in order to create a blue ocean, Netflix not only needs to be creative in offering its subscribers more convenient tools, but also ideas to attract a new market. The self-creation apps, such as Snapchat, can gain popularity for fame seekers and debuted and beginner actors and actress. This tool is used to boost an individual’s fame, creating high turnover. More diverse shows can be created, such as kids shows, live concert and educational shows. In fact, the top star on YouTube channels earn up to $4 million and the biggest makeup tutorial artist gains over $145,000 as a net income. This can be an incentive for many customers to use this tool. Another niche market consists of children, as they are more engaged with technology than any other generation. In fact, 71% of children surveyed watch videos on a smartphone or tablet. Hollywood is actually allocating more than 20% of its production towards children identified from age of 4 to 17, including Disney tv shows and movies. As for music lovers, even though cable television shows, such as MTV, lost its appeal, people turn to different platforms to watch live concerts. As for live streaming, using technology to bring live special annual events, such as the Rio De Janeiro Festival, or big sports events such as the Tennis Grand Slam, can be a good idea to generate more viewers. Trends show that the sports industry accounts for 37% of broadcast TV.

Netflix: Blue Ocean Strategy

25

As the Strategy Canvas indicates, Netflix has many strong points that make it a competitive advantage over its competitors. In the creation phase, there is a potential to be the leader in new services that other competitors need time to adapt to. Technology is the major key in doing so. By providing a diversity of different services, Netflix can create a blue ocean, and therefore, a competitive advantage over others.

BUYER UTILITY MAP AND EXPERIENCE CYCLE Awareness: Customer awareness is significantly part of a company marketing and communications plan. Marketing and communications plans include education of the product and service, delivery, and performance; the strengths and benefits of the Netflix streaming service. Customer awareness can include the following: recognizable brand/logo (presence), positive references and word of mouth, strong social media audience (LinkedIn, Facebook, Twitter, Instagram), and customer service available for issues or questions and additional product education. The best capture method for Netflix has been word of mouth as confirmed by the Vice President of Corporate Communications, Steve Swasey, himself (Massoud, 2011). Netflix implements word of mouth by listening actively to what customers want, and then acting upon these opinions, so that they can then recommend it to their friends. Also, when the catch phrase, “Netflix and Chill� escalated into mainstream pop culture, Netflix encouraged the term, even adding it to their official Tumblr website (Netflix, 2015).

Netflix: Blue Ocean Strategy

26

Research: Customers have the ability to do additional research about Netflix and the competition before a purchase. Research often includes personal suggestions from friends, family, and coworkers and reading reviews of each subscription option. Most importantly, Netflix adds the free month option to assist in the customer research process; letting customers use the service without any penalty or financial requirements. With the free trial, potential customers are able to sample Netflix’s services without any sort of commitment.

Purchase: Free month free for all customers and 3 “plans” or payment options available: Basic, Standard, and Premium. Customers create a personal account with payment information (all major credit cards) and choose the plan preference of the three packages Netflix currently offers. Netflix is available at any time; the place of purchase being attractive and very accessible. Creating the Netflix account and making the purchase does not require a significant amount of time – payment can be made within minutes, making the subscription service available to the new customers immediately.

Delivery: The online streaming service is available immediately after customer purchase – not physical delivery is necessary. Customers interested in the DVD rental service get discs with US Postal Service First Class Mail. “Netflix ships to all 50 states and US territories, including Puerto Rico, Guam, American Samoa, the Federated Islands of Micronesia, the Marshall Islands, the Northern Mariana Islands, Palau, and the Virgin Islands. [They] also ship to APO, FPO, and DPO addresses” (Netflix). Shipments are usually next take, at most taking up to three business days. There is a great amount of compatibility with the product; it is playable on almost each type of device. This includes the following: Apple TV, iOS devices (Apple), Android devices, PC, Sony PS4 and PS3 consoles, Xbox systems, Nintendo Wii U, and many types of Smart TVs. There is no additional charge for customers to have Netflix integrated or downloaded on these devices.

Use: Netflix is easy and straightforward to set up and later use. The interface has simplicity and very user-friendly. The first login requires that customers pick three preferred shows or movies; this is used to help the system with the recommendation lists provided for the customer. Customers are able to create different “profiles” or pages for different family members or users. These profiles include separate recommendations and viewing history. There is a profile created that is custom to children and being user-friendly. Inappropriate content is then not available to these users. Customers are able to browse Netflix content through different

Netflix: Blue Ocean Strategy

27

genres and categories, including: Home, My List (user-selected content), Originals (Netflix produced content), New Arrivals, Audio & Subtitles, and Ways to Watch (connecting different devices). Netflix also saves the point at which a viewer stopped watching a movie or show so that viewers can easily go back to it later. There is great convenience with Netflix making the content available at anytime, anywhere, on almost any Internet-connected screen, without commercials or commitments.

Netflix does not require a lot of maintenance. Customers are billed monthly automatically for the subscription service; they are not required to make a manual payment. Almost no effort is required. Customers are also able to change payment methods, service plans, and personal account information through the Netflix account after login. Instructions and homepages for each are easily available and a customer service team is available to assist with any questions, difficulties, or concerns.

Customer Relationship Management: Customers are able to change his or her mind at any time and deactivate or cancel the membership and future payments. The customer can log onto the personal account and select the cancel option; there is then no billing after that moment. The account then automatically closes at the end of the current billing period – even if it was the free trial. Customers are not charged unless the account is restarted. DVD plans can also be cancelled; DVDs and Blu-ray discs are returned by mail within one week of closing the account to avoid additional charges or late fees for the discs. Customer relationship management is significant for Netflix, to keep customers from discontinuing the service. Netflix can continue the relationship and after quitting (disposal) try to win back as customer.

Utility Blocks: Utility blocks are problems or roadblocks that can happen during the customer experience cycle. Below are examples of some of Netflix’s utility blocks and recommendations to solve the problem. Utility blocks can sometimes lead to a customer disposing of the product or research a competitor or other option for streaming services.

Current Utility Blocks Limited Program Selection

Recommendation Provide customers the opportunity to suggest programs and series and Netflix include feedback on the likelihood; provide customers with as much information as possible.

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Netflix: Blue Ocean Strategy User-Friendly & Interface

Create a visually pleasing user-guide, including the search engine. Make the interface as simple and convenient as possible.

Poor Customer Service

Hire more employees for the customer service department and make customer satisfaction a priority.

Lack of Community

Allow people to add others as “Friends� on Netflix, and therefore be able to recommend shows to each other.

Lack of Interactivity

Create an algorithm that allows viewers to post live comments while the show is streaming. Viewers will have the option to turn this option off or on.

The Six Stages of Buyer Experience Cycle

The Six Utility Levers

Awareness Research Purchase Delivery

Use

CRM

Customer Productivity

Simplicity

Convenience

Fun and Image

Environmental Friendliness

Current Industry Focus Blue Ocean Offering

Netflix: Blue Ocean Strategy

29

CONCLUSION Netflix is a multinational entertainment company that specializes in and provides media and video on demand (online) and DVD (by mail). There is currently crowded marketplace in many different industries, including the streaming community; “competing in overcrowded industries is no way to sustain high performance. The real opportunity is to create blue oceans of uncontested market space� (Mauborgne and Kim 1). The Blue Ocean Strategy is based on creating an uncontested market space and making competition irrelevant. This creates a competitive advantage and lasting success, rapid growth of the product or service.

The following paper created a case for Netflix as a company being considered a Blue Ocean. Netflix can take into consideration the following opportunities, including: global expansion, new services, offline content, airline partnership, and social media and selfcreation. Netflix’s positioning based on the Blue Ocean Strategy will provide the company the opportunity to continue being the most-used streaming service nationally and the preferred choice among the national community.

There continues to be questions, with unknown (and not so simple) answers. Netflix is a pioneer in its industry, but what strategies should be employed to avoid getting caught in the red trap like many other companies who declined in business or even been destructed by other competitors (that were previously considered Blue Ocean ideas). How fast, should the company execute new ideas/services and what was can Netflix compete with others in the market with the limited resources and budget, while still remaining the customer favorite streaming tool?

Netflix: Blue Ocean Strategy

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