Netflix: Shifting distribution channels
Netflix was founded in 1997 as a DVD rental service that mailed discs to customers through the post. Initially it offered a pay-per-rental system, but in 1999 it switched to a web-based subscription service based on a flat monthly fee and unlimited DVD rentals. It had come to dominate the DVD rental market in recent years and by 2010 it had 20 million subscribers, who had access to both postal delivery of DVDs and streaming services. It had $2 billion in sales, but spent $600 million per year posting DVDs to its US customers. In 2010 Netflix launched a streaming-only subscription plan for $7.99 (with no DVDs); subscription plans that included DVDs increased in price by between $1 and $8, depending on the plan. Around 60% of Netflix’s customers had tried the streaming service, using web-enabled TV sets, games consoles and Blu-ray disc players. It also planned to launch a streaming-only service in Canada and the UK in the coming years. But was this shift from DVD to streaming really playing to Netflix’s strengths? The streaming world was a competitive one, with high content acquisition costs. It would put Netflix into competition with a new set of companies, including suppliers of content (like cable companies). Also, would Netflix’s existing customer base be easily converted to streaming? Or would the company alienate its customers in the process?
The learning objective is to prompt participants to consider the challenges of shifting business model without;
- Losing your competitive advantage in the process
- Alienating your existing customer base
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