Digital marketing analysis of Netflix

Digital Marketing – Assignement Assignement 2

Netflix Case

Sophie LEROSEY Pierre JATTEAU Florian BIDAULT Léopold DUCLOS-PIETTE

Hanken School of Economics Helsinki 2019

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Part 1

Today, Netflix represents 12 million subscribers worldwide (N. Richaud). However, this success was not planned. Netflix's story began in 1997 when its founder, found er, Reed Hastings, decided to create c reate a DVD rental service that allows people to keep movies for as long as they want. At the time, it was the beginning of the DVD's success, and the idea of streaming was very distant. Netflix's early years were not good, as the company offered a subscription service that did not appeal to its target audience. In 2000, Hastings tried to sell Netflix. However, at the same time, Netflix launched an innovative service that explained the beginning of its real success: the personalization of the offer. Customization Cust omization plays an a n important role in the operation o peration of Netflix . The films watched by subscribers are analyzed in order to offer them other content they might like. This function has two main consequences. First of all, the offer comes directl y to the consumer, he doesn't have to look for what he wants to look at and given the number of references in the Netflix catalogue, this point seems very important. The second thing is the ability for Netflix to analyze consumer trends and anticipate future successes (O. Dumons). It allows Netflix to identify the type of content it needs to offer to be successful. For the consumer, this allows him to feel free to look for anything he wants while making his choice easier. The second main reason for Netflix's success in the 2000s was the dematerialization of its offer. In 2007, Netflix decided to diversify its offer by offering a streaming service. Today, we can say that this is the part of Netflix's history that we remember, but at the time, it was really innovative. Dematerialization is accompanied by another very central practice in the operation of Netflix,







is provided, consumers have the possibility to watch their films on different media such as television, telephone, computer.... This allows them to keep Netflix with them at all times and watch their content whenever they want. But in addition, omnichannel content is also used in Netflix's marketing mark eting strategy str ategy and is well illustrated illus trated by b y 2016 with an advertising campaign that allows people to share their faces with their favorite characters (La Réclame). This crosschannel strategy works very well and seems to be a good way to encourage people to react, especially on social networks, and fits Netflix's young adult target perfectly (Anne-Cécile Guillemot). The last interesting point to emphasize, especially considering the large number of Netflix subscribers, is the social phenomenon that has become Netflix. As is often well explained with the concept of "Extended Self" (Belk, R. W.), we are more and more used to identifying ourselves through our consumption behavior. Today, using Netflix is a way to be part of a group, a community. The success of the term "Netflix and Chill" for nearly ten years and its evolution is a clear indication of this. Many journalists have tried to explain this cultural phenomenon (Kevin Roose), which finally proves that Netflix has succeeded in adopting its target's codes.

Part 2

Netflix is now the leader in the SVOD segment in terms of customers: customer s: it gathers more than 139 million subscribers worldwide, up almost by 9 million in the last quarter of 2018 (CNN). Since 2016, when it added 130 new countries to its streaming list, it is present in all countries in the world except China, Crimea, North Korea and Syria. Netflix was a “born global” company: it extended its diffusion in the whole world very fast because of the important







If Netflix is for now an uncontested leader, many competitors are entering or have already entered the market. Amazon Prime with its more than 100 million subscriber base -even bi llion though Prime isn’t only about SVOD - is starting to be a threat: it has invested in 2018 $5 billion on content, not that far from the $8 billion Netflix spent. Hulu, on another hand, already reached 25 million subscribers, increasing by 8 million compared to 2017, invested almost $3 billion last year in original content. Those two are for now the biggest competitors of Netflix, even though they are mostly focused on the North American market, which will certainly reach saturation this year with the launch of new platforms by Disney, Apple and Warner Bros.

But if this emergence of new competitors is a direct threat because of their notoriety and their large unique programs, it is also an indirect threat for Netflix. As it is well-known, Netflix’s library is composed of original creations but also of much licensed content: it is

estimated to be around 60% of all the titles on the platform (Parrot Analytics and S&P Global Market Intelligence), decreasing decr easing to 50% by the end of 2019. Among this content, content , 20 is estimated to be Disney/Fox content and Disney/Fox and Warner Bros. content might represent more than 40% of all hours spent watching Netflix (Annie Gaus, 2018). With both pulling their content out of Netflix, Netflix will have to find a way to cope with it . Moreover, this competition

between platforms make mak e the cost of licensed content increase substantially . The example of Friends is gripping: Netflix spent $100 million to renew its license through the end of 2019, compared to the $30 million it paid previously. All of these are threatening the rentability on the local market of Netflix, which is for now the “cash cow” of the brand, the international

activities still being question marks. These new market threats are combined with environmental threats that could limit the growth of Netflix, the first one being the end of net neutrality . Because of it, internet providers







bandwidth. And Netflix consume around 40% of it. The creation of tolls could limit the growth of Netflix in the US, as well as its competitors’ one.

Netflix also has its own structural problems, the first being its huge debt of around $10 billion that could limit its capacity to invest in content in a close future or reduce its investors’ trust in the company. From October 2017 to September 2018, Netflix s pent $11.7 billion in new contents while earning $14.9 billion revenues (Jeff Sommer), necessitating a $2 billion loan to cover other expenses. To cope with it, it has increased its subscriptio n prices both in the US and in Europe, but this could slow down its acquisition of new customers. This increase shows Netflix doesn’t have a large leeway to improve its rentability. If its competitors can finance the SVOD with their complementary activities (e-commerce for

Amazon, Box office for Disney…), Netflix only has two ways to improve its profitability: gain subscribers or increase its prices, which could harm its sales .

But Netflix can count on its multiple strengths. At first, it is the leader on SVOD in the world, which means it is the one making more economies of scale , allowing it to invest more on new content. It can also benefit from a strong brand image acquired by a consistency in the quality of the experience offered to customers : as described in a Piper Jaffray report,

71% of consumers felt the service has improved, even exceeding their expectations (Edward Helmore, 2019), which explains the 93% renewal rate , the highest of any SVOD services (Annie Gaus, 2018). Their platform technology gives also Netflix a big advantage on the market: it helps improving the customer experience via its efficiency but is also a big source of data that help the company improve its future content and know what consumers want, reducing the risk of the investment on production. All of this create new opportunities opportuniti es for Netflix to develop further internationally even







Netflix as always felt the trends coming in this industry. Thanks to its well-advanced technology, it could explore new ways to broadcast or even more advanced video quality . Finally, the withdrawal of the Disney/Fox content this year could be an opportunity for Netflix to ax its strategy even more on its own content : the growth in subscriptions could be a

leverage to invest more on unique content. Then, Netflix would get less dependent on other studios and thus save money on licensed content in the future: it would still focus on “brand content” while old own production would make th e “complement content”. Strengths

Weaknesses



Unique quality content



No control of the data centers cent ers



Unique technology



Limited financial capacities (debt)



Large loyal customer base



Mono-activity make the company



Strong brand image

more at risk

Opportunities 

Arrival of new competitors (3 major)

internationally



American market saturated



Improve the platform’s technology



Increasing cost and loss of licensed



Make of Netflix a unique brand with



Still

a

large

room

Threats

for

its own unique productions

growth

content 

End of Net neutrality

Part 3

Based on our evaluation, we assume two main recommendations for Netflix, that will help the company to grow in the future: Netflix must try to capture and retain customer’s attention but also to monetize customer’s attention. We divided those two objectives into three types of

recommendations: about Process, People and Technology.









The issue of the monetize attention remains terribly sensitive in the digital media. With the upheaval of the value chain and the emergence of new power relations in the sector (between producers and publishers, etc.), the sharing of value between the different stakeholders is becoming more and more mor e strategic. strat egic. Netflix Netfl ix is thus thu s engaged en gaged in i n a real race rac e to size. Acquisition operations have intensified on the publishing side (horizontal integration) for several years. Netflix, which has embarked on this path of integration, should shoul d continue like this. As Huang et al. (2017) explain, « digital ventures grow by drawing on and adding to digital infrastructures and can reach scale much faster than traditional, industrial companies. ». The acquisition of a competitor would allow Netflix to consolidate its positions in its market or its segment of intervention . This gives a greater market power and a more favorable

balance of power. p ower. By B y gaining gainin g bargaining bar gaining power p ower against a gainst the th e upstream upst ream and / or downstream do wnstream of of the value chain, Netflix would put itself in the position of becoming a little more price maker as opposed to price taker - and therefore of capturing more value. In the future, this solution would help Netflix remain market leader. Netflix should redefine its vertical integration strategy . Upstream and downstream of the

value chain are becoming increasingly strategic for digital media, especially because of the rising content acquisition cost that sheds new light on production. Netflix is already going on this path and it gives it several advantages. At first, Netflix create a clear editorial line and control the quality of the contents, to preserve its mark. It is also a way to increase revenues by







neutrality, or the fact that the data centers where are storage Netflix’s data belong to Amazon,

could be threats in a close future. That’s why it could be safe to invest in own data centers, as well as in an internet provider to ensure its customers won’t be charged more because they use

more internet bandwidth. b) Build a strong brand by being consistent in the content

The brand, because it is inimitable and plays a major role as a benchmark for consumers in an abundance of offers, is a more strategic asset than ever before. Netflix has every interest in building a strong brand if it wants wants to stand out from the competition and attract attention. There are different ways for them to proceed, that Netflix could borrow: -

Ensure editorial relevance: in this case, the media and the brand are one.

-

Acquire or produce "brand-content". It relies on its catalog of content to fuel its brand: this content raise interest to attract users alone and constitute its "face of appeal."

The strength of "content brands" changes the strategic approach of digital media. When the assembling contents produced internally and / or produced by third parties, it happens then that the notoriety of the contents make equal play, even exceeds, that of the media which diffuses them. This phenomenon is amplified by the cultural globalization which favors the emergence of world licenses. The objective for Netflix would be to have a few "brand-content" to attract consumers, who are potential influencers, to its offer, and to make them stay with content "complement", less expensive, but bigger. Netflix should keep using a mix of content, with







The ability to monetize attention is also measured by the potential for brand extension. The brand gives its holder a competitive advantage to win the battle of attention, attention , but it also allows digital media to extend their territory of influence outside of their core business: it facilitates the penetration of new markets and generates derived income. It would strengthen the influence of Netflix and hence its ability to attract attention. Thus, Netflix could explore two paths: -

Media brand extension, the least risky option. Netflix is only declining its mark on other media where it is currently absent (i.e. music streaming). It requires low investment thanks to synergies, and so the least expensive option in case of failure.

- Non-media brand extension. Because of the growing sector, SVOD platforms are essentially blocking their brands to their core business for the moment. Due to business uncertainty, Netflix would be advised to be a pioneer to expend to non-media sectors. 2) People Netflix could extend its content from "brand-content" to "person-brands", a similar strategic logic. What has profoundly changed with digital technology is the ability of

individuals to stage themselves, to promote their editorial or artistic creations through social networks. The strategic logic is the same as for "content brands": individuals bring the audience to the platform, which pays them (via advertising). These artists become brands thanks to their community (i.e. CR7 on Instagram). Netflix Instagram). Netflix could invest in i n this way that looks promising, pro mising, just like YouTube already does: extend its activities to video-sharing. In a way, those individuals







3) Technology a) Netflix needs more than ever to signal itself

Netflix must be ubiquitous. It must be visible and accessible everywhere, all the time, and "scream" louder than its competitors. To do this, three major strategic options are available: Broadcast on all screens. With the revolution of uses, particularly delinearization and mobile

consumption, it is imperative to publish the content on the various terminals available to users: it is a way of guaranteeing an optimal quality of navigation to their users. Netflix already offers a wide choice of distribution but must remain informed of possible advances in this area. Distribute its offer widely . Thanks to the digital, media have the opportunity to self-distr ibute,

by distributing their contents on the web and by presenting their subscription offers via their own website. But if Netflix wants to gain visibility, it must also be distributed by a lot of intermediaries strongly implanted on the human-machine interface: box of Internet operators, connected TVs, application stores, game consoles, connected speakers, etc. It is necessary to go further than the offer developed on the Xbox. Finally, Netflix need a real social media polic y. You have to occupy the ground as much as possible to get attention.. Interact regularly with users, promote content to the community that will be the first communication channel (prescriber effect). It is a question of organizing the viral propagation of its editorial offer. b) Netflix should keep investing in its distribution, which is a key factor of success

If distribution is a key issue to win the battle of attention, attent ion, it may be even more true on segments







REFERENCES :

Harmeling, C. et al. (2017) ‘Toward a theory of customer engagement marketing’, Journal of

335. the Academy of Marketing Science, 45(3), pp. 312 – 335. Russell W. Belk (2013). Extended Self in a Digital World, Journal of Consumer Research, 40(3), pp. 477 – 500. 500. Huang, Jimmy C., Henfridsson, Ola, Liu, Martin J. and Newell, Susan (2017) Growing on steroids : rapidly scaling the user base of digital ventures through digital innovation. MIS Quarterly, 41 (1). pp. 301-314. Constantinides, P., Henfridsson, O., & Parker, G. G. (2018). Introduction — Platforms Platforms and Infrastructures in the Digital Age. Information Systems Research 29(2), 381-400. Belk, R. W. (2013). Extended self in a digital world. Journal world. Journal of Consumer Consumer Research, Research, 40(3), 477-500.

Nicolas Richaud, 2018, Les 5 chiffres chiffr es fous de Netflix, Les Echos, Accessed February 26, 2019, Available : https://www.lesechos.fr/23/01/2018/lesechos.fr/0301193125057_les5-chiffres-fous-de-netflix.htm La Reclame, 2016, Netflix vous propose un faceswap avec ses héros, La Réclame, Accessed February 26, 2019, Available : https://lareclame.fr/darewin-netflix-netflixswap-151254 Olivier Dumons, 2014, L’algorithme de Netflix, un cerveau à la place du coeur, Le Monde,









catchph rase, Fusion, Kevin Roose, 2015, ”Netflix and chill” : the complete history of a viral sex catchphrase, Accessed February 26, 2019, Available : https://fusion.tv/story/190020/netflix-andchill/?utm_content=bufferc869f&utm_medium=social&utm_source=facebook.com&u tm_campaign=buffer Xerfi Precepta (2017).Stratégie des médias numériques. Accessed February 19, 2019. Available : https://www-xerfi-com.ezp.em-lyon.com/telechargement premium/400339_EMLYON_7COM28

Digital marketing analysis of Netflix

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