Strategic Management For Netflix In Online Video Streaming

Key Drivers of Change in Macro Environment of UK for Online Streaming Business

The report aims at providing an insight into strategic management from the perspective of a management consultant for Netflix in respect of online video streaming business in UK. Netflix is a provider of media services headquartered in the Los Gatos, California. Marc Randolph and Reed Hastings in the Scotts Valley California found the company in the year 1997(netflix.com 2018). The primary business of the company is the subscription based media streaming service that offers online streaming of television programs and films including the ones produced in house.  Netflix has close to 137 million subscribers across the world with 58.46 million subscribers from United States.  The initial business of Netflix were restricted to the sales of DVD which was jettisoned by Hastings and expanded in the year 2007 through introduction of the streaming media in addition to retaining the Blu ray and DVD rental service. Netflix underwent an international expansion in the year 2010 with streaming facilities in Canada, Caribbean and Latin America. As per the records of 2017, the net income of Netflix had an annual income close to US$559 million (nasdaq.com 2018). The report focuses on the key drivers of change in the macro environment of United Kingdom for online streaming business put forward by Netflix.  The report also focuses on the drivers of profitability of the industry with the help of Porter’s five forces. There is also identification of the key opportunities and threats faced by the online video streaming industry. The report also focuses on the company’s leadership in exploiting the counter threats and opportunities.

The key drivers of change in the Macro Environment of UK for online streaming of business are done through the PESTLE analysis.

The key principle on which the Internet service providers and government depend is network neutrality that implies that the data should receive equal treatment. There should not be any discrimination or differentiation of charge imposed by subscribed site, user, content, platform, type of the attached content and the communication mode. Proposed regulations for implementations of neutrality have been a serious matter of conflict (Jackson and Lilleker 2013). Besides, network neutrality, it was also necessary to influence the other laws that was not in favor of the industry. One such law has been the Video Privacy Protection Act (VPPA) that Netflix should influence for incorporating changes and sharing features over the social media that would hold relevance for online streaming.

The online streaming business of Netflix is influenced by amendments in the customer spending that remains influenced tax rate, growth rate and the interest rate. The increase in the customer spending will result in an increase of the subscriptions of the online streaming business. At the end of the 2016, customer spending increased slowly thereby put forward the opportunities of growth for the online media streaming business of Netflix in United Kingdom (Schaltegger and Wagner 2017).

Customers having more time prefer watching movies, television shows and play games from various companies within the industry (Hajli 2014). The fall in the rate of unemployment in the next five years will result in people preferring more online streaming services for saving time. To ensure driving in the change Netflix needs to ensure effective plans for marketing. Online video streaming services can result in the gradual downfall of sports and the other activities of leisure.

Political Factors

The emergence of internet has brought about a revolution in life of people and served innumerable functions. Media streaming represents one of the services associated with internet and technology. Netflix also gained popularity through its media streaming services. The Netflix application allows the people to watch movies and television shows during free time on their laptops, tablets and smart phones (Hallinan and Striphas 2016). Netflix remains compatible with each internet enabled device that acts as the driving force for accessing the online streaming service from anywhere at any particular location.

There exist instances of the legal action against the companies within the media streaming industry due to the wider use of the licenses for the contents and contracts in relation to the privacy issues of the customer and the content providers.

The online streaming business of Netflix has a huge environmental impact. The driving force for online streaming business has been in the partnership of the company with Greenpeace for reducing the carbon footprint (Darrow 2017). Besides, the online streaming business put forward by Netflix remains accessed by the various groups for enforcing the usage of renewable sources of data for the data centers.

Porter’s five forces determine the drivers of profitability in online video streaming industry:

Bargaining Power of Buyers:

 It depends on various factors like switching cost, video and preferences, television and movie show selection and refinement of the brand. The switching cost refers to the biggest issue faced by the online video streaming business put forward by Netflix, as it seems to be an easier option (Gonçalves et al. 2014). It also becomes easier due to the lack of annual contract and the minimal cost of signing up for the service. As most of the video streaming business offers a free trial so it becomes easier for the customers in making a switch between the services. Netflix also addresses video preferences by charging premium for the HD services. It has been necessary for video streaming industry in building a number of video preferences for competing against newer entrants. The online video streaming industry like Netflix should pay attention to the viewer preferences. This takes into account the ability of streaming the wants of the content viewers with the addition of the viewing features that includes incorporating foreign languages and closed captioning. In case of movie and television show selection, the subscribers of Netflix have bargaining power concerning the television and the movie show. Besides, buyers of the online video streaming service bargains on its brand. To create an appeal, Netflix should refine the brand for appealing to a broader customer range.

It is determined by the various factors like contract cost, role of competitors and exclusive content and the supplier alliances. In relation to the contract cost, the video streaming business of Netflix should not only keep but also secure contracts with most popular studios and net work for ensuring customer happiness(Lyubareva, Benghozi and Fidele 2014). Provided, the number of subscribers of the company falls below the break-even threshold it results in loss of the company. It might have to lead to severance of contract that is not only costly but causes the existing subscribers in cancelling the service or absorbing the cost until it is capable of attracting newer customers. As increasing number of movie networks and television studios have started their own streaming services, they have made competition all the more difficult. Besides, some of the suppliers might develop strategic alliance or partnership.

Economic Factors

Competition is fierce in the online video streaming industry. Netflix has to compete with the Amazon directly where each not only creates some content but also stream movies and television shows (Weill and Woerner 2013). Besides, Netflix also had to compete with the other providers. Other video streaming services offered next day viewing of the current hits that is not a feature with the Netflix. This acts as an important feature of a person who wanted to replace the cable with the video streaming service. As far as product differentiation is concerned, there exists very low differentiation between the providers of video streaming services. This helps in enhancing the competition between the providers. In case of price wars, the cost differentiation between the primary video streaming providers is at the minimum level.  Netflix remains priced at premium to the rivals. Therefore, the firm remains under pressure for making sure that the selection of the title justifies higher price.

One of the contenders for the online video streaming industry has been You Tube Red that is the premium version of the You Tube with certain additional features (forbes.com 2015). It not only allows the subscribers in watching the content in a commercial free manner but also provides access to the original shows thereby linking it to the music app of You Tube that enables the creation of playlist from the videos streamed. In terms of cost and scale, the new entrant in the online video streaming industry do not have same support and scale and  cannot compete with the well established rivals like the Netflix. This is because the kind of the long-term contract that Netflix possess is expensive due to cost of the server and tech support. Therefore, for making an entry the new entrants requires needs to collaborate with established network, studio or brand for competing with Netflix. However, the new entrants can have an impact on the established online streaming business by putting forward niche offerings that also enables the subscribers in switching service. On the other hand, online video streaming service like Netflix can provide individual experience for expansion of the catalog or in offering differentiated services to ensure effective competition against the newer entrants. Some of the video streaming companies have created different identities of viewing so that they are able to attain individualized experience based on the preferences and the habits.

Threat of the Substitutes: Many people do not seem to be interested in the online streaming service and they prefer entertainment via the cable service for entertainment. In addition, it is also hard to compete against free services and online video streaming service like Netflix faces the competitive forces on the several fronts. The company also faces the risk when people substitute the service through pirating (Borja and Dieringer 2016). Besides the aspect of being social also possess as a risk to Netflix as people seem to spend more time being social rather than spending on the streaming of video.  People also look forward to not only connecting through social media services but also play online games, interact with the friends and spend time on the face-to-face interactions with the loved ones.

Social Factors

Opportunities:

1. Originality in Programming: Netflix puts forward various original programs and owns an exclusive right for streaming them. Netflix has comedy, series, documentaries, movies and television program (Sweney 2018). The originality in programming directly influences the marketing and membership that in turn influences the financial status of an organization.  This even defines the value since Netflix has better cost to value ratio in comparison to the competitors who does not own an extensive program offering.
2. Deals with Mobile Data: The teaming up of Netflix with various cellular providers puts forward various data deals where Netflix streaming do not influence the monthly allotment of mobile data of the consumers (Scott 2017). This seems important, as until then the consumers without larger data plan had not as online streaming of video required immense data access that seems expensive. As Netflix, do not affect the monthly allotment of data so it became accessible to increasing number of consumers. This also acts as a suitable example of market segmentation as the Netflix customers seem to fit particular demographics. Therefore, through segmentation of the market the company is able to target the user who can afford a Smartphone and the segmentation.
3. Advertisement Free Entertainment: Netflix presently offers not a single membership price but also an advertisement free entertainment. There exist no levels of membership necessary for accessing an uninterrupted streaming of video service. This acts as opportunity from the point of view of marketing. For instance, Amazon offers an ad free streaming of online videos at a yearly cost higher than Netflix’s yearly subscription of $96 (Sulleyman 2017). This adds value since it allows Netflix remains at a better cost to the value ratio compared to the competitors.

Threats

1. Cultural and Political Censorship: Netflix looks forward for expansion in the given geographic market. However, the expansion seems difficult as there are some government controls over the contents of the online video streaming in the country. The government also censors the content and the officials of the government ban anything that seems objectionable.  The content is made to pass through the screening process and anything failing to meet the mark is pulled from the distribution. This is vital since Netflix offers variety of shows. With the content being censored or disapproved, there will be very little reasons for the UK market to pay for the subscription (Mou, Atkin and Fu 2013). Besides, Netflix faces the challenges of socio cultural difference that also implies that the company needs to worry about the attitude, value, language and the cultural differences in the targeted foreign markets. This might influence the type of programming that the foreign users want to view thereby creating an impact on the customer expectations.
2. Unlawful Means of Video Streaming: Netflix faces the challenge of competing with the illegal streaming of the online video that presently is a free service (Ellis 2015). Although the demand for Netflix is higher but when the users discards their ethics for watching the free hit shows it directly influences the expected revenue of the company.
3. Liabilities Related to Off the Balance Sheet: This represents the cost for the future programming (Mazzolini 2016). Netflix categorizes the cost in association with the preparation of content for streaming as ‘off balance’ since it is not considered the current cost until the show goes live. The cost seems to be increasing at a rapid pace due to the original price of the programming. This is vital as it relates to the company’s financial perspective and must be dealt with caution while accessing the risk related to the finances off balance sheet.  

Netflix can exploit the Opportunities to become the following (Anokhin and Wincent 2014): 

1. Become a niche online video streaming companies: Netflix can adopt the compression technology coupled with the higher speed internet service to easily stream over internet.
2. Adoption of conglomerated strategy: This helps the company in developing programs based on the different audience interest
3. Dominant Global Presence: With innumerable subscribers and increasing opportunities for growth in the UK market, Netflix can claim to be become one of the first global networks for television.

Netflix can counter Threats by adopting the following steps (McDuling 2018):

1. Entry into UK Market with original content: The Company plans to enter into the market by spending huge amount of money for not only producing original content but also acquire such content.
2. Dealing with Illegal Streaming: Netflix strengthens its crack team for battling against the online pirates that illegally streams the popular television and the movie shows. With increased amount of investment of their own content, Netflix look for ways in stopping the online pirates from illegally accessing the movies and the television shows. For clamping down piracy, the company is bolstering its in-house team.
3. The company has also put forward the income statements that help in preparing content for ‘Off balance’ streaming.

Conclusion:

On a concluding note, it can be said that Netflix is gradually becoming one of the household names for adapting and shifting the focus for serving the ever-changing market filled with increasing competition. The online streaming service offered by Netflix seems to dominate close to thirty percent of all the downstream internet traffic in streaming the video content to the users. The report shows how the company generates its revenue through digital distribution. Illegal downloading and streaming will exist to certain degrees with failed attempts of either normalizing it or reducing its impact on the Netflix bottom line.

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