Netflix Case

Since the publishing of this case, Netflix has entered the video on demand (VOD) market. What is your analysis of how Netflix has attempted to update their business model with VOD?

Currently, Netflix is running its VOD service in parallel with their main source of revenue, DVD rentals. However, the VOD service is not offered as a standalone service, but rather as a bonus offering added to the standard DVD subscription service. Users have several options in regards to how they watch the streaming video content: on their PCs, Macs, or Netflix-ready device such as the Xbox 360, etc.

By offering the VOD service as a free bonus, Netflix is able to get a foothold in the newly emerging process of “video rental” without cannibalizing its DVD rental operations. By pursuing the emerging technology and rental process, Netflix has determined that having a first-mover advantage is critical to its future business operations. Thus, reinforcing its significant amount of investment in the VOD service. One critical component of the VOD service will be to return a profit. It is unclear whether Netflix is currently making any money off of VOD and/or whether it will be able to make money in the future. Or better yet, how it will be able to make money (i.e. rental fees, advertisements, purchase, etc.) It can be assumed that DVD rentals will wane in the future due to new technological advances such as Blue-Ray technology and Internet VOD. With Blue-Ray technology taking off as we speak, it seems obvious that Netflix will have no troubles incorporating Blue-Ray discs into its offerings. However, internet VOD hasn’t taken a strong foothold yet. This is primarily due to the fact that people prefer to watch movies on large HD TV screens over small computer screens and the technology to combine internet and TV hasn’t yet evolved to the point of mainstream. Netflix is trying to bridge this gap through netflix-ready devices. The other problem area for VOD is content and being able to provide large amounts of it. Despite this issue, Netflix advertises that it has access to over 12,000 movies and TV episodes.

Opinion Section:
I believe that despite the massive amounts of financial hemorrhaging that Netflix will endure pursuing the internet VOD service, it will suffer a greater financial catastrophe if it turns a blind eye to VOD and gives up any possible first-mover advantage into this new market, which I predict will be the predominant methodology for video rental in the near future. Additionally, Netflix must continually reinvent itself in order to offer cutting-edge methods for video rental or else competitors will cut it out and take the lead, leaving its DVD rental service to wither and die. Finally, I believe that Netflix chose the best of its options, in terms of offering VOD. People don’t want to buy movies on the internet that they have to download...that’s not renting! Also, it is highly unlikely that Netflix would be able to generate enough revenue based off of selling advertisements, to make the business model as successful as the current one. By offering the service for “free” to its existing loyal customers, it will better be able to test the adoption of the VOD offering as well as slowly migrate its users from DVD rental to VOD. All-in-all, I believe Netflix has chosen a wise path.