Netflix - Oops, something went wrong...

A few days ago, Netflix’s founder and CEO Reed Hastings published on Medium an excerpt from his book (https://medium.com/@reed-hastings/netflixs-keeper-test-is-the-secret-to-a-successful-workforce-9ab791cb610e).

It would be interesting to speculate the rationale for publishing this specific part of the book, as one might argue that the excerpt sounds almost like a justification with which Netflix is trying to address HR and people issues that exist in their company’s culture. The timing of this article is also interesting as it coincides with a recent Netflix strategy analysis we did at Harvard.

Namely, in the strategic analysis exercise with Harvard University, we analyzed Netflix from a strategic management point of view and came to a surprising realization:  Despite their current market dominance, Netflix DOES NOT have a sustainable competitive advantage. 

Netflix is a video streaming provider (emphasis on the word “video”) with currently the highest market share, and significant goodwill. Sure, with their global presence in 190 countries and a customer base of over 163 million subscribers, Netflix is true to their mission “To entertain the world.” However, this highly lucrative industry attracts other players with superior resources and additional customer values. Take, for example, Amazon with their bundled Prime service offering or HBO’s combined cable and streaming offer.

According to Netflix’s financials and publicly available information, their focused strategy combined with the business model that relies on owning the digital media marketplace and pipeline (Netflix platform with content production), cutting-out-the-middleman approach (owning production to distribution supply chain), and the unlimited-subscription business model positioned them as the market leader with a sizable revenue stream that is able to service their increasing debt used for intensive growth and expansion.

However, an analysis using 9 strategy tools indicates that Netflix is susceptible to market forces and changing conditions influenced by existing rivals and new entrants with vastly superior resources and additional value-added services (with Amazon and HBO leading the charge, followed by Disney and the rest of the giants from the media cohort). More to the point, most of Netflix’s competitive advantages are not inimitable nor non-substitutional. This is a prelude to an imminent price war, which in a long run might prove to be vastly unfavorable to Netflix due to its single source of revenue. With the service bundling attractiveness of competitors and vastly superior resources, the question is not IF the rivals can surpass Netflix, but WHEN.

To mitigate the risk and address the issue of lacking a sustainable competitive advantage, this analysis argues that Netflix should adapt their portfolio strategy to focused diversification, following the transnational expansion strategy, while further expanding their subscription offering. More precisely, the summary of the analysis points out the following moves as a way to obtain the sustainable competitive advantage*:

• Diversification of the existing content (a task they are already implementing),
• Increase market utilization (perhaps the easiest strategy to implement, with the quickest ROI),
• Continuous innovation (including leveraging the gamification potential, building community, and utilizing social network integration)
• Increase types of revenue sources (audio streaming, podcast, and alliance licensing are just some of the related diversification approaches).

Those who have followed Netflix might argue that the untapped potential of the Chinese market is a way to go. We disagree. Although several analyses indicate high operating costs and an opportunity for new market expansion into China, neither of these are critical issues.

On the contrary, high operating costs are unavoidable in the content war that Netflix is waging against Amazon, HBO, and Disney. Production of original content is expensive, and these costs will increase further over time, as indicated by Netflix in their annual report. Therefore, lowering operating costs is not considered as the critical issue.

Expansion to China is, at least in the foreseeable future, a lost cause. This is something that Netflix has tried and failed before. Instead, Netflix should continue to appeal to a numerous Chinese community outside of China in an attempt to eventually manage to get a share of the Chinese market through the back door.

Netflix’s current management, with Reed Hastings at the helm, has proven to be capable of adapting their strategy to changing market circumstances, which gives them enough experience to respond to rivalry. However, some of the outlined approaches are new to Netflix’s management and are therefore not without the associated risks.

It remains yet to be seen if Netflix will manage to re-invent themselves once again and retain the throne or if they will vanish under the relentless pressure of the hub economy kings and media rulers.

*Details available via DM.