Chapter 2 Case Study Netflix

NETFLIX, now 20 years old, has more than 94 million subscribers worldwide and is the most popular subscription media business in the United States.15 In the fourth quarter of 2016 alone, Netflix had estimated total revenue of nearly $2.4 billion.16 But the road has not always been so smooth for Netflix. In 2011, Netflix dramatically changed its business strategy from one based on the physical distribution of DVDs and Blu-ray discs, to one based predominantly on the direct streaming of entertainment content across the Internet. This case study looks at the impact on Netflix’s supply chain strategy.

¹⁵T. Team, “Netflix Subscriber Growth Continues Unabated, As Margins Improve,” Forbes, January 19, 2017, www.forbes.com/sites/greatspeculations/2017/01/19/netflix-subscriber-growth-continues-unabated-as-margins-improve/#5579d8fc52dd.

¹⁶Netflix letter to shareholders, January 18, 2017, http://files.shareholder.com/downloads/NFLX/4178437955x0x924415/A5ACACF9-9C17-44E6-B74A-628CE049C1B0/Q416ShareholderLetter.pdf.

Netflix’s Supply Chain Strategy, before 2011

Before 2011, Netflix’s supply chain strategy mixed information technology and physical logistics to replace traditional brick-and-mortar stores, such as Blockbuster. The Netflix Web site not only served as a virtual storefront but also used customized software to track its subscribers’ preferences and make recommendations based on an individual’s viewing habits. Enough subscribers responded to these recommendations that Netflix could keep many of its older DVD titles circulating and continuing to earn revenue, while lowering demand somewhat for the “latest” releases.

The second major piece of Netflix’s supply chain, its distribution system, was just as critical to the firm’s success. By operating several distribution centers around the United States right from the start, the company was able to accept, inspect, and clean DVDs quickly and ship them out just as fast, so customers experienced very short wait times between placing their orders and receiving their DVDs. By 2011, Netflix had about 60 distribution centers in operation.

For the most part, Netflix’s traditional supply chain, with its one-day delivery and same-day processing, was effective. Its inventory system not only automatically tracked incoming DVDs that customers had returned, it also emailed each customer a confirmation of receipt and alerted the appropriate shipping center to send the next title on that customer’s list or queue. It also ensured that subscribers weren’t sent more DVDs than they had paid for (customers were limited to a certain number of DVDs per month). However, a number of factors affected which DVDs a subscriber got and when they got them. If there weren’t many copies in the system, the company would ship one from a center that was far from where a subscriber lived. Another was the popularity of the movies. Often there were fewer copies of a newly released film than there were people who wanted to see it. And the shipping process, which involved multiple handling steps, sometimes resulted in damage to the DVDs.

Netflix’s Supply Chain Strategy, Today

In retrospect, all the problems listed earlier stemmed from the fact that Netflix’s traditional supply chain tied the delivery of an intangible service (information content) to a tangible item (a DVD or Blu-ray disc). With this in mind, starting in 2007 Netflix made a conscious effort to take advantage of advances in information technology and move to a truly virtual supply chain that uses the Internet to both manage subscribers’ accounts and stream content directly to them. Such a supply chain has numerous advantages, including:

• Subscribers can receive content immediately.
• Netflix no longer needs to manage an expensive network of distribution centers. In addition to cutting costs, this also allows Netflix to quickly expand into any market that has Internet access.
• Netflix no longer needs to make decisions regarding how many DVDs or Blu-ray discs to order or where to stock them.

But this new supply chain solution is not without its risks:

• Upstream supplier risks. Netflix depends on entertainment companies to provide the content subscribers want, yet many of these companies have concerns about having their content—particularly newer shows and movies—delivered in electronic format.17If entertainment companies refuse to license their products or provide only limited access to their “best” content, this could undermine the quality and range of Netflix’s offerings.

¹⁷B. Stelter, “In Setback for Netflix, Starz Won’t Renew Distribution Deal,” The New York Times, September 2, 2011, p. B2.

• Downstream distributor risks. Instead of having the U.S. Postal Service deliver discs, Netflix’s new supply chain strategy depends on Internet service providers (ISPs), such as cable companies and satellite network providers, to deliver the content. Many of these providers have been arguing that Netflix or its subscribers should pay higher fees due to the higher levels of traffic they generate. And even if these issues are resolved, higher traffic levels could result in overloaded networks and service interruptions.
• Competitive risks. Today, Netflix faces a new set of competitors, including Amazon, Google, and Hulu, and possibly new companies that have not yet entered the market.18

¹⁸Investopedia, “Analyzing Netflix’s Degree of Rivalry among Competitors,” www.investopedia.com/.university/netflix-porters-5-forces-analysis/analyzing-netflixs-degree-rivalry-among-competitors.asp.

Nevertheless, Netflix provides an excellent example of how supply chain strategies can provide firms with a distinctive competitive advantage and how these strategies need to adapt to changes in technology and the marketplace.

Questions

1. What were some of the key structural and infrastructural elements that defined Netflix’s supply chain strategy before 2011? Today?
2. How have the customers’ order winners for Netflix’s customers changed over time? Would today’s customer be satisfied by the delivery performance or selection of Netflix’s “old” supply chain?
3. As of early 2017, Netflix still supported customers who want to rent DVDs, although the number of subscribers has fallen to around 4.1 million (vs. 94 million online subscribers)19. Should Netflix abandon its physical distribution system altogether? Why or why not?

¹⁹M. Whener, “Here’s How Many People Still Rent Netflix DVDs by Mail, and Why Netflix Loves It,” January 20, 2017, http://bgr.com/2017/01/20/netflix-dvd-rentals-subscribers/.

Solution Overview

1. What were some of the key structural and infrastructural elements that defined Netflix’s supply chain strategy before 2011? Today?

Before 2011, Netflix did various actions to try to offer movies. For instance, it tried to send movies to Blu-rays and DVDs instead of using traditional stores. The key structural elements used included using 60 distribution centers located all over the United States. For the better and smoother operation of systems, the company could inspect, accept, and clean the DVDs. Before 2011, an example of a key infrastructural feature that defined Netflix was allowing the circulation and reviving of older DVDs, which resulted in newer movies’ demand. Today, the key structural element of Netflix is that it has advanced information technology and it uses a virtual supply chain. As a result, customers can access more content faster through subscriptions. The key structure, in this case, is internet access and digital movies. The infrastructural element is Netflix’s choice to go fully virtual and adapt faster to the technological advancements in the marketplace.

2. How have the customers’ order winners for Netflix’s customers changed over time? Would today’s customers be satisfied by the delivery performance or selection of Netflix’s “old” supply chain?

The traditional supply chain delivery, which Netflix used in delivering tangible items to intangible services, has immensely improved. Luckily, customers love this. With the changes, there came multiple advantages, and they include the following; first, there is instant receiving of content for the subscribers. Secondly, there is room for faster expansion in any market with adequate internet access.

The customers would not be satisfied if Netflix decided to go back to the older ways of delivery by any chance. With advanced technology and people have adapted to the technological changes, they would find it hard to move back and go the traditional methods. I know I would not want to go to the traditional ways, and I would be one of the most unsatisfied customers.

3. As of early 2017, Netflix still supported customers who want to rent DVDs, although the number of subscribers has fallen to around 4.1 million (vs. 94 million online subscribers)19. Should Netflix abandon its physical distribution system altogether? Why or why not?

No, it should not abandon its customers whatsoever. This is because these customers are important too, and the fact that they still choose this method means they may not be well conversant with the technological advancements. If it makes them happy, then there is no problem keeping them……….

To get your original copy of this completed paper, please Order Now