Case Analysis: Netflix
1. a) Netflix has resorted to revenue-sharing arrangements with the movie studios. Netflix does not own most of its movies outright, but it makes arrangements in which a percentage of the subscription fees is kicked back to the originating studio rather than outright purchase. Hence, it does incur a significantly higher cost than Blockbuster (which owns its DVDs outright), but it circumvents the capital investment of full ownership. It does this only for new releases. For old movies, Netflix guides its customers to those movies released by independent studios.
b) One of the main challenges that Netflix faces in choosing its inventory is that it offers only DVD format, limiting its selection of movies because many movies on demand are also offered on VHS format.
Secondly, Netflix attempts to dodge capital investment costs by engaging in a revenue sharing arrangement with top studios for the latest movies while it guides its customers towards older movies. This has led to an argument that it should focus more on old and foreign movies rather than the latest releases.
c) They would need information about the regional distribution of their customer base. They would want to concentrate more distribution centers around where they have an abundance of customers. Moreover, they would also require the views of their customers on which alternative distribution systems other than the USPS would deliver great service.
d) The system is very costly when there is a faster turnover of the movies watched by the customers. Therefore, there is a tradeoff between better customer satisfaction and increased costs of transport.
e) When the demands of the customer are managed effectively, shelf time is reduced on the inventory. It also slows hiring and it reduces labor costs substantially, thereby translating into effective selling.
2. A customer would have to rent a minimum of five new movies a month or ten old movies a month so that the deal can be as good as that of Blockbuster. If the customer has a frequent late rate, the numbers would be even smaller because watching one blockbuster movie would cost so much; even as much as half of the monthly subscription fee for Netflix. Customers who watch different movies would have to watch many more movies to make the deal better.
3. For each disk, Netflix incurs about $1.4 to purchase (new releases), about $0.37 to post and a labor cost that has not been elaborated upon. Therefore, the company spends close to $ 2 in order to provide the customer each disk, but the revenue that it accrues in return is about $ 4.
The customer described in question 2, if he is fond of new releases, then the cost of providing him/her with CDs for an entire month would sum up to about $10.
Customers who love new movies more are likely to incur more costs on the part of Netflix. On the other hand, customers whose selection of movies includes more kids’ movies and more old movies are likely to incur fewer costs.
4.The per disk revenue for Netflix would roughly be:
The total monthly subscription divided by the number of disks viewed per month. The number of disks viewed per month depends on the total delivery time, which in turn depends on the proximity of the closest distribution center and the efficiency of the USPS.
5. This increase presents a problem for Netflix because the total monthly subscription fee is constant. Therefore, an increase in average monthly viewing without a corresponding increase in subscription fee would mean higher operational costs without a corresponding increase in profit. Netflix would have to cut on the operational costs by reducing the number of workers per distribution center. Alternatively, it may use a policy where the customer pays for the postal charges for delivering each DVD while the company continues to cover the return postal charges. To reduce the revenue costs, Netflix would have to reduce the number of new releases it offers its customers.
6. The revenue sharing agreement should be structured in such a way that after the revenue sharing period expires, Netflix should acquire all the rest of the units at a minimal fee or at no fee at all, and they should do this for sale. It might mean that the initial revenue for borrowing may go up a little from $1.4, but it will be a good deal for Netflix to increase inventory and a good way to dispose of the excess. Revenue sharing arrangements for DVDs make sense because a substantial number of new releases are still in the DVD format.
7. Multiple regional DCs are convenient for the customer because it reduces the distribution time and increases the movie turnover. For the company, it is a good marketing point, but it also increases the operational costs substantially. The central DC employed by Wal-Mart is good for the operational costs of the company, but not for the convenience of the customer. Moreover, working from a single DC is hectic because it would involve a lot of stress in attempting to locate the localities of the customers.
Netflix should allocate movies in short supply to fifty percent of its core customers and fifty percent of its new customers in a random fashion. This is because as much as it would like to retain its customer base, it might also be interested in acquiring new customers.
8. The information that Netflix collects from its customers would be helpful a great deal. Netflix might consider shaping its customers’ ordering decisions by proposing movies that are in stock. If customers are prodded to order movies that are available, then they might do just that. This will result in more customer satisfaction due to less waiting time. On the film studios, the information on viewer habits might help Netflix negotiate lower revenue prices by providing the studios with crucial information on the most trending movies.
9. The Revenue-sharing arrangements that Netflix has are more favorable to the studios than those of blockbuster. Netflix pays the studios about $0.4 more than Blockbuster does. Naturally, movies that may not be able to earn enough owing to their narrow theatrical release might find comfort in a distributer who pays them more. Again, since DVDs sold to the rentals are the same price as those that customers see, then such studios gain a lot from selling to Netflix. Looking at it closely, Netflix might gain more from finding a niche in the DVD market and exploring it.
10. Yes indeed, Netflix should consider expanding its product offering to video game rentals. This is because a wider variety of products opens the gates of Netflix to a larger market. DVDs are amenable to this business model because their product supply chain heavily involves the internet. Since the primary feature of the Netflix rental model is the internet, it provides the perfect interface for Netflix to interact with a potential plethora of customers. Another product that would be amenable to this feature is music albums.
11. This model has the competitive advantage of complete automation, which makes the delivery easy. Moreover, the model uses a minimum of operational costs since it cuts down on the costs incurred by vendors. On the flipside, the model is prone to such limitations as vandalism and inefficiency of the models. Moreover, the model cannot respond to the immediate needs of the customer because the stock is replenished after regular periods and not on customer demand, as would be in a non-automated mode. The inventory planning in this model would involve estimating the needs of the customers and stocking the machines according to these estimates, as opposed to getting stocking in response to customer needs in the Netflix model.
12. This new option would remain in tandem with the initial corporate strategy of making use for the internet to deliver goods to customers. However, it would change the contracts significantly, since the company would have the option of acquiring the copyrights at a fixed fee or in proportion to the number of downloads. Each of these options has its advantages and disadvantages. In choosing titles and staffing, this might limit the staffing capacity because there are still relatively few companies that make their movies available for downloading. Technology and costs of delivery would be greatly reduced because transport costs account for a very large percentage of the operational costs in the original model. Finally, this model would have a much wider reach because in contrast with the original distribution centers, the internet is available to almost all of the US, and this would, therefore, widen the distribution system and make it more efficient.