Netflix and the State of Streaming Video in 2011 Custom Case Solution & Analysis

1. Evidence Brief: Case Data Extraction

Financial Metrics

Revenue Growth: 2010 total revenue reached 2.16 billion USD, a 29 percent increase over 2009 [Case Text].
Profitability: 2010 net income was 161 million USD, up from 116 million USD in 2009 [Case Text].
Content Obligations: Streaming content purchase obligations rose from 400 million USD in 2010 to 2.3 billion USD by mid-2011 [Case Text].
Marketing Spend: 2010 marketing expenses totaled 293 million USD, approximately 13.5 percent of revenue [Case Text].
Price Adjustment: July 2011 price change unbundled DVD and streaming, raising the combined price from 10 USD to 16 USD per month, a 60 percent increase for dual-service users [Case Text].

Operational Facts

Subscriber Base: Total subscribers reached 23.6 million by Q2 2011, though Netflix projected a loss of 600,000 to 1 million subscribers following price changes [Case Text].
DVD Infrastructure: 58 regional shipping centers supported the DVD-by-mail business, reaching 98 percent of the US population with one-day delivery [Case Text].
Library Composition: The streaming library contained approximately 20,000 titles, while the DVD library held over 100,000 titles [Case Text].
International Reach: Launched in Canada (2010) and announced expansion into 43 countries across Latin America and the Caribbean (2011) [Case Text].
Content Loss: Starz announced it would end its licensing agreement in early 2012, removing approximately 2,500 movies from the streaming service [Case Text].

Stakeholder Positions

Reed Hastings (CEO): Positioned streaming as the future; emphasized the need to move fast despite short-term subscriber backlash [Case Text].
Ted Sarandos (Chief Content Officer): Focused on securing exclusive rights and original programming, such as the 100 million USD bid for House of Cards [Case Text].
Content Owners (Starz, Sony, Disney): Increasingly wary of Netflix; seeking higher licensing fees or exclusivity for their own platforms [Case Text].
Subscribers: Expressed significant hostility toward the Qwikster brand split and price hikes, leading to a stock price drop from 300 USD to under 80 USD in late 2011 [Case Text].

Information Gaps

Churn Granularity: The case does not provide specific churn rates for pure streaming versus pure DVD subscribers post-price hike.
Bandwidth Costs: Detailed variable costs for ISP peering and CDN delivery are not explicitly broken down.
Originals ROI: No financial projections for the House of Cards investment are provided beyond the total bid amount.

2. Strategic Analysis

Core Strategic Question

How can Netflix sustain market leadership while transitioning from a low-cost DVD distribution model to a high-cost, licensing-dependent streaming model?
Can the company survive the rising bargaining power of content suppliers while competing against deep-pocketed technology firms?

Structural Analysis

Supplier Power: Critically high. Content owners realize Netflix is a threat to the cable bundle. The Starz exit proves that licensing is no longer a reliable long-term moat. Netflix is essentially renting its business model from its competitors.

Competitive Rivalry: Intense and asymmetric. Amazon (Prime), Hulu (Joint Venture), and HBO (HBO GO) have different profit motives. Amazon uses video to drive e-commerce; HBO uses it to protect cable margins. Netflix is the only pure-play streaming provider, making it more vulnerable to price wars.

Threat of Substitutes: High. Digital piracy and free platforms like YouTube compete for consumer attention, though they lack premium long-form content.

Strategic Options

Option	Rationale	Trade-offs
Vertical Integration (Originals)	Mitigates supplier power by owning IP. Creates a unique moat.	High capital expenditure; high risk of creative failure.
Aggressive Global Scale	Amortizes fixed content costs over a larger subscriber base.	Complex local regulations; varying internet infrastructure quality.
Niche Aggregation	Focuses on back-catalog and independent films to keep costs low.	Reduced mass-market appeal; likely to lose to broad-catalog rivals.

Preliminary Recommendation

Netflix must prioritize Vertical Integration and Global Scale. The Qwikster error proved that the DVD business is a distraction. The company must accept short-term margin compression to secure original IP (House of Cards) and expand into Latin America and Europe. Without owned content, Netflix remains a commodity distributor at the mercy of Hollywood studios.

3. Implementation Roadmap

Critical Path

Phase 1 (Months 1-3): Damage Control and Brand Consolidation. Immediately abandon the Qwikster brand. Re-integrate the user interface to allow a single login for both services, even if billing remains separate. This stops the branding hemorrhage.
Phase 2 (Months 4-12): Content Pivot. Finalize production for House of Cards. Shift 30 percent of the licensing budget from broad catalog acquisition to exclusive or original content.
Phase 3 (Months 6-18): Infrastructure Build-out. Deploy Open Connect (CDN) to reduce ISP delivery costs. This is essential for maintaining streaming quality during the Latin American rollout.

Key Constraints

Capital Liquidity: With content obligations reaching 2.3 billion USD and a falling stock price, Netflix has limited room for financial error. High-interest debt may be necessary.
Creative Competency: Netflix is a tech and logistics company, not a studio. Success depends on hiring the right creative talent without over-managing the process.

Risk-Adjusted Implementation Strategy

The transition must be sequenced to preserve cash. Netflix should delay entry into high-cost Asian markets until the Latin American expansion reaches a break-even point. Contingency planning must include a fallback licensing strategy if House of Cards fails to drive subscriber acquisition. The 90-day focus is purely on subscriber retention through improved streaming discovery algorithms.

4. Executive Review and BLUF

BLUF

Netflix must transition from a distributor to a producer. The 2011 crisis is not a pricing problem; it is a structural supply problem. As content owners like Starz withdraw, Netflix faces an existential threat. The company must aggressively fund original content and expand internationally to achieve the scale necessary to outbid Amazon and HBO. Abandon the DVD business mentally, if not yet physically, and focus entirely on the streaming unit economics.

Dangerous Assumption

The analysis assumes that content owners will continue to license any library content to Netflix. There is a material risk that studios will collectively embargo Netflix to protect the 40 billion USD annual cable ecosystem, regardless of the price Netflix offers.

Unaddressed Risks

ISP Throttling: As Netflix consumes more bandwidth, ISPs may introduce tiered pricing or degrade service, significantly increasing delivery costs (Probability: High; Consequence: Moderate).
Creative Failure: A 100 million USD investment in a single show (House of Cards) creates a single point of failure for the brand pivot (Probability: Moderate; Consequence: High).

Unconsidered Alternative

Netflix could have pursued a White-Label Technology Strategy. Instead of fighting for content, it could have licensed its superior streaming architecture and recommendation engine to legacy media companies (like Disney or NBC) that lacked technical expertise. This would have generated high-margin service revenue without the content-cost risk.