Netflix Custom Case Solution & Analysis

1. Evidence Brief: Business Case Data Researcher

Financial Metrics

Metric	Value	Source
Annual Revenue (2009)	1.67 billion dollars	Exhibit 1
Net Income (2009)	116 million dollars	Exhibit 1
Total Subscribers (2009)	12.3 million	Paragraph 4
Subscriber Acquisition Cost	25.48 dollars per user	Exhibit 4
Churn Rate	Approximately 4 percent per month	Paragraph 12
Marketing Expense	244 million dollars	Exhibit 1

Operational Facts

Distribution Network: 58 regional shipping centers supporting DVD-by-mail operations. (Paragraph 8)
Delivery Performance: 97 percent of subscribers receive discs within one business day. (Paragraph 9)
Streaming Transition: Streaming library includes 12,000 titles compared to 100,000 on DVD. (Paragraph 15)
Technology: Proprietary Cinematch algorithm uses 2 billion ratings to drive 60 percent of member choices. (Paragraph 11)
Infrastructure: Shift from private data centers to Amazon Web Services for streaming scalability. (Paragraph 22)

Stakeholder Positions

Reed Hastings (CEO): Prioritizes streaming growth over DVD preservation; views the DVD business as a melting ice cube.
Ted Sarandos (Chief Content Officer): Focused on securing long-term licensing deals and exploring original production.
Traditional Studios: Disney, Sony, and Warner Bros seek higher licensing fees as streaming gains popularity.
Competitors: Blockbuster (liquidating assets), Amazon (entering streaming via Prime), and Hulu (ad-supported model).

Information Gaps

Exact renewal pricing for the Starz licensing agreement expiring in 2011.
Detailed breakdown of international licensing costs for the Canadian market entry.
Internal projections for DVD subscriber decline rates over a five-year horizon.

2. Strategic Analysis: Market Strategy Consultant

Core Strategic Question

How can Netflix sustain its market leadership and valuation while transitioning from a low-cost physical distributor to a high-cost digital content aggregator?
How should the firm respond to increasing supplier power as content owners launch competing streaming services?

Structural Analysis

Porter Five Forces Analysis:

Supplier Power (High): Major studios control the library. As Netflix grows, studios demand higher fees or withhold content for their own platforms.
Threat of Substitutes (High): Piracy, cable on-demand, and emerging streaming rivals offer similar utility.
Competitive Rivalry (Increasing): Amazon and Hulu are well-capitalized and aggressive.
Barriers to Entry (Low): Unlike the physical DVD network, streaming distribution has lower capital barriers, though content costs remain a hurdle.

Strategic Options

Vertical Integration: Produce original content to own intellectual property and reduce reliance on third-party studios.
- Rationale: Direct control over the library and differentiation from rivals.
- Trade-offs: High capital expenditure and risk of production failure.
Aggressive International Expansion: Launch streaming in global markets before local competitors gain scale.
- Rationale: Amortize content costs over a larger global subscriber base.
- Trade-offs: Complex regulatory environments and localized content requirements.
Hybrid Maintenance: Continue milk-and-harvest strategy for the DVD business to fund streaming.
- Rationale: Uses existing cash flow to bridge the digital gap.
- Trade-offs: Risk of brand confusion and operational inefficiency.

Preliminary Recommendation

Netflix must pursue Vertical Integration immediately. The current distribution-only model is vulnerable to content owners who act as both suppliers and competitors. Owning content is the only way to build a sustainable moat in a digital environment where distribution is commoditized.

3. Implementation Roadmap: Operations Specialist

Critical Path

Month 1-3: Establish a dedicated content production unit in Los Angeles; hire experienced creative executives.
Month 4-6: Secure data-driven insights from Cinematch to identify genres with high engagement and low licensing availability.
Month 7-12: Greenlight the first two original series; begin production while simultaneously negotiating international rights for the Canadian launch.
Month 13-24: Scale cloud infrastructure to support simultaneous global streaming traffic.

Key Constraints

Capital Allocation: The shift to original production requires billions in upfront cash, creating a negative free cash flow profile in the short term.
Creative Talent Acquisition: Netflix must compete with established studios for top writers, directors, and actors who may be wary of a tech-first firm.
Network Bandwidth: International expansion depends on local internet infrastructure quality, which varies significantly outside North America.

Risk-Adjusted Implementation Strategy

Phased rollout is mandatory. The firm will test original content in the domestic market while using licensed content for international entry. This limits exposure if the first original productions underperform. Contingency plans include maintaining the DVD business longer than planned if streaming margins compress faster than projected.

4. Executive Review and BLUF: Senior Partner

BLUF

Netflix must pivot from a distribution platform to a primary content producer. The physical DVD moat is evaporating, and digital distribution offers no long-term structural advantage. To maintain 20 percent annual subscriber growth, the company must commit to a multi-billion dollar original content budget. This shift mitigates extreme supplier power and secures the subscriber base against churn. Success depends on content quality and data-led production choices rather than distribution speed. Approve the transition to vertical integration immediately.

Dangerous Assumption

The analysis assumes that proprietary viewing data can reliably predict the success of original content. Creative hits are frequently idiosyncratic; data-driven production remains unproven at scale in the entertainment industry.

Unaddressed Risks

Debt Accumulation: High probability. Shifting to content production will require massive debt financing, making the firm vulnerable to interest rate hikes or a subscriber plateau.
Studio Retaliation: High consequence. Major studios may collectively pull content licenses early to starve Netflix of variety before its original library matures.

Unconsidered Alternative

The team did not evaluate a White-Label Distribution path. Netflix could have pivoted to providing the streaming backend for legacy studios, acting as a technology partner rather than a direct competitor. This would have avoided the content arms race while using the existing technology stack.