Recently, Netflix’s international streaming revenue exceeded it domestic revenue which is impressive given the relative infancy of the company. Netflix is now in over 190 countries and everyone of the countries it enters creates unique challenges for Netflix such as it “must secure content deals region by region, and sometimes country by country. It also must face a diverse set of national regulatory restrictions, such as those that limit what content can be made available in local markets. International subscribers, many of whom are not fluent in English, often prefer local-language programming. And many potential subscribers, accustomed to free content, remain hesitant to pay for streaming services at all.” (https://hbr.org/2018/10/how-netflix-expanded-to-190-countries-in-7-years) This is not to overlook the competition that exists in every nation as well so the fact that has more subscribers worldwide that all other pure streaming services combined is extremely impressive.

Netflix’s international strategy is attributed to how it expanded then worked within those markets. Netflix started small entering similar markets to the United States such as Canada then used the lessons learned to increasingly expand into more diverse markets. Then Netflix expanded to almost 50 countries simultaneously where it saw opportunity, but remained committed to local preferences and content agreements. Finally, Netflix expanded rapidly keeping to what it knew to be a successful method such as adding local language subtitling.

Netflix’s international strategy is impressive as it partners with key local companies to allow for its platform and responds to customers preferences for local content. In addition, Netflix has wisely, “increasingly pursued global licensing deals so that it can provide content across all of its markets at once. Netflix has also begun to source regionally produced content, providing a win-win for these producers, whose local content can find a global audience.” (https://hbr.org/2018/10/how-netflix-expanded-to-190-countries-in-7-years) The localization that Netflix has brought to so many countries is a blueprint as it demonstrates that the internet can overcome traditional gatekeepers, technology matters and being authentically local is the key factor international strategy.

Netflix and Disney formed a strategic alliance in late 2016 to release several Disney-owned content brands exclusively on Netflix. These include Disney content itself, in addition to Marvel, Lucasfilm, and Pixar. The distribution agreement by which Netflix distributed some Disney content exclusively on the streaming service is an example of a nonequity strategic alliance. The Netflix deal was a three year agreement with Disney to become the exclusive pay-TV home of the studio’s releases for all new theater content. This meant that all new Disney movies went from the big screen to Netflix.

Strategic alliances are rare and this agreement with two major industry titans is now officially over. Starting with Captain Marvel, all new Disney content will no longer be distributed on Netflix after the three year agreement expires. The reason is because Disney is developing their own exclusive streaming service. While many of the details remain murky, it is known that the House of Mouse will take their massive content library off Netflix and start a separate subscription platform. Customers will certainly be upset by the migration of content away from Netflix. While it makes sense that Disney would want their films under their own brand, only time will tell if consumers will pay for yet another streaming service. And yet again, another strategic alliance that benefits consumers comes to an end.

Netflix is implementing corporate diversification by building a new model of corporate governance. In traditional corporate structures “as the elected representatives of shareholders, corporate directors are supposed to monitor management’s performance and conduct, weigh in on strategic decisions, and ensure a CEO succession plan is in place.” (https://www.gsb.stanford.edu/insights/another-netflix-disruption-transparent-board) However, these directors often lack “the critical information and intimate knowledge of the company’s operations needed to make well-informed decisions.” (https://www.gsb.stanford.edu/insights/another-netflix-disruption-transparent-board)

Netflix sets much more intense expectations for board members who attend monthly and quarterly senior management meetings as observers, and communications to the board are usually 30-page, analysis-laden memos that have hyperlinks to relevant data on Netflix’s internal computer systems. “Being armed with the memo before the board meeting makes for ‘an intelligent and informed conversation,’ according to one director.” (https://www.gsb.stanford.edu/insights/another-netflix-disruption-transparent-board). One might think this could be frowned upon by the CEO who might be overly arming the directors with too much information or setting up for information leaks. Netflix board of directors spend twice as long preparing for board meetings than their counterparts at other companies, but meetings are often shorter because the attendees are so well informed. A big takeaway is decision-making happens quicker because the of the openness.

As for the possibility for leaking proprietary information, this has not really taken place. Part of the reasoning is the data structure that Netflix has built which restricts and tracks the sharing of information. Although the directors governance structure might not be the driving reason for the success of the company, from implementing corporate diversification “the Netflix culture is the key driver of value, and the open board process supports the value creation process.”(https://www.gsb.stanford.edu/insights/another-netflix-disruption-transparent-board)

Diversification is one reason you can expect a Netflix move to be coming to a theater near you with much more frequency. The primary business is to provide on-demand video streaming services. The on-demand video includes television series, movies, cartons and documentaries which is the core competence for the business. Most of these are made the United States, as well as other countries such as the England, France, Japan and India. Recently, Netflix has has diversified its business to include numerous subsidiaries which can be considered as related corporate diversification.

Netflix owns “three content production companies: The US-based Netflix Studios, the Germany-based Netflix Services Germany GmbH, and the Singapore-based Netflix Pte. Ltd.” (https://www.profolus.com/topics/the-business-strategy-of-netflix/) These are production companies that produce and create original programming such as television shows and movies which have been very successful.

The original content allow Netflix to retain subscribers and exposes them to their programming in new venues. Recently, Netflix has launched a few movies in theaters for the public to view. The movies that receive favorable reviews might even attract new customers who have never tried the service previously. The competition should expect for Netflix to continue diversifying to increase their competitive advantage.

The number of stages in a product’s or service’s value chain in which a firm engages represents the company’s vertical integration. Netflix has rapidly increased the level of vertical integration within the firm. The first major step at vertical integration by Netflix was similar to the example of HBO which is known as backward vertical integration. Essentially, Netflix increased the number of value chain stages in which they engaged and moved further away from the ultimate customer. The content play is important because it allows Netflix to avoid costly royalties and own the content in-house. Netflix began to purchase content as a first step then increased vertical integration by producing it.

Now Netflix is really stepping up the vertical integration by purchasing a massive TV and film studio called ABQ studios in Albuquerque, NM for $30 million which cost $91 million to originally build. This is a critical acquisition for Netflix which has made a stated goal of creating half of its library content in-house. The deal is a sweet one for Netflix because New Mexico offered some very rich incentives to lure the company to the state and employ its residents to assist with content creation. The vertical integration of Netflix continues the upward climb.

Tacit collusion is when firms coordinate their production and pricing strategies indirectly by observing the output and pricing strategies of other firms. No agreements are actually agreed upon and the firms are not acting in acting with explicit collusion which is to negotiate directly on pricing and output to reduce competition. Fortunately for consumers, explicit collusion is usually considered illegal in the United States.

Tacit collusion is present in the competitive relationship between Netflix, Hulu, and Amazon.  All three firms have similar pricing as competitors and seemingly observe each other to utilize pricing strategies. The basic starter pricing for Netflix is currently $11 per month, $8 per month for Hulu and $8.99 per month for Amazon Prime Video. Netflix recently raised pricing and it will be interesting to see if Hulu and Amazon follow. All three services are facing increasing competition though from other firms who are gaining subscribers such as Sling and Crackle thus reducing the benefits of tacit collusion.

Netflix has several different types of flexibility, but the point to highlight is using the option to expand to eventually abandon. As mentioned earlier in previous posts Netflix entered the market with the subscription mail delivery service which was successful and helped establish dominance in the process. Because of this success, Netflix was able to transition to an entirely new on demand video delivery model. Slowly, the mail service is being phased out as the on demand lowers distribution costs.

Netflix is also a great example of building a portfolio of options which includes positioning options, scouting options and stepping-stone options. Virtual reality is a realm where Netflix is positioning to see how the technology plays out. Netflix is constantly scouting to see what entrepreneurial ventures might pan out in their video streaming service. Finally, the original content development has certainly used the stepping-stone option. The bottom-line is that Netflix has quickly proven to be a flexible company staying ahead of the game in an industry where others less flexible (Blockbuster) have failed.

Product differentiation creates a competitive advantage by increasing the willingness of customers to products or services through perception. Netflix has created product differentiation since the inception of the company. Originally, Netflix established new distribution channels for providing movies to customers. Rather than go to a movie rental store, Netflix created a subscription based service that offered DVD direct to the consumer through the mail. Customers could choose a level of service that dictated how many movies they could have at any given time. Shortly thereafter, Netflix added a streaming service to compliment then ultimately replace the DVD in the mail model. As this service evolved, Netflix customized the experience to recommend movies or shows to consumers. Customers didn’t consider other streaming services for the most part because Netflix already had a solid reputation from the mail business. Additionally, the subscribers did not want to switch as they were accustomed to paying for the service.

Netflix’s latest product differentiation is in the content space. With an established distribution channel through streaming content, Netflix began to create original content. With a captive audience already on the platform, marketing the original content was easy. Furthermore, the entire season of a new show would be added all at once. No more waiting until next week with Netflix. Thus, Binge Watching was born and Netflix once again achieved product differentiation.

Netflix is up for an Oscar which is a historic accomplishment. Well actually, a Netflix movie, Roma, is up for an Oscar for Best Picture. However, Roma would never have made it to this place without Netflix being a cost leader creating a competitive advantage in its industry. Cost leadership is all about having a lower cost of doing business than the competition.

Netflix cost advantage seems to most clearly come from experience differences and the learning-curve economies. Netflix was the first prominent mover in the industry. When it comes to distributing original content, Netflix has mastered the industry. There would be a significant learning-curve for any upstart firm to compete with Netflix especially when accolades such as Oscar nominations are rolling in. Furthermore, the upstart will face challenges that Netflix has probably already faced and corrected for.

Low Cost Access to Factors of Production is most evident in a global race for content. Netflix is based in the United States which provides direct access to many experienced and talented content creators including Hollywood. If a firm in another nation tried to compete the cost of production and resources would likely be higher. Netflix can keep costs lower by having such a ready source of talented producers.

Finally, Netflix has a Technological Advantage when it comes to cost. New ways are constantly being created to source on demand videos. The Netflix app is almost a given on any smart TV. Such an example shows that while others are trying to catch up, Netflix is already able to win by having a low cost technological advantage such as an app on a factory TV brand. As a result it will be very difficult for any competitor to overtake Netflix in the foreseeable future.

Netflix started as a substitute for renting from a video store. As seen above, one could rent DVDs by mail. When VHS gave way to DVDs then shipping made more sense. However, customers wanted to get movies almost immediately and waiting on a show to be mailed seemed strange. Netflix overcame this obstacle by having the necessary supply (the stores were often out of the new hits) and pricing far below the brick and mortar. Yet, just as people began to become comfortable with the entire mail process for renting movies, Netflix pivoted.

The emerging technology of streaming videos was nothing new. I’d been doing it (possibly illegally) ever since my college years. No one had been able to do it in a mainstream way though. Enter Netflix with streaming videos on Demand. As TVs became smart TVs the trend took off. Netflix was an established brand that seized upon an emerging industry to be the first mover in an already established subscription service. Why would I switch to someone else? I’m already paying my Netflix subscription but now I don’t even have to mess with the mail. Netflix once again hit on multiple fronts when evaluating environmental opportunities.