The subscription business model is a business model that was pioneered by magazines and newspapers, but is now used by a myriad of businesses. Rather than selling products individually, a subscription sells periodic (monthly or yearly) use or access of a product or service (Bremner, 1999). Thus, a one-time sale of a product becomes a recurring sale and builds consumer and brand loyalty. Netflix is an example of this model. Netflix was the first company to create an online DVD movie rental service.
The service has created a new ‘movie’ market niche which has secured them a competitive ‘first-mover’ advantage in this new ‘high-tech’ venture. The popularity of the service has sparked the interest of market competitor Blockbuster who may become a growing threat to Netflix should they enter the online movie rental market. Our group will discuss Netflix, do an analysis and answer questions that one would like to know. Set-up – A History of Netflix Founded by Reed Hastings, Netflix was incorporated on August 29, 1997 and began operations on April 14, 1998.
Netflix began operations with an online version of a more traditional pay-per-rental model which included financial penalties for late returns (US$4 per rental plus US$2 in postage). It did not introduce the monthly subscription concept until late 1999 (Rosenberg, 2000). Since then it has built its reputation on its policies of having no due dates, late fees, or per-title rental fees. After incurring substantial losses during its first few years, Netflix posted its first profit during fiscal year 2003, earning US$6. 5 million profit on revenues of US$272 million. Netflix has been one of the most successful dot-com ventures.
A New York Times article from September 2002, said that Netflix mailed about 190,000 discs per day to its 670,000 monthly subscribers. The company’s published subscriber counts have increased substantially since then from one million by the fourth quarter of 2002 to around 5. 6 million at the end of the third quarter of 2006(Rosenberg, 2000). Netflix’s growth has also been fueled by the fast spread of DVD players in households; as of 2004, nearly two-thirds of U. S. homes have a DVD player. Netflix also operates an affiliate program, which has helped it to build online sales for DVD rentals. Play – Key Capabilities
Netflix was born as a result of a spontaneous reaction to the traditional movie rental model which included costly and annoying late fees. Hastings tapped into a new, emerging market venture which enabled customers to rent DVD’s online for a monthly fee. By subsequently copying a very simple ‘subscription’ based model, Netflix would grow into an entirely new market concept with unrivalled success. Having a first-mover advantage, Netflix has identified a niche based on customer needs and responded by utilizing the internet to focus on customer convenience and timely delivery of DVD’s across the US.
They have since expanded their facilities throughout the United States and have established themselves as industry leaders. Competitors such as Blockbuster and Hollywood video were relatively slow to respond and were initially unaware of the market share Netflix would capture in the upcoming years. This has given Netflix a sustainable competitive advantage. An opportunity that Netflix could (and is currently considering) to explore, is to provide a downloadable service to complement their existing online service; however, there are still copyright issues on the Internet.
While it is possible and often more convenient to directly download movies via the Internet, licensing issues and the fear of piracy have prevented the establishment of such a service (Rosenberg, 2000). The CEO of Netflix, Reed Hastings, said that he believes it would not be an instant success because of complications in copyright handling and relatively slow adoption of broadband Internet; however, Netflix will offer limited video on demand sometime in the future, allowing users to download movies via the Internet and is even considering an expansion into the video game market.
Pause – Traditional Rentals versus Subscription Model The traditional movie rental model does not provide the consumer with flexibility. Customers are typically paying a fixed fee per movie rental with financial penalties for returning movies past their due date. Although there are various promotions such as rent a new release and receive an old release for a reduced fee, the model still requires the user to return the movie(s) on site and on time.
The subscription based model, on the other hand, is based on a fixed monthly fee providing the user with flexibility in the amount of movies they can rent at any given time with the added bonus of no late fees. If you compare the Netflix model based on a $20. 00 monthly subscription fee for 3 rentals (on average every 11 days) to Blockbusters per movie cost of $3. 79 for the same number (and frequency) of movies, there is a significant savings with the Netflix service of $1. 97 per movie which is more than 50% off of the Blockbusters per movie price. (Refer to the table below)