Netflix has been in the headlines a lot recently, and not in a good way.
There’s news about competitor Amazon launching a monthly video service, subscription fees going up, its library of content shrinking and lower global subscriber gains than the company had anticipated.
But since its launch in 1997, Netflix has always been in the headlines.
Its forays into new territory are often met with suspicion and negative forecasts because of the way it diverges from traditional business models, doing things others have deemed impossible.
As a professor of media studies who researches and writes about TV’s changing business and technological landscape, I’ve been watching Netflix’s growth and evolution with great curiosity. The company, which arguably invented the U.S. subscription streaming business, continues to change how we view television.
Now, as Netflix braces itself to disrupt the model of global television distribution, the company appears poised to remain influential – though, again, in unexpected ways.
It started with a red envelope
For a brief refresher: Netflix began as a video rental by mail service. It then pioneered broadband video distribution, forcing the television and film industries to evolve or be left behind. Next it proved a broadband-distributed service could produce its own films and series.
The latest round of headlines comes as the company pivots toward its next endeavor: becoming a global television and film network.
Like many companies seeking to enter established industries, Netflix built itself on a barely sustainable business model. Companies that require changes in consumer behavior – like Amazon, with its vast online marketplace – will endure low profit margins for a period of time to encourage people to try their service, whether it’s renting DVDs by mail or buying toothpaste from what you thought was a bookseller.
In Netflix’s case, in order to prove itself as a source of top-rate programming, the company has spent lavishly on licensing content from studios and on developing its own series and movies. All the while, it maintained a low monthly fee of US$8 – about half that of HBO Now.
But now that many millions of U.S. subscribers have come to appreciate the experience of ad-free television and films on demand, long-term sustainability requires increasing profitability.
A 2015 report by industry analyst Matthew Ball noted that Netflix earned only a monthly profit of $.28 per subscriber (compared with $3.65 for HBO) as a result of its high programming costs, low subscription price and global expansion. Though profitable – which is more than many new media economy businesses can claim – such margins aren’t feasible in the long term.
Now, the company is simply adjusting prices to increase profits.
Notably, even with the planned rate increase, few entertainment sources offer comparable value. A January 2016 analysis by BTIG Research found the average Netflix subscriber streams two hours a day. That average subscriber will pay just 17 cents per hour of content after the increase to $10 per month.
Going global by cutting out the middleman
For U.S. subscribers, it is important to note the company’s next aspirations are more about the global market and becoming a global television network than growing its U.S. audience. Netflix’s ability to create original programs and simultaneously self-distribute them internationally marks a new stage of competition in media distribution.
This has enormous implications for the business of television. Admittedly, they’re the parts of the business that most viewers know nothing about, but they’re parts that are nonetheless critical to sustaining media companies.
Netflix’s next strategy bets on vertical integration – that is, on owning its content and using its distribution system to deliver that content to its subscribers. Owning rights and distributing direct to viewers allows Netflix to keep all revenues, rather than sharing with distributors. For example, a distributor such as iTunes keeps roughly 30 percent of the revenue from the albums, tracks or films it sells.
Reliance on vertical integration is becoming more common throughout television. Ten years ago, AMC contracted with Lionsgate Television to produce “Mad Men.” As was the norm, Lionsgate later sold the series to various channels around the world to earn back the costs of production and even secured a lucrative licensing deal with Netflix. Now AMC has its own AMC Studios to produce “The Walking Dead” and has purchased channels around the globe so that it can self-distribute its hits to a wider audience.
While this new stage of Netflix may be best thought of as a global “network,” the fact that it offers a library of content for a fee, rather than a schedule that limits viewers to watching programs at certain times, makes it part of a wholly new phenomenon.
And new things are often tricky to evaluate.
Music streaming services Pandora and Spotify have tried a similar model, but continue to struggle with converting users from advertiser-supported versions into more lucrative subscription versions. Oddly, the closest precursor for Netflix’s business model may be the circulating libraries of the 1700s.
These libraries existed before public libraries, when books were too expensive for most to afford. Like Netflix, subscribers paid a periodic fee for unlimited access to a library of content. For Netflix, the big difference from these libraries – and from music streaming services – is that they are owning more and more of the content that they’re distributing.
It’s not TV, it’s Netflix
The measures long used to evaluate television – ratings, demographics, time slot – don’t matter to Netflix.
Instead, the value of an original series like “Narcos” comes when the company owns the series in perpetuity and can distribute it on a global scale. When a distributor owns a show, its value cannot be measured by how many watch it in the first week, month or even year. Netflix is building a library, not a schedule.
Interestingly, HBO is its closest competitor. Like Netflix, HBO produces a portion of its content, has a business model based on subscriber fees and is working toward a global broadband-distributed service.
Both will try to find the right balance of subscriber fees and spending on exclusive, original content to maintain subscribers. As broadband-distributed services, they also are able to gather data about what subscribers watch to learn much more about viewing patterns and the value of each piece of content. And they’ve kept that knowledge to themselves, creating an unprecedented advantage.
In some ways, broadband-distributed portals such as Netflix and HBO Now are merely the next stage of television.
Just as Netflix revolutionized the experience of watching television for U.S. audiences, it’s now on the verge of rewriting the model of global television distribution.
FAQs
The company offers TV shows and movies such as original series, documentaries, and feature films through an internet subscription on the TV, computer, and mobile devices. It also offers a wide range of leisure activities, video games and other sources of entertainment.
What is a good example of vertical integration? ›
Vertical integration involves acquiring or developing one or more important parts of a company's production process or supply chain. For example, Netflix's shift from licensing shows and movies from major studios to producing its own original content is an example of vertical integration.
Is Netflix a good example of vertical integration? ›
Today, Netflix uses its distribution model to promote its original content alongside programming licensed from studios. 2 Instead of simply relying on the content of others, Netflix performed vertical integration to become more engaged in the entertainment development process earlier.
How Netflix disrupted the market? ›
1 By creating compelling original programming, analyzing its user data to serve subscribers better, and above all by letting people consume content in the ways they prefer, Netflix disrupted the television industry and forced cable companies to change the way they do business.
What is Netflix main business strategy? ›
Customer-centricity: Netflix focuses on creating a solid connection with its customers by engaging them personally and personalizing their viewing experience. They also use clever marketing tactics to get people to watch their shows.
What company did Netflix put out of business? ›
Netflix is ending its DVD business. Netflix is shutting down its original business of delivering DVDs by mail, 25 years after introducing a revolution in at-home TV viewing. The company will ship its final discs on Sept. 29, according to a statement Tuesday.
What is a real business example of forward vertical integration? ›
Forward vertical integration involves acquiring a business further up (forward) in the supply chain – e.g. a vehicle manufacturer buys a car retail business. Another example might be Amazon or Netflix deciding to buy a chain of movie theatres (cinemas).
What is a real life example of forward integration? ›
A good example of forward integration would be a farmer who directly sells his crops at a local grocery store rather than to a distribution center that controls the placement of foodstuffs to various supermarkets.
What is the integration strategy of Netflix? ›
Netflix's next strategy bets on vertical integration – that is, on owning its content and using its distribution system to deliver that content to its subscribers. Owning rights and distributing direct to viewers allows Netflix to keep all revenues, rather than sharing with distributors.
Is Netflix an example of horizontal integration? ›
The internet thrives through the superior network technologies that enable it. This, in turn, enables platforms – or what Ben Thompson calls aggregators – with potentially global reach. Google, Facebook (and ad networks), Amazon, Netflix, Uber and Airbnb are all examples of this kind of horizontal integration.
The Netflix Model
Netflix is one of the most significant backward vertical integration examples in the entertainment industry.
How could Netflix improve? ›
5 Ways Netflix Can Improve to Remain the Best Streaming Service
- Bring Back Free Trials. Everybody loves free stuff. ...
- Better Notifications for When Content Is Leaving Netflix. ...
- Capitalize on Merchandise. ...
- Redesign the "Are You Still Watching?" Feature. ...
- Ability to Share Content Directly to Social Media.
Netflix's Threats – External Strategic Factors
- Competitive Pressure – Netflix is not the only one which provides digital streaming around the world. ...
- Government Regulations – Strict governmental rules and regulations regarding service providers like Netflix in many countries can be a big threat for them.
Netflix's AI considers your viewing habits and hobbies to provide Netflix recommendations. Users can take charge of their multimedia streaming and customize their interactions owing to the system's ability to compile and recommend content based on their preferences.
What is Netflix business strategy 2023? ›
On February 22, 2023, Netflix announced a new pricing strategy that will significantly cut subscription prices in over 100 countries. The move is an attempt to stay competitive in the increasingly crowded streaming market, where rivals such as Disney+, Amazon Prime Video, and HBO Max are gaining ground.
How has Netflix business model changed? ›
An outstanding example of such a company is Netflix. They have successfully changed their business model twice: first, from an online-DVD-rental service to a streaming provider and then, to a content provider.
Why did Netflix split into two companies? ›
So we realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently.
Who owns Netflix now? ›
Since Netflix is a publicly traded company, no single entity owns it outright; instead, many investors collectively own the company. One such major investor is Vanguard Group Inc., which owns 35.5 million shares of Netflix.
What is the biggest vertically integrated company in the world? ›
One of the earliest, largest and most famous examples of vertical integration was the Carnegie Steel company.
What is an example of a vertical growth strategy? ›
An example of vertical growth can be seen with clothing retailer Zara. The Spanish company produces many of their clothes themselves rather than outsourcing to suppliers. This gives Zara greater control over the quality of their products and allows them to quickly turn around supply.
Integrating companies can allow the larger resulting company to offer a wider variety of products or services. For example, if a hotel chain purchases a vacation rental company, the integration can result in the company offering both hotel rooms and vacation properties to customers.
What are examples of business vertical? ›
Generic examples of business verticals include the aerospace industry, agriculture, chemical manufacturing, defense industry, energy production and distribution, healthcare, real estate, and transportation.
What is a real business example of backward vertical? ›
Backward vertical integration involves acquiring a business operating earlier in the supply chain – e.g. a retailer buys a wholesaler, a brewer buys a hop farm. Another good example was Apple Inc. buying a chip supplier Dialog in 2018.
What is a real business example of horizontal integration? ›
One of the most definitive examples of horizontal integration was the acquisition of Instagram by Facebook (now Meta) in 2012 for a reported $1 billion. 1 Both companies operated in the same industry (social media) and shared similar production stages in their photo-sharing services.
What companies are an example of forward integration? ›
Amazon's purchase of whole foods is one of the highest-profile examples of forwarding integration strategy in the current years. Amazon publishes the book itself and provides a publishing platform for independent writers.
What are the pros and cons of forward vertical integration? ›
Forward Integration Advantages And Disadvantages
- Low costs as a result of the absence of market transaction expenses.
- Transportation costs are reduced.
- Coordination of supply chain as supply and demand are synchronized.
- Increased market share.
- Independency in terms of strategy.
- Better investment growth potential.
Some of the most well-known examples of backward integration include Apple Inc. and Carnegie Steel. Apple Inc. has employed a vertical integration strategy for decades.
Which of the 3 global strategies is Netflix implementing? ›
Taken together, the elements of Netflix's expansion strategy constitute a new approach that might be called “exponential globalization.” It's a carefully orchestrated cycle of expansion, executed at high speed, to an ever-increasing number of countries and customers.
What positioning strategy does Netflix use? ›
Key Takeaways
Netflix's marketing strategy for segmentation, targeting and positioning is mostly focused on low-cost moment motion films and TV shows, with the largest audience focusing on the mass business sector. In contrast to other competitors, Netflix provides a viewing experience free of commercial interruptions.
What is Netflix strategy statement? ›
At Netflix, we want to entertain the world. Whatever your taste, and no matter where you live, we give you access to best-in-class TV series, documentaries, feature films and mobile games.
Integrating your business systems enables a holistic view of your customer, your data, and your organizational health. It creates a better customer experience and improves your internal workflow. When done – and done right – you'll be more efficient, productive, and profitable.
What is an example of an integration strategy? ›
Integration strategy examples
Stitchmade Apparel, a clothing design and manufacturing company, wants to lower manufacturing costs. It uses backward integration to buy the factory that provides the fabrics for its garments.
When did Netflix start vertical integration? ›
However, Netflix did not remain as a pure content aggregator over the internet. Instead Netflix vertically integrated its business model by producing exclusive content, Netflix originals, in 2012.
Is Netflix example of product development strategy? ›
Netflix's product development strategy
Netflix has a Profit and margin driven strategy to maximize adoption and retention. Netflix is the largest streaming service in the world. Netflix's core offer is a subscription including unlimited access to content. Its product strategy emphasizes margin growth.
Is Netflix using differentiation strategy? ›
Differentiation- Netflix mainly uses cost leadership as its main strategy for competitive advantage, the business is also using differentiation in its operations. As a generic strategy, differentiation involves developing the online business and its products in various ways that make them unique from the competition.
How is Netflix an example of digital transformation? ›
Netflix's focus on content creation is a key aspect of its digital transformation. The company has shifted its strategy from acquiring content to producing original content, which has helped it to differentiate itself from its competitors and provide a unique viewing experience for its customers.
Is McDonald's an example of vertical integration? ›
McDonald's has been studied intensively in supply chain management courses and has vertically integrated its supply chain since the early 1990s. By owning more supply chain elements, McDonald's has more control over its product quality and cost.
Why McDonald's is example of vertical integration? ›
Effective Vertical Integration
McDonalds is integrated in every stage of the supply chain through partnerships with contracted suppliers. This means that the fast-food chain processes the meat themselves, grows its potatoes and transports its own materials.
What was the best vertically integrated company? ›
One of the earliest, largest and most famous examples of vertical integration was the Carnegie Steel company.
What is the most successful vertical integration? ›
Oil, Gas and Energy | BP, Shell, and ExxonMobil. The fossil fuel industry as a whole is one giant case study of vertical integration along the entirety of the supply chain. Major corporations such as British Petroleum, ExxonMobil, and Shell are prime examples of this, and have a presence at all major levels.
Global coffee brand, Starbucks uses a vertically integrated supply chain to surpass its rival, Dunkin' Donuts. The company is involved in every step of its supply chain process, from the coffee beans to the cup of coffee sold. With this system, Starbucks works directly with its nearly 300,000 coffee growers worldwide.
Is Walmart an example of vertical integration? ›
In addition to owning its own manufacturing plants, Walmart also owns its own fleet of trucks. The company owns thousands of trucks, and it employs thousands of drivers. This allows it to move goods to its stores faster, and it reduces the cost of shipping. Why is vertical integration so important?
Does Coca Cola have vertical integration? ›
In addi- tion, for The Coca-Cola Company, the vertical integration leads to 1.48 more new products annually being introduced to markets that are vertically integrated than markets that are not vertically integrated, i.e. vertical integration leads to 9% more new products; for Pep- siCo, the vertical integration leads ...
What are examples of vertical integration in the food industry? ›
Generally speaking, vertical integration in the processing and manufacturing sectors involves the manufacturer purchasing companies that support earlier processes and provide key inputs. For example, a cereal manufacturer may purchase a wheat farm and a company that produces paperboard boxes.
What is example of horizontal and vertical integration? ›
Horizontal integration helps acquire control over the market, but vertical integration helps gain control over the whole industry. Example: The Heinz and Kraft Foods merger is an example of horizontal integration.
Is McDonald's vertical or horizontal structure? ›
The organizational structure of McDonald's restaurants is vertical to help employees grow in their careers. The organizational chart is provided in Figure 1 below. According to the structure, the head of the restaurant is the restaurant manager who reports to the general manager.
What film companies had vertical integration? ›
Vertical Integration in Film
By the 1930s the industry was dominated by five vertically integrated companies: Warner Brothers, Paramount, RKO, MGM and 20th Century Fox.
Why was vertical integration successful? ›
Vertical integration makes sense as a strategy, as it allows a company to reduce costs across various parts of production, ensures tighter quality control, and ensures a better flow and control of information across the supply chain.
Who is the king of vertical integration? ›
Apple: The King of Vertical Integration
Apple Inc. is famous for perfecting the art of vertical integration. The company manufactures its custom A-series chips for its iPhones and iPads. It also manufactures its custom touch ID fingerprint sensor.
Who benefits from vertical integration? ›
Vertical integration is the method by which an organization acquires or creates its own suppliers, manufacturers or distributors in an effort to manage its supply chain directly. Vertical integration offers many benefits to businesses, including the potential for economies of scale and increased market control.
There are two basic types of vertical integration:
- Backward integration occurs when a company decides to buy another business that makes an input product for the acquiring company's product. ...
- Forward integration occurs when a company decides to take control of some aspect of the post-production process.
