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Netflix – the new face of the TV industry

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Netflix – the new face of the TV industry
______________________________________________________________________________________________________________

Entrepreneurship, Innovation and Business models

Teachers: Anders Henten

Iowan Windekilde

Written by: Amer Abd Elkawy

Andrey Lekov
Keshab Raj Adhikari
Miguel Portela

1
Table of Contents
Agenda..................................................................................................................................................................................... 3

1. Introduction .......................................................................................................................................................................... 3

2. Personalization of the TV as a market trend .............................................................................................................................. 5

3. Netflix‟s innovative approach .................................................................................................................................................. 6

4. Relevant economics theories ................................................................................................................................................. 10

4.1. Network economics ....................................................................................................................................................... 10

4.2. Information economics ................................................................................................................................................... 11

4.3. Behavioral economics .................................................................................................................................................... 13

5. Netflix‟s unique business model ............................................................................................................................................ 16

6. Conclusion .......................................................................................................................................................................... 19

Reference: .............................................................................................................................................................................. 20

2
Agenda

The basic aim of this mini report is to discuss and apply as many theories as possible from those,
included in the “Entrepreneurship, Innovation and Business models” course curriculum. In order
to achieve this goal Netflix is introduced as a case study company having a unique recipe of
doing a new generation of successful media entertainment business worldwide. After a brief
overview of the firm‟s profile, specific characteristics of its market are examined with an
emphasis on the personalization of the TV services as a main trend shaping its progress. Then the
application of the innovation theory in the development of Netflix‟s services, technologies and
business processes is mentioned, as a key tool for interaction with those market tendencies.
Furthermore the theories of Network, Information and Behavioral economics are suggested as
frameworks facilitating a better understanding of the principles of how Netflix operates within
the micro economic environment. Finally, the assumptions stated in the previous chapters of the
report are combined together within the unique business model used by the Netflix.

1. Introduction

Netflix is the world‟s leading subscription-based Internet television network, using the OTT
(Over-the-Top) technology to provide custom tailored on-demand streaming media services to
over 40 million customers in more than 40 counties worldwide. Established back in 1997, the
company with 2045 full-time employees headquartered in Los Gatos, California achieved annual
revenue equal to 3, 61 billion dollars [1] for 2012. Its huge success started back in September
1999, when Netflix introduced the monthly subscription concept 2 starting its business model
based on flat-fee unlimited rentals without due dates, late fees, shipping and handling fees, or per
title rental fees. Three years later on May 2002 Netflix made its initial public offering of
5500000 shares at a price 15$ each. Later, in 2006 (Netflix Prize) was launched – a campaign
promising $1 million to the customer who can achieve certain accuracy goals in recommending
films based on personal preferences, thus emphasizing the personalization and evaluation of the
content as key features distinguishing their own vision about the future of the TV industry. One
year later streaming was introduced as a more convenient way of distributing the content,
allowing members to instantly watch movies and TV shows on their personal computers without
the need to locally store the data. The network became even more open one year later when it

3
was introduced to a wider variety of platforms like the Xbox 360, Blu-ray disc players, TV set-
top boxes and Apple computers, thus embedding the openness concept as a key factor of its
expansion strategy. Consequently the PS3, Interconnected TVs, Nintendo Wii, iPad, iPod and
iPhone families of devices were integrated with Netflix allowing its content to be accessed
conveniently from a larger number of platforms and devices, resulting in customer base
enhancement to 2 million members in 2010.

F IGURE 1 - N ETFLIX ' S SUBSCRIBER BASE TIMELINE

Graph -1: Data Source – Netflix

During the last few years the company introduced another successful approach for expanding its
user base. It offers exclusively its own produced content like the “House of Cards” and “Arrested
development” series, thus merging the traditional roles of the content creator and content
provider in the content networking value chain [ 3 ] and improving the flexibility in terms of
satisfying customer‟s demands in a more efficient way than before. This approach facilitated an
incensement in Netflix‟s profits, minimizing the influence of the suppliers on its business model

4
and maximizing the uniqueness of the platform. Lately the company implemented a trial-based
advertising strategy for attracting new customers, while at the same time is building strong
relations with the TV device manufacturers complementing their product characteristics with
additional access to the network for a limited amount of time after the purchase of the TV set.

2. Personalization of the TV as a market trend

The rapid growth of the company, retrospectively represented above, is far from accidental. In
fact, it is a fair result of Netflix‟s ability to adjust effectively to the specific trends shaping the
market environment at a particular moment. In the segment where the firm from Los Gatos is
positioning its services, it is crucially important for the dynamically shifting consumer needs to
be recognized and analyzed, in a way that more valuable prepositions could be offered, thus
fulfilling those demands. For instance, right from its foundation the company had the clear vision,
that traditional TV is unable adapting to the dynamic lifestyle of the modern customers. In a
daily round where spare time is a highly limited resource that has to be spent wisely, the fixed
TV schedule and the bundled sets of cannel is not anymore good enough as a central source of
entertainment. Moreover when the company started distributing mailed DVDs the main
assumption embedded in the service design was that people like to watch particular movies but
are not willing to put time and affords renting them from the local rental store. Nor are they
comfortable to let the “gatekeepers” (Cable and Broadcasting TV providers) to take instead of
them the crucial decision what they should watch and do respectively on their free time.

On the other hand it has to be taken into account the influence of the technology, which is also
unambiguously shaping the market trends. As the process of convergence allowing “different
network platforms to carry essentially similar kinds of services” thus stimulating the “coming
together of consumer devices such as the telephone, television and personal computer” [ 4 ]
emerged at the beginning of the new millennium, it introduced more sophisticated possibilities
for the user demands to be addressed. Those technology solutions were very rapidly
implemented by the industry according to the user requirements and in parallel with a few
essential technology concepts. Probably the most important of them all is the “IP over everything”
principle [5] embedded at the center of this convergence process. It worked as a spark, unleashing
brand new ways for content distribution and unleashing the crucial ability to access every user,
anytime, anywhere and on any device boosted Netflix‟s service distribution, migrating from the

5
old-fashioned DVDs by mail towards the top of the most commonly used IP protocol. While
technological convergence made the process of content distribution more efficient, shortening
the distance between company and consumers and helping services reach bigger user base, it also
improved the abilities for service customization. “Netflix revolutionizes the way people watch
TV programs and films” [6] explicitly because of the fact that technology allows the content to be
tailored according to the individual preferences of every single user of the network. Most
significantly this feature effectively corresponds to the increased user requirements for
maximization of the utility gained from media entertainment during their limited spare time. The
content is not only suggested according to the individual taste, but it is also evaluated, organized
and discussed, transforming Netflix into a social network for consumers sharing a same passion.
Also this interaction is a key factor in terms of service improvement, since it provides a vital
feedback for the content creators in terms of what is and what is not appreciated by their
audience.
Regulatory concerns and competition also need to be taken into consideration as key factors
affecting development of the market trends. Because of the fact that Netflix is an international
company recognized in more than 40 countries all over the world, it has to adjust no only the
local regulatory frameworks, but also to the particular competitive companies in each national
market. Very often Netflix services are distributed by ISP companies which offer substitute
services based on IPTV or DVB-C technology. This vital conflict of interests has to be taken into
account along with the existing legal norms securing the fair competition on the particular
market and shaping the rules of the game.

3. Netflix‟s innovative approach

A good way to start a discussion about innovation theory is describing, what is the exact
meaning of the term “innovation”. Then is important to look into the different types of
innovation and the ways the innovation can be diffused.

Also in this chapter will be discussed the various levels of acceptance that innovation can have.

Then Last but not least we will try to apply all this Knowledge to the Netflix case that is the
center of this paper.

6
Definition of innovation
Innovation can be defined in many ways but some bright people have defined has:

“The ability to deliver new value to a customer” (Jose Campos)

“A new idea, method or device” (Webster online)

“Change that creates a new dimension of performance” (Peter Drucker)

So innovation is when something new or improved is created to address to meet new

requirements or existing market needs. Innovations also don‟t come only in one form, in fact
there is many ways innovation can be defined Sustaining VS Disruptive, incremental VS radical,
Continuous VS Discontinuous, Complementation VS substitution.

But the main idea of all them is a choice between build upon what exist in the market and make
it better. Or create something new, sometimes this means to create an entire new category of
product that can substitute the old one or even make it obsolete, is also possible that product is
ahead of time and it fails. [7]

Netflix‟s innovation
In the case from Netflix the innovation came in a disruptive, radical, Discontinuous and
substitution way. Netflix started as a rental DVD Company trying to distinguish itself in the
market owned at that point by Blockbuster. [8]
The innovation started to be incremental was a service to people rent DVD in the internet and
then they were shipped to people homes. This service was better already than going to stores and
rent a movie. These innovation paths kept on moving forward and in 1999 Netflix launched a
subscription model so people could rent unlimited number of videos. But then the innovation
started to be disruptive when Netflix decided to go even further with their online platform now
people wouldn‟t only be able to rent videos but to watch them streamed and this was when
Netflix really entered in a new era and their main competitor started to lose ground.

This process took a while mainly because of the internet connections that took a while to get to
the amount of QoS and price point required for this service is truly disruptive. Another very
important aspect about innovation that can‟t be forgotten in the case of Netflix; diffusion played
a major role in their success.

7
In 1962, Rogers “Diffusion of Innovations theory” discuss these aspects and he comes with 4
major aspects that influence the Diffusion aspect of innovation [9]:

 The innovation itself

 How information about the innovation is communicated
 Time
 The nature of the social system into which the innovation is being introduced (Rogers,
1995).
Again drawing from the theory to the particular Netflix case, the success started really when all
this diffusion aspects aligned and even today Netflix face some challenges especially in the last
aspect that can be translated also to regulatory, in Netflix case the concept of Network Neutrality
is at this point is generally favorable to Netflix business model but if it changes their business
may be disrupted.

Also Netflix like all other companies, Netflix faces the unknown challenges of a new disrupted
technology or business model.

The diffusion success that Rogers describes are also connected to what Rogers proposes to be
five perceived attributes that affect the rate of adoption of innovations:

 Relative advantage – How much better the new product is perceived to be than the
product that it supersedes?
 Compatibility – How much consistent with the existing values and needs of the potential
adopters the new product is perceived to have?
 Complexity – How easy is to learn to use the new product?
 Trial ability – How easy is it to try the innovation?
 Observe-ability – How visible are the results?

In case of Netflix the relative advantage from see a movie from a web portal (now a days
available almost in all devices everywhere and anywhere) or go to a store to rent each “DVD”,
was perceived in fact has one big innovation.

The compatibility was there because most of the potential users had internet and computers and
this service has compatible with them in fact was made for such devices.

8
The complexity was low which also helped to fuel its success.

The trial ability was also an important aspect and still it is for Netflix even now days, they still
give one month trial to everyone to test their service. [10]

And finally the observe-ability in the case of Netflix, results was instantaneous which also fuel
their success.

Finally the last aspect that we believe that is important to talk about in innovation is acceptance
of innovation. This is an extremely important aspect when a company studies their target market
for their business model.

In the acceptance model there is several categories of adopters.

Image 1 - Source: Everett Rogers

 Innovators - Experimentalists and "techies"

 Early adopters - Technically sophisticated
 Early majority - Pragmatists, First part of the mainstream
 Late majority - Less comfortable with technology, Second half of the mainstream;
 Laggards - Very conservative, May be antagonistic
Netflix success is drawn from the fact that has able to reach the early majority in several
countries and with much less fix cost which made the traditional competitors have big troubles.

9
And now days, Netflix is building its own content so it can break throw the late majority.

Because the incumbents now a days mainly the cable companies own in many cases their
country cultural content.

4. Relevant economics theories

In this chapter, three theories will be presented which are relevant when someone discuss a
business case. It starts with Network Economics that will be presented and then applied to
Netflix case. The theory that will follow is Information Economics where the same process will
be applied and the last but not least will be discussed and implemented behavioral economics.

4.1. Network economics

The Theory behind Network Economics is that networks have their own economic characteristics
and these characteristics make them different from traditional products and services.

In Neo-Classical economics there has the concept companies will face increasing costs per unit
produced when they decide to expand their market. And this will make them less profitable.

This doesn't apply to Network provisions. There are 2 types of advantages in network provisions
[Network economics, course material].

The first one is on the supply side where for a large producer there are low or marginal costs of
production, but very high entry costs.

The second one is on demand side where the larger network, the more contacts the company has
and the larger utility for the individual users.

And together this to advantages feed each other, creating a larger network with lower service
costs to attract more customers. This can be denominated as a “Winner takes all” situation.

Other important aspect about Network economics is the Network externalities, which means that
is a form of direct interdependence among the members of an economic system which is not
mediated by prices. [Network economics “course material”].

10
Network economics within the Netflix case
In case of Netflix, they invested in construction of the platform and in building relations with
content creators (copyright owners), but for each new user the extra costs is very low.

Netflix is attractive for more customers, because it offers very affordable price. The reason for
this price is the fact, that Netflix pays copyrights per single use this contrast with expensive
DVD, because you can watch it a lot of times and the more users Netflix has the lower price per
single use, it is.

On the demand side Netflix created the option users to evaluate the content (ranking system and
the possibility to leave a comment) maximizes the benefit for the users the more users are
evaluating, more mutual utility the system is. This helps to create a larger utility for the
individual users.

Netflix also offers flexible system for content distribution, because users are completely free to
choose what to watch and this is one of the reasons that Netflix became more and more attractive
for the customers. That is why the whole market started “tipping” in direction in terms of
providing flexible and personalized services.

An example of this can be “SPOTIFY”; it is a company that uses many of the concepts that
Netflix introduced to the world but to a different area, the music. Both services allow their user
to personalize their experience and have a pleasant time.

4.2. Information economics

Throughout this part, we are talking about information on economics (service and products),
what others characteristics are involved in information economics and short intro to content
networking. We are going to analyze and applying these cases with Netflix.

The information economics is a major concept and can be define in various ways; normally
information economics consist of many microeconomics concepts, which refer to the categories
of items, which normally trade for values.
Information as a good
The moral of the information economic is „information is good‟. A product separated from an
immediate producer and sold in an anonymous market, which is good. A product sold in
different market shows that the product carriage the strength. A good product means experience
good, which mean if the consumers experience the product and value it [11]. Nearly every new
product in market is an experience good and marketers have developed strategies such as free

11
sampling, promotional pricing for special occasion and testimonials to help consumers to learn
about new goods.

Information is a special kind experience good every time it‟s consumed. We are unknown about
information until we read it. – For example, we don‟t how much a new iPhone6 will worth? (We
assume that six is the iPhone‟s next version) until Apple release the piece of information
available for public. Information in business is like those in the print, music and movies
industries, which have devised various strategies to get wary consumers to overcome their
reluctance to purchase information before they know what they are getting.

We use the terms information very broadly. Essentially, anything that can be digitized –encoded
as a stream of bits-is information. For our purpose, baseball score, books, databases, magazines,
movies, music, stock quotes and web pages are all information goods [12].

When computer scientists designed and developed the World Wide Web (www) they were
shocked by the traffic consumed by images. Still today 60 percent traffic on the web is
consuming by the images. That means everything in the information biz, because it is the image,
which carries information like brand name, reputation and so on.

Others Characteristics on Information economics

The characteristics in economics includes, before product reach to end-users, the good has to be
experienced whether the good worth it or not. The result of the experience good leads to special
properties of the markets.

Advantage to production of information- for example, the new product toward the market has
very high cost then the 2nd low marginal copy and the price for the information products can be
lowered.

IPR rules
The idea behind the IPR provision and arrangements are the producers of information or content
should be able to get their money back and that there should be sufficient incentives for
information producers to develop new pieces of information and content.

Intellectual property right in information good, they are not competitor and the marginal costs
are very low leads to necessity for the producers to protect their information products. The legal
side of this deals with the provisions for copyright, patent legislation and trademark protection.

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Content is the King
The content is the information superhighway and most people use it for archiving some sort of
information. Content could be any creative works, such as text, graphic, images or video. The
maximum increments in Internet users at World Wide Web become the great emerging place for
information good. People share the content throughout the social networks and spare the
information. Indeed it is the hot topic attaches with the information share and content in that
point stand in the top „content is king‟.

The technology infrastructure makes information more accessible and hence more valuable [13].
On this note; the infrastructure mean the possibilities that computer makes to store, search,
retrieve, copy, filter, manipulate, view, transmit and receive information.

Information economics within Netflix case

After the short description above, now let‟s compare information with the Netflix – the world‟s
leading company with more than 40 million [14] members from all over the worlds. Does Netflix
is aware of the information economics, how such a big and fastest growing company manage to
delivered their goods, service information to the end users.

Netflix is using information economics on following manner. The information is good: The
company use newspaper, web sites, hardware or collaboration with companies like ISP, IP TV
etcetera to distribute their information to the end users. The “information as good” concept
applies to Netflix services, in a way that, content (movies and shows) are expensive to produce
then reproduced.

Other Characteristics: Netflix offer the end users the trail periods for one month before
subscribing their service, a satisfied customers can retain their subscription, which mean if the
users experience the Netflix service and value it. Current growth shows the product/service
Netflix offer is experience good.

Information as public good: The information to the product or the service does not disappear
when consumed. Netflix published their users‟ stats, income growth regularly basic in contrast to
their service. In the language of economics, information is a public good.

4.3. Behavioral economics

In this part, we will be defining about the behavioral economics and its terms, and we will be
writing how world-leading company Netflix is applying this behavior on their good and service.

13
The Behavioral meant to be about people‟s behavior on economics. The core of behavioral
economics is the conviction that increasing the realism of the psychological underpinnings of
economic analysis will improve the field of economics on its own terms. [15]

Behavioral economics is based on studies of actual human behavior in economic matters. Human
habits can make huge impact and so it‟s the economic behaviors of peoples and the self-
exceptions they have. The behavioral generate theoretical insights by making better predictions
of field phenomena and suggesting better policy. This theory is based on the irrational decisions
made by the costumers. It is called the seven principles of human behavior [16], and they are
listed as follows.

1. Other people’s behavior matters: people do many things by observing others and copying;
people are encouraged to continue to do things when they feel other people approve of their
behavior.
2. Habits are important: people do many things without consciously thinking about them.
These habits are hard to change – even though people might want to change their behavior,
it is not easy for them.
3. People are motivated to ‘do the right thing‟: there are cases where money is de-
motivating as it undermines people‟s intrinsic motivation, for example, you would quickly
stop inviting friends to dinner if they insisted on paying you.
4. People’s self-expectations influence how they behave (commitments; guilt, shame or
disappointment): they want their actions to be in line with their values and their
commitments.
5. People are loss-averse and hang on to what they consider ‘theirs’ (endowment effect).
Their willingness-to-pay is the same as their willingness-to-accept, so people are neutral to
loss or gain.
6. People are bad at computation when making decisions: they put undue weight on recent
events and too little on far-off ones; they cannot calculate probabilities well and worry too
much about unlikely events; and they are strongly influenced by how the
problem/information is presented to them.
7. People need to feel involved and effective to make a change: just giving people the
incentives and information is not necessarily enough.

Moreover, human behaviors are based on various terms, for example – a price on a good or
service can impact on test of the product, a 10$ wine sell in 30$ value might test better when the
original price. In some cases, too many choices for same service or products might impact the
human behaviors, which make human being confuse and that over load lead them to choose the
random or not at all.

The “frame” in which information is presented influences consumer‟s choice. Presentation of the
same information in a different frame can lead to a different decision. Consumers favor stability
over change - may be reluctant to give up what they have. Ability and willingness to switch –
determined by variety of factors such as; length switching procedures, early exit charges,

14
confusing products, which are hard to be compared, technical incapability, long-term contracts,
etc.

Information imperfection is a situation where consumers have limited awareness of the products
or an excess of available information confuses them. For example a seller of a used car has more
information about its quality then the buyers because they are more familiar with it. They know
more about the products quality, durability and others features. Buyers in contrast have limited
contact with commodity and may have less information.

Behavioral economics within the Netflix case

Regarding Behavioral economic implication on Netflix, the company is simplifying the pricing
structure of their service by offering a flat rate or a single fixed monthly fee, regardless on the
usage or the number of movies/series watched per user. According to the behavioral economics
when the customer is given unlimited variety of options very often the customer is not able to
take a decision and sometimes even deny the purchase of the service. Instant of going to buy
every single movie from blockbuster or from movie stores and pay per single selected movie
might discourage them to take a decision and prevent them from buying the service from Netflix
respectively.

Talking about Netflix case path-dependency and lock-in approach are also relevant. Path
dependency can apply with technologies adoption process and evolution, the personalization
functions facilitated by the Netflix algorithms are explicitly and helping the user to minimize the
possibilities of choices, thus offering them only suggestions, tailored according to their own taste.
This personalization, which is the key part of Netflix‟s TV service revolution, is accurately based
on the previous behavior and the particular types of content previously watched. In fact the
feedback from the customer‟s behavior is extremely vital in terms of Netflix‟s service
development. While in the old fashioned TV the programs and the cable providers (so called
“Gatekeepers) were taking instead of the customers the crucial decisions what kind of content to
be distributed, now the feedback from how do they behave, what they like and watch, enabled by
the capabilities of the technology is naturally regulating the content supply, thus stimulation the
creation of content that fits their demands and discouraging production of movies and series that
do not correspond to their taste. As companies like Netflix are expanding towards the content
creation business by producing their own excusive content and the behavioral characteristics of
their customer base is becoming increasingly decisive factor of their business success. Trough
the way they behave, the clients are becoming more involved within the service development,
which is the most effective approach for maximizing their utility.

15
“Consumers will not switch to a competing supplier unless the price difference exceeds the
switching cost” – While you are watching content on Netflix you are telling the service what
your preferences are and with every additional movie the preciseness of this feature is
maximizing. This makes it hard for switching to an alternative service since the time and the
efforts spend in building a personal profile of the taste regarding the content will be lost while
switching. This is the most essential switching cost in this case, locking-in the users by offering
high quality of personalized service, unavailable in other substitute service for the current
moment in time.

5. Netflix‟s unique business model

Business model as a concept is used to describe different issues; for example in 70‟s business
models was used to describe the business processes and knowledge management inside the
company, for the purpose of building information and communication technology systems to
enhance the workflow inside the company. More recently with the era of the information and
communication technology and specifically the evolution of the World Wide Web; business
model concept has been more used to describe market structure and how individual companies
will place themselves and operate in those structures.

The evolution of the World Wide Web has opened a new communication channel which in
return opened new business form (E-business) which is discussed using the business model
concept.
Business model definition

Because this concept is used in different way for different businesses and market structures;
therefore different definitions and business model designs are conducted from different schools.

In 1998 Timmers defined the business model as and architecture for the product, service and
information flows, including a description of the various business actors and their roles,
adscription of potential benefits for the various business actors, and a description of the sources
of revenues”. Based on this definition, a number of alternatives were proposed from various
disciplines.

In 2001 Hawkins says that a business model concept is way that describes the “architecture of a
business” which is closely related to the internet based e-commerce.

16
The most complete definition of business model concept is achieved by (Osterwalder and
Pigneur (2002, p. 2): “a business model is nothing else than a description of the value a company
offers to one or several segments of customers and the architecture of the firm and its network of
partners for creating, marketing and delivering this value and relationship capital, in order to
generate profitable and robust revenue streams”. This definition complements Timmers
definition in 1998 and Hawkins description in 2001.

Osterwalder and Pigneur belong to the Swiss school; which focuses on consultancy and fostering
entrepreneurship and a design named business model canvas.

Netflix‟s successful business model

For Netflix case; Hawkins description and the definitions by Timmers and Osterwalder could be
a well-defined description for Netflix business Model.

Netflix business model approach is called the “Long-Tail”. This approach in the Netflix context
is to have tremendous variety selections of movies, TV shows and lot of other videos where the
vast majority of these contents are not popular and still can make a lot of money from that by
targeting a real wide number of customers. The following figure shows the long tail approach.

The success of the long tail approach can only exists in the online store, due to the limitation of
having inventory in physical stores.

Image -2

The business model canvas created by Alex Osterwalder [17]. In a nutshell it describes the
services of products offered and how and whim it is delivered. Also takes into account the cost
that a company incurs by doing so and its revenue.

The figure in the next page shows the 9 design parameters used to design the business Canvas
model.

17
 Key Customer Customer
Key Partners Value
activities Relationship segments
proposition
 subscribers
. Amazon  Easy access
• Marketing
IPR • Low price
• Customer
. Content Streaming  Trail ability for Behavior -
producers development one month research
 Tremendous
selections of
. TV sets Key digital media Distribution channel
companies resource content
 Flat low price
• Internet
rate
100,000 • Set top box in the
DVDs new TV sets

CDNs

Cost structure Revenue flows

 fixed costs “ labor,
maintenance , leasing
cloud capacity and  Monthly Subscription

CDNs
 Advertisements
 Maintenance of the IT
system

Image - 3

18
6. Conclusion

From one point of view the assumptions stated above are providing sufficient base for further
discussion regarding the economic aspects of Netflix‟s success. From another perspective they
present basic clues in terms of the mechanisms shaping the future strategy of the company and its
service development approach in a highly competitive market environment. In both cases the
knowledge gained from this mini report represents a valuable lesson learned from a company
which is shaping the progress of a whole industry beyond any geographical boundaries.
Therefore it might be challenging to try look at the “crystal ball” of the TV industry and try
guessing where the process of personalization and convergence of the services would go in the
near future.

The huge business success of Netflix has not remained unseen. Most of the biggest players in the
TV industry across the Atlantic like HBO and BBC are successfully imitating Netflix‟s business
model, thus developing their own OTT networks for content distribution and fueling their
competitiveness with own cocked exclusive content. Nonetheless as increasing number of
consumers are “cutting their cords” and switching to OTT TV services, Netflix looks in a good
position to use its market maturity and focus on content development, while the rivals are putting
efforts in maximizing their market shares and refining their platforms. Regarding this possibility
Netflix‟s chief content officer “Ted Sarandos” claims that the main goal embedded in the
company‟s strategy is “to become HBO faster than HBO can become us”[18]. Such statement
clearly illustrates the intensified process of convergence between the TV and the movie
industries fueled by the technology development and the Internet evolution.

19
 Reference:

1 Netflix, Inc. Annual Report Filed Feb 1, 2013

2 O'Brien, Jeffrey M. (December 2002). "The Netflix Effect". Wired News
3 Content networking p. 21, “The diversity of Interests in Content Networking”
4 EU green paper on the convergence of the telecommunications, media and

information technology sectors, and the implications for regulation

5 “Everything over IP, IP over everything” Robenlert Haas and Raffael Marty, 2000
6 Netflix.com, company overview

7. Windekilde, Iwona ; Innovation Slides

8 https://signup.netflix.com/MediaCenter/Timeline
9 Windekilde, Iwona ; Innovation Slides
10 https://signup.netflix.com/
11 Carl Shapiro and Hal r. Varian, Information Rules – A strategy guide to the network

economy- 1999.
12 Carl Shapiro and Hal r. Varian, Information Rules – A strategy guide to the network

economy- 1999.
13 Carl Shapiro and Hal r. Varian, Information Rules – A strategy guide to the network

economy- 1999.
14 http://ir.netflix.com/index.cfm
15 advance in behavioral economics, Colin F. Camerer, George oewenstein, Metthew

Rabin,
16 Behavioral economics: seven principles for policy makers”, NEF, 2005

17Alex Osterwalder & Yves Pigneur, Business Model Generation, 2009

18 “And the award for the Next HBO Goes to ...”- http://www.gq.com/entertainment/movies-and-
tv/201302/netflix-founder-reed-hastings-house-of-cards-arrested-development?currentPage=1&printable=true
18 “And the award for the Next HBO Goes to ...”- http://www.gq.com/entertainment/movies-and-
tv/201302/netflix-founder-reed-hastings-house-of-cards-arrested-development?currentPage=1&printable=true

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