After acquiring right to popular Chinese movie “Crouching Tiger, Hidden Dragon”, does Netflix want to dominate the movie industry as well?
Ronak Hegde
Netflix is one of the rare companies who have not only managed to renew their business propositions but also reinvent themselves from time and again. It is remarkable to see a DVD-Mail-Delivery start-up achieve such economies of scales from constantly evolving and adapting to the changing times.
As showcased in the figure, Netflix originally made enormous profit from their DVD venture. The idea struck Reed Hastings, the current CEO of Netflix, when he was a charged an extra fee for not returning a DVD ordered from a store on time. It was easier for the company to rent out DVD, as it did not face any complications from movie producers. The copyrights law allowed Netflix to rent out DVD with out adding any burden on the operating costs. Their DVD model was very uncomplicated; the customers were charged a flat rate and they were not charged an extra fee for not returning the DVD on time. The customer friendly model started by Netflix overpowered the small retail chains, as consumers could order a movie from a wide selection online without having to leave their premises.
Unfortunately for Netflix, winning the online streaming market has not been an easy task. Netflix could make enormous profits with DVD rental business without increasing the operating cost of their business, but the same does not hold true for the online streaming market. Netflix was in a much weaker bargaining power with the owners of digital videos. It had to be involved in painful negotiation with the movie producers who were not ready to forgive Netflix for eating up DVD model of their business. The negotiations and acquisition of movie rights from the movie producers led to huge increase in the operating cost of Netflix. As the result of this extra charge, the consumers were forced to shell out an extra fee. These higher costs showed up in Netflix’s financial statements. For example, by the end of June 2011, Netflix’s accounts payable had climbed 218% from $137 million at the end of 2010 to $435 million.
The next set of strategy can be prophesized in one of the statements of Netflix’s employee. Ted Sarandos, Netflix’s chief content officer, told GQ “the goal is to become HBO faster than HBO can become us.” As shown the above chart, to reduce the dependency on other movie producers, Netflix started producing its own content. The strategy applied by Netflix is called as backward integration. Over the course of two years, Netflix produced more than 5 TV series content and invested a lot of money in future production.
Since the time they have started producing these TV contents, they have been successfully able to lower the operating costs and emerge has a successful TV series content generator. TV series like House of Cards, Orange is the New Black has helped establish not help them establish as an online streaming company, but also has a great content provider. In the coming years, we can expect Netflix to apply similar strategy to the movie industry, where they won’t be just producing the movie, but also distributing it. Crouching Tiger, Hidden Dragon is widely regarded and successful movie in Hollywood. All that Netflix has to do is produce the content for this movie and leverage its past glory. We can expect in coming years, Walt Disney, Paramount, Weinstein Productions to face huge competition from Netflix and disrupt their existing model in face of growing competition. One thing is for very sure, since the introduction of Netflix, life has never been the same for us and who knows what life holds for us in the future.