Netflix - Is Enterprise’s Competitive Advantage Sustainable? Why or Why Not?

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- Internet costs: with the popularity for streaming, demand for bandwidth is unprecedented. ISPs have started shifting from a flat-rate unlimited to a tiered or charge for high usage which would make Netflix more expensive, an issue in a very competitive industry where we can assume that consumers are likely to be price sensitive.

- Threat to first sale doctrine: While this is a DVD sales problem and DVD is becoming a secondary product for Netflix, it may threaten that revenue stream.

Internally there are problems as well

- Decline Free Cash Flow conversion: This limits their ability to invest in new content.

- Content providers relationships: Media creators have started to get threatened by Netflix’s quick rise. Specifically with the Starz contract up for negotiation, this could be a problem.

- Perceived Weak Content: Tilson argues that this is an issue but on this end, I agree with Hastings that subscribers are happy and the competitors are almost complementary in that certain content is exclusive to Netflix while other content is exclusive to a competitor. Considering multiple subscriptions are cheaper than the TV subscription, customers may have more than one streaming service.

What strategic moves should Netflix make in order to strengthen its position?

Having agreed with Tilson, I must admit that all hope is not lost.

- Grow Quickly: If Netflix continues to grow subscriber base fast enough, it will increase revenue and by decreasing reliance on DVD revenue will have greater margins. In the short term, they can look at international expansion which will help build brand further. Once they’ve tapped into network effects as a big player, they will be able to renegotiate deals without losing out. Recognizing that DVD sales are decreasing, the media companies need Netflix more than they let on.

- Buy More Content: Recognizing that it’s not fair to compare an $80 service with an $8 one, Netflix can strengthen position by investing in more content. With the money from new subscribers, they can invest in content, further encourage greater subscribers.

- Create Content: Netflix can further differentiation by starting to make their own content and stop relying on content providers. Though this is both expensive and risky.

- Create relationships with ISPs: Like ESPN, Netflix should build exclusivity or promotional relationships with ISPs, capitalizing on the fact that all their subscribers would subscribe to high usage networks and that volume of business should get the subscribers a better deal.

- Build relationships with internet TV / Mobile device manufacturers: Have Netflix pre-installed in every device.

- Product positioning and pricing: Once they lose out on economies of scale, Netflix can differentiate between DVD and Streaming more. Instead of bundling, have them as standalone products and price them differently to charge a premium on DVDs (a non-core business with the evolution toward internet business)