To prepare for this Discussion, review this week’s Learning Resources concerning disruptive technology and disruptive innovation. Read the case study “The Rise and Fall of Netflix: What Happened and Where Will It Go From Here?” and consider Netflix’s role as a disruptive innovation or technology that is now being threatened by the disruptive technology of its competitors. Netflix’s leaders are facing many challenges as they consider the global market. Put yourself in the intern Chris’s position, and think about how you, as a global change agent, would advise the company’s leaders.

Post an analysis of the impact of disruptive technology on Netflix, with your own prognosis for this business. Your analysis should include all five statements in ( two to three paragraphs) be structured as follows:
Summarize the challenges Netflix is facing, as detailed in the case study.
Evaluate whether disruptive technology has a primarily positive or negative impact on Netflix’s challenges. Provide a rationale.
In line with your argument, identify whom disruptive technology benefits and whom it adversely affects.
Develop two strategies for either surviving or taking advantage of disruptive technology.
Support your post with data and information from the Learning Resources and at least one peer-reviewed article or journal of your choice.

Be sure to support your work with a minimum of TWO specific citations from this week’s Learning Resources and one or more additional scholarly sources. Follow APA 7th edition for using references also find one to two additional references related to disruptive innovation within business

Allen, G., Feils, D., & Disbrow, H. (2014). The rise and fall of Netflix: What happened and where will it go from here? Journal of the International Academy for Case Studies, 20(1), 135-143.

Refer to the Week 7 Discussion Rubric for specific grading elements and criteria. READ and FOLLOW using this rubric to assess your work.

Superior

Criteria

Excellent Criteria

Satisfactory Criteria

Margin

al

Criteria

Unsatisfactory

Criteria

Not Submitted

Element 1a: Initial

Post

–

Summary of

C

h

allenges

4

 

(8%)

Student provides a

thorough

an

d

detailed

summary of the

challenges Netflix is

facing wit

hi

n

the case

study. Several

sources

and

examples support

summary.

3

.8

 

(7.6%)

Student provides a

thorough and detailed

summary of

the challenges Netflix

is facing within the

case study. Several

sources and

examples support

summary.

There are

one or two minor

errors in summary.

3.4

 

(6.8%)

Student provides a

summary of

some

of

the challenges Netflix is facing within the

case study. Some

sources and examples support summary.

3 

(6%)

Student provides a

cursory or incomplete

summary of the challenges Netflix is

facing within the case

study. Few sources

or examples support

summary.

2

 

(4%)

Does not meet

minimal standards.

0

 

(0%)

Did not submit element.

Element 1b: Initial

Post –

Impact of

Disruptive

Technology

4 (8%)

Student presents a

thorough and detailed

evaluation of whether

disruptive technology

has a primarily

positive or negative

impact on Netflix’s

challenges, and

includes

strong

rationale. Sever

al sources and examples support

evaluation.

3.8

 (7.6%)
Student presents a thorough and detailed evaluation of

whether disruptive

technology has a

primarily positive or

negative impact on

Netflix’s challenges,

and

includes strong

rationale. Several

sources and examples support

evaluation.

There are

one or two minor

errors in evaluation.

3.4 (6.8%)

Student presents an

evaluation with some

details of whether

disruptive technology has a primarily positive or negative impact on Netflix’s challenges, an

d

includes some

rationale. Some

sources and examples support evaluation.

3 (6%)

Student presents a cursory or incomplete

evaluation with vague

or missing details of

whether disruptive technology has a primarily positive or negative impact on Netflix’s challenges,

and includes some

rationale.

Some sources and

examples support evaluation.

2 (4%)

Does not meet minimal standards.

0 (0%)

Did not submit element.

Element 1c: Initial

Post –

Who

m

Disruptive

Technology

Benefits

and Adversely

Affects

4 (8%)
Student presents a thorough and detailed

analysis, in line with

h

i

s/her argument, of

whom disruptive

technology benefits

and whom it

adversely affects.

Several sources and

examples support

analysis.

3.8 (7.6%)

Student presents a thorough and detailed analysis, in line with his/her

argument, of who

m disruptive technology

benefits and whom it

adversely affects. Several sources and examples support

analysis.

There are

one or two minor errors in analysis.

3.4 (6.8%)
Student presents an

analysis, with some

details, in line with

his/her argument, of

whom disruptive technology benefits and whom it adversely affects. Some sources and examples support analysis.

3 (6%)
Student presents a cursory or incomplete

analysis, with vague

or missing details in

regards to his/her

argument, of whom

disruptive technology benefits and whom it adversely affects.

Few sources or

examples support analysis.

2 (4%)
Does not meet minimal standards.

0 (0%)
Did not submit element.

Element 1d: Initial Post – Surviving or Taking Advantage of Disruptive Technology

4 (8%)

Student presents a thorough and detailed explanation of two strategies for either surviving or taking advantage of disruptive technology. Several sources and examples support explanation.

3.8 (7.6%)

Student presents a thorough and detailed explanation of two strategies for either surviving or taking advantage of disruptive technology. Several sources and examples support explanation. There are one or two minor errors in explanation.

3.4 (6.8%)

Student presents an explanation with some details of two strategies for either surviving or taking advantage of disruptive technology. Some sources and examples support explanation.

3 (6%)

Student presents a cursory or incomplete explanation of two strategies for either surviving or taking advantage of disruptive technology. Few sources or examples support explanation.

2 (4%)
Does not meet minimal standards.

0 (0%)
Did not submit element.

Element 1e: Initial Post – Improving Leadership Competencies

4 (8%)

Student presents a thorough and detailed explanation delineating the measures he/she will take to improve his/her leadership competencies.

3.8 (7.6%)

Student presents a thorough and detailed explanation delineating the measures he/she will take to improve his/her leadership competencies. There are one or two minor errors in explanation.

3.4 (6.8%)

Student presents an explanation delineating some of the measures he/she will take to improve his/her leadership competencies. Some details may be missing or unclear.

3 (6%)

Student presents a cursory or incomplete explanation delineating few of the measures he/she will take to improve his/her leadership competencies.

2 (4%)
Does not meet minimal standards.

0 (0%)
Did not submit element.

Element 2: Response to Colleagues’ Postings

15 (30%)

Responses are excellent and fully contribute to the quality of interaction by offering constructive critique, suggestions, in-depth questions, additional resources, and stimulating thoughts and/or probes to more than two peers fully addressing the direction prompts.

14.25 (28.5%)

Responses are very good and fully contribute to the quality of interaction by offering constructive critique, suggestions, in-depth questions, additional resources, and stimulating thoughts and/or probes to at least two peers mostly addressing the direction prompts.

12.75 (25.5%)

Responses are good and somewhat contribute to the quality of interaction by offering constructive critique, suggestions, in-depth questions, additional resources, and stimulating thoughts and/or probes to at least two peers somewhat addressing the direction prompts.

11.25 (22.5%)

Responses are weak and do not fully contribute to the quality of interaction by offering constructive critique, suggestions, in-depth questions, additional resources, and stimulating thoughts and/or probes to at least one peer minimally addressing the direction prompts.

7.5 (15%)

Does not meet minimal standards.

0 (0%)
Did not submit element.

Element 3: Written Delivery Style & Grammar

7.5 (15%)

Student consistently follows APA writing style and basic rules of formal English grammar and written essay style. Student communicates in a cohesive, logical style. There are no spelling or grammar errors.

7.12 (14.25%)

Student consistently follows APA writing style and basic rules of formal English grammar and written essay style. Student communicates in a cohesive, logical style. There are one or two minor errors in spelling or grammar.

6.38 (12.75%)

Student mostly follows APA writing style and basic rules of formal English grammar and written essay style. Student mostly communicates in a cohesive, logical style. There are some errors in spelling or grammar.

5.62 (11.25%)

Student does not follow APA writing style and basic rules of formal English grammar and written essay style and does not communicate in a cohesive, logical style.

3.75 (7.5%)

Does not meet minimal standards.

0 (0%)
Did not submit element.

Element 4: Formal and Appropriate Documentation of Evidence, Attribution of Ideas (APA Citations)

7.5 (15%)

Student demonstrates full adherence to scholarly reference requirements and adheres to APA style with respect to source attribution, references, heading and subheading logic, table of contents and lists of charts, etc. There are no APA errors.

7.12 (14.25%)

Student demonstrates full adherence to scholarly reference requirements and adheres to APA style with respect to source attribution, references, heading and subheading logic, table of contents and lists of charts, etc. There are one or two minor errors in APA style or format.

6.38 (12.75%)

Student mostly adheres to scholarly reference requirements and/or mostly adheres to APA style with respect to source attribution, references, heading and subheading logic, table of contents and lists of charts, etc. Some errors in APA format and style are evident.

5.62 (11.25%)

Student demonstrates weak or inconsistent adherence scholarly reference requirements and/or weak or inconsistent adherence to APA style with respect to source attribution, references, heading and subheading logic, table of contents and lists of charts, etc. Several errors in APA format and style are evident.

3.75 (7.5%)
Does not meet minimal standards.

0 (0%)
Did not submit element.

Name: DDBA_8006_Week_7_Discussion_Rubric

Superior Criteria

Excellent Criteria

Satisfactory Criteria

Marginal Criteria

Unsatisfactory
Criteria

Not Submitted

Element 1a: Initial
Post
–

Summary of
Challenges

4

(8%)

Student provides a
thorough and detailed
summary of the
challenges Netflix is
facing within the case
study. Several
sources and
examples support
summary.

3.8

(7.6%)

Student provides a
thorough and detailed
summary of the
challenges Netflix is
facing within

the case
study. Several
sources and
examples support

summary. There are

one or two minor
errors in summary.

3.4

(6.8%)

Student provides a

summary of some of

the challenges Netflix
is facing within the
case study. Some
sources and
examples support
summary.

3

(6%)

Student provides a
cursory or incomplete
summary of the
challenges Netflix is
facing within the case
study. Few sources
or examples support
summary.

2

(4%)

Does not meet
minimal standards.

0

(0%)

Did not submit element.

Element 1b: Initial
Post
–

Impact of
Disruptive
Technology

4

(8%)

Student presents a
thorough and detailed
evaluation of whether
disruptive technology
has a primarily
positive or negative
impact on Netflix’s
challenges, and
includes strong
rationale. Sever
al
sources and
examples support
evaluation.

3.8

(7.6%)

Student presents a
thorough and detailed
evaluation of whether
disruptive technology
has a primarily
positive or negative
impact on Netflix’s
challenges, and
includes strong
rationale. Several
sources
and
examples support

evaluation. There are

one or two minor
errors in evaluation.

3.4

(6.8%)

Student presents an
evaluation with some
details of whether
disruptive technology
has a primarily
positive or negative
impact on Netflix’s
challenges, and
includes

some
rationale. Some
sources and
examples support
evaluation.

3

(6%)

Student presents a
cursory or incomplete
evaluation with vague
or missing details of
whether disruptive
technology has a
primarily positive or
negative impact on
Netflix’s challenges,
an
d includes some
rationale. Some
sources and
examples support
evaluation.

2

(4%)

Does not meet
minimal standards.

0

(0%)

Did not submit element.

Element 1c: Initial
Post
–

Whom
Disruptive

Technology Benefits

and Adversely
Affects

4

(8%)

Student presents a
thorough and detailed
analysis, in line with
his/her argument, of
whom disruptive
technology benefits
and whom it
adversely affects.
Several sources and
examples support
analysis.

3.8

(7.6%)

Student presents a
thorough and detailed
analysis, in line with
h
is/her argument, of
whom disruptive
technology benefits
and whom it
adversely affects.
Several sources and
examples support

analysis. There are

3.4

(6.8%)

Student presents an
analysis, with some
details, in line with
hi
s/her argument, of
whom disruptive
technology benefits
and whom it
adversely affects.
Some sources and
examples support
analysis.

3

(6%)

Student presents a
cursory or incomplete
analysis, with vague
or missing details in
regards to his/her
argument, of who
m
disruptive technology
benefits and whom it
adversely affects.
Few sources or
2

(4%)

Does not meet
minimal standards.

0

(0%)

Did not submit element.

Superior

Criteria

Excellent Criteria Satisfactory Criteria Marginal Criteria

Unsatisfactory
Criteria

Not Submitted

Element 1a: Initial

Post – Summary of

Challenges

4 (8%)

Student provides a
thorough and detailed
summary of the
challenges Netflix is
facing within the case
study. Several
sources and
examples support
summary.

3.8 (7.6%)

Student provides a
thorough and detailed
summary of the
challenges Netflix is
facing within the case
study. Several
sources and
examples support
summary. There are
one or two minor

errors in summary.

3.4 (6.8%)

Student provides a
summary of some of
the challenges Netflix
is facing within the
case study. Some
sources and
examples support
summary.

3 (6%)

Student provides a
cursory or incomplete
summary of the
challenges Netflix is
facing within the case
study. Few sources
or examples support
summary.

2 (4%)

Does not meet

minimal standards.

0 (0%)

Did not submit element.

Element 1b: Initial

Post – Impact of

Disruptive
Technology
4 (8%)
Student presents a
thorough and detailed
evaluation of whether
disruptive technology
has a primarily
positive or negative
impact on Netflix’s
challenges, and
includes strong
rationale. Several
sources and
examples support
evaluation.
3.8 (7.6%)
Student presents a
thorough and detailed
evaluation of whether
disruptive technology
has a primarily
positive or negative
impact on Netflix’s
challenges, and
includes strong
rationale. Several
sources and
examples support
evaluation. There are
one or two minor

errors in evaluation.

3.4 (6.8%)
Student presents an
evaluation with some
details of whether
disruptive technology
has a primarily
positive or negative
impact on Netflix’s
challenges, and
includes some
rationale. Some
sources and
examples support
evaluation.
3 (6%)
Student presents a
cursory or incomplete
evaluation with vague
or missing details of
whether disruptive
technology has a
primarily positive or
negative impact on
Netflix’s challenges,
and includes some
rationale. Some
sources and
examples support
evaluation.
2 (4%)
Does not meet
minimal standards.
0 (0%)
Did not submit element.
Element 1c: Initial

Post – Whom

Disruptive
Technology Benefits
and Adversely

Affects

4 (8%)
Student presents a
thorough and detailed
analysis, in line with
his/her argument, of
whom disruptive
technology benefits
and whom it
adversely affects.
Several sources and
examples support
analysis.
3.8 (7.6%)
Student presents a
thorough and detailed
analysis, in line with
his/her argument, of
whom disruptive
technology benefits
and whom it
adversely affects.
Several sources and
examples support
analysis. There are
3.4 (6.8%)
Student presents an
analysis, with some
details, in line with
his/her argument, of
whom disruptive
technology benefits
and whom it
adversely affects.
Some sources and
examples support
analysis.
3 (6%)
Student presents a
cursory or incomplete
analysis, with vague
or missing details in
regards to his/her
argument, of whom
disruptive technology
benefits and whom it
adversely affects.
Few sources or
2 (4%)
Does not meet
minimal standards.
0 (0%)
Did not submit element.

Page 135

Journal of the International Academy for Case Studies, Volume 20, Number 1, 2014

THE RISE AND FALL OF NETFLIX:

WHAT HAPPENED
AND WHERE WILL IT GO FROM HERE?

Grace Allen, Western Carolina University

Dorothee Feils, University of Alberta
Holly Disbrow, Western Carolina University

CASE DESCRIPTION

The primary subject matter of this case concerns company analysis. Secondary issues

include financial statement analysis, corporate strategy and international expansion. The case
has a difficulty level of three and should be appropriate for undergraduate and graduate courses
in investments and financial and strategic management. The case is designed to be taught in one
to two class hours, with three hours of outside preparation by students.

CASE SYNOPSIS

Netflix is an innovative company that has changed the way we rent movies and watch TV

shows. Its business model is based on a subscription service that provides home-delivery of DVD
rentals and streaming of movies and TV shows. The company took advantage of the rapid growth
in the DVD rental market, the internet and e-commerce by providing a service that the
traditional brick-and-mortar retailers, such as Blockbuster, could not compete with. In

2011

,
however, a price hike, poor management decisions, changes in technology, and increased
competition threatened Netflix, leading to a sharp decline in its share price. In this case,
students analyze the fundamentals of Netflix including its financials and management decisions
to help determine if Netflix’s poor stock performance in 2011 was predictable as well as what the
future might hold for this company.

INTRODUCTION

Rushing into the offices of Horizon Capital Invest (Note that Horizon Capital Invest,

Brighton Portfolio, and the characters are fictitious) , Chris Thompson almost knocked into the CEO,
Ms. Steinberg. “Whew” said Chris under his breath after apologizing to the CEO. It was the last
week of April 2012 and Chris had one week left in a four month internship for this prestigious
money management firm. He had spent his internship learning how to research companies for
two senior analysts to whom he reported. It had been a steep learning curve for Chris, a finance
major in his senior year at an East Coast university. He had been lucky to land the internship and
was determined to impress the analysts at Horizon Capital Invest, a place he dreamed of working
after graduation. He certainly didn’t want to be late for the morning briefing. With his iPad in
one hand and his coffee in the other, he glanced at the clock as he entered the conference room.
Chris had 30 seconds to spare and thought to himself, “another close call. Maybe this will be my

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Journal of the International Academy for Case Studies, Volume 20, Number 1, 2014

lucky day and I finally get to show what I can do.” Chris greeted both analysts as he took a seat
at the long table, “Good morning Ms. Hunter”, “Good morning Mr. Richardson”. After some
pleasantries they got right to work. Ms. Hunter told Chris that they were considering purchasing
Netflix for the Brighton Portfolio. Abruptly, Mr. Richardson broke in and said “I don’t feel this
is a good investment. The stock has plummeted over the past ten months and I would not
consider it a value play.” Before Chris could even begin taking notes Ms. Hunter said pretty
forcefully “Come on Joe, this is a great company. Management may have made some mistakes
recently but this leads to a great buying opportunity. I feel certain we will have a double digit
return from this one.” Mr. Richardson, a very head strong individual, wasn’t about to let Ms.
Hunter have the last say. He quickly responded “Maria, you’re really off base with Netflix. It
would be against our fiduciary responsibility to add it to the portfolio.” You could see that Ms.
Hunter was not going to take this lightly. Her face was red and she raised her voice a couple of
levels and said “Joe, you have to trust me on this one. I know management will get its act
together and we’ll see a reversal in the stock price within the next quarter.” Chris had been
frantically taking notes but was beginning to get a bit nervous sitting between the two arguing
analysts. Then they dropped the bomb shell. Mr. Richardson said “alright Maria, let’s get Chris
to pull together a report covering Netflix’s background and the factors affecting the company this
past year that could help us make a decision. I really am doubtful but I am willing to see details
that will allow us to make a more informed decision.” “Chris” said Ms. Hunter “can you do a
report on Netflix by 9:00 am tomorrow?” Chris eagerly agreed to tackle the Netflix case
knowing this might be his opportunity to show both, Ms. Hunter and Mr. Richardson, his
recently enhanced research skills. After excusing himself, Chris left and headed to his cubicle
with butterflies in his stomach and thought “yep this is my lucky day!”

What made this assignment even more interesting to Chris was that Netflix was a
company he knew quite well. Many times he had watched a movie with his family or friends
that had arrived via mail in the little red envelope. Since going to college, instead of ordering
movies, he would just plug-in his iPod and stream a movie or a TV show. Chris had
remembered discussing the stock in class. It was a company that had seen very impressive
growth over the years because of its ability to provide what many Americans want in a fast and
convenient manner: unlimited rental access to movies and TV shows via mail or on-line
streaming for a low monthly subscription rate. Its’ price had soared from about $180 per share
in January 2011 to over $300 per share in July (Yahoo, nd). However, by the end of 2011 the
price per share had dropped to $69 (Yahoo, nd) and Netflix had lost 800,000 domestic members
(Form 10-K, 2012). “Wow” thought Chris “this is going to be interesting. My two bosses are at
odds with each other, a company that has taken an abrupt turnaround, and less than 24 hours to
prepare the report.”

Since yesterday, Chris had been working nonstop with only a few hours of sleep. His
cubicle was littered with pizza and donut boxes and half empty coffee cups. He believed he had
done a thorough job researching Netflix and that Ms. Hunter and Mr. Richardson would be
impressed with his report. He took one more look at the document checking to make sure that
he had organized it well and there were no spelling or typo errors. Satisfied, Chris hit the print
button and swung by the office to pick up the copies before heading into the conference room.
Chris, a little jittery and tired from lack of sleep, took a deep breath to get his second wind and

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Journal of the International Academy for Case Studies, Volume 20, Number 1, 2014

greeted his bosses cheerfully “Good Morning Ms. Hunter and Mr. Richardson. I hope you both
will be pleased with my report on Netflix and that it will help you agree on whether to add it to
the Brighton Portfolio. I made copies for both of you and would like to go through it with you
now.”

REPORT ON NETFLIX, INC.: PREPARED BY CHRIS THOMPSON

BACKGROUND

Netflix was founded by Reed Hastings and Marc Randolph in 1997 and is headquartered
in Los Gatos, California. Netflix originally operated as an online movie rental store which
included per rental fees and late fees. In 1999, Netflix initiated its subscription service which
provided unlimited DVD rentals for a monthly fee after the company received a $30 million
investment from the Group Arnault (Netflix Inc. Company Profile, 2011). Netflix began its
movie recommendation system in 2000 where subscribers rate movies and Netflix used the
information to suggest selections to its members. Netflix’s reputation was built on its unique
business model: unlimited rentals with no due date, no shipping and handling fees and no late
fees. Netflix went public on May 22, 2002 with an IPO of 5,500,000 shares at price of $15.00
per share. It is listed on the Nasdaq under the ticker symbol “NFLX” (Netflix Company
Timeline, nd). Reed Hastings, one of the founders of Netflix, has stayed on as the CEO of
Netflix (Form 10-K, 2012). Netflix’s total number of suscribers, at the time of the IPO, was
600,000 (Netflix Company Timeline, nd). The little red envelopes that became the trademark of
the DVD subscription continued to pull large numbers of new subscribers into the fold year after
year. In 2003, Netflix reported its first profit of $6.5 million after years of losses (Netflix, Inc.,
2003). By the end of 2006, Netflix had 6.3 million members (Netflix Company Timeline, nd).

Netflix began to offer streaming as an added feature with its DVD subscriptions in 2007.
Streaming, which allows movies or TV shows to be watched instantly over the internet, became
increasingly popular as Netflix teamed up with electronic companies to broaden the scope of
devices that could stream. At that time, streaming was available only for personal computers,
but by 2008 devices such as the Xbox 360, Blu-ray disc players, TV set-top boxes and the
Macintosh computer could stream. By 2009, PS3 and internet connected TVs were among the
devices able to stream (Netflix Company Timeline, nd). At the end of 2009, Netflix had 12.3
million members (Form 10-K, 2012). In 2010, streaming Netflix content became available “on
Apple’s iPad, iPhone, iPod Touch, the Nintendo Wii and other internet connected devices”
(Netflix Company Timeline, nd). In 2010 Netflix took its streaming content international by
expanding into Canada. By the end of 2010, Netflix reported almost 20 million members up
from 12.3 million in 2009 (Form 10-K, 2012).

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Journal of the International Academy for Case Studies, Volume 20, Number 1, 2014

source: Form 10-K (2012). *Note that there is a considerable overlap between streaming and DVD subscribers.
Therefore, the number of total unique subscribers is less than the sum of domestic streaming and domestic DVD
subscribers. Prior to 2011, Netflix provided only a combined streaming and DVD service.

FACTORS AFFECTING NETFLIX, INC. IN 2011

INCREASED COMPETITION AND CONTENT COSTS

By 2011, Netflix began to see competitors aggressively competing for market share (Q1

Publishing, 2011). Companies such as Hulu.com, Google TV, Apple TV, various cable
companies and others were getting in on the rivalry by offering streaming. For instance,
Comcast offered Streampix to its Xfinity subscribers with a base price of $4.99 per month
(Gorman, 2012). Dish network and Blockbuster joined in, as did Verizon and Redbox, to offer
movies and TV shows on the internet. Hulu Plus cost $7.99 per month, the same as Netflix, but
also offered a limited selection of free previously run TV shows (Gadget Review, 2012). Since
there are more alternatives for consumers, Netflix no longer has as large a hold on the market as
it once had.

The cost of acquiring content differs for the streaming and the DVD segment. To acquire
content for streaming, Netflix typically acquires and licenses content on a fixed cost basis (Form
10-K, 2012). Movie studios have been benefitting from more competitors entering the market
since they have been able to charge more for the rights to stream movies and shows and thus for
Netflix, the fixed cost of acquiring content for streaming is likely going to increase. Netflix
likely will have to deal with rival companies as its content contracts come up for renewal and as
it looks to expand its limited libraries. “Netflix’s content costs have jumped to $3.5 billion over
the past several years, up from the $2.4 billion reported previously…” (Lang, 2011). The

0

5000

10000

15000

20000

25000

30000

Total Unique
Subscribers

Domestic
Streaming

Domestic DVD International
Streaming

Subscribers by Segment and Location (in thousands)*

2009

2010

2011

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Journal of the International Academy for Case Studies, Volume 20, Number 1, 2014

potentially severe increase in the cost of content could have a major impact on Netflix’s ability to
generate profits in the future.

However, the cost structure differs for the DVD segment. In the DVD segment, Netflix
has many revenue sharing arrangements (Netflix, Inc. Company Profile, 2011), resulting in a
variable cost model (Form 10-K, 2012). Due to the “mature state of the business” (Form 10-K,
2012), Netflix does expect healthy contribution margins from the DVD business, but also not
much growth. The company expects that growth will come mainly from streaming (Wingfield,
2011b).

MANAGERIAL DECISIONS

Netflix’s loyal and growing customer base was upset in July 2011 when Netflix decided
to change its subscription plans and rates to better match them to the company’s business
segments: streaming and DVD rentals (Form 10-K, 2012). The existing subscription plans
included a $7.99 per month plan for unlimited streaming and a $9.99 per month for unlimited
streaming and unlimited DVDs sent one at a time. Starting July 2011, subscribers could
subscribe separately to a streaming only or a DVD only plan for $7.99 each. If subscribers
wanted to subscribe to both, streaming and DVDs, the subscription price increased to $15.98 per
month, starting immediately for new subscribers and in September for existing subscribers
(Netflix Company Website, 2011a). This change implied a 60 percent price hike for those
subscribers that wanted to maintain the same level of service provided by the $9.99 plan
previously upsetting many members (Wingfield, 2011a). Since many current and potential
subscribers felt that the online library wasn’t up to par as it lacked a wide array of new content,
subscribers who preferred to stream still tended to order DVDs when they could not get a
specific movie or show from the online library. Many subscribers felt that Netflix was being
greedy although the price increase was a way to raise cash to increase the online library for
streaming (Barnes and Stelter, 2011).

In addition, Netflix faces problems securing content for its streaming services.
Negotiations with Starz failed in September, 2011 (Hollister, 2011), which meant that as of
February 28, 2012 “Netflix’s three-and-a-half-year-old deal with Starz …[came] to an end, and
Starz’s roster of classic and newer films …[disappeared] from the Netflix portfolio”(NYTBits,
2012). These films include movies from Walt Disney Studios and Sony Pictures Entertainment
and were taken out of the library by the end of February 2012. The loss was a blow but Netflix
has made a deal with Dreamworks for its films and television specials beginning in 2013 when
Dreamworks’ contract with HBO is due to expire. “The Netflix accord, which analysts estimate
is worth $30 million per picture to Dreamworks over an unspecified period of years, is billed by
the companies as the first time a major Hollywood supplier has chosen Web streaming over pay
television” (Barnes and Stelter, 2011). The company has also been increasing its television
content; however, it is not clear how well these changes will be accepted by consumers.

On September 18th 2011 Reed Hastings, CEO and Cofounder, posted a blog apologizing
for not communicating the reasons behind the price hike but also announcing the splitting of
Netflix into two companies. The DVD by mail service would be renamed Qwickster and would
offer video games for an additional charge and the streaming component of the company would

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take the Netflix name. The two companies would have separate websites that would not be
integrated. Reed stated, “Some members will likely feel that we shouldn’t split the businesses,
and that we shouldn’t rename our DVD by mail service. Our view is with this split of the
businesses, we will be better at streaming, and we will be better at DVD by mail. It is possible
we are moving too fast – it is hard to say” (Netflix Company Website, 2011b). On October 10th,
after a severe backlash, including a loss of 800,000 subscribers in the third quarter, Mr. Hasting
reversed his decision to split the company. “The now aborted plan by the Netflix co-founder
and chief executive to distance the Netflix brand from its DVD rental business has gone down as
one of the year’s biggest business blunders”(Wingfield and Stelter, 2011).

Finally, the United States Postal Service announced in December that it hopes to get rid
of next day delivery for first class mail. This might cause issues for Netflix as it could slow
down deliveries of its DVDs. Management will have to think about a way to deal with this
potential problem, since customers might decide to go elsewhere if the DVD service were to
become less convenient. Consumers are already upset about the price hike and it seems as if
Netflix’s focus for the future is on streaming at any cost (Wingfield, 2011b).

INTERNATIONAL EXPANSION

In 2010, Netflix decided to go international by offering streaming services in Canada.
International expansion continued in 2011 as Netflix moved into 42 countries in Latin America
and the Caribbean including Brazil, Chile, Columbia, Ecuador, Peru, Venezuela, Mexico, and
Central America (Team, 2011). Netflix is looking for new subscribers outside the borders of the
U.S. as competition is heating up in the U.S. but this move faces challenges of its own.

First, Netflix has to create an international library that would have enough content to be
appealing in each country. As streaming content needs to be licensed separately for each market,
Netflix faces difficulty in providing foreign subscribers access to comparable content available to
US subscribers (Warren, 2011). For example, Netflix Canada has only about one third of the
titles offered by Netflix USA (Huffington Post, 2011). In addition, Netflix will have to make
some country specific content available. For example, Netflix would have to increase its French
language content to be able to attract the francophone market in Canada.

Second, the existing digital infrastructure varies greatly from country to country but is of
critical importance as a minimum of 800 kbps were required to stream movies (Team, 2011).
“A MSNBC article sourcing Ibope Nielsen’s report says that only 20% of Brazil’s 42 million
Internet users have a connection speed above 500 kbps…Latin America is also plagued by
rampant video piracy…”(Team, 2011) Netflix might have issues being able to reach its full
potential in these countries as its services might not be available to all interested consumers. Not
only does the infrastructure vary, but also the design of the internet plans. For example, some
Canadian internet providers introduced usage-based billing, or data caps. These are imposed to
limit the amount that subscribers can download per month. Netflix’s response to this has been to
reduce the quality of videos it streams to Canadians, meaning that on average content will use up
two-thirds less data to stream. (El Akkad, Krashinsky and Marlow, 2011).

Third, Netflix has to deal with regulatory uncertainty in foreign markets. For example,
at the end of 2011, Canadian regulators did not require Netflix, or other internet-based movie

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distributors, to fund Canadian broadcast content or to adhere to other regulations required by
cable and satellite companies. Not surprisingly, the competitors argued that Netflix had a
competitive advantage that needed to be addressed (Argitis, 2011). The cost of operating in
Canada could increase significantly, should the Canadian Radio-television and
Telecommunications Commission change the regulations for internet-based movie distributors.

Finally, the international expansion has been costly, in no insignificant part due to the
fact that streaming content licenses has to be paid for on a national basis. Thus, Netflix expects
to run losses in the foreign markets in the short-term until a sufficiently large foreign subscriber
base can be established (Form 10-K, 2012). The capital used to finance the international
expansion could have been used to increase Netflix’s library in the U.S. “Wedbush analyst
Michael Pachter, a well-known digital-entertainment analyst, criticized what he saw as Netflix’s
“growth at all costs business model, ”….adding that its desire to expand internationally will only
cause it to incur losses for years” (Reisinger, 2012). The company’s extensive “push to go
international” is a risky move for Netflix. Only the future will tell whether the international
expansion strategy will pay off in the long-run.

FOLLOW-UP MEETING

After going through his report, Chris sensed that Ms. Hunter and Mr. Richardson were

still not on the same page. Ms. Hunter had a smile on her face and Mr. Richardson was
frowning. Immediately, Ms. Hunter said “so Joe, Chris’s research shows, as I have been telling
you all along, that Netflix is a great company and we should add it to the Brighton Portfolio.
Netflix is facing some challenges but the company is well positioned for the future.” Mr.
Richardson responded emphatically with “hold on a minute Maria, I am still leaning towards the
opposite. In fact, I cannot even consider the purchase without a more in depth analysis. Chris,
you have done an outstanding job but you need to take it a step further. Are you up to spending
another day on Netflix? By the way, we don’t have a lot of time to make this decision. We are
meeting with the Brighton representatives next week and we want to make sure that we can
justify our holdings and the portfolio is positioned to outperform our benchmark in the forward
twelve months. Please summarize your analysis with your own prognosis of Netflix and be sure
to back-up your opinion with facts.” Chris was delighted to get such positive feedback from
Mr. Richardson, someone who gave praise sparingly, but was also a bit nervous about his new
assignment. He knew he could dig deeper and had the skills to synthesize the data but a lot
hinged on the outcome. An exceptional job would set him up for a potential job offer from
Horizon Capital Invest, a dream come true.

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broadcast-regulation-as-sought-by-bce-in-canada.html

Barnes, Brooks and Stelter, Brian (September 25, 2011). Netflix Secures Streaming Deal With DreamWorks.,The
New York Times Reprints. Retrieved July 3, 2012 from

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40

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