Porter's Five Forces Analysis of Netflix, Inc.

Updated on June 17, 2020
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Tfliu90 is a University of Portsmouth graduate with a Business Administration degree.

Netflix Inc. was founded in 1997, initially selling and renting DVDs by mail. In 2010, Netflix decided to expand its operation into Video on Demand Streaming while retaining the rental business. Currently, Netflix can be viewed in over 190 countries worldwide (Help.netflix.com, 2020), with offices in USA, Netherlands, Brazil, India, Japan and Korea.

With the total number video streaming subscriptions on the rise, in the UK alone subscriptions rose from 15.6m in 2018 to 19.1m in 2019 (BBC News, 2019), and the number of services available increasing we use the Porter's five forces model to analyse the key factors impacting the performance of Netflix.

Threat of New Entrants

Major organisations such as Apple, Disney, HBO and Britbox (BBC and ITV) are either launching or have recently launched their new streaming services.

Barriers to entry are high for a new entrant who doesn't already produce their own video content, due to the extremely high investments needed in either producing new content or acquiring content from big players. For established organisations in the entertainment industry, the barriers to entry are fairly low, as they will be able to immediately launch the service with their own content and can already have a fan base for the organisation as a whole or for a specific series.

The threat of new entrants is a very real and serious issue for Netflix with an increasing number of organisations deciding to launch similar services with their own content. The size of these organisations also means initial costs for technology and marketing would not be an issue. While many customers will have multiple subscriptions, there will no doubt come a time where subscribing to so many services is no longer viable so they may decide to close their accounts.

In conclusion, the threat of new entrants is high for Netflix and must be monitored carefully.

Power of Suppliers

Traditionally, cinemas want an exclusivity window of up to 90 days before moving onto on demand streaming services. Netflix, however, has been fighting back against the major cinema chains by demanding a window of 45 days at most. Most notably, Netflix's and Martin Scorsese's latest project, The Irishman, was shown in a limited number of cinemas or in independent cinema chains before moving to Netflix. With Netflix's increasing power, the powers of traditional cinemas will continue to dwindle. This isn't the only time Netflix has done this; in 2018 they released Alfonso Cuaron's Roma, just a 21-day release at independent and small chain cinemas before it started streaming.

With more and more production companies launching their own VOD services, some of Netflix's most-watched content will soon disappear. For example, the forever popular 90's sitcom Friends will be removed from Netflix in 2020 and instead move to HBO's very own streaming service. This is unlikely to be the only big-name Netflix will lose, therefore increasing the risk of power of suppliers.

In October 2018, Netflix original content accounted for just 37% of Netflix US streams, although this is up from 17% in January 2017 according to video-measurement firm 7Park Data. So, while the popularity of Netflix original content is certainly on the rise, viewers still enjoy watching their old favourites such as Friends and The Office US.

While the Martin Scorsese deal is a clear indication of the power shift from cinemas to the producers, Netflix will be wary of the number of acquired properties they will be losing. That being said, Netflix is in its own right an accomplished and trusted producer of content now; therefore the power of alternative suppliers can be considered only a moderate threat.

Power of Buyers

The power of viewers will continue to rise because of the increasing number of streaming services being launched.

The industry is not very price-sensitive. As all the services are priced at very similar rates, viewers will mainly focus on the quality of content. As of January 2020, a single subscription costs $12.99 for Netflix, Amazon Prime $8.99, Hulu $5.99 and Disney+ $6.99 a month.

Viewers are not tied into contracts, so many viewers are paying on a monthly basis with the option to cancel subscriptions at any time, thereby putting even more power into the hands of the consumer.

The power of buyers cannot be underestimated here, with viewers now having the choice to watch whatever they want if they cannot find something they desire on Netflix they can simply look on a competitors site for something else. Also, as stated previously with content moving to other suppliers, it is only natural for viewers to therefore follow the content to other platforms.

Therefore the power of buyers will always be high because of how easy it is for viewers to join and cancel subscriptions.

Threats of Substitute Products

In the UK, the daily average time people are watching broadcasted TV is 192 mins in 2019, down from 242 mins in 2010. While the average viewing time of subscription videos on demand such as Netflix rose by 7 mins in 2019 compared to 2017.

YouTube accounts for a large part of total video viewing as 12% of all time spent watching video is on YouTube, who offer live streaming as well as recorded content.

With traditional broadcast television on the decline, especially among young adults, who are switching to subscription video services, the threat of a substitute product is low for Netflix.

Source: Ofcom Media Nations: UK 2019

Competitive Rivalry

In order to expand its offering, Amazon Prime not only gives you access to their video streaming services, but many other benefits such as faster delivery (same day, 1 day), Music and books.

In 2018 UK, Netflix had 8 of the top 10 most streamed shows for subscription streaming services. Topping the list was Friends (BBC News, 2018).

Competitive rivalry is high is for Netflix. While competitors such as Amazon can offer additional services for customers' subscription fees, others are removing the most popular video content from Netflix to show on their own platforms.

© 2020 tfliu90


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