Based on the Mini-Case “NetFlix,” did NetFlix undertake backward or forward integration?

Based on the Mini-Case “NetFlix,” did NetFlix undertake backward or forward integration? What were the primary benefits from the integration strategy that it chose?


NetFlix

Netflix, a movie and television show distributor, disrupted the television industry. It currently has about 118 million streaming subscribers in 190 countries. Netflix’s chief executive, Reed Hastings, was asked whether Netflix was interested in vertically integrating forward into internet service provision or backward into producing its own shows. He replied, Vertical integration to the data transmission layer, no. In terms of content, we’re now producing a lot of content ourselves. So that is a form of vertical integration that’s been very successful for us.

He noted that Netflix works with about 600 internet service providers around the world, and that “Netflix is an application on top of the internet.” Netflix benefits from letting subscribers connect to Netflix using whichever provider they prefer.

In contrast, vertically integrating into content provision works for them for three reasons: obtaining unique content, flexibility, and avoiding opportunistic behavior by film studios. Although Netflix has 55 million U.S. subscribers, the average length of a subscription is only 43 months. In developing greater loyalty among its customers by providing highquality, unique shows, such as Stranger Things, Netflix can keep subscribers longer.

With a steady stream of content, Netflix has flexibility in releasing films and a reliable pipeline.

By producing its own content, Netflix can avoid being the victim of opportunism. Netflix benefits from producing its own programming globally. For example, its globally popular show Narcos was produced for Netflix by a French company in Bogotá, Colombia, with a Brazilian star. Thus, Netflix is no longer dependent on a relatively small number of Hollywood production companies. These firms previously could subject Netflix to opportunistic behavior, threatening to cut off the supply of movies and shows with little notice unless Netflix paid them large sums.