Topic 1. Industry evolution and strategy 1. When Netflix entered the market, what stage in the life cycle was the movie rental industry in the 90s? Explain the characteristics of the industry in the stage. 2. What were the main changes in the industry, and evaluate the response of all companies? 3. What model of the industrial revolution do you think these changes reflect?

Netflix Founded by CEO Reed Hastings in 1998, Netflix entered the movie rental business through its online service. In its brief history, Netflix has gained close to 7 million subscribers with a library of more than 80,000 movies, television, and other entertainment shows available on DVD. Hastings indicated in a recent interview that his only regret was that he went public too soon and, therefore, revealed to competitors that the online model used by Netflix was profitable. This move, from his point of view, made Blockbuster aware of the threat that the online rental business presented relative to its brick-and-mortar business. Subsequently, in 2004, Blockbuster entered into the online rental business by introducing Blockbuster Online. In late 2006, Blockbuster renamed its service Blockbuster Total Access and allowed its customers to return videos through the mail or drop them off at the local Blockbuster store. In mid-2007, Blockbuster introduced a new plan named Blockbuster by Mail. With this mail-only option, the rates start as low as $4.99, and three-at-a-time limited rental plans cost $16.99 per month. These packages undercut Netflixs comparable plans by $1. Interestingly, Blockbuster introduced these plans even as it lost money on its Total Access plan. Although Netflix cut its fee for its one-movie-at-home-at-a-time plan by $1 to $4.99 in January 2007 to counter the initial introduction of Total Access, Netflix does not have free instore video exchange, and subscribers cannot return online rentals by dropping them off at a store. Netflix customers have to wait for Netflix to receive the movie in the mail before the next DVD shipment is initiated. Accordingly, customers can save time by utilizing Blockbusters service. A number of other small and large competitors such as Amazon.com are in the online rental service, in addition to Blockbuster and other brick-and-mortar stores. However, thwarting competitors is not the only threat on the horizon for Netflix. Netflixs current service is based on DVD rental and shipping. The biggest threat on the horizon is Video on Demand (VOD). In this market, a number of competitors are racing to be the dominant player to deliver videos directly to the computer, or ultimately the television. In August of 2007, Blockbuster completed an acquisition of Movielink, LLC, which provides streaming video over the Internet and has access to large movie producers content, in an effort to capture some of the VOD market. Of course, this service has been available from cable and satellite companies but not over the Internet. Among others, Apple, Amazon.com, CinemaNow, WalMart, and Hewlett-Packard are seeking to establish a download business in this market. In 2007, Apples iTunes accounted for about 76 percent of the market of the current available video content, albeit small at this point. Also, Apple TVa device that gets movies from the Internet to the television and works primarily with video purchased through Apples iTunes storecould potentially increase iTunes lead. Although the market is relatively small, it has the potential to be a $35 billion market as more content is digitized. Besides the significant number of potential strong competitors seeking VOD, Netflix must also deal with powerful suppliers in the movie industry. Because many of the traditional movie industry players, such as Warner Brothers and Disney, experienced a loss of a significant amount of revenue and other difficult circumstances in regard to online audio piracy as they work to digitize the content in their vast vaults of movies and television they want to make sure that they can take advantage of this potential with as little piracy as possible. Accordingly, they are cautious with whom they will contract for selling their digitized content. Coming up with the right solution to use these digitized videos will be a key issue in getting contracts with the movie industry. For instance, one Wall Street analyst observed that these suppliers fear Apple will come to dominate online distribution of movies as it now controls more than 70 percent of the digital-music market in the United States. 2022-2023 Page 3 of 8 Reed Hastings recognizes that VOD will ultimately create a total substitute for current Netflix video rental service. Whether this transition happens right away, within the next 23 years, or in 510 years will determine whether Netflixs current business model will continue to be successful. Netflix has some strong, well-developed competencies that allowed it to be successful thus far. These competencies include a cost structure that helped it make money relative to its brick-and-mortar competitors, a well-developed technology base, and an internal infrastructure for creating new technology with which it can develop its supply chain, for distributing DVDs, and manage customer satisfaction in a way that creates customer loyalty. Netflix hopes to be able to use this customer loyalty and technological base to launch a successful service in the VOD market as movie producers digitize their content.