The primary factor that distinguishes Netflix is its online streaming library catalog with an enormous collection that exceeds 100,000 unique movies and television shows. The company heavily relies on originalesolutions
Complete an executive summary based on the information in the report. The executive summary can be a maximum of 1.5 pages double space.
The primary factor that distinguishes Netflix is its online streaming library catalog with an enormous collection that exceeds 100,000 unique movies and television shows. The company heavily relies on original content to set itself apart from its competitors like Hulu and Amazon. India is one of two countries with the largest population in the world and has acurrent population ofover 1.25 billion whichis expected to cross 1.35 billion by 2020 and will include the world’s highest number of youth in the age group of 18 – 35 (worldbank.org). Penetration of the video streaming industry is in its infancy stage; hence, thisis an opportune time for Netflix to focus its attention on expanding to India.
Aggressive infrastructure development has modernized the mediums by which access and consumption of media entertainment is available to consumers. Internet users as of August 2015 in India grew to 350 million; of this number 159 million were accessing the Internet through mobile devices (statista.com).The local media industry in India thrives on plurality,regulations support net neutrality and local broadcast regulations offer a level playing field for organizations doing business in themedia infotainment and entertainment sectors – all these factors combined with the staggering number of Internet users in the age group of 18 – 35 in India provide an incredible opportunity for Netflix (TRAI.com).
Netflix owns content that has gained immense popularity and significantly contributed to the company’s stronghold in the video streaming industry. However, for Netflix to entice subscribers and succeed in India the company will need to collaborate with local established media houses like Balaji Telefilms to sponsor original content dubbed in several regional languages; add a substantial collection of Bollywood movies and television shows to their catalog, and offer a low subscription rate – at the very least in the introductory phase.
A noted by Drucker P., & Maciarriello, J (2008) and Desai, Ashok V (1999):
- Government regulations or individuals more so politicians and government tax developments; risky business environment with sudden hostile policies, tax proposal unveiled in a match that remove subsidies, and imposed huge taxes to foreign companies
As noted by Desai, Ashok V, (1999):
- Indian consumer income, spending rates, tax rate, output growth to 7% per capita income; India having the world’s fastest growing economy, and investment-friendly economic policies
As noted by H. W., Barbarav (2003):
- India 102nd on social progress ranking, low score on shelter, and basic human needs; access to information and 21st centuryinternt access use.
As noted by H. W., Barbarav (2003):
- India is ranked second largest world-wide in mobile users 983.21 million subscribers, and rank third in internet base market of 300 million users with a 24% penetration rate.
- India in recent years suffered great loss attributed to environmental degradation and, therefore, decided to embrace the green economy policies, with regards to this sensitization.
As Noted By Lee, David E (2006):
- Legal Procedures, Laws, And, Regulations Governing The Entry Of Foreign Companies Into The Indian Market Must Be Adhered To. The Managers And Directors Of The Company Must Be Legally Allowed To Operate And Stay In The Country. Companies Doing FDI Are Not Allowed To Invest Less Than $100 Million And Also 50% Of Local Indians To Be Offered A Position In The Corporation. Netflix Should Have This In Mind As It Expands Operations To The IndianMarket.
PESTLE analysis normally give both favourable and unfavourable conditions that affects or are likely to affect the organisation, thereafter it’s now the work of managers to take action on the recommendations of the analysis. Lee, David E, (2006).
Netflix analysis in India is favoured by most factors, with exceptions in legal facet that restricts its operations and inflow of its employees in India. Mitigation of this can be achieved through training of some Indian personnel to help to avoid extra costs of documentation which also consumes time. Merger is also an option to avoid the $ 100 million dollar restriction to Greenfield ventures by Indian laws. The rate at which the Indian economy is growing is alarming, hence soon competitors will join the market, to counter this Netflix needs to strategically position, market, and segment the market so than even if competitors come they are deeply rooted in the market with brand loyalty from consumers.
Technologically, a customer base of 300 million users is not easy to serve, hence research and development department are to work extra hard to innovate more powerful servers that are strong enough to serve such magnitudes effectively. Similarly, the world technology is advancing at a rocket speed and Netflix as an organisation needs to exploit such markets to the maximum, and leaving nothing to chance.
In India. the government has shown and proven their willingness to grow their technology by introducing it to schools, Netflix can use their position as a big, trusted and known company to strike a deal with the government to offer them a contract to supply Indian schools with internet. Once they have created a good working relationship then it can seek to enjoy reluctant regulations from the government.
Indian social development is still facing difficulties in trying to attain the world’s average positioning, this happened because the government was so focused in developing economy through promotion of businesses and enterprises. This lead to the neglect of one of the most important building block of a nation, the social pillar, however, capturing markets just means influencing the social matters of the consumers through good relationships and fantastic product and service delivery.
Netflix should strategize through its R&D, Market intelligence and marketing department to come up with a way to best touch the hearts of target market like no other organisation has ever imagined. Example sponsoring young children and providing their schools with the internet services, this will work since they are the next generation and once Netflix gains their loyalty at a young age, their loyalty will be unimaginable and they will defend the organisation for it opened bright future to them.
Netflix success in this venture is projected since its PESTLE analysis offers a great pathway for sustainability, survival, and rapid growth in the Indian market, therefore a reliable analysis. In every market exists a challenge and therefore it is the role of the organisations’ managers to roll up their sleeves, and sensitize humanity since success is not only measure on the basis of running a successful businesses but also the impact it creates in its environment. Further, the company should properly plan disposal ways since India is very sensitive and determined to improve its environment and sanitation.
Operational Tactics to Mitigate Operational Threats
Anytime that a company decides to enter a market, their operational tactics should be focused on when to enter the market and where to enter the market as well as how those decisions will produce the most profitable and desirable outcome. The success of Netflix’s entrance into India will rely heavily on entering first and then assuming a defensive position to retain market share as new competitors arrive.
Due to the fact that no other company currently streams movies in India, Netflix is in a position to execute a timing tactic of being a first mover in the market. “Some of the advantages of being a first mover are that the company is able to establish a reputation as a leader in the industry, move down the learning curve to assume the cost leader position, and earn temporarily high profits from buyers who value the product or service very highly.” (Hunger, 2011). The infrastructure to host Netflix services is already in place and the barrier to entry for Netflix is really easy to overcome. Netflix has the platform to deliver the services already with Amazon Web Services as its hosts and simply has to stop blocking Indian internet protocol addresses to allow Indian users access to its services. By entering the market first, Netflix can build a brand reputation and enjoy the profits of a temporary monopoly on the market until entrants arrive.
After Netflix has gained a large majority of market share from the “linear” television companies which the Netflix CEO Reed Hastings suggests is inevitable, Netflix will have to defend its position in the market as competitors like Amazon Prime, Apple iTunes, and Hulu attempt to penetrate market niches that Netflix traditionally fails to occupy. One of the defensive tactics that Netflix can utilize is raising structural barriers by blocking, “channel access by signing exclusive agreements with distributors” (Hunger, 2011) for content that it acquires and offers in their content library for India. India offers a 100% foreign direct investment which can be an extremely advantageous platform for Netflix to obtain exclusive rights to content via acquisition of Indian companies rather than the content alone. By purchasing these companies, Netflix will eliminate one of its biggest threats which is content providers increasing the price of content agreements and at the same time secure the content from entrants to the market and eliminating their ability to outbid Netflix for content. Since many of the Indian film production companies are publicly traded on the national stock exchange of India, direct purchase of a controlling interest in the companies can be done relatively cheap ($307 million for 100% of AVM Productions) compared to what they pay for content licensing to current providers ($200 million to Disney for 1 year alone). This concept is not new. In fact, Disney itself purchased UTV Software Communications Ltd. (an Indian owned entertainment company) in 2011 as a mechanism of entry to introduce their brand and all the products/revenues associated with it to the Indian market.
Lastly, another one of Netflix’s operational threats is the legal restrictions of foreign direct investment. In order for Netflix to establish operations in the company, they have to employ managers and directors that operate and live in India, invest no less than $100 million into the economy and/or business as well as employ a work force comprised of 50% local natives. This will restrict the freedom of business operations to an extent because talent may or may not be available and $100 million is a lot of money to commit to. The way that Netflix can mitigate this operation threat is to establish a business unit in India that is focused on marketing and content selection. The regulations do not specify a number of employees required to be of Indian citizenship only that 50% of them are. Netflix does not have to employ a massive amount of people to accomplish its business objectives. Additionally, If Netflix utilizes the $100 million commitment to acquire a production company, the employees that work for the production company will become employees of Netflix and the 50% ratio can be further mitigated allowing for the best talent to be hired regardless of citizenship status.
According to (Netflix 10-K, 2014), Netflix’s total assets were $7.056 billion dollars of which, the majority was in their current content library ($2.126 billion), their non-current content library ($2.773 billion) and cash equivalents ($1.114 billion). By utilizing the massive content library that Netflix has, they have been able to easily expand into English speaking countries and have over $1.1 billion in cash to purchase licensing agreements in new countries to build their international content libraries.
Netflix is currently the only company that has gone international with this type of service which gives the company a huge geographic advantage with respect to brand value. Their biggest competitor is Hulu which is a joint venture and provides their services to the USA and Japan. As of October 14th, 2015, “Netflix operated in 43 countries and had over 69 million members around the world” (Netflix Q3, 2015). Netflix is rapidly expanding its international operations and is enjoying a monopoly in the worldwide entertainment streaming services industry as its pioneer.
Netflix enjoys several competitive advantages over its competition. Netflix is very good at choosing content based on a very large user database to mine data from. They are also seeking to pursue global licensing agreements for their original content that will cut costs furthermore. Lastly Netflix is a disrupter for what their CEO calls “Linear” TV networks due to their ability to provide niche content. This allows Netflix to give customers the entertainment they want, when they want it and creates huge value for the company.
Netflix has very simple business operations with regards to how it generates revenue and economies of scale. The primary means of revenue is subscription services and to provide this service Netflix produces just under $3 million per employee working for the company compared to the S&P 500 average of $428 thousand per employee. This is a six times greater operational efficiency per employee than the 500 best performing publicly traded companies making it hard to compete with.
Since Netflix is a relative unknown in India, they will need to establish a strong and reliable brand in order to compete with some of the other players in that marketplace who are household names and have been doing business for many years. If they are able to select the appropriate content for the Indian market they are targeting, and then deliver it the right way, they should be able to effectively mitigate the risk of entering the market with an unknown brand.
Outsourced Distribution & Hosting
Through use of Amazon Web Services (AWS), Netflix doesn’t have to worry about maintaining the massive data library, bandwidth, electricity cost due to powering the servers and required HVAC systems, maintaining staffing for the systems, and all other necessities for hosting in-house (Netflix AWS, 2010). The inherent problem is that Amazon is a competitor in the streaming content market, and if they decide to renegotiate the contract Netflix currently has, it could cause problems for Netflix. By ensuring a valid Memorandum of Understanding (MOU) is in place, guaranteeing a certain amount of revenue for AWS, or negotiating licensing terms to allow AWS to offer some of the housed content through their service, Netflix can help to mitigate this weakness.
Fiscal & Licensing
Netflix’s $3.3B in off- balance sheet liabilities and commitments are held in such a way to reduce risk and possibly allow avoidance of regulatory costs or taxes. A side effect and weakness of the organization is the possibility that this may affect the picture of Netflix’s true net worth (Saunders & Cornett, 2008). There is no legal reason for Netflix to reallocate the liabilities, as it is in direct compliance with the SEC and Section 13(j) of the Sarbanes-Oxley Act of 2002 (SEC, 2015). While the appearance of a company trying to manipulate financial holdings and incomes to look more favorable is a concern, Kanter argues that in foreign markets this is less of a concern due to the differences in market, investor and corporate strategy along with governmental regulations (2011).
As of the 3rd quarter 2015 Netflix had a debt ratio of 3.58, which was higher than other companies in the industry (Nasdaq, 2015). In order to mitigate this weakness, Netflix would need to work on lowering the amount of their liabilities and increasing their total assets. This would cause the ratio to lower, showing investors and other industry insiders that Netflix is less dependent on leverage and in a stronger fiscal situation.
The primary way for Netflix to accomplish this with the streaming media content service is to focus on licensing. In 2014 Netflix spent $3 Billion on licensing for film and television content (Sweney, 2014), and reported $5.1 Billion total liabilities on their 2014 balance sheet (Yahoo, 2014). The fact that their licensing itself accounts for 62% of the entire company’s liabilities is indicative of how critical optimizing this aspect of their business model is. Netflix’s top investor questions FAQ reports that their original content is not only the most lucrative properties, but also is the least expensive to carry for their customers (2015).
The struggling DVD mailing service is another aspect which will need to be evaluated. Netflix has been losing customers of this service steadily since 2011, reaching an all-time low in 2015 (Fox, 2015). By not offering the struggling DVD mail-order service in India, and focusing more on streaming original content that will be well received by the Indian target demographic, Netflix has a good chance of mitigating this risk.
By reworking existing license deals with Indian content providers who have exclusive rights to broadcast Netflix original programming such as Orange is the New Black and House of Cards, they have a chance of bringing their flagship products back in-house for the launch in the Indian market. If these deals cannot be renegotiated, short of pursuing lengthy and likely costly legal recourse to regain legal rights to their own content, Netflix will likely need to wait for the existing licenses to expire (Scott, 2014). Once they have done so, Netflix will once again be able to provide their original content exclusively in this market.
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