Session 24 05 11 2013 Pure play Characterizes a firm that focuses on a specific product service or Internet Pure Play a firm that operates through the internet business model channel Netflix in 2 acts Analyst and managers have struggled to realize that Netflix could actually create a sustainable competitive advantage and beat out blockbuster and Wal Mart Data disclosure required by pubic companies may have attracted these larger rivals to the firms market Netflix operates via a DVD subscriptions and video streaming o Started as single subscriptions but are now viewed as two o Model is a substitute good for the conventional use based separate services media rental Fear of clinging to a sure to fail DVD by mail business model prompted Netflix management to split and re price its services o Price increases poorly handled rebranding effort and a process that would have made the firms services more difficult to use all contributed to the firms first major customer contraction and satisfaction decrease Netflix survived o Big competitors o A price war o Competitor spending on the rise How Netflix works o DVD by mail service model Fat rate monthly subscription As opposed to pay by amount you use so customers feel like they are getting a better deal Customers don t pay mailing expenses and late fees Videos arrive in Mylar envelopes containing After watching the video consumers Put DVD in envelope wit barcode showing through Prepaid postage Return address the window Put DVD in mail o Users chose DVD s and videos to stream in their request queues at Netflix com The list of movies shows they want to watch o Consumers use Netflix s website too Rate videos Specify movie preference Get video recommendations Check out DVD details Share their viewing habits and review NETFLIX SAVES AND USES ALL OF THIS DATA Long Tail Long tail an extremely large selection of products Long tail come from the long tail of an exponential diagram o The steep but narrow part of the diagram represents the most popular products offered by most retailers o The long flat tail represents a demand for products even though they aren t popular enough to be offered in stores o Netflix has nearly a limitless selection of movies offered over the internet They found there is MORE MONEY to be made selling the obscure stuff rather then the big hits People have no where else to go to get this Traditional retailers cannot offer this section because they have limited shelf space o Traditional retailers can determine their breakeven point by considering Number of customers that can reach their location Store size Store inventory Payback from inventory Cost to own and operate the store o Internet firms can have just a few highly automated warehouses Long tail works because o Cost of production and distribution drop o Gives firm a selection advantage that traditional stores cannot o Geographic constraints go away and untapped markets open match up Netflix had used long tail to create close ties with film studios o Film studios are characterized by large fixed upfront cost Most of the marketing budgets are concentrated on films when they first appear in studios and on DVD Netflix is able to find a market for older movies that aren t being promoted without the studio having to apply a dime on additional marketing o Studios earn a percentage of the subscription revenue for every disk sent out to a Netflix customer In exchange Netflix gets DVDs at a very low cost Other examples of long tail o Google long tail advertisements o eBay long tail hard goods o capital one long tail customers o offshoring long tail services Cinematch proprietary recommendation system developed by Netflix Uses customer likes and preferences Each time a DVD is returned cinematch ask a customer to rate it Netflix suggestions rated by customer Helps find an audience for the vast back catalog of film and TV show content Collaborative Filtering a classification of software that monitors trends among customers and uses this data to personalize an individuals experience o Can be mimicked by competitors o Only practical and useful with the internet o Ultimately just math Cinematch creates a data asset the delivers profit o Data provided by customers to cinematch creates a switching cost Netflix owns and keep s customers preferences and customers can t take preferences with them They want to stay with Netflix because they already know what they like and don t want to rebuild this relationship with another company Strong switching cost are shown in Netflix s churn rate Churn rate the rate at which customers leave a product or service Low churn in key to profitability Cost more to keep a customer then to acquire one The Netflix Prize A crowdsourcing effort launched by Netflix ID and Operations o Crowdsourcing the act of taking a job traditionally performed by a designated agent normally an employee and outsourcing it to an undefined generally large group of people in the form of an open call Used to see if someone can build a better search engine and improve cinematch s rating by 10 It s a job to predict weather someone will enjoy a movie based on how much they liked or disliked other movies o we use these predictions to make personal movie recommendations base don each customers taste and while cinematch is doing pretty well it can always be made better Brand it built through customer experience and a critical component of customer experience for subscribers is to get their DVDs as quickly as possible o Netflix has 58 ultra high tech distribution centers All located close to USPS facilities o Trucks Logistics Collect DVD shipments from USPS hubs Return DVDs to nearest Netflix center o Scanners pick out incoming titles o All DVD s are hand inspected for cracks smudges o Warehouse processes are linked to Cinematch o Customers DVD automatically put in envelopes o Netflix pre sorts outgoing mail before dropping it off at USPS Staff members are expected to focus on improving Netflix s facilities processes Systems have Quality management features built in o Netflix can monitor and record circumstances surrounding any failures Netflix Act 2 shift from mailing atoms to streaming bits Many media products are created as bits digital files If you are buying a DVD you are buying atoms o These are the containers for the bits Economics of bits over atoms o Virtually unlimited capacity Virtually free distribution custom streams not mass markets Access to Content o Acquiring content for
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