Saturday, March 31, 2012

Netflix DVDs More Lucrative Than Streaming


Harvard Business School wrote a case study about Netflix in 2007 and revised it in 2009 (Shi, Kaufman, Spinola).  It's time for the 2012 update.  

I include this case in my Intro to Marketing/ Marketing Management course within Columbia University's Business Certificate Program.  This case has been the most robust and engaging discussion for the past three semesters.  There are many lessons learned.  Our discussion is focused on product strategy, keeping a pulse on your target market's wants and needs, and monitoring the marketing environment.  It's interesting to discuss how Netflix addressed the convenience of having DVDs delivered to your mailbox and the ease of returning DVDs via U.S. mail.  It took a toll on Blockbuster as we saw DISH Network buy the company's assets for $228M in cash in April 2011 at the bankruptcy auction.   Blockbuster didn't respond quickly enough and aggressively enough to compete with the likes of Netflix.  

Last August, we watched Netflix flail after they made the decision to split the company into two businesses - Qwikster for DVD rentals, while Netflix would focus on streaming movies.   Subscribers would have to go to two different websites and pay two separate bills.  The subscription fee was $7.99 for each service; double the existing subscription price.  Consumer outrage began.  Within 3 months (October 2011), the company realized they alienated their customer base, and retreated on the strategy.  I was fascinated by the arrogance of the company right when competitive pressures were heating up from Amazon, Hulu and Redbox.  

Here we are in March 2012 and Techcrunch announced that Netflix has purchased the domain DVD.com.  Netflix states that the purchase is "part of a bigger strategy to improve user experience in the U.S."  Interestingly, the article addresses that the DVD business is more lucrative for Netflix:

Q42011 - 
11.1M DVD subscribers, $370M revenues versus 
21.6M streaming subscribers, $476M revenues.    

There is some overlap between segments, but for those that prefer one method of delivery over the other, having different strategies does make sense.  Once you break down the profiles for the typical DVD consumer, streaming service user and those who utilize both services, you can start to sharpen and fine-tune your messaging and value proposition for each segment.  As I mention in my class, creating value for your customers and building long-term, profitable customer relationships is the goal of a consumer-driven marketing strategy.  Everything in between those two bookends are the basics from any Intro to Marketing textbook.  However, as we have seen with Netflix (and Blockbuster and countless other brands) the basics are often overlooked.  This short cut approach may get a company to one finish line (lots of publicity), but not "the" finish line of having a profitable and sustainable business.

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