Introduction
Netflix is the largest online movie rental company with over 6 million subscribers who can rent 50,000+ movies from various genres. For $17.99 a month, the most popular plan, consumers can rent as many videos as they want, keeping them for as long as they want with no late fees. The trick is Netflix will only allow you three titles at the same time. So, it is not like you can have ten or twelve DVDs at your home. Customers spend nothing extra on late fees or shipping costs, which are a huge turn on that subscribers pay nothing more than the monthly fee. The DVDs usually are able to get shipped within one business day and reach your home though the United States Postal Service. Reed Hastings, CEO of Netflix started the most successful online movie rental company. Netflix is basically the Blockbuster of the Internet.
Business of Netflix
I am researching the business side of our company, Netflix. You are probably asking yourself how can Netflix possibly make any money? Netflix is able to make a profit by charging a monthly fee (depending which plan you take) that costs more than them sending a customer five DVDs per month. Some renters are known as �power renters� who are people who will rent as many DVDs as possible per month. This has become a problem for Netflix, since their profits decrease with the more DVDs you rent per month. There is actually a point where customers start to cost Netflix some money and that is usually around the 6th or 7th DVD rented that month. Netflix has to pick up the tab on shipping costs, so the less they ship out, the more profits they will gain.
Hastings, the CEO, has come up with a great business plan for his respective company. Everyday he pays an employee to open mail, scan and collect the enclosed DVDs, and to pack the DVDs up ready for shipping. He must pay the post office for sending and receiving the DVDs to his subscribers. The number of his employees rise and fall, depending on the business volume for that particular day. This in essence is his business plan and how it works.
You also have to remember he has overhead costs that are fixed into the company. These include equipment, rent, interest, utilities, website hosts, people to negotiate contracts, secretaries to answer phones, employees to write reviews on titles, and finally the payroll people who take care of bills and employee checks. These costs are fixed into the company meaning, no matter how many customers Netflix has, these costs remain pretty stable. Say for example, the fixed costs for Netflix equal about a million per month. Whether Netflix has ten subscribers or five million, they still shell out the million per month. Just like any business, the company tries to minimize costs, but the solution to a high volume business is to make sure you make some extra profit on each extra transaction and customer.
It is that last bit that is hurting Netflix and it is costing them a lot. The average customer signs up for the three-DVD plan, which means the customer can keep up to three DVDs for an indefinite period in exchange for a $17.99 monthly fee. Netflix's problem is that the average customer rents six to seven movies a month making the average gross a little under $3 per rental. When the customer returns one or all their DVDs, they get new DVDs. And there's the downfall to Netflix�s profits. The more satisfied the customers are with the service, the more it costs Netflix to service them. Since Netflix's income is fixed at an average $18 per month the last thing they want happening is customers using their service because that drives their fixed costs up. It is an uncharacteristic business model in that the happier your customers are, the more money you lose in profits. The more a subscriber utilizes Netflix, the less money they will make.
Netflix has a place for the people who constantly rent videos known as the �power renters.� Netflix will use a passive, aggressive service model on them. When you ship your DVDs back to receive new ones, they will delay shipping on the next one for a little bit. You may want to rent twenty movies a month, but it does not do any good if they won�t ship them to you as soon as you want them.
There seems to be rumors going around of Netflix merging with Blockbuster. This would be the DVD equivalent of Exxon merging with Mobil. Blockbuster keeps lowering their prices and Netflix will not be able to compete if it had to lower its prices to under $15 a month.
Some other companies caught onto Netflix�s great business model and have tried to copy. A California company known as Gamefly has been successful in renting video games through the mail. A unique service called Bag, Borrow, or Steal in Florida lets its members borrow designer purses for important nights out.
Conclusion
I chose this topic because Netflix is a great company using the Internet and mail in the 21st century to make a profit. It is amazing how renting movies has changed over the last ten years. People would go to a video rental store, come home and watch the movies, and bring them back a few days later. You had to spend money for gas to get there, not to mention late fees if you brought the movies back late. I learned from this project how such a simple idea for a company could earn someone millions of dollars. No matter how dumb an idea may seem, with the Internet, anything is possible. Netflix.com was a great help when it came to describing the company and its business model. In conclusion, Netflix is a company based on DVD rentals with an odd business model. The more a person uses their service, the less money they will make, reducing profits. Since, they have already made millions, more power to them!!!
Mike P. will discuss the technology and MIS theory behind Netflix. Alan will describe the company's history and CEO Reed Hastings. You can get their links from my homepage, which is on this page. (click on my name on the right)
