Firm analysis of NETFLIX

In the Entertainment and Media industry in which Netflix operates, there have been various developments in market demand and supply driven by a quick transition from the conventional distribution pattern to direct-to-consumer in the market. In particular, the digital technology expansion whose manifestation is seen through connectivity of wireless and fixed network has enhanced the growth in quantity of connected devices and newer routes to the user (Deloitte, 2015).  This has changed the structure of the industry, so that there are new ways for content production, distribution and monetization across this landscape. This has provided consumers with a lot of content to choose from and which are accessible at any moment or mix and by use of various delivery options.  This has seen an increase in demand for the various products provided by the digital companies. In fact, the share of internet traffic for Netflix has greatly increased across North America to account for about 34 percent of the flow of the said data during peak times since 2014 (Deloitte, 2015).

The number of streaming subscribers for Netflix has shown a constant increase over the years and has steadily moved towards almost 100 million mark, as per the first quarter of 2017 (Team, 2017).  The figures in the global market have been increasing over the same period due to the company’s expansion strategy.  As the subscription numbers increased, the company’s attained all time high annual revenue in 2016, which amounted to $ 8.83 billion (Netflix, Inc., 2016). This shows over tenfold rise in revenue income since 2005 fiscal year. Even though this was a steady revenue increment, the overall net income underwent through a course that is more turbulent. The company’s worth had tumbled in 2011 after the intention to split the firm was announced, and the profits also declined. In 2012, a decrease in net income was experienced from over 13 times, but the income resurged to reach the highest pick in 2014.  The firm’s prices for services have been raising in recent times, with the HD streams moving from 8.99 to 9.99 dollars each month for new subscribers.  In 2014, the two-stream plan was increased from 7.99 to 8.99 American dollars. Most of the company’s customers are located in United States, Brazil, Canada and Mexico and the number is expected to increase especially in the emerging markets like Brazil (Netflix, Inc., 2016).

 

 

Year	2012	2013	2014	2015	2016
Revenue B U.S $	3.61	4.37	5.5	6.78	8.83
	Dec -15	Sep- 16	Dec- 16
Subscribers (million)	44.738	47.497	49.431

 

 In addition, Netflix’s revenue has shown an upward trend over the past five years driven by growth in the domestic DVD sales and international streaming. The data shows that the firm attained the highest revenue and profits in the years 2015 and 2016. This can be attributed to the digital technology growth and its adoption by the firm which has enabled it to reach international streaming market and hence, facilitated this growth.  It indicates a consistent growth in the Internet TV network around the globe which has enabled consumers across the globe can access movies and TV shows at the same time without waiting (Team, 2017). The internet has put power in the hands of consumer so that they can watch anywhere with any device. The company has managed to weather effects of adverse competition from other major providers of substitute services such as Amazon and Hulu that also provide online TV shows and movie streaming (Netflix, Inc., 2016).  Moreover, other networks like Fox and CBS provide video streaming on their websites and apps which intensifies competition.

 The price elasticity of demand for Netflix was influenced by the share of budget and the availability of substitutes. Where a consumer spends a big portion of their income on a given product, demand for such product is elastic .Moreover, where there are available substitute for the product, it means that demand is quite elastic as the customers have other available competing products. The more the number of close substitutes the high the product’s elasticity (McEachern, 2013).  When subscribers found out that Netflix could be divided into two, they perceived that they would have to pay more for the program’s prices. After customers learnt of competing forms such as Qwisker, they become furious since Netflix price elasticity had went up. They were not willing to pay the hiked amount which could constrain their budgets. Customers are also likely to ignore buying the product since they can do without it. However, the possibility of the consumer being able to watch programming on two devices simultaneously also increased the price elasticity of demand , and the prices were still lower than substitute products from competitors.

 This price elasticity of demand enables Netflix to provide customers with mass market and content. The availability of substitutes has provided a fragmented market to the customers who find that they pay more due to this.  The company is able to force customers or subscribers to weigh the value proposition of subscription to the greater value of accessing larger content. However, the company increased its prices by only a dollar, given that it was aware of available substitutes. The availability of a variety of content offsets the increment. The price elasticity of demand can be illustrated by the increased number of subscribers for this program.

Reference

McEachern, W. A. (2013). Economics: A contemporary introduction. Cengage Learning. 96-97

 

Deloitte, (2015).Digital Media: Rise of On-demand Content. Retrieved from: https://www2.deloitte.com/content/dam/Deloitte/in/Documents/technology-media-telecommunications/in-tmt-rise-of-on-demand-content.pdf

 

 

Netflix, Inc., (2016). FORM 10-K.Retreived from: http://files.shareholder.com/downloads/NFLX/4554610180x0x938338/FB0485BA-48EF-4457-ABED-CF26A5B21523/10K_Final.PDF

 

Team, T., (2017). Netflix Subscriber Growth Continues Unabated, As Margins Improve. Retrieved from: https://www.forbes.com/sites/greatspeculations/2017/01/19/netflix-subscriber-growth-continues-unabated-as-margins-improve/#63627aab52dd