Introduction
The Online Entertainment Rental Industry is new and growing rapidly. Online DVD rentals are very popular and book loaning is closely following this trend. This paper explores the Internet business strategies of two industry leaders: Netflix.com (Netflix) and Booksfree.com (Booksfree). Netflix is the founder of online DVD rentals. Booksfree is currently the only known online book loaning company. These two companies currently dominate the Online Entertainment Rental Industry and are studied in this paper. The lack of late fees or due dates has, without a doubt, quickly made these services highly desirable.
Netflix offers over 13,500 DVD movie titles for its subscribers to choose from. Selections include classics to new releases, including many independent, foreign and documentary films.
Booksfree is a pure Internet business, as is Netflix.
Booksfree offers a virtual library in excess of 30,000 paperback titles. They have taken a market that already
exists, and enhanced it to provide their customers with cheap access to books
from the comfort home. Selections include current and former
bestsellers as well as other popular titles from novelists who make their books
available in mass-market paperbacks. Additionally, the retail portion of Booksfree offers over
600,000 titles available at competitive discounts.
Products and
Services
Netflix offers DVDs only. Services include
background information on DVD releases; including critic reviews, member
ratings and reviews, and personalized movie recommendations. Also Netflix’s
proprietary Cinematch technology personalizes recommendations based on a
member's tastes and preferences and allows Netflix to promote
smaller, high-quality films to customers who
otherwise might not hear about them.
Booksfree offers the mass-market paperback
novel, which is the most popular recyclable product to process
efficiently. Book categories range from
Romance to Biographies and everything in between. A recognized opportunity for growth exists for books on CD as
well as other recyclable products such as game discs. With more people
traveling and new automobiles offering the CD player as a standard item,
greater revenue growth is anticipated in the
future.
Target Market:
Demographics
The online book
rental target market encompasses 80 million readers while the video rental
market is an $8 billion industry.
Because of the variety of books and DVDs offered by the Online
Entertainment Rental Industry, the target markets are diverse. Anyone who enjoys reading or watching movies
is welcomed as a customer. Both the book and movie rental sectors tailor
product recommendations to customers based upon their rental history.
Welcoming all types
of customers, specific markets for both book and movie rentals include the
following:
§
Customers on
the go, who prioritize flexibility, convenience and ease of use for their
entertainment needs.
§
Women
§
Retirees
§
Persons
without easy access to libraries and video rental retail stores. This includes
a growing number of people on the go or those homebound due to age or
disability.
§
Senior
facilities. This service provides a
wider access to recent entertainment for the greater enjoyment of the
residents.
The DVD rental
target market hinges on the success of DVD players, which has become “the
fastest selling consumer electronics device in history”. [i]
Market
Share, Competition and Positioning
The Online
Entertainment Rental Industry is emerging as a unique E-process and has
accepted the challenge of altering typical consumer behavior. Rather than visit a library or video store,
consumers adjust to ordering/queuing books and movies online and then receive
them via mail. Available market share
can be interpreted as that portion of the $8 billion video rental industry or
the 80 million readers willing to alter consumer behavior and adjust to the
online process. Attraction to this
process lies in promoting better customer-friendly services than currently offered
in the typical rental market. By holding
a larger selection of products, offering free shipping, and eliminating late
fees, the Online Entertainment Rental Industry has been able to lure customers
into a new behavior pattern. This also
offers expanded opportunities for people who live in remote locations with
limited access to large video stores and libraries (i.e. Alaska).
Booksfree is a
unique process without any known competitors offering similar online service
and therefore currently maintains 100% of the market share for online book rentals. While they consider book retailers and
libraries as competition, they currently hold the market with their online
process. Unfortunately, this process
cannot be patented or specifically protected and does not involve
specialized/unique technology.
Therefore, Booksfree is developing a set of complimentary assets to
ensure their position as a market leader.
By partnering with
the nation’s two largest book distributors (Ingram Book Co. and Baker and
Taylor, Inc.), Booksfree has established an effective means of acquiring
books. Investing in an efficient
warehouse management system and adequate website development enables the
company to meet customer expectations.
Booksfree plans to establish itself as the “brand product” for online
book rental with a loyal customer base before others enter the market.
Netflix possesses a
lead position in the national online DVD rental market, but has seen several
competitors enter the market. Based
upon our analysis, the following competitors play a role in this market:
|
Company |
Number of DVD Titles |
Distribution Center(s) |
|
Netflix Inc. |
15,000 |
15 nation-wide |
|
RentMyDVD.com |
12,000 |
California &
New Jersey |
|
WalMart |
12,000 |
Georgia |
|
QwikFliks |
11,500 |
California |
|
BWM.net |
11,000 |
California |
|
DVD Barn |
9,000 |
Arizona |
|
DVD Overnight |
8,000 |
New Jersey |
|
FilmCaddy |
8,000 |
Arizona |
Netflix has also
undergone an aggressive plan of establishing complimentary assets. They have developed a nation-wide
distribution process in an attempt to reach one to two day delivery to most
destinations. Additionally, Netflix has
secured revenue sharing agreements with the majority of studios and film distribution
companies in order to have direct access to new DVD releases at a small or low
initial purchase cost.[ii]
Netflix has
benefited from a first player position in the Online Entertainment Rental
Industry, with a handful of newer players offering a similar service. To increase its awareness and customer base,
Netflix has also formed an alliance with Best Buy-owned stores (Media Play, On
Cue, Sam Goody and Suncoast Motion Picture Co.). This alliance provides advertising and a bricks and mortar
presence for Netflix through the top seller of DVD hardware. The growth of Netflix has depended on the
acceptance of DVD players and customer conversion from VHS format. Fortunately for Netflix, while shipments of
VCR’s fell 9.2%, to 13.5 million units in 2002, shipments of DVD players
increased 35% to a record 17.1 million.
Additionally, the Consumer Electronics Association projects 2003 DVD player unit sales to
reach 20.1 million.[iii]
As an emerging
industry, percentage growth in the Online Entertainment Rental Industry is
tremendous. Both Booksfree and Netflix
are innovators in their product offerings.
Netflix has grown to one million subscribers
(50% women) since its inception in 1997;
Booksfree has grown to approximately 4,000 members (93% women) since its launch
in 1999.
Internet
Business Strategies: Findings and Analysis
Analysis of the Internet business strategies for Booksfree and Netflix includes investigating how each company has designed and executed marketing, communication, advertising, ordering, purchasing, logistic and support processes. The basic business models are very similar but several interesting differences exist.
Marketing Processes
Booksfree has organized its website to reflect a product based marketing strategy. Should a customer not have specific author information, he or she can choose from several categories, such as Romance, Mystery & Detective, or Western. In addition, there are special categories – New Releases, Member Favorites, Young Adults, and Bestsellers. These special categories describe the type of customer and his/her specific needs rather than the book category. This adds an element of customer-based marketing flexibility to the site.
Although Booksfree does not use formal Customer Relationship Management (CRM) software, it makes use of the Web’s two-way contact channel to accomplish several CRM goals. When a new customer joins, one step in the sign-up process is to complete an optional online member survey. The survey captures typical demographic data that is available to Booksfree for tailored promotions or discounts. This data is especially valuable since 80% of Booksfree customers choose to complete the survey. Another section of the online registration process explores interest in Children’s Books, Books on Tape, Books on CD, and E-books. This is in alignment with the company’s future product offerings. Using customer demand, rather than general market research, to select new products is another way Booksfree is using technology to gain CRM benefits without the CRM expense.
Communication with customers is handled primarily over the Web; using e-mail links from the Booksfree website. Between 50 and 75 customer e-mail questions are received every day and most are answered within two hours. Overnight C2B e-mails are answered the following morning. This is considered an outstanding turnaround time as 88% of consumers surveyed by Jupiter Research “expect a response to e-mail inquiries within 24 hours”[iv] Even though only 5% of customer inquires are via phone, Booksfree plans to add a toll-free number in the future.
Booksfree also makes use of B2C e-mail marketing, based on a permission marketing strategy. Customers opt-in by checking a box on the initial member survey which reads, “Can we e-mail you of Booksfree special announcements?”. LISTSERV mailing lists manage which customers have similar interests, based on survey results and order history, and allows Booksfree to pursue a targeted e-mail marketing strategy.
The Netflix website reflects a customer-based marketing strategy. In describing the Netflix model, Reed Hastings, Netflix CEO and Cofounder stated “We were passé during the bubble because we weren’t cutting-edge. But like, AOL, we’ve focused on the ease of use, flat fees and unlimited usage”.[v] For a flat monthly fee, a subscriber can rent up to three DVD movies at a time. The DVD movies are shipped to the subscriber via U.S. Postal Service first class mail. Movies are selected from a personalized movie rental queue. The DVDs can be kept as long as the subscriber wants without any late fees. Once a DVD is returned in the postage paid self-mailer, the next DVD from the subscriber’s rental queue is shipped out.
Netflix uses the Internet as a marketing strategy, a point of contact with customers, an order-entry system and a customer support tool. A customer’s entire experience with Netflix from opening a new account, selecting movies, verifying a movie was returned to reading movie reviews occurs solely on the Internet, devoid of human contact, yet is extremely personalized.
Communication with customers occurs both on the Web and via phone. Under customer service online, Netflix has quick links to frequent problems such as reporting a missing or scratched DVD, billing issues, or password issues. An e-mail inquiry to customer support is typically answered within 24 hours. In addition, Netflix has a toll-free customer support number that is staffed Monday through Saturday.
Like, Booksfree, Netflix uses B2C e-mail marketing on a permission marketing strategy. There is an option either at the time of initial registration or by clicking on “Free Newsletter” to receive industry news, recommendations for DVD and movies in theaters or e-mail updates and special offers.
Advertising
Booksfree advertising is primarily online. Through an affiliate program, banner ads are placed on compatible websites. Clicking on a banner ad links users to the Booksfree site. Affiliate commissions are paid based on a pay-per-conversion model: when a referral joins and becomes a member, the affiliate earns $5.00. If a referral purchases something, the affiliate receives 5% of the first sale.
Netflix utilizes a number of different advertising methods. Netflix created a coupon in the form of an enlarged movie ticket offering a free month of service. These “movie tickets” are given out at cash registers at all Best Buy stores and are included in packing boxes of most of the major DVD player manufacturers (Sony, Philips, Toshiba, Panasonic, RCA, etc.). Best Buy’s website also has a link directly to Netflix which is under the “DVD rental service” drop down menu. Each DVD mailer sleeve from Netflix includes a tear off “tell a friend” certificate with a promotion code that provides the bearer with a free month of service. At one time, Netflix sold banner ads on their websites. However, they abandoned this strategy after three months because the revenue stream was not sufficient to cover the cost of maintaining the ads. Netflix also has an aggressive affiliate program. The affiliate program encourages other websites to provide links to Netflix and offers a referral fee for linked new members at a range of $9-$12 per member. This fee is dependent upon the number of referrals provided in a month. If a site is successful at delivering greater than 200 new customers in a month, the referral fee is negotiable, up to $30 per new customer.
Ordering Processes
Booksfree follows the Web Catalog E-commerce model. All books are ordered online and payment is by credit card only. Because the customer database is on the Booksfree Web server, credit card numbers are not stored with customer data. A code significant only to VeriSign, the third-party payment authorizer, is stored within the customer database.
When a customer joins or pays their periodic membership fee online, the transaction is protected by SSL authentication and encryption. The transaction is processed by VeriSign, who first verifies customers are authorized to make the purchase, then routes the transaction to the appropriate banks, after which funds are transferred from the customer’s credit card to Booksfree’s bank account.
Like Booksfree, Netflix also follows the Web Catalog E-commerce model. Netflix has movies categorized by genre, new releases, critic’s picks, Netflix Top 100, actor, director, producer, etc. As described under the Logistics section below, Netflix has a proprietary recommendation engine (Cinematch) that learns a subscriber’s interest and makes recommendations based on the subscriber’s tastes. Over 70% of movies rented from Netflix are based upon recommendations generated from Cinematch.
The personalized rental queue is a list of movies the subscriber wants and the order in which they prefer the movies to be shipped. Queue management is considered both an art and a science. Netflix has generated a mystique around what a subscriber’s queue says about the person. Devout Netflix users joke that it as much fun to manage your queue as it is to actually watch the movies. If a movie is out in theaters and not yet available on DVD, a subscriber can preselect the movie to ship as soon as it becomes available.
An early complaint about the Netflix service was the delay between a subscriber putting a return movie in the mail to the time the next movie arrived via U.S. Postal Service. To help reduce this problem and reliably estimate delivery within one to two days of returning a movie, Netflix is aggressively building distribution centers. There are currently 15 distribution centers strategically located around the United States. A member in Minneapolis can put a movie in the mail on Monday morning and consistently have a replacement movie in their mailbox by Friday night. The goal of Netflix is for one day delivery, via U.S. Postal Service first class, to most locations based upon strategic location of its distribution centers.
Purchasing Processes
For Booksfree, procurement has been simplified by using one primary supplier: Ingram Book Company. A secondary supplier, Baker and Taylor, fulfills the retail book purchases, mainly because of their drop-ship capability. Both suppliers provide Internet tools that replace or simplify steps in the typical business purchasing process.
Ingram’s electronic ordering software, flashback®, runs on the Booksfree Web server. When a customer attempts to rent a title (either by ordering it specifically or when the title reaches the top of the reading list) not in the Booksfree warehouse, the ISBN is added to the flashback® system. Once a day, this file is transmitted via FTP to Ingram and the book is ordered. ISBNs and quantities are occasionally added manually to flashback®, if demand for specific titles is forecasted to be exceptionally high.
Baker and Taylor offers a similar Internet-based ordering service. When a customer purchases a book from Booksfree, the order information is placed in a temporary text file on the Web server. Every hour, an automated process FTP’s the file to Baker & Taylor, who then delivers the book order directly to the customer.
By utilizing Ingram’s flashback® software, and FTP ordering with Baker and Taylor, Booksfree is taking steps toward creating a “network organization”. This extended enterprise model relies on the Internet, which “offers the most practical and cost-effective channel for communicating within and across organizational boundaries.”[vi]
Netflix has revenue sharing agreements with studios and
movie distributors. It also offers
filmmakers the option to contact Netflix directly to have a movie
distributed. As a result of this
approach, Netflix is able to offer its customers a much wider variety of movies
than is available in traditional bricks and mortar video stores. Netflix offers independent movies, classics,
foreign films, art house films, small release films, as well as
blockbusters. Netflix buys DVDs at cost
and kicks back a percentage of a customer’s subscription fee for every movie
rented. The percentage is determined by
the general popularity of the movie. By comparison, Blockbuster generates 80%
of its rental activity from 200 titles and Netflix generates 80% of its rental activity from 2,000
titles.[vii]
In the past year, Netflix adopted a Supply Chain Performance Management solution from Vigilance, Inc. Vigilance’s SCEM suite was selected to cover managing customer satisfaction, distribution and purchasing. One feature of the SCEM suite is Exception Based reporting. If an open purchase order has been placed with a Studio and a predetermined ship date is missed, an e-mail is sent to the Purchasing Department to initiate a response and resolution. This allows personnel to concentrate on the exceptions instead of tracing all transactions. SCEM sits over the website and the Oracle based purchasing system.
Logistics Processes
Booksfree stores their customer database on the Web server so saved Reading Lists can be quickly accessed by members. The customer database also automatically places an order from Ingram, their book distributor, if a Reading List book is not available for order fulfillment. On-hand inventory is stored in the warehouse and is maintained in its own database, which is part of the Warehouse Management System.
The Warehouse Management System (WMS) keeps track of books available to loan out. Books are identified with a unique key: Serial Number (unique, assigned when a new book is received) + ISBN (printed inside front cover of all paperback books). This Serial Number + ISBN identifier is affixed to each book with a barcode label, for scanning in and out of inventory locations. Locations are: various Shelf Locations, Shipping Area, Receiving Area, or Loaned Out. Inventory transactions (receiving, picking, shipping, transfers) are posted to the WMS database by means of Radio Frequency (RF) enabled bar code scanners communicating real-time with the WMS server.
Both the Customer database (on Web server) and the Warehouse database (on WMS server) need current on-hand inventory, so these two databases are synchronized every ten minutes. Several different updates take place between the two database servers:
§
Titles update
– Customer DB updates Warehouse DB. When a customer book request is not in the
warehouse, a copy is automatically ordered from Ingram. The Web server knows
this and sends ISBN + Location = “On order” to WMS server
§
Check Reading
List when books are returned – Warehouse DB updates Customer DB. When a
customer returns rented books, they are checked back in to inventory and the
customer is eligible to receive the next available books from the Reading List.
WMS server sends updated on-hand information to Web server, plus a trigger to create
next picking list for that customer
§
Send picking
list order to WMS – Customer DB updates Warehouse DB. When Web server
determines the next titles a customer will receive (based on Reading List and
availability), picking list information is sent to WMS server
The proprietary recommendation engine used by Netflix is called Cinematch. It is based on the concept of rating movies and is key to the customization and personalization of the Netflix website. Subscribers are asked to rate movies and are even given opportunities to write reviews that can be shared with other subscribers. While perusing the list of movies by genre or actor, a subscriber is given the opportunity to rank a movie using a 5 star rating system. When the movie is rated, the stars turn yellow. The subscriber can also use a check box to indicate movies he is not interested in. Also, when a movie is returned, Netflix’s system generates an e-mail confirming the return of movie and requests a ranking the movie. Based on the movie ratings and the history of movies checked out, Netflix generates a personalized startup page called “Your DVD Spotlight” which recommends movies. This recommendation engine “fascinates independent film producers and Hollywood studios, which see Netflix as a marketing vehicle for off-center movies that are difficult to promote through mass media.”[viii] Cinematch uses 29,000 unique lines of code and a database of 180 million film ratings. It creates the fun of the site and adds the feature of a film community to a pure rental site. Paramount movies, a sister company to Blockbuster, is never recommended by Cinematch because Paramount does not have an agreement with Netflix due to the potential conflict with Blockbuster. Paramount movies are still lent out, but do not appear on rental recommendation lists. It is interesting how politics enters into what should be a “pure” selection process.
Cinematch is an Oracle database which runs on two Sun 420 systems. It generates thousands of predictions per second. The ratings database is on a third system and has 200 million user ratings on over 15,000 movies. Netflix can have as many as 10,000 simultaneous users each viewing multiple customized pages.[ix]
In addition to rating movies, a subscriber manages her queue by indicating the priority of movies selected. The website will indicate the length of wait for popular movies. When a movie is returned, the next available movie in the queue is shipped. An e-mail is generated informing the subscriber a movie is on the way. Periodic audit e-mails are also sent asking a subscriber to confirm the exact date a movie was either received or shipped so Netflix can track and manage turnaround time.
Support Processes
Booksfree does not use Internet-based accounting, human resource, or payroll processes. General ledger and Accounts Payable is managed with QuickBooks, which does not interface with either the Web server (Customer database) or the WMS server (Warehouse database).
Netflix uses Oracle for their general ledger, accounts payable and purchasing.
Financial
Information
The Online Entertainment Rental Industry remains in a start-up phase. Netflix was launched in April 1998, with a public offering occurring in May of 2002, raising approximately $86 million in the midst of the technology crash. Netflix has nearly doubled its membership each year since its inception, currently reaching one million subscribers in February 2003.
Booksfree was formed in 1999 and began its online operations in 2000. It remains private at the writing of this report and has a much smaller membership following of approximately 4,000. The stated goal of Booksfree is to reach a membership of 100,000.
Both companies are generating losses as part of the start-up phase of their business. However, the growth of each company and the decline in annual losses has impressed investors and analysts. Because neither of these companies has any direct competitors, they are compared to the predominant online retailing giant: Amazon.com. While the Online Entertainment Rental Industry does not compete directly with Amazon.com, it has been noted that Amazon.com holds the primary position in online retail activity and many analysts hold Amazon.com’s business model as the telling tale for whether an online business model can succeed. The following table summarizes several key financial ratios for both Netflix and Booksfree compared to Amazon.com.
|
Profitability Ratios: |
Company |
2002 |
2001 |
2000 |
|
Revenues: |
Amazon.com |
100% |
100% |
100% |
|
|
Netflix |
100% |
100% |
100% |
|
|
Booksfree |
100% |
100% |
100% |
|
|
|
|
|
|
|
Gross Profit : |
Amazon.com |
25% |
26% |
24% |
|
|
Netflix |
49% |
34% |
2% |
|
|
Booksfree |
66% |
61% |
-36% |
|
|
|
|
|
|
|
Net Income
(loss): |
Amazon.com |
-4% |
-18% |
-51% |
|
|
Netflix |
-14% |
-51% |
-83% |
|
|
Booksfree |
-62% |
-577% |
-11269% |
Amazon.com commenced online operations in 1995 with an initial public offering in 1997. After eight years of operations, it appears on the cusp of profitability. Netflix is trailing Amazon in its business cycle. Netflix initiated three years after Amazon, but is already exceeding its gross margin percentages and looks to trail its net income (loss) percentages by only one year. Likewise, Booksfree appears to be trailing Netflix’s business cycle by approximately one year, with better margins than Netflix or Amazon.com.
Ultimately companies are required to generate profits, but sustainable growth is also a positive business objective. Netflix and Booksfree have experienced subscriber growth as follows:
|
|
||||
|
SUBSCRIBER GROWTH |
2002 |
2001 |
2000 |
1999 |
|
Netflix
Subscribers |
857,000 |
456,000 |
292,000 |
107,000 |
|
Growth % |
88% |
56% |
173% |
- |
|
|
|
|
|
|
|
Booksfree
Subscribers |
4,000 |
800 |
150 |
- |
|
Growth % |
400% |
433% |
- |
- |
Both companies have publicly announced financial goals of achieving and maintaining positive cash flows. As seen in Appendix A, both have reached this goal at December 2002. Netflix generated positive cash flows from operations, which it utilized to purchasing short-term investments and to increase its DVD library. Netflix also generated in excess of $80 million in its initial public offering. At December 31, 2002, Netflix recorded $60 million of cash and $44 million of short-term investments. These amounts contributed to a positive net working capital amount of nearly $66 million, representing a strong ability for Netflix, to meet its obligations over the next year.
Booksfree is not yet generating positive cash flows from operations, but is maintaining its positive cash flow by means of private financing. As mentioned previously, Booksfree is in an early stage of its business cycle. While it has a lead role in the industry, its start up phase will likely continue the need for private financing as its membership grows. Potential for a public offering is also available. At December 31, 2002, Booksfree recorded cash of approximately $62,000, which exceeded its current liabilities by $30,500. This indicates an ability to meet its current obligations, but also indicates a need for additional funding to cover cash shortfalls from likely losses in the next couple of years.
During this start up phase, large amounts of revenue are
being utilized for fulfillment, technology and development and marketing. As a percentage of sales, Netflix spent 46%
and 69% of its revenues in 2002 and 2001, respectively, in these areas. Booksfree spent 272% more than its total
revenues in 2001, mostly developing its Website. They also spent 12% of its
revenues in 2002 related to marketing.
Netflix appears to be taking a more aggressive position toward marketing
and advertising than Booksfree, who is substantially depending upon publicity,
word-of-mouth and affiliate programs for membership growth. Income Statements including the above
amounts for both companies are included in Appendix B.
From a purely financial standpoint, the Online Entertainment Rental Industry is not established nor is it stable. This is expected for companies in the start up phase of their business cycle. Both membership growth and cost control are crucial to financial survival and success. Initial costs related to advertising, building successful Websites, procurement systems and customer relationship modules should pay-off as membership numbers increase. Booksfree maintains highly efficient operations, with only four full-time and five part-time employees. Many of these employees are also owners who fulfill a dual corporate and book-shipper role on an as needed basis. Operations and corporate headquarters share warehouse space. Netflix also maintains efficient operations by channeling the majority of its revenues into marketing and technology development, spending only 4% of its revenues on general and administrative costs.
Key to the success of the Online Entertainment Rental Industry are the two factors of increased membership and cost efficiencies described above. If these two companies can continue to invest in building their brand name and brand recognition through effective marketing and then capitalize on their lead position to develop loyal customers, the financial success should follow closely behind.
Appraisal of
Online Entertainment Business Model
Positioning: The
positioning of this industry is considered high given the analysis of the following factors:
- Supplier
Power: The main players have
developed positive supplier relationships. Key partnerships and revenue-sharing agreements contribute to
maintaining these dealings.
Supplier power is considered low.
- Buyer Power: As a new industry, buyers must be
educated into changing rental habits.
Given initial interest and market estimates, demand is expected to
be moderate to high for target markets. As newer entrants appear, buyer
power will be increased. Buyer power considered low in short-term, moderate in longer term.
- Rivalry: The online book rental model is thus
far unique. The online DVD rental
model is original, but facing new entrants. Currently, major rivals are not a primary threat for either
model. Rivalry power is considered
low growing to moderate as industry expands.
- Threat of
Entrants: Barriers to entry are low
for initial entry based primarily on newness of industry. Barriers increase as current online
players build loyal customer relationships, establish efficient
distribution channels and coordinate unique supplier partnerships. Threat of entrants considered moderate.
- Substitutes:
Current substitutes
consist of the traditional rental bricks and mortar establishments, i.e.
video rental stores and libraries.
Newer substitutes will emerge as technology advances. E-books have already entered into the
market and may be considered a substitute for online book rentals. As bandwidth improves, demand for
direct DVD downloading is also expected to grow. This format will be direct competition for the online DVD
rental model. To reduce this risk,
Netflix has already invested in the technology to convert its rental
process to direct-download as the market demands.
These
factors leave the threat of substitutes at low to moderate.
Customer
Value: This model demands that customers change their
typical rental behavior and allows them to receive a unique, high value
service. The industry’s distinction
over traditional bricks and mortar is convenience and flexibility. Customer value ranking is high.
Scope: Market growth rate is increasing as market awareness grows. Alliances, referral networks, and supplier
and distribution systems serve current customer base effectively and promote
new customers. Ranking for scope is high.
Price:
Pricing is highly competitive compared to bricks and mortar
models. Customers appear willing to pay
for convenience and flexibility. Price
factor is ranked high.
Revenue
Source and Cost Structure:
Pricing is attractive enough to promote revenue growth and the model is
generating high gross margins (refer to Financial Information section). If industry growth continues, the higher
up-front costs (website development, brand awareness, etc) and lower variable
costs predict an opportunity for sustainable profits. Revenue source and cost structure ranking is moderate for the short-term, increasing to high, if the main players can continue their growth and maintain a
competitive advantage over new entrants.
Connected Activities and Implementation: The industry is dominated by major players committed and dedicated to success. They operate efficiently and have invested resources toward building quality technological systems and key alliances for supply and distribution. Connected activities and implementation are ranked high.
Capabilities and Sustainability: Current capabilities are distinct, but also imitable in some degree. The goal is to capitalize on the market leader position and develop key customer loyalty through superior customer relations, unique supplier contracts, effective distribution channels and adequate follow-up processes to build a set of complementary assets providing a competitive and sustainable advantage. Key to maintaining successful capabilities will be a strong emphasis on extending into changing markets as technology advances. Ranking for capabilities and sustainability is moderate.
Conclusion
and Recommendation
The Entertainment Rental Industry has adapted well to the Internet and has successfully met the challenge of altering typical consumer behavior. Both of the companies studied in this paper are industry leaders in the early stage of the business cycle with solid business processes and strategies. Both companies have also recognized opportunity for growth. To ensure future success, Netflix and Booksfree need to continue building complimentary assets with advances in the industry and technology. To ensure a competitive advantage, these companies should also continue to promote significant customization of the Websites to enhance customer relations. Rendering the online process a personalized experience, for instance through Cinematch, is sure to increase the switching costs. As a consumer becomes reliant on the recommendations for movies or books, switching to a new competitor, even for a price discount, is not deemed attractive.
Appendix
A
Cash Flow
Statements
For the Year
Ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
Cash Flow from Operating Activities |
Netflix |
|
Booksfree |
||||
|
Net Income (Loss) |
|
|
($21,947,000) |
|
($193,809) |
||
|
Depreciation and amortization |
|
23,336,000 |
|
8,383 |
|||
|
Other working capital items |
|
|
38,725,000 |
|
19,252 |
||
|
Net Cash Provided (Used) in Operating Activities |
40,114,000 |
|
(166,174) |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow from Investing Activities |
|
(67,301,000) |
|
(2,402) |
|||
|
|
|
|
|
|
|
|
|
|
Cash Flow from Financing Activities |
|
|
|
|
|||
|
Proceeds from issuance of stock |
|
88,014,000 |
|
- |
|||
|
Proceeds from private financing |
|
- |
|
217,500 |
|||
|
Payments of long-term obligations |
|
(17,144,000) |
|
|
|||
|
Net Cash Provided (Used) in Financing Activities |
70,870,000 |
|
217,500 |
||||
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash |
|
$43,683,000 |
|
$48,924 |
|||
|
|
|
|
|
|
|
|
|
|
Cash, Beginning of year |
|
|
16,131,000 |
|
13,129 |
||
|
|
|
|
|
|
|
|
|
|
Cash, End of year |
|
|
$59,814,000 |
|
$62,053 |
||
|
|
|
|
|
|
|
|
|
Appendix
B
Statements of
Operations
For the Year
Ended December 31, 2002
|
|
|
Netflix |
|
Booksfree |
|
Revenue |
|
|
|
|
|
Memberships |
|
$150,818,000 |
|
$288,944 |
|
Retail |
|
1,988,000 |
|
21,030 |
|
Postage |
|
- |
|
2,481 |
|
|
|
152,806,000 |
|
312,455 |
|
|
|
100% |
|
100% |
|
|
|
|
|
|
|
Cost of Goods
Sold |
|
78,136,000 |
|
106,578 |
|
|
|
51% |
|
34% |
|
|
|
|
|
|
|
Gross Profit |
|
74,670,000 |
|
205,876 |
|
|
|
49% |
|
66% |
|
|
|
|
|
|
|
Operating
Expenses |
|
86,342,000 |
|
411,249 |
|
|
|
57% |
|
132% |
|
|
|
|
|
|
|
Income(Loss)
from Operations |
(11,672,000) |
|
(205,373) |
|
|
|
|
|
|
|
|
Interest &
Other Income |
|
(10,275,000) |
|
11,564 |
|
|
|
|
|
|
|
Net
Income(Loss) |
|
($21,947,000) |
|
($193,809) |
|
|
|
-14% |
|
-62% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Costs: |
|
|
|
|
|
Marketing &
Advertising |
|
$35,783,000 |
|
$6,538 |
|
Fulfillment |
|
19,366,000 |
|
103,317 |
|
Technology
& Development |
|
14,625,000 |
|
32,309 |
|
General &
Administrative |
|
16,568,000 |
|
269,085 |
|
|
|
|
|
|
|
|
|
$86,342,000 |
|
$411,249 |
|
|
|
|
|
|
Works Cited