Terry's MBA 734 Blog

At the time of this case Netflix, founded in 1997, provided DVD rentals ordered online and delivered to customers through the mail in return for a monthly subscription fee. Netflix had worked to reduce cost of key components of this business strategy by negotiating DVD costs, identifying and selecting the content, optimizing delivery, and identifying the right pricing for the subscription. A major competitor emerged in Blockbuster video launching an online service. To combat the competition's local touch and similar service, Netflix has entered the video on demand (VOD) market. We have been asked how Netflix has attempted to update their business model with VOD?

From looking at the Netflix site, all plans include the VOD option to download to PC or watch on a TV via a capable set top device. Set top devices included popular machines such as the XBox 360 and 2 bluray Hi-definition movie players. This added conveniece of instant downloads was not provided by Blockbuster and had the additonal value to Netflix as it increased lock-in of customers who bought set top devices. Reducing turnover was probably the major factor in the company's decision as customer acquisition has been a significant cost as over the life of Netflix marketing has taken up 72% of operating expenses (through 2006).