How Is The Collaborative Filtering Software Used By Netflix Advantageous To The Firm?

four.two Deed I: Netflix Leverages Tech and Timing to Create Killer Assets in DVD-past-Mail service

Learning Objectives

Understand how many firms have confused brand and advert, why branding is particularly of import for online firms, and the factors behind Netflix's exceptional brand strength.
Sympathize the long tail concept, and how information technology relates to Netflix's power to offer the customer a huge (the industry's largest) pick of movies.
Know what collaborative filtering is, how Netflix uses collaborative filtering software to match movie titles with the client'south taste, and in what means this software helps Netflix garner sustainable competitive advantage.
List and talk over the several technologies Netflix uses in its operations to reduce costs and deliver customer satisfaction and enhance brand value.
Sympathise the part that scale economies play in Netflix's strategies, and how these scale economies pose an entry barrier to potential competitors.
Sympathise the office that market entry timing has played in the firm'south success.

To understand Netflix'due south strengths, it's important to view the firm equally its customers see it. And for the most part, upward until the summer of 2011 what they saw they liked—a lot! The house has repeatedly ranked at the top of customer satisfaction surveys. Ratings agency ForeSee has named Netflix the number one e-commerce site in terms of customer satisfaction in eleven out of twelve surveys conducted since 2005 (placing information technology ahead of Apple and Amazon, among others). Netflix has also been cited every bit the best at satisfying customers by the American Customer Satisfaction Index (ACSI), Nielsen, and Fast Company and was also named the Retail Innovator of the Year by the National Retail Federation.

Edifice a cracking brand, especially one online, starts with offer exceptional value to the customer. Don't confuse branding with advertising. During the dot-com era, firms thought brands could be congenital through Super Bowl ads and expensive goggle box promotion. Advertising can build sensation, but brands are built through customer experience. This is a particularly important lesson for online firms. Have a bad experience at a burger joint and you might avert that location but try some other of the firm'south outlets a few blocks away. Have a bad experience online and you're turned off by the house'due south one and simply virtual storefront. If you click over to an online rival, the offending firm may have lost you forever. But if a business firm tin can go you to stay through quality experience, switching costs and data-driven value might proceed you there for a long, long fourth dimension, fifty-fifty when new entrants try to court you away.

If brand is congenital through client experience, consider what this means for the Netflix DVD-by-mail subscriber. They expect the firm to offer a huge selection, to be able to find what they want, for information technology to arrive on time, for all of this to occur with no-brainer ease of use and convenience, and at a off-white price. Technology drives all of these capabilities, so tech has been at the very center of the firm'south make-edifice efforts.

Selection: The Long Tail in Activeness

Customers flocked to Netflix in part because of the business firm's staggering selection. A traditional video shop (and Blockbuster had some 7,800 of them) stocks roughly three thousand DVD titles on its shelves. For comparison, Netflix offers its customers a choice of over 125,000 DVD titles, and rising! At traditional brick-and-mortar retailers, shelf infinite is the biggest constraint limiting a business firm's power to offer customers what they desire when they want it. Just which films, documentaries, concerts, cartoons, TV shows, and other fare make it inside the four walls of a Blockbuster store is dictated by what the average consumer is most likely to be interested in. To put it simply, Blockbuster stocked blockbusters.

Finding the right product mix and store size can exist tricky. Offering too many titles in a bigger storefront and there may not be enough paying customers to justify stocking less pop titles (remember, it'southward not just the toll of the DVD—firms also pay for the real estate of a larger store, the workers, the energy to power the facility, etc.). For a profitable business there should be a breakeven indicate arrived at by considering the number of customers that tin accomplish a location, along with factors such as store size, shop inventory, the payback from that inventory, and the price to ain and operate the store. Anyone who has visited a video store but to observe a championship out of stock has sew against the limits of the physical store model.

Simply many online businesses are able to run around these limits of geography and shelf infinite. Internet firms that ship products tin can become away with having just a few highly automated warehouses, each stocking just about all the products in a particular category. And for firms that distribute products digitally, the efficiencies are even greater because there's no warehouse or physical production at all (more on that later on).

Offer a nearly limitless pick and something interesting happens: there'southward actually more money to exist fabricated selling the obscure stuff than the hits. At Amazon.com, roughly threescore percent of books sold are titles that aren't bachelor in fifty-fifty the biggest Borders or Barnes & Noble Superstores.C. Anderson, "The Long Tail," Wired 12, no. 10 (October 2004), http://www.wired.com/wired/archive/12.x/tail.html. And at Netflix, roughly 75 percent of DVD titles shipped are from back-catalog titles, not new releases (at Blockbuster outlets the equation is near flipped, with some lxx pct of business coming from new releases).B. McCarthy, "Netflix, Inc." (remarks, J. P. Morgan Global Technology, Media, and Telecom Conference, Boston, May xviii, 2009). Consider that Netflix sends out forty-five thousand different titles each twenty-four hour period. That'due south fifteen times the selection available at your average video shop! Each quarter, roughly 95 percent of titles are viewed—that means that every few weeks Netflix is able to find a client for nigh every DVD championship that has e'er been commercially released.

This phenomenon whereby firms tin make money by selling a nigh-limitless selection of less-pop products is known equally the long tailIn this context, refers to an extremely large selection of content or products. The long tail is a miracle whereby firms can make money by offer a near-limitless option. . The term was coined past Chris Anderson, an editor at Wired magazine, who also wrote a all-time-selling business book by the aforementioned name. The "tail" (see Figure 4.3 "The Long Tail") refers to the need for less popular items that aren't offered by traditional brick-and-mortar shops. While almost stores brand money from the area under the curve from the vertical axis to the dotted line, long tail firms can as well sell the less pop stuff. Each item under the right part of the curve may experience less demand than the almost popular products, but someone somewhere likely wants it. And as demonstrated from the examples higher up, the total need for the obscure stuff is often much larger than what can be profitably sold through traditional stores alone. While some contend the size of the tail (eastward.g., whether obscure titles collectively are more than assisting for about firms), two facts are critical to go along above this argue: (1) option attracts customers, and (ii) the Internet allows large-choice inventory efficiencies that offline firms can't match.

Effigy 4.iii The Long Tail

The long tail works because the price of production and distribution drop to a point where information technology becomes economically feasible to offer a huge selection. For Netflix, the cost to stock and ship an obscure foreign film is the same as sending out the latest Will Smith blockbuster. The long tail gives the house a selection advantage (or ane based on scale) that traditional stores only cannot match.

For more evidence that there is demand for the obscure stuff, consider Bollywood movie house—a term referring to films produced in India. When ranked by the number of movies produced each year, Bollywood is actually bigger than Hollywood, but in terms of U.S. demand, fifty-fifty the summit-grossing Hindi motion-picture show might open in simply i or ii American theaters, and few video stores conduct many Bollywood DVDs. Once again, nosotros see the limits that geography and shelf infinite impose on traditional stores. As Anderson puts it, when it comes to traditional methods of distribution, "an audience too thinly spread is the same equally no audience at all."C. Anderson, "The Long Tail," Wired 12, no. x (October 2004), http://www.wired.com/wired/annal/12.ten/tail.html. While there are roughly 1.7 million South Asians living in the The states, Bollywood fans are geographically disbursed, making information technology difficult to offer content at a physical storefront. Fans of strange films would oftentimes find the biggest pick at an ethnic grocery shop, but fifty-fifty and so, that wouldn't be much. Enter Netflix. The firm has found the U.Southward. fans of South Asian cinema, sending out roughly one hundred thousand Bollywood DVDs a month. As geographic constraints become abroad, untapped markets open!

For testify on Netflix's power to brand lucrative markets from nonblockbusters, visit the house's "Meridian 100 page."http://www.netflix.com/Top100. You lot'll see a listing loaded with films that were notable for their lack of box part success. In one half-dozen-yr menses during Netflix's hyper-growth, the top spot was held not by a starting time-run megahit simply past the independent film Crash (an Oscar winner, merely box role weakling).R. Elder, "'Crash' Remains Acme DVD Rental," Chicago Tribune, April 14, 2009.

Netflix has used the long tail to its advantage, crafting a business model that creates close ties with film studios. In most cases, studios earn a pct of the subscription revenue for every disk sent out to a Netflix customer. In exchange, Netflix gets DVDs at a very low cost. The movie business is characterized by large fixed costsA cost that does not vary according to production book. upward front end. Studio marketing budgets are full-bodied on films when they commencement appear in theaters and when they're first offered on DVD. Afterward that, studios are done promoting a film, focusing instead on their virtually current titles. Only Netflix is able to find an audience for a film without the studios spending a dime on boosted marketing. Since so many of the titles viewed on Netflix are in the long tail, revenue sharing is all gravy for the studios—boosted income they would otherwise exist unlikely to get. It's a win-win for both ends of the supply chain. These supplier partnerships grant Netflix a sort of soft bargaining power that's distinctly opposite the strong-arm toll bullying that giants like Wal-Mart are often defendant of.

The VCR, the Real "Killer App"?

Netflix's coziness with flick studios grateful to generate revenue from back-catalog movie titles is peculiarly noteworthy, given that the film manufacture has frequently viewed new technologies with a suspicion bordering on paranoia. In one of the most notorious incidents, Jack Valenti, the erstwhile head of the Motion Moving-picture show Association of America (MPAA) once lobbied the U.South. Congress to limit the sale of abode video recorders, claiming, "the VCR is to the American picture producer and the American public equally the Boston strangler is to the adult female home solitary."J. Bates, "Formidable Strength for Hollywood," Los Angeles Times, April 27, 2007.

Not just was the argument over the top, Jack couldn't accept been more wrong. Acquirement from the sale of VCR tapes would eventually surpass the take from theater box offices, and today, home video brings in virtually two times box office earnings.

Cinematch: Applied science Creates a Data Asset That Delivers Profits

Netflix proves in that location'south both demand and coin to be made from the vast back catalog of moving-picture show and Television set show content. But for the model to work best, the house needed to accost the biggest inefficiency in the movie manufacture—"audience finding," that is, matching content with customers. To do this, Netflix leverages some of the industry'southward almost sophisticated technology, a proprietary recommendation system that the firm calls Cinematch.

Each fourth dimension a customer visits Netflix later sending back a DVD, the service essentially asks "So, how did y'all like the movie?" With a single click, each film tin be rated on a scale of one to v stars. If you're new to Netflix, the service can prompt you with a list of movies (or you can search out and rate titles on your own). Love Rushmore merely hate The Life Aquatic? Netflix wants to know.

The magic of Cinematch happens not past offering a gross average user rating—user tastes are too varied and that data'southward too fibroid to be of meaning value. Instead, Cinematch develops a map of user ratings and steers yous toward titles preferred by people with tastes that are near like yours. Techies and marketers call this trick collaborative filteringA classification of software that monitors trends amidst customers and uses this data to personalize an individual customer's experience. . The term refers to a nomenclature of software that monitors trends among customers and uses this data to personalize an private customer'south feel. Input from collaborative filtering software tin can be used to customize the display of a Web page for each user so that an individual is greeted but with those items the software predicts they'll want well-nigh. The kind of data mining done by collaborative filtering isn't but used by Netflix; other sites employ similar systems to recommend music, books, fifty-fifty news stories. While other firms also utilize collaborative filtering, Netflix has been at this game for years, and is constantly tweaking its efforts. The results are considered the manufacture gold standard.

Collaborative filtering software is powerful stuff, only is information technology a source of competitive advantage? Ultimately it'south simply math. Difficult math, to exist sure, but cipher prevents other firms from working hard in the lab, running and refining tests, and coming up with software that'due south as good, or perhaps one 24-hour interval fifty-fifty better than Netflix's offering. Just what the software has created for the early on-moving Netflix is an enormous information advantage that is valuable, results yielding, and incommunicable for newcomers to match. Fifty-fifty if Netflix gave Cinematch to its competitors, they'd exist without the over five billion ratings that the firm has amassed (according to the firm, users add about a million new ratings to the system each day). More ratings brand the system seem smarter, and with more info to keep, Cinematch tin can make more accurate recommendations than rivals.

Evidence suggests that users trust and value Cinematch. Recommended titles make up over threescore percent of the content users identify in their queues—an astonishing penetration rate. Compare that to how often you've received a peachy recommendation from the sullen teen behind the video store counter. While data and algorithms improve the service and farther strengthen the house's make, this data is also a switching cost. Drop Netflix for a rival and the average user abandons the two hundred or more films they've rated. Fifty-fifty if one is willing to invest the time in recreating their ratings on some other site, the rival will still brand less accurate recommendations because at that place are fewer users and less information to narrow in on similarities across customers.

One style to encounter how potent these switching costs are is to examine the Netflix churn charge per unitThe charge per unit at which customers leave a product or service. . Churn is a marketing term referring to the charge per unit at which customers exit a product or service, and upwardly until the customer rebellion following the 2011 re-pricing and Qwikster debacle, Netflix did a practiced job at keeping customers. A low churn is unremarkably key to profitability because information technology costs more to acquire a client than to go on one. And the longer a customer stays with the business firm, the more profitable they go and the less probable they are to leave. If customers weren't completely satisfied with the Netflix experience, many would exist willing to churn out and experiment with rivals offering cheaper service. However, the year afterwards Blockbuster and Wal-Mart launched with copycat efforts, the rate at which customers left Netflix actually cruel below iv percent. Upwardly until summertime 2011, churn rates had remained stable, despite a challenging recession."Final Transcript: NFLX—Q1 2011 Netflix Inc. Earnings Conference Phone call," Thompson StreetEvents, April 25, 2011.

All of this impacts marketing costs, also. Happy customers refer friends (complimentary marketing from a source consumers trust). During the high growth period for the DVD-by-mail concern, 94 percent of Netflix subscribers say they have recommended the service to someone else, and 71 percent of new subscribers say an existing subscriber has encouraged them to sign upwards.

The Netflix Prize

Netflix isn't content to stand up still with its recommendation engine. Recognizing that there may be useful expertise outside its Los Gatos, California headquarters, the firm launched a crowdsourcingThe act of taking a job traditionally performed by a designated amanuensis (usually an employee) and outsourcing it to an undefined generally big group of people in the form of an open up call. attempt known as The Netflix Prize (for more on crowdsourcing, encounter Affiliate 7 "Social Media, Peer Production, and Web ii.0").

The goal was simple: Offering $1 million to the first grouping or individual who can improve Cinematch'south ratings accuracy past 10 percent. In club to give developers something to work with, the firm turned over a large ratings database (with customer-identifying information masked, of class). The effort attracted over xxx,000 teams from 170 countries. Non bad when you consider that $1 million would otherwise fund merely four senior Silicon Valley engineers for about a year. And the endeavor earned Netflix a huge amount of PR, as newspapers, magazines, and bloggers chatted upwards the effort.

While Netflix gains access to any of the code submitted as part of the prize, it isn't exclusive access. The Prize underscores the value of the information asset. Even if others incorporate the same technology as Netflix, the house still has user information (and attendant customer switching costs) that prevent rivals with equal technology from posing any real threat. Results incorporating many innovations offered by competition participants were incorporated into Cinematch, fifty-fifty before the prize was won.

Equally the contest dragged on, many participants wondered if the 10 percent threshold could ever be reached. While many teams grew within hitting distance, a scattering of particularly vexing titles thwarted all algorithms, including the notorious Napoleon Dynamite. The pic is and then quirky, and Netflix customers then polarized, that there'due south little prior indicator to advise if you lot're in the "dear it" or "hate it" camp. One contestant claimed that single film was responsible for fifteen per centum of the gap between his team's effort and the meg dollars.C. Thompson, "If Y'all Liked This, You're Sure to Love That," New York Times, November 21, 2008.

The eventual winner turned out to be a coalition of four teams from 4 countries—prior rivals who sought to pool their noggins and grab fame and glory (even if their individual prize split was less). BellKor'due south Pragmatic Chaos, the first team to cross the 10 percent threshold, included a pair of coders from Montreal; two U.Due south. researchers from AT&T Labs; a scientist from Yahoo! Research, State of israel; and a couple of Austrian college students turned consultants.B. Patterson, "Netflix Prize Competitors Join Forces, Cantankerous Magic x-Percent Marking," Yahoo! Tech, June 29, 2009. It's rubber to say that without the Netflix Prize, these folks would likely never have met, permit alone collaborated.

Patron Saint of the Independent Picture show Crowd

Many critically acclaimed films that failed to be box function hits take gained a 2d life on Netflix, netting meaning acquirement for the studios, with no additional studio marketing. Babel, The Queen, and The Last Rex of Scotland are among the films that failed to crack the acme twenty in the box office, but ranked amidst the most requested titles on Netflix during the twelvemonth after their release. Netflix really delivered more revenue to Fox from The Final King of Scotland than information technology did from the concluding Ten-Men film.Netflix Investor Mean solar day presentation, May 2008, accessed via http://ir.netflix.com/events.cfm.

In the true spirit of the long tail, Netflix has occasionally caused small-scale market place titles for exclusive distribution. One of its starting time efforts involved the Oscar-nominated PBS documentary, Daughters from Danang. PBS hadn't planned to distribute the disc after the Academy Awards; it was simply too costly to justify producing a run of DVDs that almost no retailer would carry. But in a bargain with PBS, Netflix causeless all production costs in exchange for sectional distribution rights. For months subsequently, the film repeatedly ranked in the Pinnacle 15 well-nigh requested titles in the documentary category. Cost to PBS—null.C. Anderson, "The Long Tail," Wired 12, no. 10 (Oct 2004), http://www.wired.com/wired/archive/12.ten/tail.html.

A Look at Operations

Tech also lies at the center of the warehouse operations that evangelize client satisfaction and enhance brand value. As mentioned earlier, brand is built through customer feel, and a critical component of client experience is for subscribers to get their DVDs equally chop-chop as possible. In gild to exercise this, Netflix has blanketed the state with a network of fifty-viii ultra high-tech distribution centers that collectively handle in excess of ane.8 million DVDs a day. These distribution centers are purposely located within driving distance of over 100 U.S. Postal Service (USPS) processing and distribution facilities.

Past 4:00 a.g. each weekday, Netflix trucks collect the day's DVD shipments from these USPS hubs and returns the DVDs to the nearest Netflix center. DVDs are fed into custom-built sorters that handle disc book on the way in and the way out. That same machine fires off an electronic mail as soon as it detects your DVD was safely returned (now charge per unit it via Cinematch). Most DVDs never hitting the restocking shelves. Scanners option out incoming titles that are destined for other users and place these titles into a sorted outbound pile with a new, appropriately addressed red envelope. Netflix not just helps out the postal service by picking upwardly and dropping off the DVDs at its hubs, it presorts all outgoing mail for faster delivery. This actress effort has a payoff—Netflix gets the everyman possible postal rates for commencement-class mail delivery. And despite the loftier level of automation, 100 percent of all discs are inspected by hand so that cracked ones can be replaced, and muddied ones can be given a wipe downward.B. McCarthy, "Netflix, Inc." (remarks, J. P. Morgan Global Technology, Media, and Telecom Conference, Boston, May 18, 2009). Total in and out turnaround time for a typical Netflix DVD is simply viii hours!North. Kenny, "Special Study: Inside Netflix," WMC TV, July 7, 2009.

First-form mail takes just one day to be delivered inside a l-mile radius, so the warehouse network allows Netflix to service over 97 percent of its client base of operations within a two-twenty-four hours window—one day is allotted for receipt; early the next morning the next item in their queue is candy; and the new title arrives at the customer'due south accost by that afternoon.

Warehouse processes don't exist in a vacuum; they are linked to Cinematch to offering the firm boosted operational advantages. The software recommends movies that are likely to be in stock so users aren't frustrated by a await.

Everyone on staff is expected to have an eye on improving the house's processes. Every warehouse worker gets a Netflix subscription so that they understand the service from the customer'southward perspective and can provide suggestions for comeback. Quality management features are built into systems supporting nearly every process at the house, allowing Netflix to monitor and tape the circumstances surrounding whatsoever failures. When an mistake occurs, a tiger team of quality improvement personnel swoops in to figure out how to preclude whatsoever problems from recurring. Each client complaint that the firm must field is a cost, not a acquirement enhancement, and each error increases the adventure that a dissatisfied customer will bolt for a rival.

Past paying attention to procedure improvements and designing technology to smooth operations, Netflix has slashed the number of client representatives even as subscriptions ballooned. In the early days, when the business firm had i hundred and fifteen thousand customers, Netflix had one-hundred phone support reps. By the time the customer base of operations had grown thirtyfold, errors had been reduced to the point where only forty-three reps were needed.J. McGregor, "High Tech Achiever," Fast Company, October 2005. Even more than impressive, because of the firm'due south effective use of applied science to bulldoze the firm's operations, fulfillment costs as a percentage of acquirement have really dropped even though postal rates have increased and Netflix has cutting prices.

Killer Asset Recap: Understanding Scale

Netflix executives are quite frank that the technology and procedures that make up their model can be copied, but they likewise realize the challenges that whatever copycat rival faces. Says the house's VP of Operations, "Anyone can replicate the Netflix operations if they wish. It's non going to be like shooting fish in a barrel. Information technology's going to take a lot of time and a lot of money."Netflix Investor Day presentation, 2008, accessed via http://ir.netflix.com/events.cfm.

While Netflix might accept seemed like David battling the Goliaths of Wal-Mart and Blockbuster, inside the DVD-by-mail segment Netflix is now the biggest thespian by far, and this size gives the business firm pregnant scale advantages. The yearly price to run a Netflix-comparable nationwide delivery infrastructure is nigh $300 million.Due south. Reda and D. Schulz, "Concepts that Clicked," Stores, May 2008. Retrieve about how this relates to economies of scale. In Affiliate 2 "Strategy and Technology: Concepts and Frameworks for Understanding What Separates Winners from Losers", we said that firms enjoy calibration economies when they are able to leverage the cost of an investment beyond increasing units of production. Fifty-fifty if rivals have identical infrastructures, the more profitable firm will be the one with more customers (see Effigy 4.viii). And the firm with improve calibration economies is in a position to lower prices, too as to spend more on client conquering, new features, or other efforts. Smaller rivals accept an uphill fight, while established firms that try to challenge Netflix with a copycat effort are in a position where they're straddling markets, unable to gain total efficiencies from their efforts.

Figure iv.8

Running a nationwide sales network costs an estimated $400 meg a year. Only Netflix has several times more subscribers than Blockbuster. Which firm has economies of calibration?Chiliad. Hoffman, "Netflix Tops 23 Meg Subscribers," Inc., Apr 25, 2011; T. Hals and L. Baker, "Dish Expands Scope with Blockbuster Win," Reuters, Apr 6, 2011; infrastructure price estimates from S. Reda and D. Schulz, "Concepts That Clicked," Stores, May 2008.

For Blockbuster, the inflow of Netflix plays out like a horror picture show where it is the victim. Netflix pressure level forced Blockbuster to drop late fees, costing the firm nigh $400 million a yr.T. Mullaney, "Netflix: The Mail-Lodge Firm That Clobbered Blockbuster," BusinessWeek, May 25, 2006. The Blockbuster store network once had the advantage of scale, merely somewhen its many locations were seen every bit an inefficient and swollen liability. During a 3-year flow that included the launch of its Total Access DVD-by-mail endeavour, Blockbuster lost over $4 billion and closed hundreds of stores.Northward. MacDonald, "Blockbuster Proves It'southward Not Dead However," Maclean's, March 12, 2008. The firm tried to outspend Netflix on advertising—fifty-fifty running Super Bowl ads for Full Access—just a money loser can't outspend its more profitable rival for long, and Blockbuster was eventually forced to cutting back on promotion. Blockbuster also couldn't sustain subscription rates below Netflix'southward, then it has given up its price advantage. A Viacom executive said about the house, "Blockbuster volition certainly not survive and it will not be missed."E. Epstein, "Hollywood's New Zombie: The Last Days of Blockbuster," Slate, January ix, 2006, http://world wide web.slate.com/id/2133995. This assessment had to sting, given that Viacom was once Blockbuster's parent (the firm was spun off in 2004). In September 2010, Blockbuster declared bankruptcy, and in April 2011 the firm was purchased by Dish Network at a defalcation sale.T. Hals and L. Baker, "Dish Expands Scope with Blockbuster Win," Reuters, Apr half dozen, 2011.

For Netflix, what delivered the triple calibration advantage of the largest selection, the largest network of distribution centers, and the largest customer base and the firm'south industry-leading strength in brand and data avails? Moving first. Timing and technology don't always yield sustainable competitive advantage, but in this case, Netflix leveraged both to arts and crafts an extraordinarily valuable pool of avails.

Simply every bit we'll see in the next section, while technology shifts helped Netflix attack Blockbuster'southward one time-dominant position, even newer technology shifts may threaten Netflix. As they like to say in the mutual fund industry "Past results aren't a guarantee of future returns."

Cardinal Takeaways

Durable brands are congenital through client feel, and technology lies at the eye of the Netflix summit satisfaction ratings and hence the firm's all-time-in-class make forcefulness.
Physical retailers are express past shelf space and geography. This limitation means that expansion requires building, stocking, and staffing operations in a new location.
Cyberspace retailers serve a larger geographic surface area with comparably smaller infrastructure and staff. This fact suggests that Internet businesses are more scalable. Firms providing digital products and services are potentially far more than scalable, since physical inventory costs go away.
The ability to serve large geographic areas through lower-cost inventory means Cyberspace firms can provide access to the long tail of products, potentially earning profits from less popular titles that are unprofitable for physical retailers to offer.
Netflix technology revitalizes latent studio avails. Revenue sharing allows Netflix to provide studios with a free opportunity to earn money from dorsum itemize titles: content that would otherwise non justify further marketing expense or retailer shelf infinite.
The strategically aligned use of technology past this early mover has allowed Netflix to proceeds competitive advantage through the powerful resources of make, data and switching costs, and scale.
Collaborative filtering engineering has been continually refined, only even if this technology is copied, the truthful exploitable resource created and leveraged through this technology is the data asset.
Technology leveraged across the firm's extensive distribution network offers an operational advantage that allows the firm to reach almost all of its customers with 1-day turnaround.

Questions and Exercises

What are Netflix's sources of competitive reward?
Does Netflix accept a strong brand? Offer evidence demonstrating why the firm'south brand is or isn't strong. How is a strong brand congenital?
Scale advantages are advantages related to size. In what primal ways is Netflix "bigger" than the 2 major competitors who tried to enter the DVD-by-mail market?
What is the long tail? How "long" is the Netflix tail compared to traditional video stores?
What "grade" of software does Netflix utilise to make movie recommendations? Think about Chapter two "Strategy and Applied science: Concepts and Frameworks for Understanding What Separates Winners from Losers": Which central competitive resource does this software "create"? What kinds of benefits does this provide to the house? What benefits does it provide to Netflix'due south suppliers?
Could a new competitor lucifer Netflix's recommendation software? If it did, would this create a threat to Netflix? Why or why not?
What is the Netflix churn rate and what are the reasons behind this rate?
Netflix uses applied science to coordinate the process of sorting and dropping off DVDs for the U.Due south. Postal service. This application of technology speeds delivery. What other reward does it requite the firm?
How has Netflix improved its customer service operation? Describe the results and impact of this comeback.