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Managerial Eco Assigenment

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MGCR 293 - 051

FALL 2018




Started as a DVD rental firm in 1997, Netflix Inc. went public in 2002 and introduced streaming content in 2007. Netflix’s CEO Ted Sarandos acquired successful TV show “House of Cards” for 100 million US dollars in 2011 at which point the company was quoted to having become “an industry in and of itself”. Not only has Netflix become a market leader in the video on-demand industry, but the full vertical integration of the business, spending approximately $8 billion on content, allows it to produce more content with lower average cost per episodes. Netflix aims to release 80 original films and TV shows in 2018 however, with their net profit for 500 million dollars in 2017 the company has to take on significant debt to support its trajectory. With 111 million subscribers in 2017 and $11.5 billion in revenue the future of this corporation is dependent on their understanding of the managerial economics involved. Begging the following questions: What is the market structure of the video on-demand industry? What impact does Netflix have on traditional DVD rental companies e.g Blockbuster? And What is the pricing strategy of Netflix in regards to the supply and demand of the products and services?

Market Structure

Netflix is currently in a market structure which is hard to really pinpoint. The market structure in which Netflix is in certainly carries with itself the properties of monopolistic competition where there are many competitors providing similar online streaming services such as Hulu, Amazon, YouTube and HBO. It seems like a monopolistic competition in terms of many firms supplying similar products and services while trying to differentiate their products to appeal to more customers and the firms’ ability to alter prices without losing or gaining the entire market. However, the market can also be labelled as an oligopoly because there are only several rival firms to compete with Netflix. Whether the number of rival firms are enough to consider it as a monopolistic competition instead of an oligopoly is subjective. Although that’s subjective, there are other factors involved which we can analyse to determine the market structure. One would be the market share. As indicated, there are several firms competing with Netflix but currently Netflix serves to 90% of the US population who are using a streaming service and 36% of the whole US population. This dominance in market share suggests that it may be more appropriate to label the market as oligopoly. To further extend this point, a market share of some 90 percent is such an overwhelming dominance is that the market structure may be moving towards a monopoly. However, if Netflix’s monthly subscription price raises, it surely will lose some customers. Hence, it is not quite a monopoly yet. The way that Netflix achieved the shift from monopolistic competition to oligopoly and now to monopoly is through differentiation of their services. Having the motto of “content is king”, Netflix made its selection of shows very wisely, tailoring the shows to customer tastes and gaining and universal recognition while at the same time producing Netflix Original Series, thus, offering benefits to customers for choosing Netflix over other streaming services. From the perspective of barriers to entry, the streaming service industry is certainly on the monopoly-oligopoly side of the spectrum. A new player wanting to enter the industry must compete with the huge pools of titles Netflix and current competitors are offering. Just to get a feeling of the scale, Netflix’s number of original titles increased from 4 to 59 between the years 2012 and 2015 (Comparitech, 2018). Another point to mention is the effect of economies of scale. As Netflix becomes the number one player and “to go” streaming service, the cost of adding new shows to its library and working with celebrities decrease because they have a higher bargaining power. They are aware of the advantages celebrities can gain by having a show on Netflix instead of other companies because they’ll be able to reach to more people. By the same logic, it also costs Netflix less to work with big names such as David Fincher. To achieve a library as vast as Netflix, while Netflix is continuously adding new titles under its name, is very challenging. Hence, it can be said that the barriers to entry are very high, as it would be in an oligopolistic market.

[pic 1]

The image above adds to the discussion about entry barriers being high and also about the market moving towards a monopoly. The investment done by Netflix easily surpasses all its competitors providing itself a competitive edge and a higher chance to keep existing customers as well as to reaching out to new customers. Due to all the reasons indicated above, Netflix may very well be called a current mixture of monopolistic competition and oligopoly and a future monopoly.

Netflix’s Impact on traditional DVD rental companies

Netflix, an innovative company that breaks the tradition of the DVD rental companies

Netflix has been a true digital disruptive innovation in the movie industry. Its model brought more advantages to the consumer, so the only way rental companies could survive was to try and rethink their model, or they would lose customers.


Regular rental companies

  • There are thousands of movies to choose from so there is a lot more variety
  • Customers can view others’ ratings
  • The movies can be viewed on many devices in partnership (Computers, iPhones, Androids, Chromecasts, Smart TV, Xbox 360, Xbox One, PS3, PS4 , PlayStation Vita, Wii, Nintendo)
  • Netflix has exclusive programs available nowhere else (House of Cards, Orange is the New Black, Lilyhammer, Stranger Things)
  • There is no time limit, movies can be watched repeatedly and there is no extra fee
  • It is more affordable for people who watch a lot of movies seeing as Netflix's standard SVOD (Subscription Video On Demand) plan for content viewing on two screens in 2018 is of $10.99 a month

(Why Blockbuster Failed, 2018)

  • Unlike online models, rental companies could offer other products such as microwave popcorn, soft drinks and candy to enhance the movie rental and viewing experience
  • Customers have to actually go to the store to rent the movie
  • There are only a few hundred mainstream titles
  • Customers have to wait in line to pay and only have a few days to watch the movie before they have to bring it back
  • Customers have to pay an extra fee if they bring back the movie after the time limit (a part of rental companies’ profit depends on this) which cost the company $300 million in revenue annually in 2010
  • The cost of renting just two movies was basically the equivalent of a month’s subscription in online services

(Why Blockbuster Failed, 2018)

Netflix managed to expand its market to the detriment of the DVD rental companies

Many Blockbuster customers saw the worth in Netflix and transitioned to it



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