Managerial Eco Assigenment

MANAGERIAL ECONOMICS

MGCR 293 - 051

FALL 2018

TERM PAPER

GROUP NUMBER:

Introduction

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.

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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.

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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