Final Project Milestone One: Netflix Microeco

Final Project Milestone One Introduction 12 Netflix Microeconomic Analysis

Netflix Inc. is the leading streaming internet television in the world operating in more than one hundred and ninety countries. The organization has more than one hundred and thirty million subscribers who enjoy their products and services. The user enjoys various television shows and movies in a day, including feature films, original series, and documentaries on different platforms such as television, tablets, smartphones, laptops, and personal computers. The increase in internet usage has made Netflix Inc. dominate the United States market, enabling it to generate substantial revenue (Havens, 2018).

The streaming market is growing rapidly due to advancements in technology, the Internet of Things, and increased internet usage, creating a sustainable foundation for Netflix Inc.'s expansion and growth. This paper focuses on the microeconomic analysis of Netflix Inc., examining how supply and demand, sales, and market trends influence the company's operations. It evaluates the price elasticity of Netflix’s products and services and how these factors affect demand and supply, as well as the influence of production costs and market share on profitability and future prospects.

An effective analysis of Netflix Inc. will facilitate recommendations on how the company can continue to lead in the streaming television industry. Founded in 1997 by Reed Hastings in California, Netflix initially operated as an online DVD rental service with a model allowing subscribers to rent DVDs by mail without limitations on quantity per month. In 2002, Netflix went public, surpassing its main competitor Blockbuster with over 600,000 members (Jenner, 2018). Transitioning from DVD rentals to digital streaming in 2007, Netflix enabled users to access content instantly through personal computers, leveraging increased global internet penetration. The company's expansion into international markets beginning in Canada in 2010 further increased its user base (Jenner, 2018).

Currently, Netflix’s business segments include international streaming, domestic streaming, and domestic DVD rental. The international segment targets customers outside the U.S., while the domestic segments serve U.S. subscribers. Recently, Netflix introduced a download feature, allowing offline viewing, which enhances customer value and retention. The company's strategic focus on original content creation drives growth and differentiation in a highly competitive market (Jenner, 2018).

Supply and Demand

Netflix has experienced consistent sales growth driven by rising demand for its streaming services, which correlates with global increases in internet usage. The demand trend has led to a gradual increase in subscription prices, illustrating price-setting behaviors influenced by supply and demand dynamics (Pfeifer & Conroy, 2017). The supply side faces high costs associated with licensing agreements, content creation, and technological infrastructure, which influence pricing strategies and revenue performance.

Market challenges include increased costs for content licensing and regulatory taxes introduced by various countries, affecting demand elasticity. For example, the rising costs of licensing original content have pressured margins, leading Netflix to shift investment toward proprietary content, which has shown to be more cost-effective in the long term (Pfeifer & Conroy, 2017).

Price Elasticity of Demand

Netflix's demand exhibits inelastic characteristics, meaning changes in price have a relatively small effect on quantity demanded. Despite periodic price increases, subscriber numbers remain largely stable due to the company's strong brand loyalty, extensive original content, and limited close substitutes. Data indicates that while some subscribers may cancel subscriptions following price hikes, overall growth in revenue persists, reflecting inelastic demand (Shattuc, 2019).

Research shows that even with a price increase, Netflix’s market share remains dominant because many consumers are willing to pay a premium for exclusive content and a seamless user experience (Venkatesan & Shively, 2017). However, the rise in competition from Amazon Prime, Hulu, and other streaming services could eventually increase the price elasticity, stimulating subscriber migration if Netflix’s pricing becomes unaffordable or if substitute offerings improve.

Cost of Production and Profitability

Over recent years, Netflix's production costs have escalated due to increased investments in original content and licensing fees. Starting from 2013, variable costs like licensing agreements, employee salaries, and marketing expenditures have surged, with Netflix spending approximately $7.5 billion on content licensing in 2018 (Pfeifer & Conroy, 2017). Despite rising costs, the company's revenues have also increased, with revenues reaching $5.2 billion in 2019, up from $4 billion in 2018, illustrating product and content strategy effectiveness (Jones, Bechtold, & Hayman, 2017).

Netflix’s investment in original content serves as a strategic advantage, fostering customer loyalty and reducing dependence on external licensors. This shift has positive impacts on profitability, though it requires substantial upfront investment. The fixed costs associated with technological infrastructure and content production influence cash flow and liquidity, emphasizing the need for balancing growth investments with financial stability (Jones, Bechtold, & Hayman, 2017).

Market Trends and Market Share

Market share analysis reveals Netflix’s dominant position, holding approximately 51.8% of the streaming market, compared to Amazon Prime’s 24.8%. Other competitors include Hulu, HBO Now, YouTube Red, CBS All Access, Sling TV, and PlayStation VUE, competing for the remaining segment (Bouma, 2016). Netflix’s large market share is supported by its extensive original programming, user-friendly platform, and global reach.

The high entry barriers, such as substantial capital investment, licensing complexities, and technological infrastructure, sustain Netflix’s market dominance and limit new competitors. The company operates within an oligopolistic market structure, where a few firms compete, and Netflix’s strategic positioning allows it to influence market trends and innovation (Aliloupour, 2016). Competition from Amazon Prime and Hulu continues to challenge Netflix’s leadership, necessitating ongoing innovation and customer retention strategies.

Recommendations

To maintain its market leadership, Netflix should focus on enhancing customer loyalty through continuous content innovation and personalized viewing experiences. Monitoring subscription trends and adjusting pricing strategies thoughtfully will help prevent erosion of market share due to price sensitivity. Furthermore, investing in original content production will reinforce its competitive edge, making substitute services less appealing (Tryon, 2015).

Additionally, Netflix must remain vigilant regarding regulatory changes, such as digital taxes, which could impact profitability and demand elasticity. Diversifying offerings, exploring new markets, and leveraging advanced data analytics for targeted marketing will support sustained growth and market dominance (Jones, Bechtold, & Hayman, 2017).

References

  • Aliloupour, N. P. (2016). The Impact of Technology on the Entertainment Distribution Market: The Effects of Netflix and Hulu on Cable Revenue.
  • Bouma, R. (2016). Streaming Wars: The Market Share Battle Among Major Platforms. Journal of Streaming Media, 8(3), 45-58.
  • Havens, T. (2018). Netflix: From Networks to Netflix. Routledge.
  • Jones, E. H., Bechtold, A., & Hayman, K. (2017). HBO NOW: Watch Out, Netflix! Journal of Case Studies, 35(2), 37-43.
  • Pfeifer, P. E., & Conroy, R. M. (2017). Netflix, Inc., 2007. Darden Business Publishing Cases, 1(1), 1-15.
  • Pfeifer, P. E., & Conroy, R. M. (2017). Valuation of Netflix, Inc. Darden Business Publishing Cases, 1(1), 1-13.
  • Shattuc, J. (2019). Netflix, Inc. and Online Television. A Companion to Television. Wiley-Blackwell.
  • Tryon, C. (2015). TV Got Better: Netflix’s Original Programming Strategies and the On-Demand Television Transition. Media Industries Journal, 2(2), 105-123.
  • Venkatesan, R., & Shively, D. (2017). Netflix, Inc.: The Customer Strikes Back. Darden Business Publishing Cases, 1(1), 1-7.
  • Netflix - quarterly revenue in 2019. (n.d.). Retrieved from https://www.statista.com/statistics/245501/quarterly-revenue-of-netflix/

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