Digital platforms organizations are the main tools of transforming the
economy into a digital economy. They use advanced digital technologies, are
primarily data-driven, and match supply and demand in unconventional and new
ways. The last century, information technology has deeply reduced the need to
own physical infrastructure and assets; it facilitates the platform’s ability
of evaluating and exchanging huge amounts of data, and consequently increases
the value of the platform.
technology enabled business models to contrast the traditional organizational
forms in the ways they control supply chains, lead a network of platform
partners, and develop business models. Platform businesses bring together
producers and consumers in high value exchange. Their chief assets are
information and interaction, which together are the source of the value they
create and their competitive advantage (Marshall W. Van
Alstyne Geoffrey G. Parker Sangeet Paul Choudary, 2017, March 21, Pipelines,
Platforms, and the New Rules of Strategy. Retrieved December 15, 2017, p.54).
These operating systems do not sell products or services, rather they are
selling access to a software and a digital system of reputation and trust
between supply and demand.
based business model gave also rise to what is often called the sharing
economy. The sharing economy refers to the phenomenon which deals with people
obtaining, giving, and sharing access to goods and services by means of a
digital platform. Platform providers can be both for-profit and non-profit.
understand how digital platforms are transforming competition in the sharing
economy, the paper is going to focus on the following question: to what extent is
Netflix influencing competition in its industry and in the U.S. sharing economy?
To come up with an answer to this main theme, the research method will be
literature based and the structure of the paper is first dealing with some general
information about the organization’s background and afterwards Porter’s Five Forces
model is going to be applied to Netflix’s industry, with the aim of determining
the level of competition in the industry in which it competes. Furthermore, in
order to analyse the digital platform’s influence on the U.S. economy, the
paper is going to deal with Netflix’s disruptive impact on it, known as the
2. Theoretical Framework
founded on 1997 in California by Marc Randolph and Reed Hastings. Initially, Marc
Randolph came up with the idea of selling a product or service over the
Internet (but he didn’t know what to sell). One day, Reed Hastings was charged
$40 in overdue fines because he returned too late a copy of a film. He then suggested
to his partner to start renting out videos on the internet and, in this way, Randolph
and Hastings started a business together.
Netflix website was officially launched in 1998 (Keating,
Gina (2012). Netflixed: The Epic Battle for America’s Eyeballs. Portfolio/
Penguin.). At that time they had about 30 employees and 925 items
available to rent. Netflix’s core competency was that customers were sent DVDs
via mail on a pay-per-rental basis where late and postal fees were applied.
1999 the platform introduced the monthly subscription format (O’Brien, Jeffrey M. (December 2002). “The Netflix
Effect”. Wired News.) ; it consists in paying a flat-fee each month
in exchange for unlimited rentals. The innovating feature of this business is
that costumers don’t have due dates to return rentals, no late fees, no
shipping costs, and handling fees (“Things You
Should Know About Renting From Netflix”. Lifewire. Retrieved August 10,
company had considered the idea of providing movies online. In the mid-200s the
data speeds and capacity were able to offer the service of downloading movies
from the internet. The idea consisted in a ”Netflix box” that allowed
costumers to download movies overnight and watch them the day after. However,
with the increasing popularity of Youtube, Netflix decided to adapt the
streaming concept as well. The plan was completed in 2007 (“The inside story of how Netflix transitioned to
digital video after seeing the power of YouTube”.).
2006, Netflix introduced a new service which dealt with recommending movies. By
using subscribers’ ratings, the platform can accurately predict which movies a
subscriber would enjoy watching next by using a filtering algorithm. This service
led to huge success, it caused, in fact, an increase in rentals and subscribers
across the world. In 2005 Netflix gained 4.2 million members, and two years
later, in 2007, it delivered its billionth DVD by mail (“The
Victoria Advocate – Feb 26, 2007”. p. B4.).
In the same year, the digital platform offered video on demand, thus streaming,
to its subscribers.
The big revolution of
Netflix’s strategy consisted in providing the opportunity to costumers of
watching television shows and movies instantly on their PC’s and laptops as
well as on the traditional television. This service marked the beginning of
streaming media as known these days.
In the following years, the company partnered with electronics companies to
allow streaming on electronic platforms, such as the Xbox 360, Blu-ray disc and
smart TVs (“What Netflix
and Hulu Users are Watching… and How”. NielsenWire.
July 27, 2011. Retrieved July 27, 2011.).
In 2010 Netflix became available on Apple’s iPad and iPhones, Nintendo Wii as
well, and other Internet connected devices (Falcone,
John P. (May 9, 2008). “Netflix Watch Now: Missing too much popular
content”. CNET. Retrieved July 19, 2010.).
the digital platform expanded itself and made services available around the
world. In April 2014, Netflix had 50 million global subscribers with 32.3%
video streaming market share in the United States. The company offered its
services in 41 countries worldwide (Chakrabarty,
Saumyadeb; Kalluvila, Sriraj, eds. (April 22, 2014). “Netflix price hikes
seen boosting global expansion”. Reporting by Soham Chatterjee; Photo
Credit: Reuters/Mike Blake. London. Reuters. Archived from the original on
April 22, 2014. Retrieved April 22, 2014.). Just
a couple of months later, the digital platform improved the number of
subscribers, of which 36 million in the United States (Lawler,
Richard (July 22, 2014). “Netflix crosses 50 million subscribers worldwide
and takes aim at Comcast / TWC”. Retrieved July 23, 2014.). Thanks
to the new service that allowed costumers to watch movies and shows offline, on
April 2017, Netflix reached the 100 million subscribers (Bond, Shannon (April 17, 2017). “Netflix nears 100m subscriber
milestone”. Financial Times. Retrieved April 30, 2017.). In the month of October 2017, Netflix was estimated
having 109.25 million subscribers worldwide, counting 52.77 million in the
United States (“Netflix Letter to Stockholders Q3
2017″ (PDF). Retrieved October 16, 2017.).
December 13. Retrieved December 15, 2017, from https://en.wikipedia.org/wiki/Netflix).
suggested by the data about Netflix’s expansion, the digital platform could be
defined as successful. However, a way to accurately attest its profitability is
by means of Porter’s five forces model, which analyses the level of competition
within the industry in which the business operates.
makes Netflix such a successful business is the bargaining power of buyers. Buyers
are powerful because they can easily switch to another service but they still
choose to purchase and consume Netflix’s services. As they are not bound to an
annual contract, consumers can subscribe to one service one month and then
switch the next. As a consequence, Netflix react by offering an appealing
selection of movies and series in order to encourage as many costumers as
possible to renew their subscription.
the bargaining power of suppliers the company has to obtain and renew contracts
with networks and studios to keep the costumers satisfied. These suppliers are
lately debuting with their own streaming services, and hence less willing to
share products with Netflix. In such manner, some of the suppliers are becoming
the digital platform’s competitors. Suppliers can also establish strategic alliances
or cooperation making the industry more concentrated and thus themselves more
threat of new entrants is an addressing problem considering the new trends coming
up. However, entering the streaming video industry although being a company of
small-scale makes it difficult to compete with a renowned brand such as
Netflix. The costs involved in lasting contracts are extensive and new entrants
are not able to face them if not by partnering with a competitor, thus an entry
barrier is represented by capital requirements. Nonetheless, in order to limit
the competition and the new entrants, Netflix has to keep improving its
services selection or offer differentiated ones.
services are one of the main substitute for streaming video. Costumers who are
interested in watching news and sports enjoy the traditional cable television
which often also offers free streaming entertainment. Furthermore, Netflix
faces the risk of being substitute by pirating. In general, competing with free
services is always difficult. Netflix has to deal with rivals as streaming
apps, PBS, Crackle or Snag Films, for example, offer their products for free or
in exchange to publicizing their sponsors. However, as on-demand streaming
keeps growing in popularity, the threat of substitutes is going to diminish,
considering that online entertainment is gradually replacing the traditional cable
result of the examination of the latter forces, the degree of rivalry can be
assessed in this specific industry. In the streaming video industry, competition
seems to be fierce since there is a low product differentiation between
streaming video providers. Rivalry is, in fact, based on the selection of films
and series titles. Nonetheless, a cooperative competitive environment is
emerging within the rivals of this industry. Amazon, for example, launched the
Amazon Fire TV Stick in 2014, a streaming media player, which allows the
customers to connect with other on-demand video players as well, including
Netflix. The involvement of competing services points out the acknowledgment of
the additional value created by means of a vast selection of streaming media. Furthermore,
the digital entertainment platform industry recognize the fact that its customers
are more and more willing to subscribe to different products, which means that multiple
organizations are able to gain market share without being affected by the greater
number of competitors.
the previous analysis we can conclude that: the bargaining power of buyers is
high, the bargaining power of suppliers is high as well, that the threat of
substitute products or services is moderate, likewise, the threat of new
entrants can be defined as moderate, and finally that rivalry among existing
competitors is moderate too.
conclusions that can be made from the Porter’s five forces analysis, are that
Netflix competes in an quite profitable industry and that its business model permits
the company to be one of the dominant organizations in its arena.
conclusions that came up from Porter’s five forces analysis, Netflix meets the
increasing demand of costumer’s new needs and wants, such as the availability
of commercial free, high quality image, and original television content (Matrix, S. (2014). The Netflix effect: Teens, binge
watching, and on-demand digital media trends. Jeunesse:
Young People, Texts, Cultures, 6(1), 119-138.). Thanks
to its vast selection of commercial-free television shows and movies, Netflix
allows all the spectators to determine their watching and entertainment
experience. The goal of the business is thus to attract as many participants as
possible, and this aim leads to an increased value. As a consequence, the phenomenon
known as ”network effect” raises, which means that the increase of value
depends on the number of users making use of the network, and it is central to
platform strategy (Van Alstyne, M. W., Parker, G.G.,
& Choudary, S. P. (2016). Pipelines, platforms, and the new rules of
strategy. Harvard Business Review, 94(4),
advanced technologies that digital platforms use, such as Netflix’s successful data-driven
commissioning (Jackson, J., (2017). The secrets of
Netflix’s success: How the company has transformed TV. New Statesman, 146(5390), 19.), are
part of their strategies and are transforming competition. These techniques permit
the platform based businesses to contrast traditional organizational models. In
such a way, on-demand streaming services have an impact on the industry within
they compete and, in particular, on the cable television, which is considered their
consumer’s raising need for innovating operating systems, such as the media
distribution practice, which permits streaming content providers to offer media
content straightforwardly over the internet, is having a disruptive effect on telecommunications
and cable or broadcast television, which were generally the providers of these services
(Jeunesse: Young People, Texts, Cultures, 6(1), 119-138.). Netflix is in fact
offering cable television content to appeal to the subscribers making use of
it. In this manner, the company directly and successfully faces the competition
with the American cable and satellite services (Street,
A. (2010). TV data: Netflix typifies competition pay-TV platforms are facing. New Media Age, 25.).
the sharing economy, in general, creates a conflict between the primary
producer of the specific product and the secondary sharer. Secondary sharing
represents a significant complication for Netflix; a subscriber, who faces low
costs for the platform’s services, could share its account or rent its movies
to a tertiary individual. The subscriber is thus able to make some profit with assets
that are not of its own property. The way of sharing might be profitable, but
it can represent a threat for the demand of Netflix’s product and for movies
producers (Malhotra, A., & Van Alstyne, M. (2014).
The dark side of the sharing economy… and how to lighten it. Communications of the ACM, 57(11), 24-27.).
Furthermore, the disruptive impact, that the on-demand
video business represents, does not only affect its industry and thus its
rivals, but also the U.S. economy. Like many considerable companies, Netflix
has been closely scrutinised for not have been paying the full amount of taxes it
was charged of (Jackson, J.,
(2017). The secrets of Netflix’s success: How the company has transformed TV. New Statesman, 146(5390), 19.). The company makes use of escamotage in order to exploit
deficiencies in the national tax system. However, in defence, the enterprise can
discuss that its low taxation is a consequence of the amount of investments
that it makes in its industry and in the U.S. economy. Netflix’s overall
revenues are indeed higher than its profits, because of its considerable amount
of spending on original movies production for example. This fact has been seen
in different perspectives by competitors, some argued that this kind of
behaviour is not fair and others, like the director of US network FX, support
the many investments that Netflix devotes to new series and movies (Jackson, J., (2017). The secrets of Netflix’s success: How
the company has transformed TV. New
Statesman, 146(5390), 19.).
means of considering the latter arguments, it is possible to remark that Netflix
has a noticeable impact on its industry, since it represents the main
competitor and substitute for traditional business models and their products such
as the cable television, and on the U.S. economy in general as a consequence of
the significant amount of money it spends in its market. However, the Porter’s
five forces model used in the paper to determine whether the industry is
profitable or not, is a model that dates back to 1979, before the arise of the sharing economy and digital platforms.
Porter’s framework is thus not up-to-date and probably not able to accurately
analyse these new emerging business models and their industries. Furthermore, it
is not possible to determine whether Netflix has a definitive disruptive effect
on its industry and on the U.S. economy, since it gives on one hand new
opportunities to film makers and its industry by investing, and on the other it
tries to evade the national taxation system in legal ways.
be able to give a better answer to the main question of the paper, it would be helpful
to make further research into the competition dynamics that take place in the
sharing economy and among digital platforms. By doing so, it would be possible
to better analyse the impact that digital platforms, and Netflix in the
specific, have on an industry and an economy.
The goal of the literature based research was to analyse whether Netflix has an
influence on its industry and on the U.S. economy. By trying to give an answer
to this central question, some limitations and problems came up. It is in fact difficult
to analyse an emerging and modern phenomenon, such as the sharing economy that
give rise to different competition dynamics and new organizational models, known
as digital platforms.
main results are that Netflix, as a digital platform, represents a threat for
traditional businesses, such as broadcast and cable television, and that it also
increases the money issue in its market.
conclude, the answer to the central question is that Netflix has a relevant
impact on its industry and on the U.S. economy as well, it represents indeed a
source of new opportunities, new jobs and investments, but also a threat for traditional
organizational forms. However, to come up with a definitive and accurate answer,
there is need for a further research.