Microeconomic Analysis of Netflix

Microeconomic Analysis of NetflixIntroductionThis paper provide assess the demarcation operations of the Netflix Company from a microeconomics viewpoint examining and discussing how factors such as products supply and shoot conditions, hurt elasticity of charter, appeal of production, grocery entry barriers, market sh atomic number 18, and market structure effect Netflixs performance in their market. The paper will start with historical overview of the Netflix Company and conclude with recommendations based on the analysis suggesting how Netflix could perish its future operations to stay competitive in the entertainment market and Industry.Company HistoryNetflix began operation in 1997 as a DVDby mail rental work (About Netflix, 2017). After many years, it has morphed into the considerablest online television network, with over 100 million members worldwide which streams over 125 million hours of programming per day. Its members atomic number 18 able to watch on multiple d ifferent devices from just about anywhere, at any time. These entertainment choices include films, television, documentaries, and original programming (About Netflix, 2017). With an enterprise lever of $71.47 billion, this internet giant has alternated the way we consume modern media and entertainment (Netflix Enterprise Value, 2017). Netflix has frequently invested in original programming that is generated strongly based on the trends of the consumer. This confederacy has market insight that Nielsen ratings batht compare with. In addition to the number of people watching programming, Netflix can too tell when users watch, how long they typically watch for, what people want to see, and much more than. This information is used to provide the laid-backest quality experience for the consumer. With a large share of the online streaming market cornered, Netflix has openly said that their biggest current competitor is sleep (Netflixs View Internet TV is replacing linear TV, 2017). Supply and Demand ConditionsSupplyand demand is the availability of an essence for a certain product and thedemand for that product has on cost. Meaning that if there is a low supply witha high demand the expense increases or if the supply is greater with a demandthat is lower than the price will likely drop. When it comes to Netflix and itssupply and demand conditions, you can see that they are as well as vulnerable to thesame supply and demand stress as different business organizations. Netflix isconstantly expanding the streaming list of depicted object providers along with theircompetitors such as Hulu, Amazon Prime, HBO and other premium networks. Thedemand for growth in these streaming companies has driven prices upwards overthe last few years. The line of business industry, which is what Netflix is classified under, is perpetually andquickly changing. Advances in technology puzzle driven the demand for telephone line television and companies like Netflix to haveeasily and quickly accessible pith. In 1948, telegraph television originated inArkansas, Oregon, and Pennsylvania to enhance poor reception of traditionalbroadcast television signals in remote areas. (History of Cable, n.d.) Duringthe 50s and 60s, business subscriptions grew from 14,000 proofreaders to 850,000subscribers. From the 1990s into the present, cable has continued to rapidlygrow due to the different service that it offered guests. Ascustomers started demanding higher(prenominal) quality cable service, the demand for basiccable started to decline. Satellite television originally provided morechannels to their customers which increased the demand for these more extensivesystems over the traditional basic cable system. Due to this high demand, thecosts for these products continues to grow. The latest movement in the cabletelevision industry is media streaming. This has caused massive growth forNetflix and similar services.Netflixhas positioned itself to be a frontrunner in the media streaming industry. As astreaming provider, Netflix gives its customers the ability to watch ad free contentfrom a large array of devices, at any time. This makes for a high demand as itgives customers more freedom than traditional cable packages. One other factoris the low cost of Netflix compared to the cost of cable subscriptions. The second-rate monthly cable bill is over $120, which is more than a $35 averageincrease from the cost in 2011, succession the average monthly fee for streamingservices is $8 per month. With thedemand for streaming services on the rise, it is understandable that Netflixsubscriptions would increase. IfNetflix continues to grow its internet television concept of providing TV showsand movies that customers demand, it will hold their spot as an industry leaderin the marketplace. With very strongreception from critics and customers alike, they will need to continue with theproduction of original content, such as original TV series and movies, whichha ve not only increased the demand for services, but has also increased theirprofits.Thereare few supply issues facing Netflix. In the streaming market, there are fewcompeting firms that may threaten the market share of Netflix. These firmsoffer alike services at a comparable price to Netflix This means that theamount of substitutes that can supply similar quality services as Netflix arefew. The largest supply issue Netflixfaces is technological change. However, keepingup traffic with various electronic devices, remaining relevant should be fairlyeasy. Price Elasticity and DemandPrice elasticity ofdemand the relationship between change in the demanded quantity of a product anda change in the products price. If the price of services increase, it could affectthe quantity of services demanded. There are a handful of quality substitutesfor Netflix. In the cable industry itself, AT&T, Comcast, and Time-Warner, areall providers of services that compete for the same customers as Netflix. In the streaming market, Netflix competitors are other content providers such asAmazon Prime and Hulu. The major factor in this competition is pricing andcontent availability. In 2014, Netflix increased consumer cost by $1-2 each month. While the price increase was a venturey choice, it was necessary because of the rising prices of acquiring more content. Before this change, subscription plans for streaming and DVD rentals come up to $8 a month for streaming and $10 a month for streaming and DVD rentals. In 2011, this was raised again. All subscribers would have to pay $16 a month for both streaming and DVD rentals which is nearly a 60% rise in cost for the consumer. There was a large squinch from consumers as they felt that the picayune streaming depository library was not enough to justify those costs. This price increase was a way for Netflix to upgrade and expand the library content they were offering for streaming. With this price increase, Netflix lost nearly 750,000 subscrib ers and its stock tumbled in the following months. However, with Netflix expanding the production of their original series, this decrease of subscriber growth was only temporary. Netflix doesnt appear to see price elasticity as risk for their organization, but more of a prospect. As seen on the graphabove, the stock and earnings of Netflix have proven to be growing at a steadyrate over the last few years. Netflix has reported that the amount of watchingfrom the average subscriber has grown in every quarter after the fourth quartersince 2011. Netflix continues to grow. In Argentina, United Kingdom, Brazil,Irelands, Chile, and Mexico is expected to make up more than a triplet of TV inthe average household by 2020. If Netflix raised pricesagain, it could cause customers to other platforms because of the lower cost.On the other hand, if Netflix would lower its price, then the demand for itsservice could potentially increase. Netflix is a service that could beconsidered a luxury and not a necessity. This would provide Netflix a higherelasticity of demand. This may not be the case in the future as many people arebeginning to use Netflix as their primary entertainment source. This means thatin the customers budget, Netflix has already started to become a monthlyexpense, replacing standard cable services. As time goes on, it is expectedthat consumers will change their spending habits to all move away fromcable and move directly to streaming services which would increase theelasticity of Netflix. Although the expense is monthly, it will only be a smallpercentage of the consumer budget making it an inelastic demand. Because themarket for media streaming is broadly defined, the number of availablesubstitutes is low therefore it is inelastic.Netflix has shown to beprofitably consistent, which allows shareholders to expand its candor asearnings are built up over time making Netflix more valuable. Money is beingspent by Netflix to expand into more international markets a fter seeing hugesuccess in its international growth into countries like the United Kingdom,Mexico, and Canada. This has allowed Netflix to study the trends of consumersacross the world to create content that is palatable in many nations. Thisexpansion should assist in lowering overall costs and increase the companysprofitability. Costs of ProductionCurrently,Netflix offers streaming services on movies and TV shows. They have threesubscription levels Basic, Standard, and Premium. Netflix is currently workingsto grow their offerings and continue with original programming.The main cost that Netflix incurs comes from the licensing and production of their streamable titles. The cost of maintaining their content library has been quickly rising over the last five years as they expand the choices that they are offering to consumers, which can be seen in the graph below. While the largest cost for Netflix is their content, they also have various SG&A expenses, otherwise known as selling, ge neral and administrative expenses. These expenses have also grown as the demand for their rises. From 2012 to 2015, these SG&A expenses had more than doubled.These costs have been growing as the consumers demand for more varied content grows and as Netflix expands into the international marketplace. This demand by consumers that Netflix has met, has resulted in a continuous growth for the Netflix Company. In 2016, the COGS had a nearly 32% increase in from the year previous. These growing costs for the most part have not prevented company growth. As you can see below, by continuing to increase the content available, Netflix has also helped itself to create strong gross sales growth. In 2016, Netflix experienced sales growth of 30.26%. Market ShareWhileNetflix is the largest paid for streaming service, it has a market share ofonly around 12.7% (Netflix Incs Competitiveness, 2017) . The creator for thisis that Netflixs marketplace competitors are well established cablecorporations and video providers that have many other products and servicesthat would result in a higher revenue than Netflix. These companies includeAmazon, Comcast, Cablevison, and Time Warner Cable. Although Netflix has strongsales growth, their profitability is lower than market competitors, with a netmargin of 2.36%. Competitors in this market have an average net margin of justunder 11% (NFLXs Competition by Segment and its Market Share, 2017).Dueto the large capital and resources required to enter this market, Netflix willneed to be aware of the streaming services provided by established cablecompanies and original content providers. These pose the greatest risk due totheir large access to streamable content and access to existing customers. The market structure that Netflix operates under is an oligopoly. In an oligopoly, there are a few companies that control the entire market. In the streaming market, Netflix, Hulu, and Amazon Are the main competitors. In this type of market, price wars have a chance of occurring. This means if one of these companies decides to drop its prices, the others must also drop prices in order to stay competitive. Taking a look at the current state of the market, this is evident because all of the major providers have comparably priced packages for their product. With Netflix being the market leader, they have large influence over this market. If Netflix decides to reduce prices, then Hulu and Amazon must also reduce consumer cost or risk losing customers to Netflix. RecommendationsWith streamingquickly becoming the industry standard in television viewing, Netflix isexpected to continue to increase its hold on the industry and market. Theircurrent COGS while increasing, has provided Netflix a strong advantage in termsof sales growth due to their original content and variety of offerings. Thiscurrent strategy seems to be working well for them. While some of the mostexpensive options to produce are original programming, these expensiveprodu ctions are key to attracting customers due to the lack of availabilityfrom other previously subscribed to services.This will also be helpful in further securing themselves in themarketplace. As mentioned earlier it will also be burning(prenominal) for Netflix to keepdeveloping their technology and continue to partner with different companies toupdate and keep their technology modern and relevant.By persistentlyproviding the services and integration that consumers desire, Netflix cancontinue to expand its service to more consumers than it currently does. If Netflix can continue to understand thewants of the consumers, then they will remain leaders in their market.CitationsAbout Netflix.(n.d.). Retrieved July 15, 2017, from https//media.netflix.com/en/about-netflixCaporaso,T. (n.d.). Netflixs pricing strategies are bound by the same laws of supplyand demand that affect every other commercial entitys rates. Retrieved July30, 2017, from http//www.sdcexec.com/article/11442396/netflixs-p ricing-strategies-are-bound-by-the-same-laws-of-supply-and-demand-that-affect-every-other-commercial-entitys-ratesHistory of Cable. (n.d.). Retrieved August 20, 2017, from https//www.calcable.org/ moderate/history-of-cable/NFLXsCompetition by Segment and its Market Share. (2017). Retrieved August 06, 2017,from https//csimarket.com/stocks/competitionSEG2.php?code=NFLXNetflixEnterprise Value. (n.d.). Retrieved July 15, 2017, fromhttps//ycharts.com/companies/NFLX/enterprise_valueNetflixIncs Competitiveness. (2017). Retrieved August 06, 2017, fromhttps//csimarket.com/stocks/compet_glance.php?code=NFLXNetflixInc Income Statement. (2017). Retrieved August 06, 2017, fromhttp//quotes.wsj.com/NFLX/financials/annual/income-statementNetflix, Inc.(NFLX) Stock Chart. (n.d.). Retrieved July 30, 2017, from http//www.nasdaq.com/symbol/nflx/stock-chartNetflixrevenue in 2016. (n.d.). Retrieved July 30, 2017, fromhttps//www.statista.com/statistics/272545/annual-revenue-of-netflix/NetflixsView Internet TV is replacing linear TV. (n.d.). Retrieved July 15, 2017, fromhttps//ir.netflix.com/long-term-view.cfmTVRatings. (n.d.). Retrieved July 15, 2017, from http//www.nielsen.com/us/en/solutions/measurement/television.html