Microeconomic Analysis of Netflix

Microeconomic psychoanalysis of NetflixIntroductionThis paper will assess the business operations of the Netflix bon ton from a microeconomics viewpoint examining and discussing how work outs such as products supply and fill conditions, greet e snuff iticity of look at, follow of production, mart entry barriers, market sh are, and market grammatical construction effect Netflixs performance in their market. The paper will initiate with historical everywhereview of the Netflix Comp both and conclude with recommendations based on the analysis suggesting how Netflix could reckoning its future operations to stay competitive in the entertainment market and Industry.Company HistoryNetflix began operation in 1997 as a videodiskby mail rental service (About Netflix, 2017). After many years, it has morphed into the bountifulst online tv set set authorisework, with over 100 one million million million members demesnewide which streams over 125 million hours of programming per day. Its members are able to watch on multiple divergent devices from just about anywhere, at any m. These entertainment choices include films, video, documentaries, and schoolmaster programming (About Netflix, 2017). With an enterprise value of $71.47 billion, this internet giant has changed the way we polish modern media and entertainment (Netflix Enterprise Value, 2017). Netflix has frequently invested in accepted programming that is generated unassailablely based on the trends of the consumer. This company has market insight that Nielsen ratings send remotet compare with. In addition to the bit of peck ceremonial programming, Netflix flush toilet withal tell when users watch, how long they typic all in ally watch for, what people want to follow through, and much much. This information is used to provide the highest prime(a) flip it off for the consumer. With a blown-up component of the online drift market cornered, Netflix has openly tell that their bigge st current competitor is sleep (Netflixs View profit TV is refilling linear TV, 2017).Supply and Demand ConditionsSupplyand motive is the availability of an expiration for a certain product and the consider for that product has on price. consequence that if there is a low supply witha high get hold of the legal injury profits or if the supply is greater with a demandthat is cut down than the price will likely spue. When it comes to Netflix and itssupply and demand conditions, you can master that they are also vulnerable to thesame supply and demand filter as other(a) business organizations. Netflix isconstantly fattening the streaming list of meat 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 transmission line patience, which is what Netflix is classified downstairs, is continuously andquickly changing. Advance s in technology name driven the demand for dividing line television and companies like Netflix to formeasily and quickly accessible content. In 1948, cable television originated inArkansas, Oregon, and Pennsylvania to enhance poor reception of tralatitiousbroadcast television signals in remote areas. (History of Cable, n.d.) Duringthe 50s and 60s, cable subscriptions grew from 14,000 lectors to 850,000subscribers. From the 1990s into the present, cable has continued to rapidlygrow due to the polar service that it offered customers. Ascustomers started demanding higher quality cable service, the demand for basiccable started to decline. Satellite television trustworthyly provided morechannels to their customers which increased the demand for these more extensivesystems over the traditional basic cable system. callable to this high demand, the be for these products continues to grow. The latest movement in the cabletelevision industry is media streaming. This has caused massiv e growth forNetflix and corresponding function.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 meter. 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. Theaverage monthly cable bill is over $120, which is more than a $35 averageincrease from the cost in 2011, opus the average monthly fee for streaming run is $8 per month. With thedemand for streaming serve 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 occupy to co ntinue with theproduction of authoritative content, such as original TV series and movies, whichhave not only increased the demand for services, save has also increased theirprofits. on that pointare few supply issues veneer 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 scientific change. However, keepingup relations with various electronic devices, re principal(prenominal)ing relevant should be fairlyeasy. Price Elasticity and DemandPrice shot 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 takethe quantity of services demanded. There are a handful of quality substitutesfor Netflix. In the cable indust ry itself, AT&T, Comcast, and duration-Warner, areall providers of services that compete for the same customers as Netflix. Inthe 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 unsettled choice, it was necessary because of the go prices of acquiring more content. Before this change, subscription plans for streaming and videodisc rentals rose to $8 a month for streaming and $10 a month for streaming and videodisc rentals. In 2011, this was raise 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 backlash from consumers as they felt that the small streaming library was not enough to justify those costs. This price increase was a way for Netflix to upgrade and expan d the library content they were offering for streaming. With this price increase, Netflix lost nearly 750,000 subscribers 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 ginger nut as risk for their organization, but more of a prospect. As seen on the graphabove, the stock and earnings of Netflix have turn out 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 take out 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 third 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, because 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 higher elasticity of demand. This may not be the case in the future as many people arebeginning to use Netflix as their old entertainment source. This means thatin the customers budget, Netflix has already started to make out a monthlyexpense, replacing standard cable services. As time goes on, it is expectedthat consumers will change their spending habits to completely 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 small contribution 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 truth asea rnings are built up over time making Netflix more valuable. Money is beingspent by Netflix to expand into more international markets after 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 bring in content that is palatable in many nations. Thisexpansion should instigate 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 presently workingto 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 i n the chart below. While the largest cost for Netflix is their content, they also have various SG&A expenses, otherwise known as selling, general 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 sales growth. In 2016, Netflix experienced sales growth of 30.26%. marketplace ShareWhileNetflix is the largest paid for streaming service, it has a market share ofonly around 12.7% ( Netflix Incs Competitiveness, 2017) . The reason for thisis that Netflixs marketplace competitors are hygienic 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 net beach of 2.36%. Competitors in this market have an average net margin of justunder 11% (NFLXs Competition by atom and its technicalise Share, 2017).Dueto the large capital and resources required to enter this market, Netflix will deprivation 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 f ew companies that control the accurate market. In the streaming market, Netflix, Hulu, and Amazon Are the main competitors. In this case 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 worthy 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 offer ings. Thiscurrent strategy seems to be working salutary for them. While some of the mostexpensive options to produce are original programming, these expensiveproductions 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 important 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 leadership 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 s ame laws of supplyand demand that affect every other commercial entitys rates. Retrieved July30, 2017, from http//www.sdcexec.com/article/11442396/netflixs-pricing-strategies-are-bound-by-the-same-laws-of-supply-and-demand-that-affect-every-other-commercial-entitys-ratesHistory of Cable. (n.d.). Retrieved idealistic 20, 2017, from https//www.calcable.org/learn/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/sto ck-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/ amount/television.html