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Netflix is the world’s leading online streaming entertainment service with over 220 million paid memberships in over 190 countries. Founded in 1997, Netflix has grown from a DVD-by-mail service to a $100 billion streaming media powerhouse producing award-winning original movies, shows, and documentaries.
In this post, we will analyze Netflix using Porter’s Five Forces model to understand the competitiveness of the industry and external factors impacting the attractiveness of the video streaming business.
Porter’s Five Forces Analysis
Porter’s Five Forces is a framework developed by Harvard professor Michael Porter to analyze an industry’s profitability and attractiveness. The five forces are:
- Threat of New Entrants
- Bargaining Power of Suppliers
- Bargaining Power of Buyers
- Threat of Substitute Products or Services
- Competitive Rivalry Among Existing Competitors
Let’s examine how each force applies to Netflix.
Threat of New Entrants
The threat of new entrants is moderate for Netflix. The video streaming industry has the following entry barriers:
- High capital costs – Building a streaming platform requires significant investments in content acquisition, production, licensing deals, cloud infrastructure, and marketing.
- Brand equity – Netflix has spent billions building its brand over 25 years as a first mover in streaming. Matching this as a newcomer is difficult.
- Technical capabilities – New entrants need to build technology, apps, recommendation algorithms and streaming infrastructure from scratch.
However, the industry also has some low barriers:
- Low distribution constraints – Streaming apps can be quickly distributed online without the need for physical infrastructure.
- Intellectual property not vital – Patents and licensing are not as critical in streaming compared to other tech industries.
The substantial upfront investments required and Netflix’s strong position balances out the low distribution and IP barriers. Overall, there is a moderate threat of new entrants.
Threat of New Entrants – FAQ
- What are the key entry barriers in the streaming industry?
- How does Netflix’s position as a first mover give it an edge over potential new entrants?
- Why can streaming apps be distributed more easily compared to traditional media distribution?
Bargaining Power of Suppliers
The bargaining power of suppliers is moderate. Netflix deals with:
- Content creators – Studios, production houses, artists who produce original shows and movies. As Netflix expands original content, it relies less on external studios.
- Internet and cloud providers – Companies providing cloud infrastructure, CDN and internet delivery like AWS, Verizon. But many alternatives exist.
- Consumer electronics firms – Hardware partners that make streaming devices like smart TVs, media players and gaming consoles.
Suppliers have limited leverage over Netflix due to low switching costs, diverse options and because Netflix brings huge demand. But popular content creators that produce original hits do have some bargaining power over licensing and royalties. Overall, suppliers have moderate power.
Bargaining Power of Suppliers – FAQ
- Who are Netflix’s main suppliers?
- Why do popular content creators have more influence over Netflix compared to other suppliers?
- Can Netflix easily switch between alternative vendors for internet delivery and cloud infrastructure if needed?
Bargaining Power of Buyers
Buyers have low bargaining power in the video streaming industry. Netflix sells subscriptions directly to individual consumers who have little ability to negotiate prices. While enterprise customers like airlines and hotels that buy Netflix for guests do get bulk discounts, buyers overall have minimal bargaining leverage. Reasons include:
- Individual buyers – Consumers have no power to customize their Netflix subscription or pricing.
- Few big buyers – No single enterprise customer accounts for a major chunk of Netflix’s viewership or revenue.
- Low switching costs – Consumers can cancel Netflix anytime with one click so the risk of losing subscribers is high.
- No backward integration threat – Viewers cannot create their own competing platform due to high barriers.
Due to the direct-to-consumer model and the broad customer base, buyers have very limited bargaining power over Netflix.
Bargaining Power of Buyers – FAQ
- Can individual Netflix customers negotiate prices or contract terms?
- Why is backward integration not likely in the streaming industry?
- What gives enterprise customers some leverage compared to individual subscribers?
Threat of Substitutes
The threat of substitutes is high for Netflix. Some alternatives viewers can easily switch to include:
- Traditional television – Cable, satellite and IPTV provide a similar experience and are the closest substitutes.
- Other streaming platforms – Prime Video, Hulu, Disney+, HBO Max compete directly with similar offerings.
- DVD rental – Redbox, brick-and-mortar stores still serve older demographics.
- Piracy – Illegal downloading remains widespread despite legal crackdowns.
- Gaming, social media, other entertainment – Indirect substitutes take up leisure time and attention.
While Netflix offers a unique content library and viewing experience, viewers have many alternative options for entertainment. This results in a high threat of substitution.
Threat of Substitutes – FAQ
- What types of entertainment platforms compete directly with Netflix as a streaming service?
- Why is piracy through illegal downloading still a competitor to Netflix?
- What are some indirect substitute threats that take away Netflix’s viewing time?
Competitive rivalry is high in the video streaming space. The intensity stems from:
- Several major players – Amazon, Disney, WarnerMedia, Apple are all investing heavily in original content and subscriber acquisition.
- Slow growth – The streaming market is nearing saturation in developed countries, increasing competition for new users.
- Low differentiation – Streaming services are similar with broadly appealing content libraries and comparable subscription fees.
- High exit barriers – Netflix and rivals have invested billions in content that cannot be recouped easily if they exit.
The streaming industry is a red ocean with bloody competition between deep-pocketed players for subscribers. This makes the competitive rivalry very intense.
Competitive Rivalry – FAQ
- Who are Netflix’s main competitors in the video streaming industry?
- Why does slowing growth increase competition between streaming platforms?
- What factors make differentiation between streaming services difficult?
Through this Porter’s Five Forces analysis, we see that Netflix faces high threats from rivals and substitutes. Moderate threats come from new entrants and suppliers bargaining power. Buyers have low influence over the industry.
To maintain its leadership position, Netflix will need to continue differentiating through proprietary content, improved personalization, and global expansion. Its first-mover advantage and subscription model provide competitive buffers against intense competition and substitution threats.
What factors make it difficult for new companies to compete with an established streaming platform like Netflix?
Developing an extensive content library, production capabilities, and streaming technology from scratch requires billions in capital. Netflix also has an entrenched position after years of building its brand, proprietary algorithms and global reach. These pose barriers to newcomers.
Why do content creators have more bargaining power over Netflix than infrastructure or device suppliers?
Popular shows and original programming are harder to replicate for Netflix than replaceable infrastructure like cloud and internet delivery. Hit movies, shows and artists have leverage during licensing and royalty negotiations. However, most suppliers have limited options compared to Netflix’s scale.
How does the direct-to-consumer subscription model limit the bargaining power of Netflix customers?
Individual subscribers cannot negotiate pricing or bundles. Netflix sells to consumers directly rather than through intermediaries. Viewers also face high switching costs due to Netflix’s personalized recommendations and content. Together these reduce any leverage buyers may have.
Who are the streaming platforms competing most aggressively for market share with Netflix?
Amazon Prime Video, Disney+, HBO Max and other well-funded tech giants are competing head-to-head with virtually identical subscription streaming models. Slow growth in mature markets intensifies competition between these players for new subscribers, raising rivalry.