Lecture 5 Netflix & Digital Goods

Transcription

1 Lecture 5 Netflix & Digital Goods Clicker Q: 1. Which of the following is a source of bargaining power for buyers? 1) Greater choice of products 2) High switching costs 3) Loyalty programs 4) Network effects 5) Differentiated products 2. A value chain is a set of 1) similarly profitable firms competing against each other in any given industry 2) large firms that are vertically integrated 3) interdependent activities that bring a product to the market 4) profitable products or services, the market for which is dominated by a large number of small firms 3. In an industry where nearly every major player outsources manufacturing to low-cost countries, Zara is highly, keeping huge swaths of its production process in-house 1) Privatized 2) Vertically integrated 3) Publicly traded 4) Subsidized 5) Autonomous 4. An information system consists of hardware, software, data, procedures, and the people who interact with and are impacted by the system. 1) True 2) False 5. Zara s dominance in the fashion industry is due to its horizontally integrated structure accompanied by a globally dispersed production model 1) True 2) False it s vertically integrated and not globally dispersed 6. are critical for capturing sales data, and are usually linked to inventory systems to subtract out 1) Point-of-sale systems 2) Legacy systems 3) CRM systems 4) Server farms 5) Data aggregators 7. is a decision situation where one party has more or better information than its counterparty. 1) Strategic superiority

2 2) Positional awareness 3) Choice Three 4) Data redundancy 5) Operational precedence 6) Information asymmetry 8. In retail in general and fashion in particular, having is considered the kiss of death 1) Excess inventory 2) Too many storefronts 3) A large labor-force 4) Limited production runs 5) Dispersed production facilities 9. are small chip-based tags that wirelessly emit a unique identifying code for the item that they are attached to 1) PDAs 2) Smart adaptors 3) Trackbacks 4) Bar codes 5) RFID tags Today s class - Netflix - Long tail - Begin economics of digital goods Netflix - What are Netflix s sources of competitive advantage? - Leverage time and key resources to technology o What are those key resources?: - data o Based on the resources, bargaining power of supplier for netflix is low due to movie/no channels, but it starts to increase because they are trying to distribute their channel through other contents *** read books!! o Supplier: providing contents o Bargaining power of buyers are increasing because of o 4 forces: (reducing) threat of substitutes, threat of new entrants, bargaining power of buyers, bargaining power of suppliers How Netflix Works - Users make their video choices in their request queue at Netflix.com - Consumers use the Web site to: o Rate videos

3 o Specify movie preferences o Get video recommendations o Check out DVD details o Share their viewing habits and review Tech and Timing: Creating Killer Assets - Building a great brand online starts with offering exceptional value - Advertising builds awareness, but brands are built through customer experience - Subscribers expectations from Netflix: o Huge selection o Ability to find what they want o Timely arrival o Ease of use and convenience o Fair price Technology drives all of these capabilities. Technology is at the center of the firm s brand building efforts Cinematch: Technology Creates a Data Asset that Delivers Profits - Netflix uses a proprietary recommendation system called Cinematch o How does it work? Users rate movies they've seen & NetFlix recommends additional movies. Each time a DVD is returned, Cinematch asks the customer to rate it o Collaborative filtering: A classification software that monitors trends among customers and uses this data to personalize an individual customer s experience It can be mimicked by competitors - The data provided by Cinematch is a switching cost - To see how strong switching costs are is to examine Netflix s churn rate o Churn rate: The rate at which customers leave a product or service o In mid-2008, churn rates for Netflix s most active regions were below 3 percent - Netflix s marketing costs benefit from satisfied customers, as referrals are a better choice than advertisements - Netflix launched a crowdsourcing effort known as The Netflix Prize

4 Collaborative Filtering - Technology that monitors trends among customers and uses this to personalize an individual consumer's experience. - Examples? - Amazon other user of collaborative filtering Video: Malcolm Gladwell - While watching the video, think about : o What is Gladwell s point? o How has technology changed the phenomenon that Gladwell talks about? o How does this relate to the Long Tail theory? - Lessons from Moskovitz People don t always know what they want! People have different tastes! Not in a world of universals we re in a world of variabilities. In embracing the diversity of human beings, you will find a sure way to true happiness. Enter: Technology The era of one-size-fits-all is ending, and in its place is something new, a market of multitudes. The Long Tail Internet firms can have just a few highly automated warehouses Digital goods do not suffer from the limitation of physical goods Long tail: A phenomenon whereby firms can make money by offering a nearlimitless selection Drivers of the Long Tail Supply-Side Cost: Virtual shelf space, made-to-order production, electronic delivery Benefit: Aggregation of consumers Demand-side Active: Powerful search tools, sampling tools Passive: Recommendation sytems, advisers, dynamic Web-based storefronts Combination: Customer reviews, online communities

5 Selection: The Long Tail in Action Netflix offers its customers a selection of over 100,000 DVD titles Traditional retailers cannot offer this because of shelf space constraints (Blockbuster: 3000 titles) Traditional retailers can determine their breakeven point by considering: Number of customers that can reach a location Store size Store inventory Payback from inventory Cost to own and operate the store (1/3 of Blockbuster revenues!) The Long Tail The long tail: commerce model where physical and cost constraints no longer hold buying pattern of a population results in a power law distribution E.g., 80% of profits from 20% of customers Retailer display of good are constrained by storage, transport, and space constraints by lowering search costs, IT substantially increases the share of hard-to-find products, thereby creating a longer tail in the distribution of sales How many CDs did your favorite physical store carry compared to Amazon? What happens when you can access the long tail? Fattens the tail: as consumers discover obscure/rare products that better suit their needs, the shape of the distribution changes You can profit by selling small volumes of hard-to-find items to many customers

6 Netflix long tail: evidence of consumption shifting to the tail: Implications of the long tail: from hits to niches The long tail works because: Cost of production and distribution drop It gives the firm a selection advantage that traditional stores cannot match Geographic constraints go away and untapped markets open up Technology enables it centralized warehousing allows for more offerings search engines, recommendation software, sampling tools, community feedback Implication for other businesses: e.g., broad Web content providers (e.g., Yahoo! CNET, ESPN, NYTimes), may be threatened by the rise of specialist Web sites that cover niche content better than larger sites Netflix The Long Tail in Action Netflix has used the long tail to create close ties with film studios Studios earn a percentage of the subscription revenue Netflix gets DVDs at a very low cost

7 Studios do not spend on additional marketing What s in the long tail? Bollywood Films 1.7 million (S. Asian) Indians in the US Not a critical mass (best films open at most on 2 screens) NetFlix rents 100,000 Bollywood films a month. NetFlix is leveraging this to its advantage: PBS produced & aired an Oscar-nominated documentary "Daughters of Danang. Wasn't going to release on video - didn't think it justified production costs NetFlix assumed costs itself for an exclusive. Consistently one of Top 15 documentaries on NetFlix - cost to PBS = $0