Netflix – 5 Forces Analysis, Essay Example

Threat of substitute products (Strong)

For Netflix, the threat of substitute products is strong because there are several competitors in the market who offer online video and streaming products such as Amazon, HBO, VOD andPay-per-View. Many customers simultaneously subscribe to one or more of these services. In addition, switching is convenient and requires minimum costs and prices offered by different players in the market are competitive to each other.

The substitution threat doesn’t always come from competitors but also changing technology trends. Arguably the greatest substitute threat is replacement of DVD products with online digital content and it is predicted that DVD content will be entirely replaced by online digital content in the next ten to twenty years. Netflix has already started addressing this threat because it understands that the market player who providesthe best digital content at the most competitive prices is more likely to dominate the market. Therefore, Netflix should take immediate steps to address the greatest substitute threats by developing its business model around online digital content.

Cost of Switching: (Weak)

Cost of switching is low for customers. It is cheap for customers to switch to other product both in terms of cost and prices. There are many market players that offer products quite similar in nature such as cable service providers, movie rental businesses, and subscription-based video websites. Videos offered by these competitors can either be downloaded or streamed directly.

Quality of substitutes: (Strong)

Many cable and internet companies provide content that is not only competitively priced but also of similar or even better quality. In addition, the quality of content such as higher resolution videos will only continue to improve due to advancements in internet technologies.

Threat of new entrants: (Strong)

Netflix is the leading player in DVD rentals and online streaming. However, the on-going progress in internet technologies as well as digital products poses a serious threat to current market players. There have been entries in the movie rental industry and even though the entry into in-home video entertainment market is unregulated, high costs of acquiring distribution rights from studios do serve as barrier. But as more and more movie and television content becomes digital, cost of entering the market will decline because a business model like Netflix has lower capital costs than the business model which is based on “brick and mortar” structure. But a new firm may not pose serious competitive threat unless it can produce quality content or offer superior digital quality. Similarly, a firm that maydevelop a new technology for in-home entertainment viewing may also be able to gain market share by differentiating itself through innovation.