Netflix: Porter's 5 Forces Analysis

Netflix Inc. (NASDAQ: NFLX) is the king of streaming video. A 2014 Nielsen report showed that 90% of homes in the United States with streaming video service choose Netflix. However, almost one-third of these households subscribe to more than one video streaming service, such as Amazon Prime or rival Hulu. With subscription prices being available for less than $10 per month on either service, buyers do not actually have to choose. Most people can afford to have all the video streaming service subscriptions they want, so what keeps Netflix at the top? This is the bargaining power of buyers, one of the five forces of competition identified in 1979 by Michael E. Porter, a Harvard Business School professor. The Five Forces analysis framework he developed is still used in 2015. It also includes the threat of substitutes, the rivalry between competitors, the bargaining power of suppliers and the threat of new entrants. Consider the bargaining power of Netflix’s buyers or subscribers.

Switching Costs

One of the biggest issues Netflix faces is the cost of switching services is so easy. There is no annual contract, and the cost of signing up for service is minimal. Also, most video streaming service providers offer a free trial. It is easy for customers to subscribe to one streaming video service one month, and then switch the next. They can go from Netflix to Hulu, and then HBO Now or Showtime Anywhere. Netflix has to make sure its selection is compelling enough for subscribers to justify keeping the service year-round.

Video Preferences

Netflix also has to address video preferences. The company already charges a premium for its HD service. A standard definition subscription to Netflix is $7.99 per month, but if you want HD, it costs $9.99 per month as of December 2015. According to Consumer Reports, the company offers over 7,500 HD videos, which is about twice as many as rival Amazon Prime offers and roughly 75% of its video catalog. However, Netflix has to continue to build that number if it is going to compete against some of the newer entrants.

Viewer Preferences

In addition to format preferences, Netflix also has to keep viewer preferences in mind. This includes securing the ability to stream the content viewers want in addition to some of the added viewing features, such as closed captioning and foreign languages. Netflix offers closed captioning and some foreign language options, but the usefulness of these features is limited by the streaming device the viewer uses.

Movie and TV Show Selection

Netflix subscribers also have bargaining power concerning movie and television show title selection. As video streaming has become more popular, the number of new entrants has also increased. However, instead of taking Netflix head on, new entrants are taking on genres. For example, streaming video service Fandor has more cinematic films. It specializes in foreign movies, independent films and documentaries, as well as cinema classics such as movies from the Criterion Collection. Netflix has to offer films that appeal to these viewers if it is going to compete in these niche spaces. Otherwise, some subscribers may jump ship.

Refining the Brand

Netflix customers can bargain on the brand. New entrants may have a novelty factor or be considered “cool” in certain circles. To compete, Netflix has to refine its brand to appeal to a broad range of consumers. Similarly, Netflix has to ensure its brand works. Part of this is making sure the technology behind its streaming service works well, but the company also has to make sure people can relate to the brand in other ways, like how they search for titles to watch.