NETFLIX
Irina V. Onyusheva, Ann S. Baker
Introduction
Netflix has started as an online movie rentals business back in 1997, providing services in the
United States only.
Today, it has become one of the world's leading streaming entertainment services with 183 mln
paid memberships in over 190 countries, providing TV series, documentaries and feature films
across a wide variety of genres and languages (Netflix, 2020). Its online streaming services
allow members to watch as much content as they want, accessing content anywhere and anytime
on any internet-connected device. In addition to partnering with content providers to license
streaming rights for a variety of TV shows and movies, the company also produces its in-house,
original content (Netflix, 2020).
Figure 1 - Netflix’s Global Presence
(Source: https://www.netflix.com)
Netflix is a publicly listed company that went public on May 23, 2002, with an initial public
offering (IPO) price of $15 per share. It was the best-performing stock in the S&P 500 from
2010 through 2019 (Investopedia, 2020).
Netflix has been ranked 47th on Forbes list of ―Top 100 Digital Companies of 2019‖, it has
been also ranked 38th on ―World’s Most Valuable Brands 2019‖ and 431st on ―GLOBAL
2000: The World's Largest Public Companies‖ (Forbes). Although its services reach members
across the globe, Netflix is headquartered in Los Gatos, CA, and it also has 19 office locations
across other 14 countries (Craft, 2020).
Netflix is part of the video streaming industry. The global video streaming market size was
valued at $42.6B back in 2019. The industry is surely expected to continue to grow, in line with
consistent innovations in technology to improve streaming quality and especially considering
the two years of the ongoing pandemic.
As of 2019, over 100 streaming services were competing with each other in this industry
(Emster, 2019).
International Expansion
Netflix is a truly global enterprise. As of 2020, it had operations in over 190 countries, and
more than half of its 183 mln subscribers live outside of the US (Netflix, 2020). In the second
quarter of 2019, subscriptions from the members outside the US contributed to over half of the
company’s revenue (Reyes, 2019).
This is illustrated below in Fig. 2. Noteworthy, oly ten years ago, back in 2010, Netflix was
available only in the United States. By 2017, the company had expanded to over 190 countries
(Netflix, n.d.).
Figure 2 - Netflix Domestic vs. International Subscribers (in mln)
(Source: https://www.businessinsider.com/netflix-focuses-on-public-policy-strategy-abroad-2019-8)
Motivations for International Expansion
According to Netflix’s chief executive, Reed Hastings, the company's global expansion was
strategically motivated to offset the financial impact of slowing down growth in the United
States. By growing the company's global markets, the aim was to help Netflix reach its target
profits, which would allow the company to reinvest in its service as well as develop and license
more content (Steel, 2015).
Before it adopted an international expansion strategy, Netflix reported subscriber growth of
around 2.4 mln members per year.
The subscription growth increased to an average of 7 mln subscribers per year following its
initial phase of expansion into the first group of markets, including Canada, Europe, and Latin
America (Smith, 2014).
The motivations behind its international expansion was to gain access to new customer bases
and remain the leader in the industry, especially as the U.S. subscriptions started to drop under
the increasing domestic competition. By capturing more market segments and a larger market
share, the international expansion also brought in more revenue for the company.
Global Expansion Strategy
Netflix took a phased approach to its global expansion strategy. It first started with the countries
that were relatively close geographically/physically and also the markets with similarities to the
U.S. For example, its initial international expansion was back in 2010 to Canada, which is
geographically very close to and shares many similarities with the United States (Brennan,
2018). By doing so, the company was able to learn more about internationalization capabilities
in locations outside the U.S.
At the second phase of its expansion, Netflix rolled out its services to another 43 countries,
mostly in Latin America and Western Europe (Izquierdo-Castillo, 2015). This helped the
company to continue learning about localization and partnerships with local companies and
stakeholders. It also allowed Netflix to collect data and study different consumer behaviors
within different markets.
During the third and final phase, Netflix ramped up entry into the remaining markets, to bring
it to 190 countries. It was able to use everything it had learned during the previous phases,
where it had gained expertise in the content people prefer, the marketing they respond to, and
how the company needed to organize itself overall (Brennan, 2018).
Netflix adopts a transnational approach: the company launches the same basic concept of the
product globally, but also localizes content and marketing efforts to respond to the local
consumers.
The basic concept of its product is the low-cost monthly subscription for unlimited content
viewing, and the user interface of the product — this stays the same for all the markets. On the
localization part, Netflix has its international content translated into local languages and local
content created specifically for certain markets (Brooks, 2019). For example, in South Korea,
Netflix entered into a strategic partnership with Studio Dragon, a leading production studio, to
produce original content, which would attract South Korean consumers specifically (Netflix,
2019). It also launched the "Top 10 list" feature, which allows viewers to see shows that are
trending in their location.
Modes of Entry into Foreign Markets. Netflix has a hybrid entry mode which differs from
market to market. While the company exports much of its US-centric content, it also licenses
its content to local market players, giving them the right to show Netflix's content. The company
partners with key local companies, such as cell phone and cable operators, to make its content
available as part of their existing video-on-demand offering (Brennan, 2018).
An example of licensing is Netflix's entry approach to China. Netflix does not currently operate
as a company or service provider in China. It has struggled with entering this market since
China has strict data and censorship regulations.
However, it introduced its original content at Chinese market via the licensing deal with one of
China’s largest video streaming services, iQiyi.com.
Another example: as the company prepared to enter Japan, it partnered with Japanese talent
agency Yoshimoto Kogyo to produce exclusive local shows. The partnership involved funding
by Netflix in exchange for exclusive streaming rights to the shows for a certain period of time
(Schilling, 2015).
In Thailand, Netflix partnered with Thai mobile network AIS (Advanced Info Service),
allowing AIS to offer its customers exclusive entertainment (The Nation, 2017), while
simultaneously promoting Netflix’s international expansion.
The SWOT Analysis
Strengths Netflix’s strengths include its ability to benefit from the first-mover advantage. As a
pioneer in the streaming video-on-demand field, Netflix has succeeded in experiencing
exceptional growth over the past ten years, to reach over 150 million global viewers (Saurel,
2019). It also has more subscribers worldwide than all other streaming services combined
(Penamatsa, 2018). The company’s huge volume of operations allows it to benefit from the
economies of scale; as its subscriber base increases, the company benefits from lower cost per
unit. It creates original content that attracts millions of viewers (Kolbin, 2019) and cannot be
imitated by the competitors.
Weaknesses Its weaknesses, however, include heavy dependence on the providers that
determine customers’ connectivity speed, which is a critical factor influencing customer
satisfaction with Netflix’s services (Rivera, 2019). Therefore, if an Internet connection is not
present in a certain location, Netflix is not able to provide its services there. While its original
content attracts viewers, the production of movies and series has rather high costs, which have
driven up Netflix’s operational costs (Bowman, 2017). Furthermore, the business model is easy
to copy, which has been clearly illustrated by the fast rise of direct competitors.
Opportunities Opportunities include further international expansion. For example, Netflix has
not penetrated China just yet, which would be a huge opportunity given the market size. Netflix
is still advertisement free, but it could explore a new revenue stream from advertisements. There
is a great potential for revenues there, given that the TV advertising industry is worth over $70
bln these days (McBride, 2019). In addition, there are opportunities to increase and strengthen
partnerships with both content providers and producers globally.
Threats. Threats in the context of international expansion are different regulations in different
countries that could prevent Netflix from entering the market or limit its business activities. For
example, the EU has introduced a new rule for services like Netflix, saying that at least 30% of
the offering would need to be made up of European production (Reyes, 2019). Furthermore,
there is increased competition from both global and local players, with over 100 streaming
services being available, as of 2019 (Emster, 2019). Furthermore, because Netflix operates
internationally, revenues from international markets are affected by the fluctuations in exchange
rates (Penamatsa, 2018).
PESTEL Analysis
Political factors. Since Netflix is a US-based company, international political and economic
relationships with other countries may have an impact on where the company expands. It also
needs to consider politics when it is looking to launch content into certain markets. For example,
when it promoted the show ―Narcos," many people in Colombia were offended because they
saw it as Netflix promoting the drug lord Pablo Escobar who had damaged their country and
culture (Brodzinsky, 2015).
Economic factors. Economic factors include, inter alia, fluctuating exchange rates. As Netflix
is operating in many countries and currencies across the world, adverse foreign exchange rate
fluctuations could impact its earnings (Pelts, 2016). Economic growth at different markets is
also a factor directly impacting the purchasing power; an increase in disposable income would
eventually lead to increased spending on entertainment (Penamatsa, 2018).
Social factors. Key factors include consumer demographics and consumer preferences, as both
have direct impacts on product offerings. Netflix needs to study and understand its audience to
tailor its marketing efforts and content and thus attract viewers from different backgrounds and
cultures.
Technological factors. Technological factors are perhaps the most important ones as Netflix
and the streaming industry as a whole are heavily dependent on them. These factors include
internet coverage, speed, and capacity, all having a direct impact on viewers’ accessibility and
streaming quality. Therefore, Netflix needs to consider the technological advancements of the
different markets it enters. However, with the growth and expansion of the internet in general,
including accessibility on phones, tablets, and smart televisions (Brennan, 2016), this is a
promoting factor for Netflix.
Environmental factors. Netflix has the opportunity to play a larger part in contributing to
environmental preservation by sourcing more renewable energy to offset its carbon footprint.
Although it does not produce physical products, it does indirectly produce carbon dioxide by
using energy to run the servers. Many tech companies are switching to this trend. For example,
larger tech companies, such as Apple, Facebook, and Google, continue to lead efforts to build
an Internet that is renewably powered (Pomerantz, 2012).
Legal factors. Primary factors include adhering to government regulations on censorship across
different countries (Pelts, 2016). This has a direct impact on the content Netflix can stream in
different markets, and also the extent to which it needs to edit its content. Furthermore, because
Netflix produces and licenses a lot of content, it must also consider copyright and intellectual
property rights legislation. As Netflix is operating in many countries, it must face a diverse set
of national regulatory restrictions, such as those that limit what content can be made available
in local markets (Brennan, 2016); therefore, it must invest in the resources that ensure
compliance with regulatory bodies in each market.
Risk Management. Business risk is the degree of exposure a company or an organization has to
the factor(s) that will lower its profits or lead it to fail (Kenton, 2019). This includes anything
that poses a threat to a company’s ability to achieve its targets and/or financial goals. When
companies engage in international business activity, they take on additional risks along with
the opportunities (Beers, 2019). The section below is devoted to the risks from the
internationalization of Netflix as well as potential measures for their control and mitigation.
Risk Identification
Technical Risks. Netflix relies solely on technological infrastructure and an internet connection
to deliver its product to consumers around the world. Therefore, any severe and long-lasting
power outage would resort to Netflix completely unable to provide its services. This is a risk in
all markets that it operates in, especially in the locations that house its servers.
In addition to reaching customers, power outages or other technical faults would inhibit
Netflix’s ability to produce content, as it would be unable to power its studios and equipment,
which would result in potential schedule delays.
Financial Risks. International businesses are susceptible to foreign exchange risks, which falls
under financial risks. Being a US-based company reporting its earnings in US dollars, a strong
US dollar relative to foreign currencies would negatively impact the company’s sales and
operating income (Pelts, 2016).
Political Risks. Geopolitical risks, also known as political risks, transpire when a country's
government unexpectedly changes its policies, which can negatively affect foreign companies
(Beers, 2019). For Netflix, this has a direct impact on the content it can showcase in each
country. For example, government censorship requirements can cause Netflix to remove or edit
popular content, leading to consumer disappointment, brand tarnishment, or dissatisfaction with
the service (Netflix Inc, 2020).
Contractual Risks. Netflix relies on an extensive network of partners to serve its customers
across the world. Its partnerships include content providers, as well as cable and
telecommunications operators, to make services available through many devices (Netflix Inc,
2020). If such partners were to break the contract or choose not to renew it, this could have
adverse effects on Netflix's business. It could mean that Netflix would lose the rights to stream
certain content or lose connectivity with its customer base.
Customer Risks. The market for entertainment and content is increasingly competitive. With
new and existing competitors, consumers have more options to access entertainment videos.
Such competitors may be able to provide compelling content and aggressive pricing, such as
AppleTV+ and Disney+ (Babu, 2019). Therefore, if Netflix does not continue its product
development or strive to maintain competitiveness in the market, it risks losing its customer
base. There is a risk here, given the fact that under the current Netflix's subscription model,
there is no cost on the customer side for switching to a new product.
Cost-related Risks. The company typically enters into multi-year commitments with studios
and content providers globally, some of which are non-cancelable commitments (Netflix Inc,
2020). Therefore, if global memberships reduce or do not meet the targeted growth, the
company’s liquidity and revenue would be adversely impacted. Furthermore, as there is more
competition in the industry and potentially more demand to secure content from producers and
content suppliers, this may drive up the costs of acquiring and producing content.
Human Resources Risks. As of the end of 2019, Netflix had approximately 8,600 full-time
employees globally (Netflix Inc, 2020). In addition to its full-time employees, the company also
contracts consultants and third-party service providers. If employees leave to competitors, then
there is a risk of Netflix’s confidential information being shared with competitors. This is
especially impactful if Netflix loses members of its executive team and other key employees.
Risk Assessment. Tab. 1 illustrates the types of risks with the associated impacts on
international business development as well as the possibility of their occurrence.
Table 1 - Risk Classification, Impact and Likelihood (made by the authors)
Risk Type Brief Explanation Risk Impact Risk Likelihood
Technical Severe technical faults,
power outages and largescale/long-lasting
internet
connectivity issues.
High – because Netflix’s
services rely solely on
technology. If there is a
technological failure, it is
unable to provide its
service as such.
Low (10%) – because a
large technological
system and internet
usually have backup
systems and servers to
prevent them from longterm
outage.
Financial Adverse exchange rate
fluctuations, especially
high USD value, to other
currencies.
Medium – exchange rate
fluctuations are gradual
and typically do not
change drastically.
High( 100%) – exchange
rates typically change
daily.
Political Unexpected changes in
local regulations
governing business
licensing, allowed content
and government
censorship.
High – changes in
regulations could cause
Netflix to discontinue
certain programs, shows,
or even the whole service.
Medium-Low (30%) –
regulations concerning
media content are usually
set in stone already, by
the time Netflix enters the
country. Further changes
would be relatively rare.
Contractual Global/local content
providers or other key
partners such as cable and
telecommunication
operators decide to
discontinue or break their
contract with Netflix.
High — losing or
discontinuing contracts
with key partners could
result in the inability to
provide services or
content on certain
markets.
Medium-Low (40%) –
such contracts are
typically over an extended
period, and breaking
contracts would result in
hefty penalties.
Customers Customers shift to other
competitor platforms.
Low - if Netflix loses
customers, it will lose
revenue. However, since
the fees are relatively low,
when customers leave
Netflix, the impact is low.
Medium-High (60%) –
given the number of
cheaper alternatives and
the economic downturn,
people may switch to
cheaper alternatives.
There is also no switching
cost involved.
Costs Suppliers such as content
producers or costs such as
content licenses increase
due to higher bargaining
power on the suppliers’
side.
Medium – since suppliers
have higher bargaining
power, they could
increase prices, which
would impact costs.
Medium-Low (30%) such
contracts are
typically over an extended
period, and breaking
contracts would result in
hefty penalties for
suppliers.
Human Resources Turnover of key
employees and movement
of employees (and
knowledge) to competitor
companies.
Low – NDAs typically
bound employees upon
signing employment
contracts.
Low (15%) – the average
employee turnover rate is
15% annually (Zojceska,
2018)
Expansion into China
China is an attractive market for many businesses and industries; the video streaming industry
is no exception in this regard. With its vast population and economic size, the revenues in the
video streaming industry in China are expected to reach $1,926 mln, the second-highest in the
world, straight after the United States (Statista, 2020).
Although Netflix is available in over 190 countries, China is still not one of them (Lashinsky,
2017).
Although an attractive market, China is known to be more difficult to enter for other countries,
especially media and entertainment companies, given the government’s tendency to control the
content its consumers see and to promote local players (Lashinsky, 2017).
This is a political risk for Netflix. However, Netflix has slowly introduced its originally
produced content in China via a licensing deal with one of China’s largest video streaming
services, iQiyi.com.
This was Netflix’s way of slowly entering China. By doing this, Netflix was able to get a better
understanding of Chinese market and indirectly introduce itself to local consumers. Although
the partnership with iQiyi.com has ended, there are many other local partners that Netflix could
partner with to introduce its content to an even wider audience. For example, Youku and
Tencent Video are other large streaming services comparable to iQiyi (Canaves, 2019).
Netflix could also look to partner with companies in parallel industries such as with
telecommunication and mobile phone companies like it has done with some other markets. This
would give it more exposure and would allow the company to create more ties with local
partners, and eventually, government bodies and regulators to pave its way into the market.
For example, in South Korea, Netflix entered into a partnership with a local electronics
manufacturer, Samsung. The win-win partnership would allow Netflix to improve its
integrations with Samsung devices, whereas Samsung would be able to leverage Netflix's large
user base to its advantage (Wood, 2020). Netflix could also take the same approach, for
example, by partnering with Huawei, a local technology giant in China.
In order to eventually penetrate the market, Netflix needs to partner, place a greater focus on
commissioning locally produced content, and address censorship issues (Kharpal, 2019).
Creating partnerships would help the company to mitigate risks such as political ones, which is
the primary risk group when any company is entering Chinese market. It will also need to create
content that caters to the needs and interests of Chinese consumers. For example, in South
Korea, Netflix has partnered with a rising production studio to produce original content that is
attractive for South Korean consumers specifically (Netflix, 2019).
The entrance into China may take time and investment in local content; however, given the
potential volume of revenue, it remains a market that has a high potential. This is especially so
as competitors at other markets continue to rise as it happened in the U.S., causing Netflix's
customer base to slowdown in growth. Therefore, by keeping an eye on Chinese market, Netflix
could be the first international video streaming company to enter and benefit exponentially from
the first-mover advantage.
Conclusion
Netflix’s rapid international business expansion and the ability to penetrate local markets is an
indicator of its success in internationalization. The company's approach to partnering with local
companies and localizing its content to each market has provided it with a competitive edge.
As a result, the company has captured 183 mln users in over 190 countries (Netflix, n.d).
The video streaming industry remains a competitive business space, especially across
international markets, with the rise of global, regional, and local players. Netflix should,
therefore, continue to strengthen the already existing partnerships and consider establishing
new ones with both global and local companies. This will help the company to mitigate and
avoid risks faced at international markets, as well as allow it to maintain competitiveness.
There are also untouched markets with a great potential that Netflix should continue to explore,
namely China. Although Netflix has experienced exponential growth over the years with its
internationalization strategies, it may start to experience a flatter curve in the future as the
market in question matures. Thus, to continue its growth, the company under analysis should
look to expand into new markets in the future, especially those that pose great economic returns.
Otázky
1. Popište základní fakta: v jakých zemích Netflix působí, jakou strategii vstupu zvolil,
jaké hlavní výzvy identifikoval.
2. Jaké motivy měl Netflix pro mezinárodní expanzi?
3. Jaké překážky a rizika se objevily (např. právní, kulturní, logistické)?
4. Jak firma přizpůsobila nabídku (= produkt/službu) místnímu trhu, pokud vůbec?
5. Pokud byste byli strategickým manažerem Netflixu vstupujícím na nový trh (např. do
ČR/Slovenska nebo jiného regionu), jaký byste navrhli postup?
6. Jakou strukturu řízení byste doporučili (centrální vs. lokální)?
7. Jak byste měřili úspěch vstupu a co by byly klíčové ukazatele (KPI)?
8. Jaká teoretická východiska z mezinárodního obchodu se v studii objevují (např.
standardizace vs. adaptace, vstupní strategie, globální vs. lokální řízení)?
9. Jaké faktory by mohly změnit úspěch strategie Netflixu v dalších 5 letech (např. digitální
regulace, konkurence, kulturní změny)?