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Netflix SWOT & PESTLE Analysis

Last Updated : 27 Jun, 2017

OVERVIEW

Name of the Company: Netflix

Business Sector: Media and Entertainment

Operating Geography: North America, United States, Global

About the Company: Netflix is an American entertainment company that has now become a leading internet television provider. It has a vast member base of over 93.8 million members spread out across over 190 countries with more than 50 million being in the United States alone.The company was founded by Reed Hastings and Marc Randolph in 1997.. The headquarters are located in Los Gatos, California. While it originally confined itself to streaming media and providing DVDs for sale and rent, it has now expanded into television and film production. In 2016 alone, it has released an estimated 126 original films which is more that achieved by any cable provider globally.

Revenue: USD 2.48 billion (2016)

SWOT & PESTLE Analysis

The SWOT analysis for Netflix is presented below:
Strengths
Weaknesses
1. World’s Leading Video Streaming Network with presence over 190 Countries
2. Ever Increasing Paid Membership for Domestic as well as International Streaming
3. Strong Focus on Advertising and Innovation in Technology and Development
4. Big Brand Name with Strong Brand Associations
5. Producing Local Content, Distributing Globally over its own Global Content Delivery network known as “Open Connect”
6. Strong Relationship with Directors and Producers for producing blockbuster content like House Of Cards and Narcos
7. Strong Focus on Content and Availability on Each Screen Size
1. Netflix’s suppliers of content are becoming its competitors
2. Dependency of user subscribing to Netflix services on release of famous TV shows
3. Netflix free cash flow has decreased
4. Cost paid of License of new content is more than streaming content costs
5. Investment in original content lead to shrinking of content library
Opportunities
Threats
1. World is shifting most of the content on internet which provides with huge opportunity for Netflix
2. Niche segments like documentaries, cinematic movies
3. Revenue from the Advertisement
4. International broadband users are increasing
5. Tapping the untapped territories with a benefit of English being second language
1. Increasing expenses for domestic as well as International business
2. Decrease in the domestic DVD revenue
3. Increasing Technological, Development and Administrative expenses
4. Dependency of revenue from International business on fluctuating exchange rates
5. Price rise in subscription packs could lead to switching of customers to the competitors
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Strengths

1. World’s Leading Video Streaming Network with presence over 190 Countries: Netflix, the World’s leading internet television network was founded on 29 August 1997. The company offers 7,500 HD videos which is twice as many as rival Amazon Prime. Currently Netflix service is available in over 190 countries with targeted content depending on the taste and preference of the country.

2. Ever Increasing Paid Membership for Domestic as well as International Streaming: For the fourth quarter in 2016 there was a growth of 12% in the average number of paid domestic memberships and 57% growth in the average number of paid international memberships which led to a growth of 8% in average monthly revenue per paying domestic membership and 4% in average monthly revenue per paying international membership. In 2017, unique audiences visiting the Netflix increased by 48% compared to last year.

3. Strong Focus on Advertising and Innovation in Technology and Development: Netflix investment increases on Advertising which included promotional activities such as digital and television advertising which showed company’s focus on improving service offerings. To provide best user experience Netflix heavily invested on Network Servers, Internet connection with different ISB around the World and codex (Incredible picture quality for least MB used) and to get best user experience on both mobile and desktop/laptop platforms.

4. Big Brand Name with Strong Brand Associations: Netflix is a strong brand and by a 2015 study which shows that Netflix's brand identity was much stronger than its competitors, and that the name has become inseparable from streaming. Netflix users/subscribers are considered as trendsetters and opinion leaders within their social circle. These users are more likely to spend more on products of higher quality and consistent with the image they wish to convey.

5. Producing Local Content, Distributing Globally over its own Global Content Delivery network known as “Open Connect”: Netflix is producing some blockbuster TV series like Narcos and House of Cards with foreign language options. Netflix plans to spend more on original content and reduce outlays on licensed material such as movies. To efficient stream high volume content they also built their own Global Content Delivery Network known as “Open Connect”.

6. Strong Relationship with Directors and Producers for producing blockbuster content like House Of Cards and Narcos: As Netflix plan to spend more on original content, there relationship with producers and directors become critical for their success in this segment. Currently they are running some successful original content like House of Cards and Narcos and distributing them all over the World which shows their sound relationship.

7. Strong Focus on Content and Availability on Each Screen Size: In an interview with Mobile World, Netflix CEO Reed Hasting indicated that the focus of the company remains on collecting stories and sharing it around the World and not on the screen size. They want to be as flexible as possible in screen size and needed to be available on all possible screen size.

Weaknesses

1. Netflix’s suppliers of content are becoming its competitors: Some of the suppliers of content have become its competitors, and that makes competition more difficult. There is a possibility that these supplier-competitors will keep choice content exclusive to their platforms or charge Netflix an extreme premium.

2. Dependency of user subscribing to Netflix services on release of famous TV shows: In 2016, Netflix have end up short of subscribers as forecasted and comparing to its competitors in the US, it added a third fewer new members than the same period a year ago, while overseas members fell 22%.

3. Netflix free cash flow has decreased: Netflix continues to see massive cash outflows. Through the first six months of 2016 it reported negative $515 million in free cash flow.

4. Cost paid of License of new content is more than streaming content costs: Netflix’s reported content costs continue to understate its actual cash payments for new content. Through the first six months of 2016, Netflix recorded $3.4 billion in streaming content costs but paid $4.1 billion to license new content.

5. Investment in original content lead to shrinking of content library: With Netflix focusing on providing more original content, Netflix has less money to spare on building up its library. In 2016, one recent count has Netflix’s content library shrinking by 40% over the past four years. As library is a differentiating factor its contraction could lead to adverse effect.

Opportunities

1. World is shifting most of the content on internet which provides with huge opportunity for Netflix: In an interview with Mobile World Congress 2017, Netflix CEO Reed Hastings said 10 to 20 years from now all the contents will be available on Internet and this provide with ample opportunities for Netflix in the coming years.

2. Niche segments like documentaries, cinematic movies: Some of the streaming video service providers are targeting niche segments like foreign movies, documentaries and cinema classics. Netflix has to come up with films that can appeal to this segment if it is going to compete. Else, some subscribers may shift to these niche players.

3. Revenue from the Advertisement: Nielsen acts as an auditor for Netflix and gives studios better information that they can use to sell ads, which it has never done before.

4. International broadband users are increasing: In an interview with Bloomberg, Joe Dennison, an associate portfolio manager with Zevenbergen Capital Investments said: “In the big picture, there are seven or eight times as many broadband users internationally as domestically, and the number is growing fast. For Netflix to be the first truly global streaming player in the market makes a lot of sense.”

5. Tapping the untapped territories with a benefit of English being second language: Netflix can target countries like India and other neighbouring countries like Pakistan, Bangladesh and South-East Asian countries. English being the second language in majority of the countries and a greater prevalence of Hollywood movies within the local market provide added benefits to reduce the need to produce customized content.

To get the complete detailed SWOT report on Netflix please mail us at: support@swotandpestle.com. or contact us here.

Netflix SWOT analysis has been conducted by Shubham Sharma and reviewed by senior analysts from Barakaat Consulting.

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The PESTLE / PESTEL analysis for Netflix is presented below:
Political
Economical
1. US has restrictions on countries like Crimea, North Korea and Syria thus leaving a potential market untapped
2. Netflix is still not present in largest populated country i.e. China due to permission issues from Chinese Government
3. Need to work on content restrictions so that same films and TV shows are available in every country
1. Fluctuating exchange rate can negatively impact revenues
2. Increase in personal related cost due to increase in workforce also third party expenses, General and administrative expenses and facility related cost increased recently
3. Domestic streaming cost, Domestic marketing expenses and other cost also increased which needed to be controlled
4. Cash outflow continue to increase thus less liquidity
Social
Technological
1. Netflix has big brand reputation and prides itself on ethical business standards and morality
2. Netflix is known for giving away student scholarships and charities to aid financially challenged students
3. Reed Hastings (the CEO) has set an example by giving a large sum of his personal funds to the Giving Pledge Charity
1. Improvement in compression techniques will improve overall quality of streaming with relatively less data
2. Focus not only on video streaming quality but also improving experience in convenient payment and delivery processes
3. The New Thumbs Up/Down Rating System will help in improving personalization, making the front screen on Netflix even more relevant to the users
Legal
Environmental
1. Need to fight battles against Geoblocks and copyright infringements
2. Video piracy is the reason of huge loss to the streaming and cinema industry thus punishments to the offenders should be severe
3. Streaming on multiple devices should be checked as users are sharing their credentials to reduce cable bills
1. Using wind power to offsets its energy for cloud storage is a new initiative to reduce its carbon footprints
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Political

1. US has restrictions on countries like Crimea, North Korea and Syria thus leaving a potential market untapped: Netflix has made it clear that it won’t be available in Crimea, North Korea and Syria due to U.S. government restrictions on American companies

2. Netflix is still not present in largest populated country i.e. China due to permission issues from Chinese Government: China which is the most populated country in the World is still untapped by Netflix as it needs to get permission from their government, which has strict rules when it comes to online censorship

3. Need to work on content restrictions so that same films and TV shows are available in every country: Reed Hastings, CEO of Netflix on launch of 130 new countries revealed that they are working on removing content restrictions so that the same films and TV shows are available in every country at the same time

Economic

1. Fluctuating exchange rate can negatively impact revenues: Since Netflix is now present in about 190 countries its revenue is dependent on changes in exchange rates and major threat is the weakening of foreign currencies relative to the U.S. dollar which may negatively affect its revenue and contribution profit (loss) of its International streaming segment in terms of U.S. dollars

2. Increase in personal related cost due to increase in workforce also third party expenses, General and administrative expenses and facility related cost increased recently: The increase in technology and development expenses was primarily due an increase in personnel-related costs resulting from an increase in compensation for existing employees and new employees getting on board. In addition, third-party expenses, including costs associated with cloud computing, increased $27.3 million. General and administrative expenses increased primarily due to increase in personnel related costs, including stock-based compensation expense, resulting from a 39% increase in average headcount. In addition, facilities-related costs increased $16.2 million due to the growth in average headcount

3. Domestic streaming cost, Domestic marketing expenses and other cost also increased which needed to be controlled: There was an increase in domestic streaming cost of revenues. In addition, there is an increase in other costs, such as payment processing fees and customer service call centres, due to its growing member base. Domestic marketing expenses also increased due to an increase in advertising and public relations spending as well as increased payments to its partners

4. Cash outflow continue to increase thus less liquidity: Massive cash outflows i.e. negative $515 million in free cash flow led to liquidity crunch

Social

1. Netflix has big brand reputation and prides itself on ethical business standards and morality: Netflix prides itself on ethical business standards and morality. The work environment is relaxed also there is a lax dress code and employees receive numerous vacations days as well.

2. Netflix is known for giving away student scholarships and charities to aid financially challenged students: Netflix has ventured into giving away student scholarships and charities to financially challenged students. As of now, they are currently awarding many PhD students.

3. Reed Hastings (the CEO) has set an example by giving a large sum of his personal funds to the Giving Pledge Charity: Reed Hastings (the CEO) has contributed large sums even from his personal funds to the Giving Pledge Charity.

Technological

1. Improvement in compression techniques will improve overall quality of streaming with relatively less data: In its new research Netflix’s Dynamic Optimiser compression system will improve overall video quality while reducing the amount of data used to access it. It uses artificial intelligence to work out the complexity of the image being presented.

2. Focus not only on video streaming quality but also improving experience in convenient payment and delivery processes: Netflix is not only working on providing compelling viewing experiences, but at the same time working on convenient payment and delivery processes by investing in Technology & Development leading to increase in expenses from $457M to $1095M.

3. The New Thumbs Up/Down Rating System will help in improving personalization, making the front screen on Netflix even more relevant to the users: The New Thumbs Up/Down Rating System increases the amount of usage user gets. With this additional personal input, it will be able to improve personalization, making the front screen on Netflix even more relevant.

To get the complete detailed PESTLE report on Netflix please mail us at: support@swotandpestle.com. or contact us here.

Netflix PESTLE analysis has been conducted by Shubham Sharma and reviewed by senior analysts from Barakaat Consulting.

Download Analysis Report




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