{"id":263,"date":"2018-06-14T19:04:25","date_gmt":"2018-06-14T19:04:25","guid":{"rendered":"https:\/\/pressbooks.ccconline.org\/bus3060\/chapter\/ch04-2\/"},"modified":"2026-02-12T02:35:13","modified_gmt":"2026-02-12T02:35:13","slug":"ch04-2","status":"publish","type":"chapter","link":"https:\/\/pressbooks.ccconline.org\/bus3060\/chapter\/ch04-2\/","title":{"raw":"4.2 Tech and Timing: Creating Killer Assets","rendered":"4.2 Tech and Timing: Creating Killer Assets"},"content":{"raw":"<div id=\"slug-4-2-tech-and-timing-creating-killer-assets\" class=\"chapter standard\">\r\n<div class=\"ugc chapter-ugc\">\r\n<div id=\"fwk-38086-ch03_s02_n01\" class=\"bcc-box bcc-highlight\">\r\n<div class=\"textbox textbox--learning-objectives\"><header>\r\n<h3><strong>Learning Objectives<\/strong><\/h3>\r\n<\/header>\r\n<div>\r\n<p id=\"fwk-38086-ch03_s02_p01\">After studying this section you should be able to do the following:<\/p>\r\n\r\n<ul>\r\n \t<li>Understand the difference between branding and advertising, why branding matters online, and what drives Netflix\u2019s strong brand.\r\nLearn how the long tail strategy supports its massive movie selection.\r\nKnow how collaborative filtering enables personalized recommendations and competitive advantage.\r\nIdentify the technologies Netflix uses to cut costs and improve customer satisfaction.\r\nRecognize how scale economies and early market entry have fueled success and discouraged competitors.<\/li>\r\n<\/ul>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<p id=\"fwk-38086-ch03_s02_p02\">To understand Netflix\u2019s strengths, it\u2019s important to view the firm as its customers see it. And for the most part, what they see they like\u2014a lot! Netflix customers are rabidly loyal and rave about the service. The firm repeatedly ranks at the top of customer satisfaction surveys. Ratings agency ForeSee has named Netflix the number one e-commerce site in terms of customer satisfaction nine times in a row (placing it ahead of Apple and Amazon, among others). Netflix has also been cited as the best at satisfying customers by Nielsen and Fast Company, and was also named the Retail Innovator of the Year by the National Retail Federation.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_p03\" class=\"indent para editable block\">Building a great brand, especially one online, starts with offering exceptional value to the customer. Don\u2019t confuse branding with advertising. During the dot-com era, firms thought brands could be built through Super Bowl ads and expensive television promotion. Advertising can build awareness, but <em class=\"emphasis\">brands are built through customer experience<\/em>. This is a particularly important lesson for online firms. Have a bad experience at a burger joint and you might avoid that location but try another of the firm\u2019s outlets a few blocks away. Have a bad experience online and you\u2019re turned off by the firm\u2019s one and only virtual storefront. If you click over to an online rival, the offending firm may have lost you forever. But if a firm can get you to stay through quality experience, switching costs and data-driven value might keep you there for a long, long time, even when new entrants try to court you away.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_p04\" class=\"indent para editable block\">If brand is built through customer experience, consider what this means for the Netflix subscriber. They expect the firm to offer a huge selection, to be able to find what they want, for it to arrive on time, for all of this to occur with no-brainer ease of use and convenience, and at a fair price. Technology drives all of these capabilities, so tech is at the very center of the firm\u2019s brand building efforts. Let\u2019s look at how the firm does it.<\/p>\r\n\r\n<div id=\"fwk-38086-ch03_s02_s01\" class=\"section\">\r\n<h2 class=\"title editable block\">Selection: The Long Tail in Action<\/h2>\r\n<p id=\"fwk-38086-ch03_s02_s01_p01\" class=\"nonindent para editable block\">Customers have flocked to Netflix in part because of the firm\u2019s staggering selection. A traditional video store (and Blockbuster had some 7,800 of them) stocks roughly three thousand DVD titles on its shelves. For comparison, Netflix is able to offer its customers a selection of over one hundred thousand DVD titles, and rising! At traditional brick-and-mortar retailers, shelf space is the biggest constraint limiting a firm\u2019s ability to offer customers what they want when they want it. Just which films, documentaries, concerts, cartoons, TV shows, and other fare make it inside the four walls of a Blockbuster store is dictated by what the average consumer is most likely to be interested in. To put it simply, Blockbuster stocks blockbusters.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s01_p02\" class=\"indent para editable block\">Finding the right product mix and store size can be tricky. Offer too many titles in a bigger storefront and there may not be enough paying customers to justify stocking less popular titles (remember, it\u2019s not just the cost of the DVD\u2014firms also pay for the real estate of a larger store, the workers, the energy to power the facility, etc.). You get the picture\u2014there\u2019s a breakeven point that is arrived at by considering the geographic constraint of the number of customers that can reach a location, factored in with store size, store inventory, the payback from that inventory, and the cost to own and operate the store. Anyone who has visited a video store only to find a title out of stock has run up against the limits of the physical store model.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s01_p03\" class=\"indent para editable block\">But many online businesses are able to run around these limits of geography and shelf space. Internet firms that ship products can get away with having just a few highly automated warehouses, each stocking just about all the products in a particular category. And for firms that distribute products digitally (think songs on iTunes), the efficiencies are even greater because there\u2019s no warehouse or physical product at all (more on that later).<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s01_p04\" class=\"indent para editable block\">Offer a nearly limitless selection and something interesting happens: there\u2019s actually <em class=\"emphasis\">more money<\/em> to be made selling the obscure stuff than the hits. Music service Rhapsody makes more from songs outside of the top ten thousand than it does from songs ranked above ten thousand. At Amazon.com, roughly 60 percent of books sold are titles that aren\u2019t available in even the biggest Borders or Barnes &amp; Noble Superstores (Anderson, 2004). And at Netflix, roughly 75 percent of DVD titles shipped are from back-catalog titles, not new releases (at Blockbuster outlets the equation is nearly flipped, with some 70 percent of business coming from new releases) (McCarthy, 2009). Consider that Netflix sends out forty-five thousand different titles each day. That\u2019s <em class=\"emphasis\">fifteen times<\/em> the selection available at your average video store! Each quarter, roughly 95 percent of titles are viewed\u2014that means that every few weeks Netflix is able to find a customer for nearly <em class=\"emphasis\">every<\/em> DVD title that has <em class=\"emphasis\">ever<\/em> been commercially released.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s01_p05\" class=\"indent para editable block\">This phenomenon whereby firms can make money by selling a near-limitless selection of less-popular products is known as the <span class=\"margin_term\"><a class=\"glossterm\">long tail<\/a><\/span>. The term was coined by Chris Anderson, an editor at <em class=\"emphasis\">Wired<\/em> magazine, who also wrote a best-selling business book by the same name. The \u201ctail\u201d (see Figure 4.2 \u201cThe Long Tail\u201d) refers to the demand for less popular items that aren\u2019t offered by traditional brick-and-mortar shops. While most stores make money from the area under the curve from the vertical axis to the dotted line, long tail firms can also sell the less popular stuff. Each item under the right part of the curve may experience less demand than the most popular products, but someone somewhere likely wants it. And as demonstrated from the examples above, the total demand for the obscure stuff is often much larger than what can be profitably sold through traditional stores alone. While some debate the size of the tail (e.g., whether obscure titles collectively are more profitable for most firms), two facts are critical to keep above this debate: (1) selection attracts customers, and (2) the Internet allows large-selection inventory efficiencies that offline firms can\u2019t match.<\/p>\r\n\r\n<div id=\"fwk-38086-ch03_s02_s01_f01\" style=\"text-align: center; font-size: .8em; max-width: 497px;\">\r\n<p class=\"nonindent title\"><span class=\"title-prefix\">Figure 4.2<\/span> The Long Tail<\/p>\r\n<p class=\"indent\"><a>\r\n<img style=\"max-width: 497px;\" src=\"https:\/\/pressbooks.ccconline.org\/wp-content\/uploads\/sites\/324\/2018\/06\/860d841136e1534c0fb459fe9ed54ad1.jpg\" alt=\"The Long Tail\" \/>\r\n<\/a><\/p>\r\n\r\n<\/div>\r\n<p id=\"fwk-38086-ch03_s02_s01_p06\" class=\"indent para editable block\">The long tail works because the cost of production and distribution drop to a point where it becomes economically viable to offer a huge selection. For Netflix, the cost to stock and ship an obscure foreign film is the same as sending out the latest Will Smith blockbuster. The long tail gives the firm a selection advantage (or one based on scale) that traditional stores simply cannot match.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s01_p07\" class=\"indent para editable block\">For more evidence that there is demand for the obscure stuff, consider Bollywood cinema\u2014a term referring to films produced in India. When ranked by the number of movies produced each year, Bollywood is actually bigger than Hollywood, but in terms of U.S. demand, even the top-grossing Hindi film might open in only one or two American theaters, and few video stores carry many Bollywood DVDs. Again, we see the limits that geography and shelf space impose on traditional stores. As Anderson puts it, when it comes to traditional methods of distribution, \u201can audience too thinly spread is the same as no audience at all (Anderson, 2004).\u201d While there are roughly 1.7 million South Asians living in the United States, Bollywood fans are geographically disbursed, making it difficult to offer content at a physical storefront. Fans of foreign films would often find the biggest selection at an ethnic grocery store, but even then, that wouldn\u2019t be much. Enter Netflix. The firm has found the U.S. fans of South Asian cinema, sending out roughly one hundred thousand Bollywood DVDs a month. As geographic constraints go away, untapped markets open up!<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s01_p08\" class=\"indent para editable block\">The power of Netflix can revive even well-regarded work by some of Hollywood\u2019s biggest names. In between <em class=\"emphasis\">The Godfather<\/em> and <em class=\"emphasis\">The Godfather Part II<\/em>, director Francis Ford Coppola made <em class=\"emphasis\">The Conversation<\/em>, a film starring Gene Hackman that, in 1975, was nominated for a Best Picture Academy Award. Coppola has called <em class=\"emphasis\">The Conversation<\/em> the finest film he has ever made (Leonhardt, 2006), but it was headed for obscurity as the ever-growing pipeline of new releases pushed the film off of video store shelves. Netflix was happy to pick up <em class=\"emphasis\">The Conversation<\/em> and put it in the long tail. Since then, the number of customers viewing the film has tripled, and on Netflix, this once underappreciated gem became the thirteenth most watched film from its time period.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s01_p09\" class=\"indent para editable block\">For evidence on Netflix\u2019s power to make lucrative markets from nonblockbusters, visit the firm\u2019s \u201cTop 100 page.\u201d<sup>1<\/sup> You\u2019ll see a list loaded with films that were notable for their <em class=\"emphasis\">lack<\/em> of box office success. As of this writing the number one rank had been held <em class=\"emphasis\">for over five years in a row<\/em>, not by a first-run mega-hit, but by the independent film <em class=\"emphasis\">Crash<\/em> (an Oscar winner, but box office weakling) (Elder, 2009).<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s01_p10\" class=\"indent para editable block\">Netflix has used the long tail to its advantage, crafting a business model that creates close ties with film studios. In most cases, studios earn a percentage of the subscription revenue for every disk sent out to a Netflix customer. In exchange, Netflix gets DVDs at a very low cost. The movie business is characterized by large fixed costs up front. Studio marketing budgets are concentrated on films when they first appear in theaters, and when they\u2019re first offered on DVD. After that, studios are done promoting a film, focusing instead on their most current titles. But Netflix is able to find an audience for a film without the studios spending a dime on additional marketing. Since so many of the titles viewed on Netflix are in the long tail, revenue sharing is all gravy for the studios\u2014additional income they would otherwise be unlikely to get. It\u2019s a win-win for both ends of the supply chain. These supplier partnerships grant Netflix a sort of soft bargaining power that\u2019s distinctly opposite the strong-arm price bullying that giants like Wal-Mart are often accused of.<\/p>\r\n\r\n<div id=\"fwk-38086-ch03_s02_s01_n01\" class=\"bcc-box bcc-highlight\">\r\n<div class=\"textbox shaded\">\r\n<h4 class=\"title\">The VCR, the Real \u201cKiller App\u201d?<\/h4>\r\n<p id=\"fwk-38086-ch03_s02_s01_p11\" class=\"nonindent para\">Netflix\u2019s coziness with movie studios is particularly noteworthy, given that the film industry has often viewed new technologies with a suspicion bordering on paranoia. In one of the most notorious incidents, Jack Valenti, the former head of the Motion Picture Association of American (MPAA) once lobbied the U.S. Congress to limit the sale of home video recorders, claiming, \u201cthe VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone\u201d (Bates, 2007).<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s01_p12\" class=\"indent para\">Not only was the statement over the top, Jack couldn\u2019t have been more wrong. Revenue from the sale of VCR tapes would eventually surpass the take from theater box offices, and today, home video brings in about two times box office earnings.<\/p>\r\n\r\n<\/div>\r\n&nbsp;\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"fwk-38086-ch03_s02_s02\" class=\"section\">\r\n<h2 class=\"title editable block\">Cinematch: Technology Creates a Data Asset That Delivers Profits<\/h2>\r\n<p id=\"fwk-38086-ch03_s02_s02_p01\" class=\"nonindent para editable block\">Netflix proves there\u2019s both demand and money to be made from the vast back catalog of film and TV show content. But for the model to work best, the firm needed to address the biggest inefficiency in the movie industry\u2014\u201caudience finding,\u201d that is, matching content with customers. To do this, Netflix leverages some of the industry\u2019s most sophisticated technology, a proprietary recommendation system that the firm calls Cinematch.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s02_p02\" class=\"indent para editable block\">Each time a customer visits Netflix after sending back a DVD, the service essentially asks \u201cSo, how did you like the movie?\u201d With a single click, each film can be rated on a scale of one to five stars. If you\u2019re new to Netflix, the service can prompt you with a list of movies (or you can search out and rate titles on your own). Love <em class=\"emphasis\">Rushmore<\/em> but hate <em class=\"emphasis\">The Life Aquatic<\/em>? Netflix wants to know.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s02_p03\" class=\"indent para editable block\">The magic of Cinematch happens not by offering a gross average user rating\u2014user tastes are too varied and that data\u2019s too coarse to be of significant value. Instead, Cinematch develops a map of user ratings and steers you toward titles preferred by people with tastes that are most like yours. Techies and marketers call this trick <span class=\"margin_term\"><a class=\"glossterm\">collaborative filtering<\/a><\/span>. The term refers to a classification of software that monitors trends among customers and uses this data to personalize an individual customer\u2019s experience. Input from collaborative filtering software can be used to customize the display of a Web page for each user so that an individual is greeted only with those items the software predicts they\u2019ll most likely be interested in. The kind of data mining done by collaborative filtering isn\u2019t just used by Netflix; other sites use similar systems to recommend music, books, even news stories. While other firms also employ collaborative filtering, Netflix has been at this game for years, and is constantly tweaking its efforts. The results are considered the industry gold standard.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s02_p04\" class=\"indent para editable block\">Collaborative filtering software is powerful stuff, but is it a source of competitive advantage? Ultimately it\u2019s just math. Difficult math, to be sure, but nothing prevents other firms from working hard in the lab, running and refining tests, and coming up with software that\u2019s as good, or perhaps one day even better than Netflix\u2019s offering. But what the software has created for the early-moving Netflix is an enormous data advantage that is valuable, results yielding, and impossible for rivals to match. Even if Netflix gave Cinematch to its competitors, they\u2019d be without the over 3 billion ratings that the firm has amassed (according to the firm, users add about a million new ratings to the system each day). More ratings make the system seem smarter, and with more info to go on, Cinematch can make more accurate recommendations than rivals.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s02_p05\" class=\"indent para editable block\">Evidence suggests that users trust and value Cinematch. Recommended titles make up over 60 percent of the content users place in their queues\u2014an astonishing penetration rate. Compare that to how often you\u2019ve received a great recommendation from the sullen teen behind the video store counter. While data and algorithms improve the service and further strengthen the firm\u2019s brand, this data is also a switching cost. Drop Netflix for Blockbuster and the average user abandons the two hundred or more films they\u2019ve rated. Even if one is willing to invest the time in recreating their ratings on Blockbuster\u2019s site, the rival will still make less accurate recommendations because there are fewer users and less data to narrow in on similarities across customers.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s02_p06\" class=\"indent para editable block\">One way to see how strong these switching costs are is to examine the Netflix <span class=\"margin_term\"><a class=\"glossterm\">churn rate<\/a><\/span>. Churn is a marketing term referring to the rate at which customers leave a product or service. A low churn is usually key to profitability because it costs more to acquire a customer than to keep one. And the longer a customer stays with the firm, the more profitable they become and the less likely they are to leave. If customers weren\u2019t completely satisfied with the Netflix experience, many would be willing to churn out and experiment with rivals offering cheaper service. However, the year after Blockbuster and Wal-Mart launched with copycat efforts, the rate at which customers left Netflix actually <em class=\"emphasis\">fell<\/em> below 4 percent, an all-time low. And the firm\u2019s churn rates have continued to fall over time. By the middle of 2008, rates for customers in Netflix most active regions of the country were below 3 percent, meaning fewer than three in one hundred Netflix customers canceled their subscriptions each year<sup>2<\/sup>. To get an idea of how enviable the Netflix churn rates are, consider that a year earlier the mobile phone industry had a churn rate of 38.6 percent, while roughly one in four U.S. banking customers defected that year<sup>3<\/sup>.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s02_p07\" class=\"indent para editable block\">All of this impacts marketing costs, too. Happy customers refer friends (free marketing from a source consumers trust more than a TV commercial). Ninety-four percent of Netflix subscribers say they have recommended the service to someone else, and 71 percent of new subscribers say an existing subscriber has encouraged them to sign up. It\u2019s no wonder subscriber acquisition costs have been steadily falling, further contributing to the firm\u2019s overall profitability.<\/p>\r\n\r\n<div id=\"fwk-38086-ch03_s02_s02_n01\" class=\"bcc-box bcc-highlight\">\r\n<div class=\"textbox shaded\">\r\n<div id=\"fwk-38086-ch03_s02_s02_n01\" class=\"bcc-box bcc-highlight\">\r\n<h4><strong>The Netflix Prize<\/strong><\/h4>\r\n<p id=\"fwk-38086-ch03_s02_s02_p08\" class=\"nonindent para\">Netflix isn\u2019t content to stand still with its recommendation engine. Recognizing that there may be useful expertise outside its Los Gatos, California headquarters, the firm launched a <span class=\"margin_term\"><a class=\"glossterm\">crowdsourcing<\/a><\/span> effort known as The Netflix Prize (for more on crowdsourcing, see <a class=\"xref\" href=\"https:\/\/pressbooks.ccconline.org\/bus3060\/part\/chapter-07\/\" target=\"_blank\" rel=\"noopener\">Chapter 7 \u201cPeer Production, Social Media, and Web 2.0\u201d<\/a>).<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s02_p09\" class=\"indent para\">The goal was simple: Offer $1 million to the first group or individual who can improve Cinematch\u2019s ratings accuracy by 10 percent. In order to give developers something to work with, the firm turned over a large ratings database (with customer-identifying information masked, of course). The effort attracted over 30,000 teams from 170 countries. Not bad when you consider that $1 million would otherwise fund just four senior Silicon Valley engineers for about a year. And the effort earned Netflix a huge amount of PR, as newspapers, magazines, and bloggers chatted up the effort.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s02_p10\" class=\"indent para\">While Netflix gains access to any of the code submitted as part of the prize, it isn\u2019t exclusive access. The Prize underscores the value of the data asset. Even if others incorporate the same technology as Netflix, the firm still has user data (and attendant customer switching costs) that prevent rivals with equal technology from posing any real threat. Results incorporating many innovations offered by contest participants were incorporated into Cinematch, even before the prize was won.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s02_p11\" class=\"indent para\">As the contest dragged on, many participants wondered if the 10 percent threshold could ever be reached. While many teams grew within striking distance, a handful of particularly vexing titles thwarted all algorithms. Perhaps the most notorious title was <em class=\"emphasis\">Napoleon Dynamite<\/em>. The film is so quirky, and Netflix customers so polarized, that there\u2019s little prior indicator to suggest if you\u2019re in the \u201clove it\u201d or \u201chate it\u201d camp. One contestant claimed that single film was responsible for 15 percent of the gap between his team\u2019s effort and the million dollars (Thompson, 2008).<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s02_p12\" class=\"indent para\">The eventual winner turned out to be a coalition of four teams from four countries\u2014prior rivals who sought to pool their noggins and grab fame and glory (even if their individual prize split was less). BellKor\u2019s Pragmatic Chaos, the first team to cross the 10 percent threshold, included a pair of coders from Montreal; two U.S. researchers from AT&amp;T Labs; a scientist from Yahoo! Research, Israel; and a couple of Austrian consultants (Patterson, 2009). It\u2019s safe to say that without the Netflix Prize, these folks would likely never have met, let alone collaborated.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n&nbsp;\r\n<div class=\"textbox shaded\">\r\n<div id=\"fwk-38086-ch03_s02_s02_n01\" class=\"bcc-box bcc-highlight\">\r\n<h4 class=\"title\"><strong>Patron Saint of the Independent Film Crowd<\/strong><\/h4>\r\n<\/div>\r\n<div id=\"fwk-38086-ch03_s02_s02_n02\" class=\"bcc-box bcc-highlight\">\r\n<p id=\"fwk-38086-ch03_s02_s02_p13\" class=\"nonindent para\">Many critically acclaimed films that failed to be box office hits have gained a second life on Netflix, netting significant revenue for the studios, with no additional studio marketing. <em class=\"emphasis\">Babel<\/em>, <em class=\"emphasis\">The Queen<\/em>, and <em class=\"emphasis\">The Last King of Scotland<\/em> are among the films that failed to crack the top twenty in the box office, but ranked among the most requested titles on Netflix during the year after their release. Netflix actually delivered more revenue to Fox from <em class=\"emphasis\">The Last King of Scotland<\/em> than it did from the final X-Men film<sup>2<\/sup>.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s02_p14\" class=\"indent para\">In the true spirit of the long tail, Netflix has occasionally acquired small market titles for exclusive distribution. One of its first efforts involved the Oscar-nominated PBS documentary, <em class=\"emphasis\">Daughters from Danang<\/em>. PBS hadn\u2019t planned to distribute the disc after the Academy Awards; it was simply too costly to justify producing a run of DVDs that almost no retailer would carry. But in a deal with PBS, Netflix assumed all production costs in exchange for exclusive distribution rights. For months after, the film repeatedly ranked in the Top 15 most requested titles in the documentary category. Cost to PBS\u2014nothing (Anderson, 2004).<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n&nbsp;\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"fwk-38086-ch03_s02_s03\" class=\"section\">\r\n<h2 class=\"title editable block\">A Look at Operations<\/h2>\r\n<p id=\"fwk-38086-ch03_s02_s03_p01\" class=\"nonindent para editable block\">Tech also lies at the heart of the warehouse operations that deliver customer satisfaction and enhance brand value. As mentioned earlier, brand is built through customer experience, and a critical component of customer experience is for subscribers to get their DVDs as quickly as possible. In order to do this, Netflix has blanketed the country with a network of fifty-eight ultrahigh-tech distribution centers that collectively handle in excess of 1.8 million DVDs a day. These distribution centers are purposely located within driving distance of 119 U.S. Postal Service (USPS) processing and distribution facilities.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s03_p02\" class=\"indent para editable block\">By 4:00 a.m. each weekday, Netflix trucks collect the day\u2019s DVD shipments from these USPS hubs and returns the DVDs to the nearest Netflix center. DVDs are fed into custom-built sorters that handle disc volume on the way in and the way out. That same machine fires off an e-mail as soon as it detects your DVD was safely returned (now rate it via Cinematch). Most DVDs never hit the restocking shelves. Scanners pick out incoming titles that are destined for other users and place these titles into a sorted outbound pile with a new, appropriately addressed red envelope. Netflix not only helps out the postal service by picking up and dropping off the DVDs at its hubs, it presorts all outgoing mail for faster delivery. This extra effort has a payoff\u2014Netflix gets the lowest possible postal rates for first-class mail delivery. And despite the high level of automation, 100 percent of all discs are inspected by hand so that cracked ones can be replaced, and dirty ones can be given a wipe down (McCarthy, 2009). Total in and out turnaround time for a typical Netflix DVD is just eight hours (Kenny, 2009)!<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s03_p03\" class=\"indent para editable block\">First-class mail takes only one day to be delivered within a fifty-mile radius, so the warehouse network allows Netflix to service over 97 percent of its customer base within a two-day window\u2014one day is allotted for receipt; early the next morning the next item in their queue is processed; and the new title arrives at the customer\u2019s address by that afternoon. And in 2009, the firm added Saturday processing. All this means a customer with the firm\u2019s most popular \u201cthree disc at a time\u201d plan could watch a movie a day and never be without a fresh title.<\/p>\r\n\r\n<div id=\"fwk-38086-ch03_s02_s03_f01\" style=\"text-align: center; font-size: .8em; max-width: 1024px;\">\r\n<p class=\"nonindent title\"><span class=\"title-prefix\">Figure 4.5<\/span> A Proprietary Netflix Sorting Machine<\/p>\r\n<p class=\"indent\"><a>\r\n<img class=\"aligncenter size-large wp-image-1234\" src=\"https:\/\/pressbooks.ccconline.org\/wp-content\/uploads\/sites\/324\/2026\/01\/4.2.0-1024x685-1.jpg\" alt=\"A Proprietary Netflix Sorting Machine\" width=\"1024\" height=\"685\" \/>\r\n<\/a><\/p>\r\n\r\n<div class=\"copyright\">\r\n<p class=\"nonindent para\">Mike K \u2013 <a href=\"https:\/\/www.flickr.com\/photos\/hackingnetflix\/3750812105\/in\/photolist-5Msngx-a5CKaS-dfPJTz-3zs6a-6HrTLe-6HvXK3-6HrQFB-6HvWdm-6HrRsi-6HrSck\">Closeup of Netflix NPI Sorting Machine<\/a> \u2013 CC BY-NC 2.0.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<p id=\"fwk-38086-ch03_s02_s03_p04\" class=\"indent para editable block\">Warehouse processes don\u2019t exist in a vacuum; they are linked to Cinematch to offer the firm additional operational advantages. The software recommends movies that are likely to be in stock so users aren\u2019t frustrated by a wait.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s03_p05\" class=\"indent para editable block\">Everyone on staff is expected to have an eye on improving the firm\u2019s processes. Every warehouse worker gets a free DVD player and Netflix subscription so that they understand the service from the customer\u2019s perspective and can provide suggestions for improvement. Quality management features are built into systems supporting nearly every process at the firm, allowing Netflix to monitor and record the circumstances surrounding any failures. When an error occurs, a tiger team of quality improvement personnel swoops in to figure out how to prevent any problems from recurring. Each phone call is a cost, not a revenue enhancement, and each error increases the chance that a dissatisfied customer will bolt for a rival.<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s03_p06\" class=\"indent para editable block\">By paying attention to process improvements and designing technology to smooth operations, Netflix has slashed the number of customer representatives even as subscriptions ballooned. In the early days, when the firm had one hundred and fifteen thousand customers, Netflix had one-hundred phone support reps. By the time the customer base had grown thirtyfold, errors had been reduced to the point where only forty-three reps were needed (mcGregor, 2005). Even more impressive, because of the firm\u2019s effective use of technology to drive the firm\u2019s operations, fulfillment costs as a percentage of revenue have actually dropped even though postal rates have increased and Netflix has cut prices.<\/p>\r\n\r\n<\/div>\r\n<div id=\"fwk-38086-ch03_s02_s04\" class=\"section\">\r\n<h2 class=\"title editable block\">Killer Asset Recap: Understanding Scale<\/h2>\r\n<p id=\"fwk-38086-ch03_s02_s04_p01\" class=\"nonindent para editable block\">Netflix executives are quite frank that the technology and procedures that make up their model can be copied, but they also realize the challenges that any copycat rival faces. Says the firm\u2019s VP of Operations Andy Rendich, \u201cAnyone can replicate the Netflix operations if they wish. It\u2019s not going to be easy. It\u2019s going to take a lot of time and a lot of money.\u201d<sup>2<\/sup><\/p>\r\n<p id=\"fwk-38086-ch03_s02_s04_p02\" class=\"indent para editable block\">While we referred to Netflix as David to the Goliaths of Wal-Mart and Blockbuster, within the DVD-by-mail segment Netflix is now the biggest player by far, and this size gives the firm significant scale advantages. The yearly cost to run a Netflix-comparable nationwide delivery infrastructure is about $300 million (Reda &amp; Schulz, 2008). Think about how this relates to economies of scale. In <strong>Chapter 2 \u201cStrategy and Technology: Concepts and Frameworks for Understanding What Separates Winners from Losers\u201d<\/strong>, we said that firms enjoy <em class=\"emphasis\">scale economies<\/em> when they are able to leverage the cost of an investment across increasing units of production. Even if rivals have identical infrastructures, the more profitable firm will be the one with more customers (see <a class=\"xref\" href=\"#fwk-38086-ch03_s02_s04_f01\">Figure 4.7<\/a>). And the firm with better scale economies is in a position to lower prices, as well as to spend more on customer acquisition, new features, or other efforts. Smaller rivals have an uphill fight, while established firms that try to challenge Netflix with a copycat effort are in a position where they\u2019re straddling markets, unable to gain full efficiencies from their efforts.<\/p>\r\n\r\n<div id=\"fwk-38086-ch03_s02_s04_f01\" style=\"text-align: center; font-size: .8em; max-width: 497px;\">\r\n<p class=\"nonindent title\"><span class=\"title-prefix\">Figure 4.7<\/span><\/p>\r\n<p class=\"indent\"><a>\r\n<img style=\"max-width: 497px;\" src=\"https:\/\/pressbooks.ccconline.org\/wp-content\/uploads\/sites\/324\/2026\/01\/44f5f661db9c8805c2ae744ced954642.jpg\" alt=\"Running a nationwide sales network costs an estimated $300 million a year. But Netflix has several times more subscribers than Blockbuster. Which firm has economies of scale?\" \/>\r\n<\/a><\/p>\r\n<p class=\"indent para\">Running a nationwide sales network costs an estimated $300 million a year. But Netflix has several times more subscribers than Blockbuster. Which firm has economies of scale?<sup>4<\/sup><\/p>\r\n\r\n<\/div>\r\n<p id=\"fwk-38086-ch03_s02_s04_p03\" class=\"indent para editable block\">For Blockbuster, the arrival of Netflix plays out like a horror film where it is the victim. For several years now, the in-store rental business has been a money loser. Things got worse in 2005 when Netflix pressure forced Blockbuster to drop late fees, costing it about $400 million (Mullaney, 2006). The Blockbuster store network once had the advantage of scale, but eventually its many locations were seen as an inefficient and bloated liability. Between 2006 and 2007, the firm shuttered over 570 stores (Farrell, 2007). By 2008, Blockbuster had been in the red for ten of the prior eleven years. During a three-year period that included the launch of its Total Access DVD-by-mail effort, Blockbuster lost over $4 billion (MacDonald, 2008). The firm tried to outspend Netflix on advertising, even running Super Bowl ads for Total Access in 2007, but a money loser can\u2019t outspend its more profitable rival for long, and it has since significantly cut back on promotion. Blockbuster also couldn\u2019t sustain subscription rates below Netflix\u2019s, so it has given up its price advantage. In early 2008, Blockbuster even briefly pursued a merger with another struggling giant, Circuit City, a strategy that has left industry experts scratching their heads. A Viacom executive said about the firm, \u201cBlockbuster will certainly not survive and it will not be missed\u201d (Epstein, 2006).<\/p>\r\n<p id=\"fwk-38086-ch03_s02_s04_p04\" class=\"indent para editable block\">For Netflix, what delivered the triple scale advantage of the largest selection; the largest network of distribution centers; the largest customer base; and the firm\u2019s industry-leading strength in brand and data assets? Moving first. Timing and technology don\u2019t always yield sustainable competitive advantage, but in this case, Netflix leveraged both to craft what seems to be an extraordinarily valuable pool of assets that continue to grow and strengthen over time. To be certain, competing against a wounded giant like Blockbuster will remain difficult. The latter firm has few options and may spend itself into oblivion, harming Netflix in its collapsing gasp. And as we\u2019ll see in the next section, while technology shifts helped Netflix attack Blockbuster\u2019s once-dominant position, even newer technology shifts may threaten Netflix. As they like to say in the mutual fund industry \u201cPast results aren\u2019t a guarantee of future returns.\u201d<\/p>\r\n\r\n<div id=\"fwk-38086-ch03_s02_s04_n01\" class=\"bcc-box bcc-success\">\r\n<div><header><strong>Key Takeaways<\/strong><\/header>\r\n<div>\r\n<ul>\r\n \t<li>Netflix\u2019s brand is built on customer experience powered by technology.<\/li>\r\n \t<li>Physical retailers face costly expansion limits; Internet and digital firms scale more easily.<\/li>\r\n \t<li>Low-cost inventory lets Internet firms profit from the long tail of products.<\/li>\r\n \t<li>Netflix monetizes studio back catalogs via revenue sharing.<\/li>\r\n \t<li>Early, strategic tech use drives advantage through brand, data, switching costs, and scale.<\/li>\r\n \t<li>Collaborative filtering creates a key data asset beyond the technology itself.<\/li>\r\n \t<li>Distribution technology enables fast, near-universal one-day delivery.<\/li>\r\n<\/ul>\r\n<\/div>\r\n<\/div>\r\n&nbsp;\r\n\r\n<\/div>\r\n<div id=\"fwk-38086-ch03_s02_s04_n02\" class=\"bcc-box bcc-info\">\r\n<div class=\"textbox textbox--exercises\"><header class=\"textbox__header\">\r\n<p class=\"textbox__title\"><span style=\"font-family: 'Cormorant Garamond', serif; font-size: 1em; font-style: normal; font-weight: bold;\">Questions and Exercises<\/span><\/p>\r\n\r\n<\/header>\r\n<div class=\"textbox__content\">\r\n<ol id=\"fwk-38086-ch03_s02_s04_l02\" class=\"orderedlist\">\r\n \t<li>What are Netflix\u2019s sources of competitive advantage?<\/li>\r\n \t<li>Does Netflix have a strong brand? Offer evidence demonstrating why the firm\u2019s brand is or isn\u2019t strong. How is a strong brand built?<\/li>\r\n \t<li>Scale advantages are advantages related to size. In what key ways is Netflix \u201cbigger\u201d than the two major competitors who tried to enter the DVD-by-mail market?<\/li>\r\n \t<li>What is the long tail? How \u201clong\u201d is the Netflix tail compared to traditional video stores?<\/li>\r\n \t<li>What \u201cclass\u201d of software does Netflix use to make movie recommendations?<\/li>\r\n<\/ol>\r\n<\/div>\r\n<\/div>\r\n&nbsp;\r\n\r\n<\/div>\r\n<\/div>\r\n<p class=\"indent\"><sup>1<\/sup><a class=\"link\" href=\"http:\/\/www.netflix.com\/Top100\" target=\"_blank\" rel=\"noopener\">http:\/\/www.netflix.com\/Top100<\/a>.<\/p>\r\n<p class=\"indent\"><sup>2<\/sup>Netflix Investor Day presentation, May 2008, accessed via <a class=\"link\" href=\"http:\/\/ir.netflix.com\/events.cfm\" target=\"_blank\" rel=\"noopener\">http:\/\/ir.netflix.com\/events.cfm<\/a>.<\/p>\r\n<p class=\"indent\"><sup>3<\/sup>\u201cIndustry Customer Churn Rate Increases 15%,\u201d <em class=\"emphasis\">GeoConnexion<\/em>, January 8, 2008. The article contains a summary of the Pittney Bowes G1 finding.<\/p>\r\n<p class=\"indent\"><sup>4<\/sup>Associated Press, \u201cOn the Call: Netflix CEO Reed Hastings,\u201d April 22, 2010; Reuters, \u201cBlockbuster Fourth-Quarter Profit Falls 28 Percent,\u201d February 27, 2010.<\/p>\r\n\r\n<\/div>\r\n<\/div>","rendered":"<div id=\"slug-4-2-tech-and-timing-creating-killer-assets\" class=\"chapter standard\">\n<div class=\"ugc chapter-ugc\">\n<div id=\"fwk-38086-ch03_s02_n01\" class=\"bcc-box bcc-highlight\">\n<div class=\"textbox textbox--learning-objectives\">\n<header>\n<h3><strong>Learning Objectives<\/strong><\/h3>\n<\/header>\n<div>\n<p id=\"fwk-38086-ch03_s02_p01\">After studying this section you should be able to do the following:<\/p>\n<ul>\n<li>Understand the difference between branding and advertising, why branding matters online, and what drives Netflix\u2019s strong brand.<br \/>\nLearn how the long tail strategy supports its massive movie selection.<br \/>\nKnow how collaborative filtering enables personalized recommendations and competitive advantage.<br \/>\nIdentify the technologies Netflix uses to cut costs and improve customer satisfaction.<br \/>\nRecognize how scale economies and early market entry have fueled success and discouraged competitors.<\/li>\n<\/ul>\n<\/div>\n<\/div>\n<\/div>\n<p id=\"fwk-38086-ch03_s02_p02\">To understand Netflix\u2019s strengths, it\u2019s important to view the firm as its customers see it. And for the most part, what they see they like\u2014a lot! Netflix customers are rabidly loyal and rave about the service. The firm repeatedly ranks at the top of customer satisfaction surveys. Ratings agency ForeSee has named Netflix the number one e-commerce site in terms of customer satisfaction nine times in a row (placing it ahead of Apple and Amazon, among others). Netflix has also been cited as the best at satisfying customers by Nielsen and Fast Company, and was also named the Retail Innovator of the Year by the National Retail Federation.<\/p>\n<p id=\"fwk-38086-ch03_s02_p03\" class=\"indent para editable block\">Building a great brand, especially one online, starts with offering exceptional value to the customer. Don\u2019t confuse branding with advertising. During the dot-com era, firms thought brands could be built through Super Bowl ads and expensive television promotion. Advertising can build awareness, but <em class=\"emphasis\">brands are built through customer experience<\/em>. This is a particularly important lesson for online firms. Have a bad experience at a burger joint and you might avoid that location but try another of the firm\u2019s outlets a few blocks away. Have a bad experience online and you\u2019re turned off by the firm\u2019s one and only virtual storefront. If you click over to an online rival, the offending firm may have lost you forever. But if a firm can get you to stay through quality experience, switching costs and data-driven value might keep you there for a long, long time, even when new entrants try to court you away.<\/p>\n<p id=\"fwk-38086-ch03_s02_p04\" class=\"indent para editable block\">If brand is built through customer experience, consider what this means for the Netflix subscriber. They expect the firm to offer a huge selection, to be able to find what they want, for it to arrive on time, for all of this to occur with no-brainer ease of use and convenience, and at a fair price. Technology drives all of these capabilities, so tech is at the very center of the firm\u2019s brand building efforts. Let\u2019s look at how the firm does it.<\/p>\n<div id=\"fwk-38086-ch03_s02_s01\" class=\"section\">\n<h2 class=\"title editable block\">Selection: The Long Tail in Action<\/h2>\n<p id=\"fwk-38086-ch03_s02_s01_p01\" class=\"nonindent para editable block\">Customers have flocked to Netflix in part because of the firm\u2019s staggering selection. A traditional video store (and Blockbuster had some 7,800 of them) stocks roughly three thousand DVD titles on its shelves. For comparison, Netflix is able to offer its customers a selection of over one hundred thousand DVD titles, and rising! At traditional brick-and-mortar retailers, shelf space is the biggest constraint limiting a firm\u2019s ability to offer customers what they want when they want it. Just which films, documentaries, concerts, cartoons, TV shows, and other fare make it inside the four walls of a Blockbuster store is dictated by what the average consumer is most likely to be interested in. To put it simply, Blockbuster stocks blockbusters.<\/p>\n<p id=\"fwk-38086-ch03_s02_s01_p02\" class=\"indent para editable block\">Finding the right product mix and store size can be tricky. Offer too many titles in a bigger storefront and there may not be enough paying customers to justify stocking less popular titles (remember, it\u2019s not just the cost of the DVD\u2014firms also pay for the real estate of a larger store, the workers, the energy to power the facility, etc.). You get the picture\u2014there\u2019s a breakeven point that is arrived at by considering the geographic constraint of the number of customers that can reach a location, factored in with store size, store inventory, the payback from that inventory, and the cost to own and operate the store. Anyone who has visited a video store only to find a title out of stock has run up against the limits of the physical store model.<\/p>\n<p id=\"fwk-38086-ch03_s02_s01_p03\" class=\"indent para editable block\">But many online businesses are able to run around these limits of geography and shelf space. Internet firms that ship products can get away with having just a few highly automated warehouses, each stocking just about all the products in a particular category. And for firms that distribute products digitally (think songs on iTunes), the efficiencies are even greater because there\u2019s no warehouse or physical product at all (more on that later).<\/p>\n<p id=\"fwk-38086-ch03_s02_s01_p04\" class=\"indent para editable block\">Offer a nearly limitless selection and something interesting happens: there\u2019s actually <em class=\"emphasis\">more money<\/em> to be made selling the obscure stuff than the hits. Music service Rhapsody makes more from songs outside of the top ten thousand than it does from songs ranked above ten thousand. At Amazon.com, roughly 60 percent of books sold are titles that aren\u2019t available in even the biggest Borders or Barnes &amp; Noble Superstores (Anderson, 2004). And at Netflix, roughly 75 percent of DVD titles shipped are from back-catalog titles, not new releases (at Blockbuster outlets the equation is nearly flipped, with some 70 percent of business coming from new releases) (McCarthy, 2009). Consider that Netflix sends out forty-five thousand different titles each day. That\u2019s <em class=\"emphasis\">fifteen times<\/em> the selection available at your average video store! Each quarter, roughly 95 percent of titles are viewed\u2014that means that every few weeks Netflix is able to find a customer for nearly <em class=\"emphasis\">every<\/em> DVD title that has <em class=\"emphasis\">ever<\/em> been commercially released.<\/p>\n<p id=\"fwk-38086-ch03_s02_s01_p05\" class=\"indent para editable block\">This phenomenon whereby firms can make money by selling a near-limitless selection of less-popular products is known as the <span class=\"margin_term\"><a class=\"glossterm\">long tail<\/a><\/span>. The term was coined by Chris Anderson, an editor at <em class=\"emphasis\">Wired<\/em> magazine, who also wrote a best-selling business book by the same name. The \u201ctail\u201d (see Figure 4.2 \u201cThe Long Tail\u201d) refers to the demand for less popular items that aren\u2019t offered by traditional brick-and-mortar shops. While most stores make money from the area under the curve from the vertical axis to the dotted line, long tail firms can also sell the less popular stuff. Each item under the right part of the curve may experience less demand than the most popular products, but someone somewhere likely wants it. And as demonstrated from the examples above, the total demand for the obscure stuff is often much larger than what can be profitably sold through traditional stores alone. While some debate the size of the tail (e.g., whether obscure titles collectively are more profitable for most firms), two facts are critical to keep above this debate: (1) selection attracts customers, and (2) the Internet allows large-selection inventory efficiencies that offline firms can\u2019t match.<\/p>\n<div id=\"fwk-38086-ch03_s02_s01_f01\" style=\"text-align: center; font-size: .8em; max-width: 497px;\">\n<p class=\"nonindent title\"><span class=\"title-prefix\">Figure 4.2<\/span> The Long Tail<\/p>\n<p class=\"indent\"><a><br \/>\n<img decoding=\"async\" style=\"max-width: 497px;\" src=\"https:\/\/pressbooks.ccconline.org\/wp-content\/uploads\/sites\/324\/2018\/06\/860d841136e1534c0fb459fe9ed54ad1.jpg\" alt=\"The Long Tail\" \/><br \/>\n<\/a><\/p>\n<\/div>\n<p id=\"fwk-38086-ch03_s02_s01_p06\" class=\"indent para editable block\">The long tail works because the cost of production and distribution drop to a point where it becomes economically viable to offer a huge selection. For Netflix, the cost to stock and ship an obscure foreign film is the same as sending out the latest Will Smith blockbuster. The long tail gives the firm a selection advantage (or one based on scale) that traditional stores simply cannot match.<\/p>\n<p id=\"fwk-38086-ch03_s02_s01_p07\" class=\"indent para editable block\">For more evidence that there is demand for the obscure stuff, consider Bollywood cinema\u2014a term referring to films produced in India. When ranked by the number of movies produced each year, Bollywood is actually bigger than Hollywood, but in terms of U.S. demand, even the top-grossing Hindi film might open in only one or two American theaters, and few video stores carry many Bollywood DVDs. Again, we see the limits that geography and shelf space impose on traditional stores. As Anderson puts it, when it comes to traditional methods of distribution, \u201can audience too thinly spread is the same as no audience at all (Anderson, 2004).\u201d While there are roughly 1.7 million South Asians living in the United States, Bollywood fans are geographically disbursed, making it difficult to offer content at a physical storefront. Fans of foreign films would often find the biggest selection at an ethnic grocery store, but even then, that wouldn\u2019t be much. Enter Netflix. The firm has found the U.S. fans of South Asian cinema, sending out roughly one hundred thousand Bollywood DVDs a month. As geographic constraints go away, untapped markets open up!<\/p>\n<p id=\"fwk-38086-ch03_s02_s01_p08\" class=\"indent para editable block\">The power of Netflix can revive even well-regarded work by some of Hollywood\u2019s biggest names. In between <em class=\"emphasis\">The Godfather<\/em> and <em class=\"emphasis\">The Godfather Part II<\/em>, director Francis Ford Coppola made <em class=\"emphasis\">The Conversation<\/em>, a film starring Gene Hackman that, in 1975, was nominated for a Best Picture Academy Award. Coppola has called <em class=\"emphasis\">The Conversation<\/em> the finest film he has ever made (Leonhardt, 2006), but it was headed for obscurity as the ever-growing pipeline of new releases pushed the film off of video store shelves. Netflix was happy to pick up <em class=\"emphasis\">The Conversation<\/em> and put it in the long tail. Since then, the number of customers viewing the film has tripled, and on Netflix, this once underappreciated gem became the thirteenth most watched film from its time period.<\/p>\n<p id=\"fwk-38086-ch03_s02_s01_p09\" class=\"indent para editable block\">For evidence on Netflix\u2019s power to make lucrative markets from nonblockbusters, visit the firm\u2019s \u201cTop 100 page.\u201d<sup>1<\/sup> You\u2019ll see a list loaded with films that were notable for their <em class=\"emphasis\">lack<\/em> of box office success. As of this writing the number one rank had been held <em class=\"emphasis\">for over five years in a row<\/em>, not by a first-run mega-hit, but by the independent film <em class=\"emphasis\">Crash<\/em> (an Oscar winner, but box office weakling) (Elder, 2009).<\/p>\n<p id=\"fwk-38086-ch03_s02_s01_p10\" class=\"indent para editable block\">Netflix has used the long tail to its advantage, crafting a business model that creates close ties with film studios. In most cases, studios earn a percentage of the subscription revenue for every disk sent out to a Netflix customer. In exchange, Netflix gets DVDs at a very low cost. The movie business is characterized by large fixed costs up front. Studio marketing budgets are concentrated on films when they first appear in theaters, and when they\u2019re first offered on DVD. After that, studios are done promoting a film, focusing instead on their most current titles. But Netflix is able to find an audience for a film without the studios spending a dime on additional marketing. Since so many of the titles viewed on Netflix are in the long tail, revenue sharing is all gravy for the studios\u2014additional income they would otherwise be unlikely to get. It\u2019s a win-win for both ends of the supply chain. These supplier partnerships grant Netflix a sort of soft bargaining power that\u2019s distinctly opposite the strong-arm price bullying that giants like Wal-Mart are often accused of.<\/p>\n<div id=\"fwk-38086-ch03_s02_s01_n01\" class=\"bcc-box bcc-highlight\">\n<div class=\"textbox shaded\">\n<h4 class=\"title\">The VCR, the Real \u201cKiller App\u201d?<\/h4>\n<p id=\"fwk-38086-ch03_s02_s01_p11\" class=\"nonindent para\">Netflix\u2019s coziness with movie studios is particularly noteworthy, given that the film industry has often viewed new technologies with a suspicion bordering on paranoia. In one of the most notorious incidents, Jack Valenti, the former head of the Motion Picture Association of American (MPAA) once lobbied the U.S. Congress to limit the sale of home video recorders, claiming, \u201cthe VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone\u201d (Bates, 2007).<\/p>\n<p id=\"fwk-38086-ch03_s02_s01_p12\" class=\"indent para\">Not only was the statement over the top, Jack couldn\u2019t have been more wrong. Revenue from the sale of VCR tapes would eventually surpass the take from theater box offices, and today, home video brings in about two times box office earnings.<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<\/div>\n<\/div>\n<div id=\"fwk-38086-ch03_s02_s02\" class=\"section\">\n<h2 class=\"title editable block\">Cinematch: Technology Creates a Data Asset That Delivers Profits<\/h2>\n<p id=\"fwk-38086-ch03_s02_s02_p01\" class=\"nonindent para editable block\">Netflix proves there\u2019s both demand and money to be made from the vast back catalog of film and TV show content. But for the model to work best, the firm needed to address the biggest inefficiency in the movie industry\u2014\u201caudience finding,\u201d that is, matching content with customers. To do this, Netflix leverages some of the industry\u2019s most sophisticated technology, a proprietary recommendation system that the firm calls Cinematch.<\/p>\n<p id=\"fwk-38086-ch03_s02_s02_p02\" class=\"indent para editable block\">Each time a customer visits Netflix after sending back a DVD, the service essentially asks \u201cSo, how did you like the movie?\u201d With a single click, each film can be rated on a scale of one to five stars. If you\u2019re new to Netflix, the service can prompt you with a list of movies (or you can search out and rate titles on your own). Love <em class=\"emphasis\">Rushmore<\/em> but hate <em class=\"emphasis\">The Life Aquatic<\/em>? Netflix wants to know.<\/p>\n<p id=\"fwk-38086-ch03_s02_s02_p03\" class=\"indent para editable block\">The magic of Cinematch happens not by offering a gross average user rating\u2014user tastes are too varied and that data\u2019s too coarse to be of significant value. Instead, Cinematch develops a map of user ratings and steers you toward titles preferred by people with tastes that are most like yours. Techies and marketers call this trick <span class=\"margin_term\"><a class=\"glossterm\">collaborative filtering<\/a><\/span>. The term refers to a classification of software that monitors trends among customers and uses this data to personalize an individual customer\u2019s experience. Input from collaborative filtering software can be used to customize the display of a Web page for each user so that an individual is greeted only with those items the software predicts they\u2019ll most likely be interested in. The kind of data mining done by collaborative filtering isn\u2019t just used by Netflix; other sites use similar systems to recommend music, books, even news stories. While other firms also employ collaborative filtering, Netflix has been at this game for years, and is constantly tweaking its efforts. The results are considered the industry gold standard.<\/p>\n<p id=\"fwk-38086-ch03_s02_s02_p04\" class=\"indent para editable block\">Collaborative filtering software is powerful stuff, but is it a source of competitive advantage? Ultimately it\u2019s just math. Difficult math, to be sure, but nothing prevents other firms from working hard in the lab, running and refining tests, and coming up with software that\u2019s as good, or perhaps one day even better than Netflix\u2019s offering. But what the software has created for the early-moving Netflix is an enormous data advantage that is valuable, results yielding, and impossible for rivals to match. Even if Netflix gave Cinematch to its competitors, they\u2019d be without the over 3 billion ratings that the firm has amassed (according to the firm, users add about a million new ratings to the system each day). More ratings make the system seem smarter, and with more info to go on, Cinematch can make more accurate recommendations than rivals.<\/p>\n<p id=\"fwk-38086-ch03_s02_s02_p05\" class=\"indent para editable block\">Evidence suggests that users trust and value Cinematch. Recommended titles make up over 60 percent of the content users place in their queues\u2014an astonishing penetration rate. Compare that to how often you\u2019ve received a great recommendation from the sullen teen behind the video store counter. While data and algorithms improve the service and further strengthen the firm\u2019s brand, this data is also a switching cost. Drop Netflix for Blockbuster and the average user abandons the two hundred or more films they\u2019ve rated. Even if one is willing to invest the time in recreating their ratings on Blockbuster\u2019s site, the rival will still make less accurate recommendations because there are fewer users and less data to narrow in on similarities across customers.<\/p>\n<p id=\"fwk-38086-ch03_s02_s02_p06\" class=\"indent para editable block\">One way to see how strong these switching costs are is to examine the Netflix <span class=\"margin_term\"><a class=\"glossterm\">churn rate<\/a><\/span>. Churn is a marketing term referring to the rate at which customers leave a product or service. A low churn is usually key to profitability because it costs more to acquire a customer than to keep one. And the longer a customer stays with the firm, the more profitable they become and the less likely they are to leave. If customers weren\u2019t completely satisfied with the Netflix experience, many would be willing to churn out and experiment with rivals offering cheaper service. However, the year after Blockbuster and Wal-Mart launched with copycat efforts, the rate at which customers left Netflix actually <em class=\"emphasis\">fell<\/em> below 4 percent, an all-time low. And the firm\u2019s churn rates have continued to fall over time. By the middle of 2008, rates for customers in Netflix most active regions of the country were below 3 percent, meaning fewer than three in one hundred Netflix customers canceled their subscriptions each year<sup>2<\/sup>. To get an idea of how enviable the Netflix churn rates are, consider that a year earlier the mobile phone industry had a churn rate of 38.6 percent, while roughly one in four U.S. banking customers defected that year<sup>3<\/sup>.<\/p>\n<p id=\"fwk-38086-ch03_s02_s02_p07\" class=\"indent para editable block\">All of this impacts marketing costs, too. Happy customers refer friends (free marketing from a source consumers trust more than a TV commercial). Ninety-four percent of Netflix subscribers say they have recommended the service to someone else, and 71 percent of new subscribers say an existing subscriber has encouraged them to sign up. It\u2019s no wonder subscriber acquisition costs have been steadily falling, further contributing to the firm\u2019s overall profitability.<\/p>\n<div id=\"fwk-38086-ch03_s02_s02_n01\" class=\"bcc-box bcc-highlight\">\n<div class=\"textbox shaded\">\n<div class=\"bcc-box bcc-highlight\">\n<h4><strong>The Netflix Prize<\/strong><\/h4>\n<p id=\"fwk-38086-ch03_s02_s02_p08\" class=\"nonindent para\">Netflix isn\u2019t content to stand still with its recommendation engine. Recognizing that there may be useful expertise outside its Los Gatos, California headquarters, the firm launched a <span class=\"margin_term\"><a class=\"glossterm\">crowdsourcing<\/a><\/span> effort known as The Netflix Prize (for more on crowdsourcing, see <a class=\"xref\" href=\"https:\/\/pressbooks.ccconline.org\/bus3060\/part\/chapter-07\/\" target=\"_blank\" rel=\"noopener\">Chapter 7 \u201cPeer Production, Social Media, and Web 2.0\u201d<\/a>).<\/p>\n<p id=\"fwk-38086-ch03_s02_s02_p09\" class=\"indent para\">The goal was simple: Offer $1 million to the first group or individual who can improve Cinematch\u2019s ratings accuracy by 10 percent. In order to give developers something to work with, the firm turned over a large ratings database (with customer-identifying information masked, of course). The effort attracted over 30,000 teams from 170 countries. Not bad when you consider that $1 million would otherwise fund just four senior Silicon Valley engineers for about a year. And the effort earned Netflix a huge amount of PR, as newspapers, magazines, and bloggers chatted up the effort.<\/p>\n<p id=\"fwk-38086-ch03_s02_s02_p10\" class=\"indent para\">While Netflix gains access to any of the code submitted as part of the prize, it isn\u2019t exclusive access. The Prize underscores the value of the data asset. Even if others incorporate the same technology as Netflix, the firm still has user data (and attendant customer switching costs) that prevent rivals with equal technology from posing any real threat. Results incorporating many innovations offered by contest participants were incorporated into Cinematch, even before the prize was won.<\/p>\n<p id=\"fwk-38086-ch03_s02_s02_p11\" class=\"indent para\">As the contest dragged on, many participants wondered if the 10 percent threshold could ever be reached. While many teams grew within striking distance, a handful of particularly vexing titles thwarted all algorithms. Perhaps the most notorious title was <em class=\"emphasis\">Napoleon Dynamite<\/em>. The film is so quirky, and Netflix customers so polarized, that there\u2019s little prior indicator to suggest if you\u2019re in the \u201clove it\u201d or \u201chate it\u201d camp. One contestant claimed that single film was responsible for 15 percent of the gap between his team\u2019s effort and the million dollars (Thompson, 2008).<\/p>\n<p id=\"fwk-38086-ch03_s02_s02_p12\" class=\"indent para\">The eventual winner turned out to be a coalition of four teams from four countries\u2014prior rivals who sought to pool their noggins and grab fame and glory (even if their individual prize split was less). BellKor\u2019s Pragmatic Chaos, the first team to cross the 10 percent threshold, included a pair of coders from Montreal; two U.S. researchers from AT&amp;T Labs; a scientist from Yahoo! Research, Israel; and a couple of Austrian consultants (Patterson, 2009). It\u2019s safe to say that without the Netflix Prize, these folks would likely never have met, let alone collaborated.<\/p>\n<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n<div class=\"textbox shaded\">\n<div class=\"bcc-box bcc-highlight\">\n<h4 class=\"title\"><strong>Patron Saint of the Independent Film Crowd<\/strong><\/h4>\n<\/div>\n<div id=\"fwk-38086-ch03_s02_s02_n02\" class=\"bcc-box bcc-highlight\">\n<p id=\"fwk-38086-ch03_s02_s02_p13\" class=\"nonindent para\">Many critically acclaimed films that failed to be box office hits have gained a second life on Netflix, netting significant revenue for the studios, with no additional studio marketing. <em class=\"emphasis\">Babel<\/em>, <em class=\"emphasis\">The Queen<\/em>, and <em class=\"emphasis\">The Last King of Scotland<\/em> are among the films that failed to crack the top twenty in the box office, but ranked among the most requested titles on Netflix during the year after their release. Netflix actually delivered more revenue to Fox from <em class=\"emphasis\">The Last King of Scotland<\/em> than it did from the final X-Men film<sup>2<\/sup>.<\/p>\n<p id=\"fwk-38086-ch03_s02_s02_p14\" class=\"indent para\">In the true spirit of the long tail, Netflix has occasionally acquired small market titles for exclusive distribution. One of its first efforts involved the Oscar-nominated PBS documentary, <em class=\"emphasis\">Daughters from Danang<\/em>. PBS hadn\u2019t planned to distribute the disc after the Academy Awards; it was simply too costly to justify producing a run of DVDs that almost no retailer would carry. But in a deal with PBS, Netflix assumed all production costs in exchange for exclusive distribution rights. For months after, the film repeatedly ranked in the Top 15 most requested titles in the documentary category. Cost to PBS\u2014nothing (Anderson, 2004).<\/p>\n<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n<\/div>\n<\/div>\n<div id=\"fwk-38086-ch03_s02_s03\" class=\"section\">\n<h2 class=\"title editable block\">A Look at Operations<\/h2>\n<p id=\"fwk-38086-ch03_s02_s03_p01\" class=\"nonindent para editable block\">Tech also lies at the heart of the warehouse operations that deliver customer satisfaction and enhance brand value. As mentioned earlier, brand is built through customer experience, and a critical component of customer experience is for subscribers to get their DVDs as quickly as possible. In order to do this, Netflix has blanketed the country with a network of fifty-eight ultrahigh-tech distribution centers that collectively handle in excess of 1.8 million DVDs a day. These distribution centers are purposely located within driving distance of 119 U.S. Postal Service (USPS) processing and distribution facilities.<\/p>\n<p id=\"fwk-38086-ch03_s02_s03_p02\" class=\"indent para editable block\">By 4:00 a.m. each weekday, Netflix trucks collect the day\u2019s DVD shipments from these USPS hubs and returns the DVDs to the nearest Netflix center. DVDs are fed into custom-built sorters that handle disc volume on the way in and the way out. That same machine fires off an e-mail as soon as it detects your DVD was safely returned (now rate it via Cinematch). Most DVDs never hit the restocking shelves. Scanners pick out incoming titles that are destined for other users and place these titles into a sorted outbound pile with a new, appropriately addressed red envelope. Netflix not only helps out the postal service by picking up and dropping off the DVDs at its hubs, it presorts all outgoing mail for faster delivery. This extra effort has a payoff\u2014Netflix gets the lowest possible postal rates for first-class mail delivery. And despite the high level of automation, 100 percent of all discs are inspected by hand so that cracked ones can be replaced, and dirty ones can be given a wipe down (McCarthy, 2009). Total in and out turnaround time for a typical Netflix DVD is just eight hours (Kenny, 2009)!<\/p>\n<p id=\"fwk-38086-ch03_s02_s03_p03\" class=\"indent para editable block\">First-class mail takes only one day to be delivered within a fifty-mile radius, so the warehouse network allows Netflix to service over 97 percent of its customer base within a two-day window\u2014one day is allotted for receipt; early the next morning the next item in their queue is processed; and the new title arrives at the customer\u2019s address by that afternoon. And in 2009, the firm added Saturday processing. All this means a customer with the firm\u2019s most popular \u201cthree disc at a time\u201d plan could watch a movie a day and never be without a fresh title.<\/p>\n<div id=\"fwk-38086-ch03_s02_s03_f01\" style=\"text-align: center; font-size: .8em; max-width: 1024px;\">\n<p class=\"nonindent title\"><span class=\"title-prefix\">Figure 4.5<\/span> A Proprietary Netflix Sorting Machine<\/p>\n<p class=\"indent\"><a><br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-large wp-image-1234\" src=\"https:\/\/pressbooks.ccconline.org\/wp-content\/uploads\/sites\/324\/2026\/01\/4.2.0-1024x685-1.jpg\" alt=\"A Proprietary Netflix Sorting Machine\" width=\"1024\" height=\"685\" \/><br \/>\n<\/a><\/p>\n<div class=\"copyright\">\n<p class=\"nonindent para\">Mike K \u2013 <a href=\"https:\/\/www.flickr.com\/photos\/hackingnetflix\/3750812105\/in\/photolist-5Msngx-a5CKaS-dfPJTz-3zs6a-6HrTLe-6HvXK3-6HrQFB-6HvWdm-6HrRsi-6HrSck\">Closeup of Netflix NPI Sorting Machine<\/a> \u2013 CC BY-NC 2.0.<\/p>\n<\/div>\n<\/div>\n<p id=\"fwk-38086-ch03_s02_s03_p04\" class=\"indent para editable block\">Warehouse processes don\u2019t exist in a vacuum; they are linked to Cinematch to offer the firm additional operational advantages. The software recommends movies that are likely to be in stock so users aren\u2019t frustrated by a wait.<\/p>\n<p id=\"fwk-38086-ch03_s02_s03_p05\" class=\"indent para editable block\">Everyone on staff is expected to have an eye on improving the firm\u2019s processes. Every warehouse worker gets a free DVD player and Netflix subscription so that they understand the service from the customer\u2019s perspective and can provide suggestions for improvement. Quality management features are built into systems supporting nearly every process at the firm, allowing Netflix to monitor and record the circumstances surrounding any failures. When an error occurs, a tiger team of quality improvement personnel swoops in to figure out how to prevent any problems from recurring. Each phone call is a cost, not a revenue enhancement, and each error increases the chance that a dissatisfied customer will bolt for a rival.<\/p>\n<p id=\"fwk-38086-ch03_s02_s03_p06\" class=\"indent para editable block\">By paying attention to process improvements and designing technology to smooth operations, Netflix has slashed the number of customer representatives even as subscriptions ballooned. In the early days, when the firm had one hundred and fifteen thousand customers, Netflix had one-hundred phone support reps. By the time the customer base had grown thirtyfold, errors had been reduced to the point where only forty-three reps were needed (mcGregor, 2005). Even more impressive, because of the firm\u2019s effective use of technology to drive the firm\u2019s operations, fulfillment costs as a percentage of revenue have actually dropped even though postal rates have increased and Netflix has cut prices.<\/p>\n<\/div>\n<div id=\"fwk-38086-ch03_s02_s04\" class=\"section\">\n<h2 class=\"title editable block\">Killer Asset Recap: Understanding Scale<\/h2>\n<p id=\"fwk-38086-ch03_s02_s04_p01\" class=\"nonindent para editable block\">Netflix executives are quite frank that the technology and procedures that make up their model can be copied, but they also realize the challenges that any copycat rival faces. Says the firm\u2019s VP of Operations Andy Rendich, \u201cAnyone can replicate the Netflix operations if they wish. It\u2019s not going to be easy. It\u2019s going to take a lot of time and a lot of money.\u201d<sup>2<\/sup><\/p>\n<p id=\"fwk-38086-ch03_s02_s04_p02\" class=\"indent para editable block\">While we referred to Netflix as David to the Goliaths of Wal-Mart and Blockbuster, within the DVD-by-mail segment Netflix is now the biggest player by far, and this size gives the firm significant scale advantages. The yearly cost to run a Netflix-comparable nationwide delivery infrastructure is about $300 million (Reda &amp; Schulz, 2008). Think about how this relates to economies of scale. In <strong>Chapter 2 \u201cStrategy and Technology: Concepts and Frameworks for Understanding What Separates Winners from Losers\u201d<\/strong>, we said that firms enjoy <em class=\"emphasis\">scale economies<\/em> when they are able to leverage the cost of an investment across increasing units of production. Even if rivals have identical infrastructures, the more profitable firm will be the one with more customers (see <a class=\"xref\" href=\"#fwk-38086-ch03_s02_s04_f01\">Figure 4.7<\/a>). And the firm with better scale economies is in a position to lower prices, as well as to spend more on customer acquisition, new features, or other efforts. Smaller rivals have an uphill fight, while established firms that try to challenge Netflix with a copycat effort are in a position where they\u2019re straddling markets, unable to gain full efficiencies from their efforts.<\/p>\n<div id=\"fwk-38086-ch03_s02_s04_f01\" style=\"text-align: center; font-size: .8em; max-width: 497px;\">\n<p class=\"nonindent title\"><span class=\"title-prefix\">Figure 4.7<\/span><\/p>\n<p class=\"indent\"><a><br \/>\n<img decoding=\"async\" style=\"max-width: 497px;\" src=\"https:\/\/pressbooks.ccconline.org\/wp-content\/uploads\/sites\/324\/2026\/01\/44f5f661db9c8805c2ae744ced954642.jpg\" alt=\"Running a nationwide sales network costs an estimated $300 million a year. But Netflix has several times more subscribers than Blockbuster. Which firm has economies of scale?\" \/><br \/>\n<\/a><\/p>\n<p class=\"indent para\">Running a nationwide sales network costs an estimated $300 million a year. But Netflix has several times more subscribers than Blockbuster. Which firm has economies of scale?<sup>4<\/sup><\/p>\n<\/div>\n<p id=\"fwk-38086-ch03_s02_s04_p03\" class=\"indent para editable block\">For Blockbuster, the arrival of Netflix plays out like a horror film where it is the victim. For several years now, the in-store rental business has been a money loser. Things got worse in 2005 when Netflix pressure forced Blockbuster to drop late fees, costing it about $400 million (Mullaney, 2006). The Blockbuster store network once had the advantage of scale, but eventually its many locations were seen as an inefficient and bloated liability. Between 2006 and 2007, the firm shuttered over 570 stores (Farrell, 2007). By 2008, Blockbuster had been in the red for ten of the prior eleven years. During a three-year period that included the launch of its Total Access DVD-by-mail effort, Blockbuster lost over $4 billion (MacDonald, 2008). The firm tried to outspend Netflix on advertising, even running Super Bowl ads for Total Access in 2007, but a money loser can\u2019t outspend its more profitable rival for long, and it has since significantly cut back on promotion. Blockbuster also couldn\u2019t sustain subscription rates below Netflix\u2019s, so it has given up its price advantage. In early 2008, Blockbuster even briefly pursued a merger with another struggling giant, Circuit City, a strategy that has left industry experts scratching their heads. A Viacom executive said about the firm, \u201cBlockbuster will certainly not survive and it will not be missed\u201d (Epstein, 2006).<\/p>\n<p id=\"fwk-38086-ch03_s02_s04_p04\" class=\"indent para editable block\">For Netflix, what delivered the triple scale advantage of the largest selection; the largest network of distribution centers; the largest customer base; and the firm\u2019s industry-leading strength in brand and data assets? Moving first. Timing and technology don\u2019t always yield sustainable competitive advantage, but in this case, Netflix leveraged both to craft what seems to be an extraordinarily valuable pool of assets that continue to grow and strengthen over time. To be certain, competing against a wounded giant like Blockbuster will remain difficult. The latter firm has few options and may spend itself into oblivion, harming Netflix in its collapsing gasp. And as we\u2019ll see in the next section, while technology shifts helped Netflix attack Blockbuster\u2019s once-dominant position, even newer technology shifts may threaten Netflix. As they like to say in the mutual fund industry \u201cPast results aren\u2019t a guarantee of future returns.\u201d<\/p>\n<div id=\"fwk-38086-ch03_s02_s04_n01\" class=\"bcc-box bcc-success\">\n<div>\n<header><strong>Key Takeaways<\/strong><\/header>\n<div>\n<ul>\n<li>Netflix\u2019s brand is built on customer experience powered by technology.<\/li>\n<li>Physical retailers face costly expansion limits; Internet and digital firms scale more easily.<\/li>\n<li>Low-cost inventory lets Internet firms profit from the long tail of products.<\/li>\n<li>Netflix monetizes studio back catalogs via revenue sharing.<\/li>\n<li>Early, strategic tech use drives advantage through brand, data, switching costs, and scale.<\/li>\n<li>Collaborative filtering creates a key data asset beyond the technology itself.<\/li>\n<li>Distribution technology enables fast, near-universal one-day delivery.<\/li>\n<\/ul>\n<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n<\/div>\n<div id=\"fwk-38086-ch03_s02_s04_n02\" class=\"bcc-box bcc-info\">\n<div class=\"textbox textbox--exercises\">\n<header class=\"textbox__header\">\n<p class=\"textbox__title\"><span style=\"font-family: 'Cormorant Garamond', serif; font-size: 1em; font-style: normal; font-weight: bold;\">Questions and Exercises<\/span><\/p>\n<\/header>\n<div class=\"textbox__content\">\n<ol id=\"fwk-38086-ch03_s02_s04_l02\" class=\"orderedlist\">\n<li>What are Netflix\u2019s sources of competitive advantage?<\/li>\n<li>Does Netflix have a strong brand? Offer evidence demonstrating why the firm\u2019s brand is or isn\u2019t strong. How is a strong brand built?<\/li>\n<li>Scale advantages are advantages related to size. In what key ways is Netflix \u201cbigger\u201d than the two major competitors who tried to enter the DVD-by-mail market?<\/li>\n<li>What is the long tail? How \u201clong\u201d is the Netflix tail compared to traditional video stores?<\/li>\n<li>What \u201cclass\u201d of software does Netflix use to make movie recommendations?<\/li>\n<\/ol>\n<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n<\/div>\n<\/div>\n<p class=\"indent\"><sup>1<\/sup><a class=\"link\" href=\"http:\/\/www.netflix.com\/Top100\" target=\"_blank\" rel=\"noopener\">http:\/\/www.netflix.com\/Top100<\/a>.<\/p>\n<p class=\"indent\"><sup>2<\/sup>Netflix Investor Day presentation, May 2008, accessed via <a class=\"link\" href=\"http:\/\/ir.netflix.com\/events.cfm\" target=\"_blank\" rel=\"noopener\">http:\/\/ir.netflix.com\/events.cfm<\/a>.<\/p>\n<p class=\"indent\"><sup>3<\/sup>\u201cIndustry Customer Churn Rate Increases 15%,\u201d <em class=\"emphasis\">GeoConnexion<\/em>, January 8, 2008. The article contains a summary of the Pittney Bowes G1 finding.<\/p>\n<p class=\"indent\"><sup>4<\/sup>Associated Press, \u201cOn the Call: Netflix CEO Reed Hastings,\u201d April 22, 2010; Reuters, \u201cBlockbuster Fourth-Quarter Profit Falls 28 Percent,\u201d February 27, 2010.<\/p>\n<\/div>\n<\/div>\n","protected":false},"author":217,"menu_order":2,"template":"","meta":{"pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[49],"contributor":[],"license":[],"class_list":["post-263","chapter","type-chapter","status-publish","hentry","chapter-type-numberless"],"part":257,"_links":{"self":[{"href":"https:\/\/pressbooks.ccconline.org\/bus3060\/wp-json\/pressbooks\/v2\/chapters\/263","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/pressbooks.ccconline.org\/bus3060\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/pressbooks.ccconline.org\/bus3060\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/bus3060\/wp-json\/wp\/v2\/users\/217"}],"version-history":[{"count":10,"href":"https:\/\/pressbooks.ccconline.org\/bus3060\/wp-json\/pressbooks\/v2\/chapters\/263\/revisions"}],"predecessor-version":[{"id":569,"href":"https:\/\/pressbooks.ccconline.org\/bus3060\/wp-json\/pressbooks\/v2\/chapters\/263\/revisions\/569"}],"part":[{"href":"https:\/\/pressbooks.ccconline.org\/bus3060\/wp-json\/pressbooks\/v2\/parts\/257"}],"metadata":[{"href":"https:\/\/pressbooks.ccconline.org\/bus3060\/wp-json\/pressbooks\/v2\/chapters\/263\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/pressbooks.ccconline.org\/bus3060\/wp-json\/wp\/v2\/media?parent=263"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/bus3060\/wp-json\/pressbooks\/v2\/chapter-type?post=263"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/bus3060\/wp-json\/wp\/v2\/contributor?post=263"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/bus3060\/wp-json\/wp\/v2\/license?post=263"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}