Strategy 390 Case Review PDF

● ● ● ● Why didn’t Netflix enter earlier? ○ Because of technological constraints such as storing the movies, they needed the internet, lack of distribution center, and had to wait for DVD shipping cost to go down due to form factor going from VHS to DVD → cost of shipping went down because the s...

● ● ● ● Why didn’t Netflix enter earlier? ○ Because of technological constraints such as storing the movies, they needed the internet, lack of distribution center, and had to wait for DVD shipping cost to go down due to form factor going from VHS to DVD → cost of shipping went down because the size and weight of the package went down What is Netflix’s value proposition? What resources allow them to deliver value? ○ They are differentiated, appear to offer high willingness to pay ○ Distribution centers were cheaper to set up/ real estate costs were cheap ○ economies of scale was good due to distribution centers ■ Lower avg. cost → but raised willingness to pay ○ Netflix dominated two s-curves: first the DVDs then disrupted themselves with the streaming industry. How are Porter's Five (Six) Forces different in the streaming industry than they were in the DVD industry? ○ Substitutes: streaming vs DVD ■ DVD: assuming competitors have similar products: cheaper VHS version compared to DVD version ■ Streaming: YouTube, cable, social media such as Instagram and TikTok Why was Blockbuster slow to respond? Netflix Recap Video: ● Blockbuster was in the mature phase ● Netflix’s original business model was only enabled by the advent of the disruptive technology which was DVD… then innovation with DVD by mail ● What were the two technologies? ○ DVD by mail ■ DVD came out allowing for a business model innovation which was DVD by mail and that allowed Netflix to go in and dominate this new business model ○ Fast Wifi/Streaming ● Why did Blockbuster’s total access fail? ○ It basically did everything that Blockbuster did plus everything Netflix was doing ○ It was unsuccessful because of the underlying cost structure that blockbuster had adopted ■ They had all those retain stores which at one time were a competitive advantage but turned into a disadvantage ● Netflix is very impressive because they made the leap from an old technology s-curve to a new technology s-curve. How did they do this? ○ They made the jump with some luck AND their existing subscriber base, the data that they had on them, and the recommendation algorithm ● ● ● ● ● ● eHarmony lies between the differentiation and niche quadrants in determining the competitive scope Industry: more attractive for this specific niche ○ Hard to imitate, increased barriers to enter for this niche because of their resources 2 sided transaction platform with men and women on each side ○ Straight dating platform 2 sided platform of men and women with strong indirect network effects Had long questionnaire and rejected people from the platform during a lengthy screening process ○ They had strong governance rules and there is a tradeoff as they increase quality but can decrease quantity Niche strategies are still viable platforms especially if people’s preferences are very different in the dating market Wii Encore: - They should make money from the gamer, but they do not follow this principle - Monopoly Rents - Porter's five forces plus a six force of complements and cross-price/demand - Complements: Porters Sixth Force - Are goods whose prevalence enhances the value of another - Negative cross price elasticity - Complements affect our consumer surplus - Suppliers affect our cost - Strong indirect network effects biggest issue is the chicken and the egg problem - In the gaming industry to overcome this, Nintendo made their own games to serve as complements - They also use exclusivity - They sold consoles for a loss (AKA Subsidizing) - Why do companies like playstation tell everyone how much the console will cost months before they release them? - Telling people how much the console costs lets the developers know how much they will sell and how the willingness to pay will be high - Royalties that console companies make developers pay, ensures that the bad developers stay out and keeps the competition going to ensure quality games - Karate game example: - Negative network effect because of how bad the game was - Game consoles are a quintessential example of two-sided innovation platforms with strong indirect network effects - Indirect network effects are good and bad - Increase barriers to entry (less competition) & WTP - - - Chicken and egg problem Indirect network effects are determined by quantity and quality (which can be at odds with one another) - Governance decisions (excluding developers, limiting # of games) work to balance quantity and quality With consoles, a three sided platform is difficult because existing consoles have such low prices that third-party hardware makers would not be able to be profitable (and if they charged higher prices the platform would fail) Video Recap: ● 2 sided innovation platform with strong indirect network effects ○ Have the power to increase WTP on each side ○ There is a chicken and egg problem ■ You need to convince developers to get on first so that there would be games for users to play ● They advertised low prices which told developers that people were going to buy the consoles due to the low prices ● Royalties kept quality high and gave incentives for developers to make good games to get in ● Widows is a 3 sided platform and video game consoles are a two sided platform ● Dell has no incentive to come in an create hardware for Xbox ○ They do not have an ability to differentiate ○ They were going to be competing with playstation who were giving away their consoles at cost so if Dell did it they would have to give them away for free so the platform would fail so it is not an industry where you can have a three sided platform ● Why does windows not charge royalties, but xbox does? ○ Razor blade model ■ Gamers WTP and the number of games they buy has a high correlation ○ Making money on the side of the games, it allows you to price discriminate and extract more money from the side or group of people that have a higher willingness to pay ○ With windows this is not true, because there is a high WTP for the computers, but not the applications/programs so there is not a high correlation -