Digital platforms organizations are the main tools of transforming the
economy into a digital economy. They use advanced digital technologies, are
primarily data-driven, and match supply and demand in unconventional and new
ways. The last century, information technology has deeply reduced the need to
own physical infrastructure and assets; it facilitates the platform’s ability
of evaluating and exchanging huge amounts of data, and consequently increases
the value of the platform.
technology enabled business models to contrast the traditional organizational
forms in the ways they control supply chains, lead a network of platform
partners, and develop business models. Platform businesses bring together
producers and consumers in high value exchange. Their chief assets are
information and interaction, which together are the source of the value they
create and their competitive advantage (Alstyne, Parker, Choudary, 2016, p. 56).
These operating systems do not sell products or services, rather they are
selling access to a software and a digital system of reputation and trust
between supply and demand.
based business models gave also rise to what is often called the sharing
economy. The sharing economy refers to the phenomenon which deals with people
obtaining, giving, and sharing access to goods and services by means of a
digital platform. Platform providers can be both for-profit and non-profit.
understand how digital platforms are transforming competition in the sharing
economy, the paper is going to focus on the following question: to what extent is
Netflix influencing competition in its industry and in the U.S. sharing economy?
To come up with an answer to this main theme, the research method will be
literature based and the structure of the paper is first dealing with some general
information about the organization’s background and afterwards Porter’s Five Forces
model is going to be applied to Netflix’s industry, with the aim of determining
the level of competition in the industry in which it competes. Furthermore, in
order to analyse the digital platform’s influence on the U.S. economy, the
paper is going to deal with Netflix’s disruptive impact on it, known as the
2. Theoretical Framework
The Californians Marc
Randolph and Reed Hastings started a business together in 1997 called Netflix. Originally,
Marc Randolph’s plan was to offer a product or service over the internet. One
day, his business partner, Reed Hastings, had to pay a charge fine of $40
because he returned a copy of a film too late. He then suggested to his partner
to start renting out movies on the internet and, in this way, Randolph and
Hastings started their enterprise together.
Netflix website was officially launched in 1998. Initially, the organization
had about 30 employees and 925 products available on their site. Netflix’s core
competency was that customers were sent DVDs via mail on a pay-per-rental basis
where postal fees were applied (Keating, 2012).
1999 the platform introduced the monthly subscription format (O’Brien, 2002);
it consists in paying a flat-fee each month in exchange for unlimited rentals. The
innovating feature of this business is that costumers don’t have due dates to
return rentals, no late fees, no shipping costs, and handling fees (Redwine, 2017).
company had considered the idea of providing movies online. In the mid-2000s
the data speeds and capacity were able to offer the service of downloading
movies from the internet. The idea consisted in a ”Netflix box” that allowed
costumers to download movies overnight and watch them the day after. However,
with the increasing popularity of YouTube, Netflix decided to adapt the
streaming concept as well. The plan was completed in 2007 (Kyncl, 2017).
2006, Netflix introduced a new service which dealt with recommending movies. By
using subscribers’ ratings, the platform can accurately predict which movies a
subscriber would enjoy watching next by using a filtering algorithm. This service
led to huge success, it caused, in fact, an increase in rentals and subscribers
across the world. In 2005 Netflix gained 4.2 million members, and two years
later, in 2007, it delivered its billionth DVD by mail (Liedtke, 2007). In the same year, the digital platform offered video
on demand, thus streaming, to its subscribers.
The big revolution of
Netflix’s strategy consisted in providing the opportunity to costumers of
watching television shows and movies instantly on their PC’s and laptops as
well as on the traditional television. This service marked the beginning of
streaming media as known these days.
In the following years, the company partnered with electronics companies to
allow streaming on electronic platforms, such as the Xbox 360, Blu-ray disc and
smart TVs (Keating, 2012).
In 2010 Netflix became available on Apple’s iPad and iPhones, Nintendo Wii as
well, and other Internet connected devices (Keating, 2012).
the digital platform expanded itself and made services available around the
world. In April 2014, Netflix had 50 million global subscribers with 32.3%
video streaming market share in the United States. The company offered its
services in 41 countries worldwide. Just a
couple of months later, the digital platform improved the number of
subscribers, of which 36 million in the United States (Lawler, 2014). Thanks to the new service that allowed costumers to
watch movies and shows offline, on April 2017, Netflix reached the 100 million
subscribers (Bond, 2017). In the month of October 2017, Netflix was estimated
having 109.25 million subscribers worldwide, counting 50.85 million in the
United States (Huddleston, 2017).
As suggested by the data about
Netflix’s expansion, the digital platform could be defined as successful. However,
a way to accurately attest its profitability is by means of Porter’s five
forces model, which analyses the level of competition within the industry in
which the business operates.
makes Netflix such a successful business is the bargaining power of buyers. Buyers
are powerful because they can easily switch to another service, but they still
choose to purchase and consume Netflix’s services. As they are not bound to an
annual contract, consumers can subscribe to one service one month and then
switch the next. As a consequence, Netflix react by offering an appealing
selection of movies and series in order to encourage as many costumers as
possible to renew their subscription.
the bargaining power of suppliers, the company has to obtain and renew
contracts with networks and studios to keep the costumers satisfied. These
suppliers are lately debuting with their own streaming services, and hence less
willing to share products with Netflix. In such manner, some of the suppliers
are becoming the digital platform’s competitors. Suppliers can also establish
strategic alliances or cooperation making the industry more concentrated and
thus themselves more powerful.
threat of new entrants is an addressing problem considering the new trends coming
up. However, entering the streaming video industry although being a company of
small-scale makes it difficult to compete with a renowned brand such as
Netflix. The costs involved in lasting contracts are extensive and new entrants
are not able to face them if not by partnering with a competitor, thus an entry
barrier is represented by capital requirements. Nonetheless, in order to limit
the competition and the new entrants, Netflix has to keep improving its
services selection or offer differentiated ones.
services are one of the main substitute for streaming video. Costumers who are
interested in watching news and sports enjoy the traditional cable television
which often also offers free streaming entertainment. Furthermore, Netflix
faces the risk of being substitute by pirating. In general, competing with free
services is always difficult. Netflix has to deal with rivals as streaming
apps, PBS, Crackle or Snag Films, for example, offer their products for free or
in exchange for publicizing their sponsors. However, as on-demand streaming
keeps growing in popularity, the threat of substitutes is going to diminish, considering
that online entertainment is gradually replacing the traditional cable
result of the examination of the latter forces, the degree of rivalry can be
assessed in this specific industry. In the streaming video industry, competition
seems to be fierce since there is a low product differentiation between
streaming video providers. Rivalry is, in fact, based on the selection of films
and series titles. Nonetheless, a cooperative competitive environment is
emerging within the rivals of this industry. Amazon, for example, launched the
Amazon Fire TV Stick in 2014, a streaming media player, which allows the
customers to connect with other on-demand video players as well, including
Netflix. The involvement of competing services points out the acknowledgment of
the additional value created by means of a vast selection of streaming media. Furthermore,
the digital entertainment platform industry recognizes the fact that its customers
are more and more willing to subscribe to different products, which means that multiple
organizations are able to gain market share without being affected by the greater
number of competitors.
the previous analysis we can conclude that: the bargaining power of buyers is
high, the bargaining power of suppliers is high as well, that the threat of
substitute products or services is moderate, likewise, the threat of new
entrants can be defined as moderate, and finally that rivalry among existing
competitors is moderate too.
conclusions that can be drawn from the Porter’s five forces analysis, are that
Netflix competes in a quite profitable industry and that its business model permits
the company to be one of the dominant organizations in its arena.