1. Analyzing Netflix's Bargaining Buyers Power (NFLX)
  2. Analyzing Netflix's Bargaining Supplier Power (NFLX)
  3. Analyzing Netflix's Degree of Rivalry Among Competitors
  4. Analyzing Netflix's Threat of New Entrants (NFLX)
  5. Analyzing Netflix's Threat of Substitutes

Netflix, Inc. (NASDAQ: NFLX) is a unique service. As of November 2015, for less than $10 per month and an Internet connection, you can have movies and television shows streamed commercial-free to your tablet, television or computer. It is also ubiquitous. There are television remotes sold with buttons just for accessing Netflix’s streaming services. In 2014, Nielsen found that roughly 40% of homes in the United States subscribed to some video streaming service and 90% of them chose Netflix. As impressive as those numbers are, it also means 60% of the households in the U.S. do not use video streaming services. They do something else, whether it is watching traditional television programming or cutting the cable completely and exploring other interests. In this sense, these households are “substituting” something in place of Netflix.

The threat of substitutes is one of the five competitive forces Michael E. Porter identified in his landmark 1979 article for the Harvard Business Review. In that piece, the Harvard Business School professor explains his qualitative analysis framework commonly known as Porter’s Five Forces and explores the effects the threat of substitutes has on a company’s profitability. The threat of substitutes, the bargaining power of customers, the threat of new entrants, supplier bargaining power and competitive rivalry within an industry can each impact how a company competes. Review the following information for a better understanding of the threat of substitutes facing Netflix.

Live Streaming

Movie and television show streaming services are popular, but more than half of the people in the U.S. are not interested. For these people, such as sports fans or people who enjoy watching the news, their existing cable services provide plenty of entertainment. Traditional cable services continue to be popular and many of these established television networks such as HBO and Fox offer their own streaming services that are free to their cable subscribers.

Opting Outside

For Black Friday 2015, sporting goods retailer REI launched an Opt Outside event to encourage people to spend time outside instead of hitting the local mall. As physical pursuits gain in popularity, Netflix could find its subscribers “opting outside.” Already, the company reports a high degree of seasonality in its subscriber numbers. Numbers tend to fall off in the second quarter and pick up steam in the third, reaching highs in the first and fourth quarters. In other words, when the weather is colder, the company has more subscribers. As spring hits, many people are watching less Netflix, if not less television altogether.

Competing Against Free

It is hard to compete against free, and Netflix faces this competitive force on several fronts. For one, Netflix faces a risk of people substituting its service by pirating. Whether the video pirates get their videos from one of the many piracy sites on the Internet or through a friend’s borrowed Netflix log-in, there is an enormous cost for the company. Netflix also has to compete against other streaming video providers that provide their content for free. In addition to the complimentary streaming cable networks provide, many streaming apps such as PBS, Crackle or Snag Films offer some content for free or in exchange for airing commercials.

Being Social

There is also a risk that Netflix subscribers substitute the time they spend streaming video with more time being social. If social media services such as Facebook have shown anything, it is that people are looking for ways to connect with others around them and share their experiences. Whether that involves playing games online and interacting with friends or spending more face-to-face time with loved ones, the fact is binge watching on Netflix is not an inherently social experience.


Related Articles
  1. Investing

    Netflix: Porter's 5 Forces Analysis

    Even though Netflix is a well established company, there is always a threat from competitive forces.
  2. Insights

    Netflix May Produce Bollywood-Style Original Shows, Says CEO

    First Blockbuster, now cable companies? Find our how Netflix's popular streaming service is forcing the television industry to adapt or die trying.
  3. Investing

    Making Sense of Netflix's Balance Sheet

    Understand how to assess Netflix's performance based on the major components of its balance sheet.
  4. Investing

    Should Netflix Consider Commercials And Ads?

    Understand why Netflix does not currently support commercials or ads on its streaming site, and learn how it could benefit if that changed.
  5. Investing

    Who Are Netflix's Main Competitors?

    Netflix has many competitors, but is that really what current and potential shareholders should be worried about?
  6. Investing

    Netflix's Future Growth: Greater Than You Think?

    The potential for Netflix could be considerably greater than you think.
  7. Investing

    6 Interesting Facts From Netflix's Earnings

    The streaming service's shareholder letter and earnings call provide a glimpse into its future growth trajectory.
  8. Investing

    Is It Time to Cash Out On Netflix?

    Understand the Netflix business model and what makes Netflix such a good company. Learn three key reasons why it might be time to cash out.
Frequently Asked Questions
  1. How did Warren Buffett get started in business?

    Warren Buffett may have been born with business in his blood, but it was a brush with Benjamin Graham that put him on his ...
  2. What is the difference between Macaulay duration and modified duration?

    Find out more about the Macaulay duration and modified duration, how to calculate them and the difference between the Macaulay ...
  3. How do I calculate a discount rate over time, using Excel?

    Learn how to calculate discount rate in Microsoft Excel and how to find the discount factor over a specified number of years.
  4. How long will it take for a bond to reach its face value?

    Learn when different savings bonds reach face value, and determine the best time to cash them in to get the highest return ...
Trading Center