Netflix Five Forces Analysis

Netflix is the world’s leading online streaming platform with a global user base of more than 230 million as of the end of 2022. The company has experienced solid growth over the past several years. At the end of the third quarter of 2023, the total paid memberships of Netflix were above 247 million. 

Netflix is an innovative online entertainment brand that has seen its worldwide popularity grow very fast. Its global popularity is attributed mainly to its focus on technological innovation, user experience and a vast collection of movies, documentaries and shows.

Netflix has been creating a lot of original content lately, a large portion of which is regional and targeted at local audiences of specific markets. The company is facing increasing competition from several other leading online entertainment platforms like Disney +, Amazon Prime, Hulu, HBO Max and others. Its user growth rate has been declining due to increased competitive pressure and market saturation. The company licenses a lot of content from third party providers which has caused its content related obligations to grow.

In this five forces analysis, we will analyze the competitive position of Netflix and how the company is positioned against its rivals in a highly competitive landscape. Porter’s five forces analysis is an analytical framework for analyzing the competitive position of a business and has been named after its creator Harvard Professor Michael E Porter.

Bargaining power of suppliers: Moderately High

The suppliers of Netflix include mainly the technology providers and the third party providers from which the company sources content. Third party content providers are the various studios that produce movies, shows and documentaries.

 For its technology related needs, the company depends mainly on the leading cloud services provider Amazon Web Services. Amazon is a large company, which is financially stronger and offers a wide range of cloud based services. 

Moreover, it is a competitor of Netflix in the online streaming segment. In recent years, Amazon has also created a lot of original content for its Prime Video online streaming platform. Overall, the threat of forward integration is already very high from Amazon. 

So, the bargaining power of Amazon is strong. The bargaining  power of other suppliers from whom the company licenses content is somewhat moderate. There are some factors that moderate the bargaining power of suppliers including the brand image of Netflix, its financial strength and its capability to create its own original content.

Netflix depends heavily on the use of technology for the worldwide delivery of its content. AWS is its main technology provider and the leading supplier with strong bargaining strength. However, the overall bargaining power of Netflix suppliers is moderately high.

Bargaining power of buyers: Moderate

Netflix customers are scattered all over the world and by the end of the third quarter of 2023, the total number of Netflix paid subscribers had grown to over 247 million. The company has enjoyed solid growth in its user base over the past several years. 

The strong competition in the industry and the availability of various online streaming providers including global and local providers gives the customers of Netflix some bargaining strength. The company invests heavily in creating and maintaining demand which is a sign of bargaining power of customers and high competitive pressure. Netflix also invests heavily in user experience and maintaining customer loyalty. Due to the high competitive pressure, customer loyalty is difficult to maintain in the online streaming industry sector. Switching costs are also not very high and pricing plays an important role in maintaining user loyalty as well as the amount of content available on the platform.

Some of the leading factors that moderate the bargaining strength of the customers in the online streaming industry include brand image, product quality, user experience, content, and pricing and marketing strategies. Netflix has invested in innovation and creating quality content for its audience. It is also ahead of others in terms of user experience. Overall, the bargaining power of its customers is moderate.

Threat of substitute products: Moderately High

The threat of substitute products in the online streaming industry arises mainly from the online streaming and entertainment providers offering similar services. There are multiple such players in the market which offer similar services like Amazon Prime, Disney Plus, Hulu, HBO Max, Apple Plus and other players including YouTube which also offers a vast collection of movies on rent. There are many more smaller local players in various markets that also offer similar services.

Overall, the threat of substitutes is getting higher for Netflix. The other brands are also creating a lot of original content. Disney Plus offers mainly its own original content and Prime Video has also released several Amazon originals in recent years. Other online entertainment providers like YouTube also offer substitute products. While the overall threat of substitute products would have been higher, it gets moderated to some extent by Netflix’s brand image, its vast collection of content, superior technologies and investment in marketing and innovation. The threat of substitute products for Netflix remains moderately high.

Threat of new entrants:- Low

The threat of new entrants in the online streaming industry is low. It is mainly the old and established players that have seen most growth and expansion. The barriers to entry are high. It is possible to enter at a smaller scale locally which many regional companies have done worldwide in various corners of the globe. However, growing into a significant player at a global scale is difficult for new entrants. 

First of all, a large investment is required for entry in this sector. Some established entertainment brands have opened their own online streaming channels locally in various geographical regions. However, they do not pose any significant threat to the leading players like Netflix. These local players hold very small market shares.

Another key factor that prevents the entry of new players is technology. Netflix is an innovative brand and focuses on providing the best user experience to its customers worldwide. Its recommendation algorithms are considered a lot advanced compared to those used by the other players. Netflix invests a large sum in research and development each year to continuously improve user experience.  Since, it is difficult for new players to match Netflix’s capabilities in this area, they pose little to no threat to its position or market share.

Intensity of competitive rivalry :- High

The overall intensity of competitive rivalry in an industry sector is an important factor that affects the competitive position of a brand in an industry sector. It also affects many more factors like customer loyalty, market share and others. In recent years, the intensity of competitive rivalry has increased a lot in the online streaming sector whose effect is also visible as shrinking market share of the company.

The number of leading players that hold significant market share in the online streaming sector is only five or six. However, these players are quite aggressive when it comes to maintaining their market share and expanding user base. Moreover, competitive pressure also comes from other sources like social media and gaming websites. YouTube is also a significant competitor of Netflix.

The main competitive threat arises from leading players like Disney Plus, Amazon Prime Video, Hulu, HBO Max, and Apple Plus. However, the dominant position of Netflix is bolstered by several factors including its excellent brand image, marketing, user experience, focus on innovation and its financial strength too. The company has kept increasing its investment in research and development to battle the competitive pressure. It has also built a vast collection of original movies, documentaries, and shows that is bigger than that held by any other player. These factors moderate the competitive pressure on Netflix. However, its competitors are financially strong and innovative brands. So, it intensifies the rivalry between these players. Overall, the intensity of competitive rivalry in the online streaming sector is high.

Conclusion:

Netflix is operating in an intensely competitive industry environment where the bargaining power of buyers and suppliers is moderately high. The company’s competitive position is strong as it has remained the dominant player in the online streaming sector over the past several years. Increasing competitive pressure has shrunk its market share over the past few years but the user base of the company is now approaching 250 million. The factors that have strengthened the competitive position of the company include its focus on user experience, technological innovation, vast amount of content including Netflix originals, strong popularity and a strong company culture that makes it a highly productive organization.

Technology has always remained key to the growth of the company and has also played a key role in helping it beat the competitive pressure and achieve faster growth. The global online streaming sector has grown crowded with a large number of smaller brands that are mainly local and limited to small regions and hold very small market shares. These companies do not pose any real threat for Netflix or its market position. The company has been feeling the competitive pressure grow from leading players like Disney Plus, Apple Plus, Hulu, Amazon Prime Video and HBO Max. YouTube is another key player which is also a rival of Netflix. However, the overall dominant position of Netflix is attributed to mainly its innovative technologies, user experience and is vast collection of movies and shows. Globally, it is enjoying strong popularity which has also bolstered its comepetitive position.