Deck 4: Netflix in Two Acts: the Making of an E-Commerce Giant and the Uncertain Future of Atoms to Bits

Question 1

Which of the following is true of Netflix?

A) It started as two separate services but is now viewed as a single subscription.
B) It began as a DVD subscription model and then simultaneously introduced a video streaming subscription while maintaining the legacy business.
C) It isn't a substitute good for conventional use-based media rental.
D) It got its start offering a DVD-by-mail service for an annual, per-disc rate subscription fee.
E) It started out as an IPO.

Answer 1

B

Question 2

Within the DVD-by-mail segment, Netflix remained bigger than both Wal-Mart and Blockbuster.

Answer 2

True

Question 3

Provide a brief description of the basics of the Netflix DVD-by-mail business model.

Answer 3

Netflix was started as a DVD-by-mail service that charged a flat-rate monthly subscription rather than a per-disc rental fee. Customers do not pay a cent in mailing expenses, and there are no late fees.
Videos arrive in red Mylar envelopes which contain the requested DVD, prepaid postage, and return address. When done watching videos, consumers just slip the DVD back into the envelope, and drop the disc in the mail. Users make their video choices in their "request queue" at Netflix.com. If a title is not available, Netflix simply moves to the next title in the queue. Consumers use the Web site to rate videos they've seen, specify their movie preferences, get video recommendations, check out DVD details, and even share their viewing habits and reviews. This model helped Netflix grow into a giant, but Hastings knew that if his firm was to remain successful, it would have to transition from mailed DVDs to streaming video.

Question 4

In addition to serving as CEO of Netflix, Reed Hastings has also served as _______________ for two other leading tech companies, Facebook and Microsoft.

Question 5

At Netflix, the majority of the DVD titles shipped are from back-catalog titles, not new releases.

Question 6

One challenge that Netflix faced was that Blockbuster and Walmart were able to quickly extend their strong brands to also become synonymous with a DVD-by-mail subscription service.

Question 7

The business of streaming video is radically different from DVD-by-mail in several key ways, including content costs, content availability, revenue opportunities, rivals and their motivation.

Question 8

Cinematch develops a map of user ratings and steers users toward titles preferred by people with tastes that are most like theirs.

Question 9

The Netflix customer experience was always weaker than the in-store experience of DVD rental firms, which had human staff. However, consumers were willing to overlook their dissatisfaction given Netflix's other benefits.

Question 10

Netflix gets to retain the entire subscription revenue for every disc sent out to a customer.

Question 11

The high degree of customer satisfaction that Netflix enjoyed is tightly linked with the firm's sized-based advantages.

Question 12

Even though Netflix is now mainly focused on digital distribution, it continues to offer the DVD-by-mail service in its base-price product.

Question 13

Once Netflix became a public company, the firm was required to disclose its financial position and reveal it was on a profit march.

Question 14

Netflix's initial revenue model was based on a flat-rate monthly subscription fee rather than a per-disc rental fee.

Question 15

Physical retailers are limited by shelf space and geography (meaning the density of customers around a particular location).

Question 16

Durable brands are built through customer experience.

Question 17

Brand and advertising are synonyms for the same concept.

Question 18

Describe Netflix's streaming video business model.

Question 19

Firms with high churn rates are likely to be more profitable.

Question 20

Although sometimes referred to as "rental," Netflix's model is really a substitute good for conventional use-based media rental.

Question 21

In exchange for a percentage of the DVD-by-mail subscription revenue for every disk sent out by Netflix, movie studios offer Netflix:

A) online streaming rights free of cost.
B) higher fees for marketing less-popular movies.
C) DVD titles at a discounted or wholesale price.
D) distribution rights to certain movies free of cost.
E) strong bargaining power in negotiations for digital distribution rights.

Question 22

Even if Netflix gave Cinematch away to its rivals, they would still not be able to make the same kind of accurate recommendations as Netflix. This is because of Netflix's _____.

A) technological superiority
B) customer loyalty
C) movie expertise
D) data advantage
E) large inventory

Question 23

Netflix has used the long tail in the DVD-by-mail business to its advantage, crafting a business model that creates close ties with film studios. What do film studios stand to gain from taking advantage of the Netflix model targeted at increasing the firm's long-tail offerings?

A) Discounted fees for marketing some of the less-popular titles from the studios
B) A cut of the subscription revenue from every disk sent out by Netflix
C) Greater bargaining power with movie rental firms such as Netflix, Blockbuster, and Wal-Mart
D) Lower costs related to screening movies in cinemas by releasing them straight on DVD
E) An equal share of revenue from the digital distribution model through online streaming

Question 24

For traditional retailers selling physical goods, _____ is the biggest constraint limiting a firm's ability to offer customers what they want and when they want it.

A) shelf space
B) video piracy
C) shipping costs
D) distribution rights
E) disintermediation

Question 25

Brands are built through _____.

A) customer awareness
B) data assets
C) excessive advertising
D) customer profiling
E) customer experience

Question 26

Netflix offered its subscribers a selection of over one hundred thousand DVD-by-mail titles, while other video rental firms can only offer as much as three thousand. This presents a significant _____ for Netflix over its rivals.

A) marginal cost
B) price advantage
C) variable cost
D) studio preference
E) scale advantage

Question 27

While the size of the tail in the long tail phenomenon is disputable, one fact that is critical to remain above this debate is that:

A) traditional brick and mortar retailers offer selections that cannot be rivaled by Internet pure-plays.
B) energy costs and worker wages drive up the costs of running stores like Netflix.
C) selection attracts customers, and the Internet allows large-selection inventory efficiencies that offline firms can't match.
D) the turnover rate of obscure titles in traditional video rental stores is only slightly higher than those for Internet pure-plays.
E) the cost of store maintenance and real estate makes stores such as Netflix unattractive.

Question 28

Churn rate is a term that refers to the:

A) average number of recommended titles in a user's queue.
B) rate at which the demand for a product or service fluctuates with price change.
C) number of movie titles that are difficult to assign reliable user ratings.
D) rate at which customers leave a product or service.
E) number of new users that each existing user attracts through word-of-mouth and social sharing.

Question 29

While it may be possible for rivals to match technology, the true exploitable resource created and leveraged through collaborative filtering technology is the data asset.

Question 30

The long tail is a phenomenon whereby firms can make money by:

A) selling the same product at different prices with only minor tweaks in their design.
B) leveraging customers to promote their products or services.
C) reselling multiple versions of a single product under different brand names.
D) offering a selection of products or services vastly greater than conventional retailers.
E) sell the same product to virtually every customer the Internet can reach.

Question 31

User ratings act as _____ for Netflix's customers.

A) marginal costs
B) fixed costs
C) switching costs
D) variable costs
E) barriers to entry

Question 32

A low _____ is usually key to a firm's profitability because acquiring a customer is more expensive than keeping one.

A) subscription fee
B) inventory size
C) churn rate
D) switching cost
E) opportunity cost

Question 33

Collaborative filtering is a classification of software that:

A) is used to gather user ratings and calculate a gross average user rating for each movie.
B) provides Netflix users with parental controls and other options while streaming movies online.
C) selectively sorts movies based on their censor ratings and delivers age-appropriate search results.
D) monitors trends among customers to personalize an individual customer's experience.
E) collates user ratings for a movie and creates a ranked list of movies most liked by users.

Question 34

How does Cinematch offer Netflix additional operational advantages for the DVD-by-mail business?

A) Cinematch offers alternate recommendations of movies based on critical acclaim and box office performance parameters.
B) Cinematch is linked to warehouses and recommends movies that are likely to be in stock.
C) Cinematch is often used by movie studios to plan movie scripts based on user preferences.
D) Cinematch is a source of additional revenue to Netflix as a marketing tool for recommending newly-released movies.
E) Netflix leases the Cinematch collaborative filtering software to smaller firms at a fee, withholding the valuable user ratings.

Question 35

By going public, Netflix encountered competition from the large, established firms Wal-Mart and Blockbuster. What aspect of Netflix going public lured these firms into the market?

A) By going public, Netflix was required to disclose its financial position.
B) By going public, Netflix was forced to reveal the Cinematch algorithm used to classify user ratings.
C) Netflix's model of flat-rate monthly subscriptions was found to be more profitable than a per-disc rental fee model.
D) Netflix's plan to enter the online movie streaming market alerted rivals to the possibility of losing their market share.
E) The migration of Netflix services to cover the Blu-ray disc market opened up opportunities for rivals.

Question 36

Internet retailers serve a larger geographic area with comparably smaller infrastructure and staff. This fact suggests that Internet businesses are more _____.

A) churn-prone
B) asymptotic
C) capitalized
D) vertically integrated
E) scalable

Question 37

How does the Cinematch recommendation system work?

A) Cinematch develops a map of user ratings and steers users toward titles preferred by people with similar tastes.
B) Cinematch gathers user ratings to calculate a gross average user rating which is continually updated with each subsequent user rating.
C) Cinematch requests users to create profiles detailing their interests and preferences and serves recommendations accordingly.
D) Cinematch uses a team of professional movie critics to create a comprehensive ranking system for each movie in its inventory.
E) Cinematch ranks movies in two separate lists based on their critical and box office ratings, and subsequently alters user preferences.

Question 38

When firms enjoy economies of scale they:

A) have a greater share of liquid assets than rivals.
B) have bigger production facilities than their competitors.
C) have a wider employee base than their competitors.
D) leverage the cost of an investment across increasing units of production.
E) leverage investment costs to decrease their subscriber acquisition costs.

Question 39

Which of the following represents an advantage enjoyed by the Netflix DVD-by-mail business over traditional video stores?

A) Lower technology overhead
B) Lower shipping expenses
C) Larger entertainment selection
D) Higher energy costs
E) Higher churn rates

Question 40

Netflix enjoys the triple scale advantage of the largest customer base, the largest selection, and the largest network of distribution centers. This can be attributed to:

A) Netflix's specialized focus on advertising and marketing.
B) Netflix's first-mover advantage.
C) Netflix going public to generate funds for expansion.
D) Netflix's effective and aggressive pricing strategy.
E) the bargaining clout it exercises over movie studios and the government.

Question 41

The shift from atoms to bits does not stand to impact content creators, middlemen, and retailers.

Question 42

The Netflix work culture is in many ways similar to its peers.

Question 43

Relate your understanding of Netflix dominance in the DVD-by-mail business to what you learned in the Strategy and Technology chapter: what three resources for competitive advantage did Netflix create in this market that rivals Blockbuster and Walmart couldn't match?

Question 44

Fixed costs vary according to production volume.

Question 45

How does Netflix use collaborative filtering software to match movie titles with customer tastes? In what ways does this software help Netflix garner sustainable competitive advantage?

Question 46

Although Netflix had a larger distribution network than rivals, other firms could build a similarly large warehouse network. Why was the size of the Netflix DVD-by-mail customer base critical to repelling rivals?

Question 47

The term _______________ refers to the rate at which customers leave a product or service.

Question 48

Netflix competitors in streaming are small and mostly unprofitable.

Question 49

One of the benefits of Netflix moving internationally is that any title licensed from the United States also comes with the right to stream the title worldwide, regardless of customer geography.

Question 50

In the context of the Netflix case, _____ refers to an extremely large selection of content or products.

Question 51

At Netflix, the marginal cost for digital goods is zero for all licensees.

Question 52

In 2010, Reed Hastings was named Fortune Magazine's "Business Person of the Year." Yet according to readings and class discussions, what was the Netflix CEO's "biggest strategic regret" to that point? What was his reason for giving this answer?

Question 53

Original content is an investment in allowing a firm to provide differentiated goods, a way to entice and retain customers with exclusive programming not available anywhere else.

Question 54

Netflix, the one-time "dot-com" upstart managed to achieve scale economies despite the fact that it faced two massive rivals: Blockbuster, a name synonymous with home video rental, and Walmart, not just a large firm, Fortune One, the largest firm in the US ranked by revenues. In what ways did Netflix offer size advantages over these rivals?

Question 55

By shifting to a streaming model, Netflix stands to eliminate shipping and handling costs.

Question 56

Walmart and Blockbuster were well-known firms. Why weren't they able to leverage their brands to compete against Netflix?

Question 57

_____ is a classification of software that monitors trends among customers and uses this data to personalize an individual customer's experience.

Question 58

Explain the long tail phenomenon at Netflix.

Question 59

The shift from atoms to bits is realigning nearly every media industry.

Question 60

Netflix uses data to create tailored audience promotions.

Question 61

How is Comcast vertically integrated?

Question 62

Marginal costs:

A) are minor, insignificant costs.
B) are associated with each additional unit produced.
C) are the costs incurred as a result of choosing one option over another.
D) are constant and do not vary according to production volume.
E) are also known as overhead.

Question 63

The marginal cost of digital goods is typically considered to be _____________

Question 64

Ownership of digital assets isn't always as it appears to consumers. Many Netflix original series like "House of Cards" are actually not own by Netflix, and other firms can license these titles, while Netflix may need to acquire additional rights to stream these titles overseas.

Question 65

What solution has Netflix come up with to address the need to deliver content to customers' televisions?

A) Netflix has entered into a revenue sharing agreement with Apple to produce customized set top boxes.
B) Netflix makes custom chips for television makers so they can offer Netflix in a way that replicates Google Chromecast and Amazon FireTV.
C) Netflix launched a self-branded hardware division to build and market its own set top boxes.
D) Netflix has acquired Vudu, a firm that specializes in the online streaming business.
E) Netflix provides tools to firms seeking to build Netflix access into their devices.

Question 66

The practice of windowing involves:

A) making content available to a distribution channel for a specified time period under a different revenue model.
B) scheduling movies to be streamed online at primetime periods to pull in more revenue from advertising.
C) relaying advertisements for limited time periods during online movie steaming, as opposed to frequent ad breaks.
D) displaying content in apps and browser windows.
E) streaming movies to customers' computers beforehand and then relaying them on television.

Question 67

Crowdsourcing is:

A) a phenomenon whereby firms can make money by offering a near-limitless selection.
B) the act of taking a job traditionally performed by a designated agent and contracting it out to an undefined generally large group of people in the form of an open call.
C) a classification of software that monitors trends among customers and uses this data to personalize an individual customer's experience.
D) the removal of an organization from a firm's distribution channel.
E) an industry practice whereby content is available to a given distribution channel for a specified time period or 'window,' usually under a different revenue model.

Question 68

How is scale important to Netflix streaming business?

A) A larger firm with more customers can spend more on content licenses
B) The firm can build larger data centers as it competes with the likes of Amazon Prime
C) Netflix can continue to expand its network of nationwide distribution centers to overseas locations
D) It will allow the firm to improve the marginal cost of its titles, which will also improve profitability
E) All of the above

Question 69

_____ refers to removing an organization from a firm's distribution channel.

A) Disbarment
B) Repudiation
C) Annulment
D) Disintermediation
E) Revocation

Question 70

In context to Netflix, what are the scale advantages associated with streaming?

Question 71

How does Netflix leverage its data asset, even as it has shifted from atoms to bits?

Question 72

A manager's decision making is often shaped by its perception of the competition. Which of the following does Netflix see as being in competition with the firm?

A) Video games
B) Magazines
C) DVD watching
D) Amazon Prime
E) All of the above

Question 73

Why is bargaining power shifting to content providers as the video content industry shifts from atoms to bits?

Question 74

An internal team at Netflix developed a prototype set top box to enable the direct streaming of content to customers' television sets. However, the idea of offering it to Netflix customers was dropped because:

A) the market for online streaming was nascent and unprofitable.
B) all major US cable firms built Netflix streaming into their set-top boxes.
C) the Blu-ray standard requires streaming features, as well.
D) of the brutally competitive nature of the consumer electronics business.
E) the entire software team was recruited by TiVo after LinkedIn made it easy to target and poach rival talent.

Question 75

Netflix's decision to unbundle the single fee for its $10 base service into two separate $8 plans for DVD-by-mail and streaming over the Internet proved to be a welcome surprise to most customers.

Question 76

Which of the following is true about the Netflix streaming business?

A) Its marginal cost for title acquisition is zero as it is currently focusing on distributing digital content.
B) It has the support of major studios such as Fox and Warner that have allowed it to stream any content the firm buys on DVD.
C) Its cost of acquiring streaming content has fallen in the recent past due to its long tail advantages.
D) It has attempted to counter rivals with exclusive content by securing exclusive streaming rights for several popular shows.
E) From the beginning it has experimented with various streaming revenue models, including pay-per-view, download-to-own, and ad-supported content.

Question 77

Netflix can send out any DVD it buys because of a Supreme Court ruling known as the _____.

A) clickwrap agreement
B) Betamax ruling
C) fair use law
D) First Sale Doctrine
E) Copyright Directive

Question 78

Why are streaming services considered more appealing to creative content creators than traditional TV?

Question 79

Choose the correct

Question 80

Costs that do not vary according to production volume are called _____.

A) total costs
B) marginal costs
C) switching costs
D) variable costs
E) fixed costs