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FACULTY OF BUSINESS AND LAW

MODULE TITLE: INNOVATION MANAGEMENT

MODULE CODE: UGB269

LONDON CAMPUS

MODULE LEADER: DEREK WATSON

MODULE DELIVERER: AKUA SACKEY

ACADEMIC YEAR 2019/18

STUDENT NAME: VANESSA CAROLINA PIZZOCHERA

STUDENT NO: 179199848

WORD COUNTS: 3511

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CONTENTS
CHAPTER ONE INTRODUCTION...........................................................................................................3
1.1 Background........................................................................................................................................3
1.2 Aim....................................................................................................................................................3
1.3 Objectives..........................................................................................................................................3
1.4 Research Question.............................................................................................................................3
CHAPTER 2 LITERATURE REVIEW......................................................................................................4
2.1 Business Model..................................................................................................................................4
2.2 Business Model’s Elements................................................................................................................4
2.3 Business Model Innovation................................................................................................................4
2.4 Success Innovating Business Models.................................................................................................6
CHAPTER 3 METHODOLOGY................................................................................................................7
3.1 Research Design.................................................................................................................................7
3.2 Case Study Method............................................................................................................................7
3.3 Case Study: Netflix.............................................................................................................................8
CHAPTER 4 RESULTS AND DISCUSSION..........................................................................................11
4.1 Netflix as a Paradigm of Online Content Distribution......................................................................11
4.2 Discussion........................................................................................................................................13
4.2.1 A business model based on demand..........................................................................................13
CHAPTER 5 CONCLUSION AND RECOMMENDATION...................................................................14
REFERENCES..............................................................................................................................................16
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CHAPTER ONE INTRODUCTION

1.1 Background

New business models are being described in the news every day with great enthusiasm and hope.
Examples such as Facebook, Apple, Netflix, and Airbnb are just a handful of companies doing
things differently and achieving high growth rates, impressive valuations and venture capital
investments. However other names such as Blockbuster and Kodak (Friedman and Kass-
Shraibman, 2017) have failed to convince the ever-changing market resulting in bankruptcy
filings. A similar situation happened in the beginning of the 2000’s decade with the so-called dot
com bubble, where companies were growing at an incredible rates but also disappearing at
similar rates. During this time the idea of business model (BM) and business model innovation
(BMI) emerged as an explanation for both phenomena (Mason and Spring, 2011) and the same
seems to be happening today. Having this in mind, this paper discusses what BMIs are, what
BMI is and what are the advantages and disadvantages of it using real examples in the context of
Netflix.

1.2 Aim

Aim of this research is to review Business Model Innovation in Netflix

1.3 Objectives

 To identify the development strategy of Netflix throughout its history

 To understand the business innovation process
 To identify Business Model’s Elements
 To explain the business model of Netflix by the Business Model Canvas

1.4 Research Question

What are the features of Business Model Innovation in Netflix?

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CHAPTER 2 LITERATURE REVIEW

2.1 Business Model

The BM refers to the way in which an organization creates, manages and captures value. From
this perspective, the success or failure of a particular solution in the market is largely determined
by the BM, that is, the way in which existing capabilities or to be developed by a company,
converge in an effective response or high value according to the needs of a particular client
facilitating their willingness to pay for it (Osterwalder and Pigneur, 2013).

2.2 Business Model’s Elements

The main components that constitute the BM are the value proposition, the clients, the external
positioning, the internal processes, the processes related to the competition, the personnel and
finally the Investors (Morris, Schindehutte and Allen, 2005).

According to Kalina (2018), there are four elements related to the BM: value proposition for the
client, revenue model, resources and key processes. On the other hand, Osterwalder, Pigneur and
Tucci (2005), select nine elements in a BM: target customer, distribution channel, customer
relations, value chain configuration, value proposition, essential competencies, network of
partners, revenue system and cost structure.

The value for both the client and the company is specified by the proposed value parameters and
revenue model. On the other hand, the key resources and processes detail how the value that has
been generated will be delivered to the client and the company. Therefore, we can say that any
variation in any of these components would affect the BM and the rest of the components that
form it.

2.3 Business Model Innovation

At present, the concept of a BMI has taken on great importance and has become a conceptual
trend, however, most of the companies we know today are not necessarily totally new and
different businesses, some are transformations of the already existing, for this reason the growth
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of SMEs will allow the creation of new industries in the country as well as they could intervene
in an innovative way in the way that customers perceive value of the industries currently
established.

According to Teece (2010), the ability of a company or nation to capture value is seriously
compromised, unless it has the capacity to create new BMs. In this way, the innovation of the
BM can be considered as one of the most effective tools that SMEs can adopt. Unlike large
companies, which have a disadvantage because it is more difficult because of its complexity to
modify their BM, adapt to new needs and manage the change in organizational culture.

Rodelo, Lopez and Hernandez Palma (2018) present the main elements that make up the
innovative BMs that they have identified in 14 large companies selected for their success and
worldwide recognition, which they started as small industries and today they are leaders in each
of their sectors, in this case the example of Wal-Mart will be taken into account as the main
contribution in this study. They also describe the importance and need for SMEs of creating an
innovative BM to overcome entry barriers and become a more competitive company in the
sector.

An innovative value proposition: This is usually accompanied by a novel system of capturing

value for the organisation, that is, through several elements, companies are in a position to
create, offer and capture value in a different way from the competition, which allows them to
find an advantage over other companies.

Innovative value chain: Companies that have an innovative value chain try to control as much as
possible the entire value chain of the sector by fully integrating it. For those activities that cannot
be integrated, strategic agreements are signed with suppliers or intermediate customers that
guarantee long-term fluid relationships. It should be noted that a key example is that of Wal-
Mart, since this company focuses on direct commercial distribution to the customer, in addition
to having agreements with its suppliers that guarantee quality and price, which allows them to
reduce costs.

Innovative Processes: The use of innovative processes with respect to the majority of
competitors in the sector that is more effective and efficient. They also stand out for trying to
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involve the client in the processes of the organization, generating value for both the client and
the organization.

Resources and Innovative Capabilities: The use of resources in an innovative way and with
innovative capabilities with respect to most organizations in the sector, that is, the use of human
or technological resources must offer an advantage for the worker and for all company
facilitating processes and improving the organizational climate.

Organizational Culture of Innovation: Innovation is incorporated as a value in the

organizational culture that is extended by the key people of the organization. In turn, this
innovation is a critical capacity for the success of these organizations in their search for total
quality.

2.4 Success Innovating Business Models

The BM concept can be applied to different levels: individuals, firms or sectors therefore, BMI
can happen to a start-up, a firm or a sector as well (Mason and spring, 2011). On the other hand,
as defined earlier BMI refers to changes in two or more components of the original way any of
these entities, did business. Having this in mind it would be difficult to see how an entrepreneur
can innovate its business since it does not yet exist, however for a company or a sector it is easier
to see how it works. For example, a company offering printing equipment changes it’s BM, from
selling them to renting them, suggesting that the company is clearly transforming its BM from a
good provider to a service provider (Peters et al., 2016). In the case of a whole sector, a BM
changes when changes introduced by companies force their competitors to shift or exit the sector
(Mason and spring, 2011). This section illustrates how BMI was carried out by an entertainment
company in order to stretch the elements described in the previous section, what BMI is, why it
is relevant for companies and how it should be implemented.
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CHAPTER 3 METHODOLOGY

3.1 Research Design

The main purpose of this methodology is to review the case of study of Netflix, supported by
three different aspects: its business model, by its monetization method; its relation policy with
users and suppliers; and its internationalization approach. In this context outcomes achieved are
observed to Netflix context. Option of this approach is supported by positive information that
portrays its development, with an enhancing consumption of online data and a high level of
technological support related to mobility and high-speed connection (Kaplan, 2011). These data
would show, a priori, a striking situation for Netflix's costly colonization policy of online
distribution, but, in contrast, it has not comprised it in its first internationalisation strategy. In this
research case study method applies data established by the bibliography review and the case
study of Netflix.

3.2 Case Study Method

The case study is a qualitative method that generally consists of a way to deepen an individual
unit. It serves to answer questions that the researcher does not have much control over the
phenomenon studied (Morris, Schindehutte, and Allen, 2005). The case study contributes to
better understand the individual phenomena, the organizational and political processes of society.
It is a tool used to understand the form and the reasons that led to a given decision. According to
Osterwalder, et al, (2005) the case study is a research strategy that comprises a method that
encompasses everything in specific approaches to data collection and analysis.

This method is useful when the phenomenon to be studied is broad and complex and cannot be
studied outside the context where it occurs naturally. It is an empirical study that seeks to
determine or test a theory, and has interviews as one of the most important sources of
information. Through them, the interviewee will express his opinion on a certain subject, using
his own interpretations. The tendency of the Case Study is to try to clarify decisions to be made
(Peters, et al, 2016). Case studies can be:
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Exploratory: when it is necessary to find preliminary information on the studied subject. For
explanatory case studies, a good approach is when using rival considerations, in which there are
different perspectives, increasing the chances that the study is an exemplary model.

Descriptive: whose objective is to describe the case study?

Analytical: when one wants to problematize or produce new theories that will seek to
problematize object, build or develop new theories that will be confronted with the theories that
already existed, providing advances in knowledge.

It is necessary to have different theoretical views on the subject studied, as they will be the basis
to guide the discussions about a certain phenomenon constitute the orientation for discussions
about the acceptance or not of the alternatives found. For that it is necessary to have a sample of
several evidences (Reeves, and Stalk, 2012).

3.3 Case Study: Netflix

Netflix was established in 1997 as an online entertainment subscription service that as of 2019
had a total of 148 million paid subscriptions worldwide (Molla, 2019). The first BM, under
which Netflix was created, targeted in-home filmed entertainment consumers as customers. The
offer of Netflix includes accessing to a wide-ranging library consisting of over 20,000
entertainment titles of movies, television shows and others by subscribing to their service. The
titles selected by the customers via Netflix’s website were delivered by first-class mail to the
subscriber, in the DVD form, who had to send them back through a pre-paid mail service.

There was a customer service centre to handle customer relations (CR) but the “proprietary”
recommendation service was base of the CR enabling Netflix to develops fully bespoke store for
all individual subscribers and to produce highly personalized advices which successfully supply
all-inclusive library of titles (Hiller, 2017).

The origination of revenue streams was from monthly subscriptions rates paid by the service
members, which commenced at $15.95 limiting to four the number of titles that could be
solicited each time and then moved to $19.95 and reduced the number of title per mail BMI
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report.docx to three but giving unlimited access to the library (Hussain, 2019). To provide these
services the company established the key activities, fulfilment, technology and development,
marketing, administration and other management related activities. For its operation there were
resources established at first, including the website, the reference algorithms, research engine for
movie, their business places, shipping centres, customer service centre, 381 employees of which
more than 50% were fulfilment personnel, 16% people were from IT and 13% from marketing
and management units. Moreover, there is a series of proprietary intellectual properties (PIP),
such as trademark, along with trade secret laws and confidentiality agreements owned by Netflix
with the aim of protecting PIP. The partnerships with content providers were a major aspect of
Netflix’s business. Those partnerships included the studios and in-home distributors of filmed
entertainment with whom they were in agreement called the revenue sharing contracts to provide
exclusive content to Netflix’s customers.

Netflix developed this BM with the aim of responding to certain demands created by the vast
market of in-home filmed entertainment because such demands were not yet satisfied by the
usual players. Netflix established the in-home filmed entertainment sector in the late 90’s and the
early 2000’s which was chiefly constituted by the rental and retail outlets for home video,
broadcast television, satellite television, cable, and so on (Cronin, 2014). The aim of all these
options was to enable customers to access filmed entertainment from anywhere else. However,
two elements were identified by Netflix that were becoming challenging for them: as the
increased variety of titles, viewers did not have a comprehensive compilation of titles that could
flexibly be accessed by them and they did not have a supportive mechanism to assist their
consumption behaviours and decisions (Cronin, 2014). Therefore, the above-mentioned BM was
developed by Netflix by introducing an innovation into the ways in which this sector was
operating: the company took the subscription concept outside the broadcasting network, using
revolutionary technology making it more flexible and personalised. In fact, a BMI was
introduced through which how the value was delivered to the customers was affected, setting up
a transformation in the industry’s game.

However, as the BMI theory states, an innovative company needs to stay at the top of its game
(Reeves and Stalk, 2012) and it has been doing by Netflix since DVD rental model era. The
company, as of 2012, was now delineated itself as an online television network, instead of an
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Internet entertainment subscription service provider, suggesting a new BM. This is due to
examining a trend that has been developed in the mid 2000’s: watching filmed entertainment
directly from computers, and adhering to it. In 2007, Netflix started to provide this service to its
subscribers even knowing that it would compete with its original model. To go even further, in
2011 it started to compete with its own partners by producing original content that has been
recognised as high-quality by international organisations. As a result of this strategic decision,
that implied the formation of a new BM, in October 2013, and now Netflix is enjoying great
annual revenue as a sign of success.
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CHAPTER 4 RESULTS AND DISCUSSION

4.1 Netflix as a Paradigm of Online Content Distribution

One important policy in three points Netflix appeared as an online video rental store in 1997,
with a modern monetization formula, supported by the subscription fee for DVD rental. Earlier
this business established streaming video, keeping the monthly subscription system, which
portrayed a turning position in the online video business. Meanwhile, the sector was led by the
Apple, which had skills in the commercialization of music under the paywall pay per unit
system, on the iTunes platform. When it defined the video in its catalogue, iTunes approached
the figure of one million videos in a week in 2006 and controlled the market until 2011, changed
by Netflix in the first position (Rodelo, et al, 2018).

Graph 1: Online video Market share of in the period 2017-2019

Netflix closed its first year of streaming system in 2007 with 7.5 million users. Its market share
stood at 44% (figure 1), and since then, it has controlled the industry, with an inter-annual
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development rate between 35 and 40 per cent, with income of around 4,500 million dollars
(graphic 2)

Graph 2: Netflix streaming service income in 2011-2014 (in thousands of dollars)

After the good recognition of the incipient online business, Netflix was focused to separate its
business lines and increase profits. Due to this it confirmed the launch of a related source,
particularly made for streaming video. In this context, Netflix focused to make a new brand
related to the actual video rental business and support Netflix as a brand related with online
distribution. Though, response of the public prevented the launch of the related system, since just
only its declaration made the loss of one million users (Teece, 2010). After the project
termination, and a public regret by the busienss, Netflix returned to its earlier approach of flat
data rate and presently has 65 million uses in the world. Netflix success can be observed, with
the monetization method, which supported online users to get a catalogue of wide data by a
reasonable subscription charge ($ 7.99 per month), which was a considerable benefit over the
opponents, which charged between 2 and 3 dollars for 24-hour access to a piece of content. But
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to improve into the Netflix system, other major aspects should be focused. Among them, three
different aspects stand out: a business model based on requirement, its relation policy with their
major publics and an internationalization approach.

4.2 Discussion

4.2.1 A business model based on demand

Subscribers usually consume further content online. This need is further marked among teens,
which focused 22 hours a week to this action, contrasted to 8.3 hours of focus given to television.
This consumption is separated between free access videos and subscription source. Regarding
this need, Netflix presents a supporting system, with a monthly fee for access to the catalogue.
This access is separated into 3 modes: SD data accessible on 1 device ($ 7.99), HD content
accessible on 2 devices and HD data and ultraHD accessible on 4 devices (Rodelo, et al, 2018).
In this manner, Netflix grows by the traditional subscription system, which establishes the price
supported on the content volume and categorization by quality. Though despite of the outcomes,
this approach supports business to make brand and support their leadership position in the
industry, which consequences in an enhancement of subscribers. Meanwhile, it provides it a
powerful position in the viewer’s mind, which supports the brand perception of the platform as a
reference in the online distribution business. In the last, it also has an essential issue to the rest of
the platforms, through breaking the serial periodicity in the contents premiere.
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CHAPTER 5 CONCLUSION AND RECOMMENDATION

Netflix sets the tone for the new media business as a leader in the online content distribution
sector. However, this model is not stable or fixed, but is subject to the lack of definition that
characterizes the convergent scenario. This translates into a continuous adaptation of the
proposals of the companies, even of the dominant ones of the sector. In this way, Netflix's on-
demand video subscription model is in itself an evolution of its original business, the online
rental of DVDs, and, in turn, has evolved towards the creation of a platform that, moreover,
behaves like a new production studio. This also happens with their competition, which
experiments with the hybridization of models. The examples are observed on a global scale, with
HBO, Amazon or Hulu, but also in smaller context, with Yomvi Play.

The main objective of this research was to review the innovation procedure of Netflix with its
evolutionary situation, portraying a theoretical approximation of the innovation system with the
business model. Focusing the research objectives, it is observed that all particular objectives
were obtained and effectively incorporated to obtain the main objective. As Netflix reviews that
it is a reference business in the sector, this research was conducted as an empirical assessment
supported by a single case study on Netflix. As the major empirical engagement, a link of
dependence on innovation with the business model implemented by Netflix was recognised in
the case reviewed here, with the sense of creation, delivery and capture of basic value for the
design and new product development. Thus, and established by this assessment, other
engagements were probable by this research. About the development approach of Netflix, it was
observed that there is a relation between empirical exercises and educational postulates, Netflix
being formed in diversification and product development policies, and in the use of relations and
geographic growth as a major power for market penetration, made to focus the global
shortcomings of 2050. In the context of business innovation model , focus is given to a dualistic
performance established by internal and external growths associated to alliances, venturing
practices, licensing and co-creation of value between partners and customers. The analysis of the
business model allowed characterizing the Netflix with an open model system supported by the
externalization and internalization of experience with a disaggregated system of product
innovation, being capable to work in an intermediate position in the development process of
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innovation for society, when inserted in the open innovation system. So, as a theoretical
engagement, it was permitted, by the empirical case analysis, to relate the “Business Model
Canvas” method with the business model innovation, so recognising a complementarity of the
two views about the static method of the first with the dynamic and staged concept.

There are some limitations in this research that are inherent to a single case study, and so, the
conclusions acquired here support a comprehensive assessment of a condition within its
situation, and cannot be generalized or extended to other businesses that have innovation in their
essence.
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