Technology of the Week – The giants of online streaming – Team 16


Introduction

Over the last decades, the evaluation of the movie retail industry has been tremendous. In the early 1990s, through the development of the digital video disc (DVD), the home entertainment deviated from the previous videocassette recorder (VCR) players. Therefore, through the development of Internet companies such as Amazon, companies use e-commerce to sell their products. This then replaces the more conventional way of buying movies in a store and allows customers to order movies in the convenience of their own home.

In 2007, Netflix created an online streaming platform due to the increase in technological development and customer need for quicker access to movies. Similarly in 2011, Amazon Prime started providing a comparable service by allowing customers to stream movies in addition mailing their products in less than two days and a free kindle e-reader.

Theoretical background

The rising informedness of consumers, brought forth by the spreading of internet use has had significant impact on corporate strategies of companies active in the field of e-commerce (Clemons, 2008). The internet makes information more broadly available, thus driving hyperdifferentiation of products and increased consumer choice. Therefore consumers are gaining bargaining power in the field of commoditized products, but show higher willingness to pay for high-touch products that exactly fit their needs (Li, Kauffman, Heck, Vervest, & Dellaert, 2014).

The changes in informedness are mainly influencing consumers’ willingness to pay and with this also the pricing models of companies. In this state of high informedness, consumers show 2 models in terms of willingness to pay (Clemons, 2008). Regarding commoditized products, where the exact attributes of the product do not especially matter to the consumer there is a general willingness to “trade-down”. In this segment, consumers choose purely based on the price at which the product is being offered. In the case of hyperdifferentiated products, consumers are generally willing to pay a premium, if so they get exactly what they desired (Clemons, 2008). This is also the case with on-demand television (Accenture, 2013).

Comparison of Netflix and Amazon Prime business models

A key difference lies in the coverage of the value chain. While both service providers rely on relationships with cable companies and film studios for input, Netflix has a stronger presence in the upstream segment, creating a larger number of successful shows themselves.

In terms of pricing, there is also differentiation between the products. Netflix offers itself more as a premium service with higher fees. This can be achieved by capitalizing on the brand loyalty of their inherently larger customer base, as well as to the differentiating effect of their in-house created shows which are more successful than those of Amazon. This differentiation pushes Amazon into a more commoditized segment, where the company competes by offering more complementary services, as the free 2 day delivery for subscribers, etc.

Further insights

The primary risk the analyzed companies are facing is possibly the potential entry of new players, such as Apple. Amazon is also facing a more specific risk, namely their potential loss of market share, as there are severe limitations to the usage of their products, not giving them the reach over which Netflix already disposes.

Further room for improvement can be seen in the field of user-friendliness of interfaces for both companies. Also regarding Amazon, it is clear to see that their core competence in comparison to Netflix is their wide range of complementary services. As a generic strategy, it should be useful to further capitalize on this advantage and introduce an even wider variety of such services.

Bibliography

Accenture. (2013). Accenture Video Over Internet Survey. Accenture.

Clemons, E. K. (2008). How Information Changes Consumer Behavior and How Consumer Behavior Determines Corporate Strategy. Journal of Management Information Systems, 13-40.

Li, T., Kauffman, R. J., Heck, E. v., Vervest, P., & Dellaert, B. G. (2014). Consumer Informedness and Firm Information Strategy. Articles in Advance.

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