Business Model
Business Model describes how a company produces, delivers and sells a service or product to create value for its customers, shareholders and other stakeholders. Netflix a pioneer in the online DVD subscription services operates in the in-home entertainment video market. "In-home distribution channels include home video rental and retail outlets, cable and satellite television, pay-per-view, VOD (video-on-demand), internet streaming and broadcast television. " (Source:- Netflix Annual Report - 2005 - Section Industry Overview)
Netflix started operations in 1997 and relied on the DVD format as the medium of in-home entertainment, although this format of viewing was restricted to a small population of affluent, technology-savvy customer base. Over a period of time DVD became accepted as the choice and its penetration into every household rose exponentially.
Netflix's business model revolves around its home-grown proprietary software Cinematch which powers its website and a comprehensive information system to manage operations. The comprehensive information system allows it to manage and integrate business across order processing, customer service and fulfilment operations. This leads to maximum utilization of library and operate with a decreased number of customer reps. It had 100 customer reps to handle 115,000 customers in the early days, now it has 43 to handle 3.2 million customers.
From a business perspective management, organizational and technical elements are aligned towards customer focussed innovations. Warehouse workers get free Netflix subscriptions and DVD players. Corporate Employees are kept happy with perks so that they are eager to solve tough engineering problems to improve user experience.
Netflix and the video distribution industry
Netflix changed the video distribution from a store based rental channel to an online subscription based distribution channel. The web-site enables "subscription account signup and management, personalized movie merchandising, inventory optimization and customer support" (Source:- Netflix Annual Report - 2009). Coupled with features such as social networking (Friends) and queue management (Profiles) it compares each subscriber's movie preferences derived from the individual's past ratings and rental patterns with preferences of other users contained in the database and comes up with personalized movie recommendations unique to each subscriber. The company leveraged on the power of Internet and technology to achieve two purposes -
(a) Enhance customer experience by providing them a web-based portal tailored to individual preferences. It comes up with a customer specific recommendation list based on the individual's ratings of past viewings. Customer's can set up their queues and receive delivery through mail. There is no return deadline; no charges and the DVD's can be mailed back through pre-paid envelopes.
(b) Enhance operational efficiency - Traditional Video rental retail outlets would have to compromise on the number of titles available in each of its stores because of space constraints. Netflix has an advantage in being able to offer a much wider range of titles since the stock is piled in its warehouses. One of its core business strengths is its vast catalogue of not so popular and old time movies and TV show content which is cost effective to procure and profitable to sell, but is not available in conventional retail stores. Cinematch also avoids suggesting out-of-stock movies and ensures maximum utilization of inventory. An effective and comprehensive Information system enables it to distribute DVD's from the nearest warehouse through US Mail. There are 100 shipping points across the United States which enables the company to provide delivery in one business days for 97% of its customers.
Advantages and Disadvantages to potential customers
Advantages -
Personalized DVD rental services and movies through internet streaming.
The recommendation software is quite accurate and is built on the customer's historic choices and ratings. Coupled with the social networking feature (Friends) it avoids the customer to go through the hassles of selecting and ending up with something he does not like.
Availability of a wide range of not so popular and old titles which are not available in a conventional DVD rental stores.
Disadvantages -
The recommendation software purposefully omits out-of-stock titles and hence influences the choice of the customer.
It is intentionally slowing down delivery to high volume customers which are not so profitable. Instead it gives a preference to the low volume members. Hence preferential treatment is given to the more profitable low volume customers.
Ability to fight competition and sustain its own markets
(Source: Annual Report 2009. From Sec Filings of 2010 Subscribers have increased to 20,010(in thousands), Revenues have increased to $2,162 Million and Net Income has increased to $161 Million)
Netflix has continued to increase its subscription base, revenues and net income over the years. The following analysis is based on how information systems can address Porter's competitive forces model - "Traditional Competitors, New Market Entrants, Substitute Products and Services, Customers and Suppliers"
Low-cost Leadership - Netflix uses its information systems to ensure maximum utilization of inventory and avoiding recommending out-of-stock titles. The information system integrates order processing and customer service and this has given it a cost advantage with increase in scale of operations, driving down per-unit cost and Netflix has been able to price its service offering at levels difficult for competition to meet.
Product Differentiation - Netflix's personalized web based movie selection services and technological innovations in the movie recommendation algorithm are a huge entry barrier for new entrants. Although the software and technology is not hard to replicate Netflix has the advantage of a database of over half a billion movie ratings and takes in more than a million new ones every day.
Focus on market niche - Unlike competitors like Amazon, Netflix has built its information systems targeted to the in-home entertainment industry. It has engaged with partners to expand the number of devices which can support streaming videos from Netflix.
Strengthen Customer and Supplier Intimacy - Almost 60% of the movies customer's put in their queue comes from Netflix's recommendation system and ensures customers run a lesser risk of wasting time on a movie that they will not enjoy. This increases the switching costs for the customer. Although the case study does not state anything explicitly, the annual reports of 2010 indicate that Netflix obtains "content through streaming content license agreements, DVD direct purchases and DVD and streaming revenue sharing agreements with studios, distributors and other suppliers" and our assumption is that supplier's would benefit from Netflix's recommendation software which could boost up sales of their not so popular titles. All new titles do not end up becoming blockbusters and the less popular ones could get recommended to customers with specific preferences based on Cinematch algorithm.
Competitive strengths of Netflix include an iconic brand, personalized merchandising, growing scale without substantial increase in cost and an information system catering to convenience, selection and fast delivery.
Principal competitors are -
DVD rental outlets and kiosk services, such as Blockbuster, Movie Gallery and Redbox (Source: Netflix Annual Reports 2010)
Video package providers with pay-per-view and VOD content including cable providers, such as Time Warner and Comcast; direct broadcast satellite providers, such as DIRECTV and Echostar; and telecommunication providers such as AT&T and Verizon (Source: Netflix Annual Reports 2010)
Online DVD subscription rental web sites, such as Blockbuster Online (Source: Netflix Annual Reports 2010)
Entertainment video retail stores, such as Best Buy, Wal-Mart and Amazon.com (Source: Netflix Annual Reports 2010)
Internet movie and TV content providers, such as Apple's iTunes, Amazon.com, Hulu.com and Google's YouTube. (Source: Netflix Annual Reports 2010)
Popularity of alternative entertainment mediums which can be distributed using a similar business model like Netflix (Example - Gaming CD and DVDs)
Threats -
Currently the time for distribution in DVD format is shorter than release to other mediums (VOD, premium TV etc) after a theatrical release of a movie. This gives a competitive advantage to the DVD market. However this competitive advantage may go if the distribution to these multiple formats happens simultaneously.
The proprietary technology and information systems are also based on a certain historic scale of operations which has increased substantially and this could lead to systemic disruptions and negatively impact operations.
The DVD format would probably give way to Internet movie and TV content providers and Netflix would be left stranded with its warehouse and sophisticated mail handling systems.
However the one thing which will continue to survive is CINEMATCH and its database of billions of movie ratings which will give a competitive edge to Netflix when it decides to switch over to other formats of movie distribution.
AOL, Yahoo to Charge for Email
Question:
Yahoo and AOL are relying on some durable economic laws to support their new email product. What are these?
What are the new opportunities that they can exploit by Certified mail product?
Durable economy:
Assumption:
1. Net Neutrality Legislation will not be approved by the congress.
2. Certified mails also have an opt-out feature that allows recipients to unsubscribe.
"A sustainable or durable economy requires the development of programs, policies, and implementable initiatives that encourage activities that will empower communities and conservation of resources; promote environmental justice; preserve ways-of-life; and promote by example and through discourse the ideas of ecological and participatory democracy and its real world implications"
(Source: http://awillner.blogspot.com/2009/12/durable-economic-prosperity-part-2.html).
The basic principal of economy is to distribute the scarce resource to most needy ones. In reference to this caselet, the spam mails are using the network bandwidth preventing the legitimate internet users to do their work. The real value produced by information providers comes in locating, filtering and communicating what is useful to the consumer. The certified email service allows email service providers to deliver only the legitimate emails to end users. As the legitimacy and the background of the email originators are already verified by the service providers like GoodMail, this will help in reducing the spam detection cost for AOL and Yahoo. Also, spam and Phishing is bigger threat to web based mail users. To provide better user experience, companies are spending huge amount of money to reduce the spam. The fundamental factors that determine the profitability is, industry structure and sustainable competitive advantage. By offering these services, AOL and Yahoo can out perform their competitors.
'There ain't no such thing as a free lunch' .The economic theory, and also the layman opinion, that whatever goods and services are provided, they must be paid for, by someone. The information production and delivery systems requires significant amount of investment in Hardware, Software and Network systems. To sustain this business, they need to recover the cost and make profit. The free mail based service cost the mail service providers close to $10-$12 per user. By charging the business to deliver their message to it's users, they can recover this cost. Yahoo, AOL mail users will also benefit from this as the information sent to their inbox is useful to them and also they will have an option to unsubscribe these certified mails if they wish to. The business will be willing to pay these charges for sending the mails as this will allow them to maximize their ROI.
Opportunities for AOL and Yahoo:
Customer care in a service-based industry and priority email delivery
In the information age, service based industry rely heavily on email based communication. Companies want to make sure that, their product information, queries and customer concerns are addressed in stipulated time. The internet traffic is growing year by year , which is creating the bandwidth issues. Yahoo and AOL can start the priority email service (similar to the FedEx, USPS, US post which charges for faster delivery) where they can provide the guarantee of delivering mails and to user inbox in stipulated time by charging a nominal fee. They can work with ISPS to prioritize their mail traffic by sharing the revenue they earn. Eg. Distributed Document Processing services.
Govt agencies wanting to reach out to mass public to explain their policies.
Yahoo and AOL can offer products to government agencies where they can deliver their communication directly to user's inbox.
On line Advertising
By collecting information about mail users interests ( based on the responses to the certified mails),Yahoo and AOL can customize advertisements that can be displayed alongside user's mail box page.
Reduce the spam and provide security to mail users.
Phishing and online identity theft are the fastest-growing threats to the email users. By using certified email service, Yahoo and AOL can fight spamming better which will help in enriching the user experience. This will widen user base for Yahoo and AOL.
UID: Much more than a number
Questions:
What ethical, social, and political issues are raised by the UID?
Explain how the UID challenges the protection of individual Privacy?
If you were an expert hired by the UIDAI, what suggestions would you make for handling the privacy concerns?
Ethical, Social and Political Issues raised by the UID:
Using the framework of five moral dimensions of Information systems, we try to understand the ethical, social and political issues raised by the UID:
Information Rights and obligations:
Privacy of personal data could be an issue as the UID number could be shared with various agencies. Cross-linking of data would happen if UID is used by different people for different reasons. Since the laws and rules of acceptable conduct are yet to be developed fully for this kind of system, it is difficult for the common man to take action against privacy violation. The UIDAI project is one of the largest projects in terms of its reach and geographical diversity. UIDAI has to cooperate with government departments and share data. Though UIDAI will not mandate enrolments, various service providers may mandate it for the residents to avail their services and would cross-link the UID data with their own data. UID may also be linked to other data sources, like Birth certificate which would have details like religion, state, mother tongue, etc. This would enable collecting information about people from various disparate sources and would give both government and the private sector powerful profiling capabilities. Such profiling capabilities would enable corrupt officials and agencies to misuse the system. This would be a great risk to the privacy and security of the residents.
Property Rights: Intellectual Property
The central repository (CIDR) is the single location where the complete database of personal information of all the residents would be stored. This is the biggest asset for UIDAI. The collection of data comprising of biometrics (Fingerprint, IRIS scan and photo) and demographic details is done via registrars, sub-registrars and enrolment bodies all over India and then fed into CIDR. There is a risk of data leakage at various stages, like collection, transmission and storage. The data transmission between registrar offices and CIDR would be via network managed by third party service vendors and internet service providers. This just adds to the data security risk. Another security concern is the compromising of the system by means of hacking, key duplication, etc. Besides, there are technological flaws associated with the biometric system, like duplication and verification problems.
Accountability, Liability and Control:
The key partners to UIDAI are the registrars, sub-registrars and the various enrolment bodies across the country. It is expected that residents submit correct data to the registrars, which in-turn is transmitted to CIDR. If the data submitted is incorrect and say, a fraudulent transaction happens based on the UID data, there would be problems establishing accountability for such incidents. As far as liability is concerned, since the laws are not fully developed to address issues arising out of the UID system, the individual is on a weaker side, when it comes to recovering damages done to him/her. The level of control, an individual has, over this data, under the scheme creates a privacy crisis for anyone, who has a number. For those who opt out of UID, can be denied services and end up in a crisis situation. These can lead to violation of civil rights issue.
The UID program is aimed to benefit India's poor by enabling them to gain access to government schemes, which would translate into new accountability to bureaucracy and transparency into funds usage. UIDAI would encounter resistance from some fraction of government staff and contractors and can create political issues.
System Quality: Data quality and system errors
UID system would rely on biometrics system which has got several technological flaws like duplication, verification problems and lack of infrastructure to collect biometrics properly. Fingerprints could change with age and would fail verification, which means the person would have to re-enrol oneself. IRIS scanners can be easily spoofed.
The UID system is aimed to eliminate duplicate entities by having de-duplication mechanism. Every new enrolment is checked against existing database for duplicate entities. This has a flip side. If there is a fake identity in the system, then it would prevent the enrolment of the genuine person. System performance is critical for de- duplication algorithm to work every time, it needs to check against biometric data of 1.2 billion people.
Since the CIDR is the single database containing all the UID information, it makes the system very vulnerable. Any kind of intrusion and hacking could cause a lot of damage and data leakage.
UID system has an online authentication mechanism and would be utilized by various service providers to provide services. If the authentication fails due to system problems, then the person can be denied service, even if he is a genuine person.
Power Outages, especially in rural areas, could be a big hindrance to the overall functioning of the UID system. The UID system is aimed to help financial inclusion of population in rural areas by banks having Business correspondents in villages and enabling financial transactions. This process would depend on the online authentication with the CIDR. System errors and flaws could have a serious impact on this process.
Quality of Life:
If the privacy and security issues are not taken care, then the UID system can bring about many negative social consequences and can cause lot of damage to individuals, societies and political institutions. System quality of UID is very important to protect the safety of individuals and the society. UID system database which depends on biometrics has to be periodically updated with the new data, as fingerprints change with age else the system would fail to identify the genuine poor people involved in manual labour in few years, depriving them of the government benefits. This can prove harmful to a wide section of society, whose quality of life would directly or indirectly depend on this system. Various service providers, whose internal processes would be re-engineered to work with UID system as the base, would deny providing services to the genuine users, if there is a fault/error with the UID system. This can cause disruptions and losses for businesses. The UID system is also aimed to bring back the "out of school" children back into the education system. The system can affect this plan, if there are no periodical updates to the data, thereby not improving the situation/ quality of life in rural areas.
UID Challenges to the protection of individual privacy:
UIDAI targets to collect only the basic personal information of the individuals in terms of just demographic and biometric details. However UIDAI is partnered to work with registrars, sub-registrars, service providers and various enrolment bodies across India who will be the primary agencies to collect personal information and feed into CIDR, which is a centralized database of all biometric personal identifiable information (PII). These enrolment agencies and registrars would be the weak links concerning privacy and data security, as they would capture/store the data and transmit to CIDR. Cross-linking of UID data to other data sources, like Birth certificate, credit card data, etc would happen as various agencies and service providers would be involved, who may mandate UID to allow residents to avail their services and also ask for more personal information from the individuals. This would give government and private sector tremendous profiling capabilities of individual data. The profiling capability can be misused by corrupt officials, agencies and middlemen which can result in intrusion of individual privacy and pose security risks. New data analysis technology, such as NORA (nonobvious relationship awareness) has enabled even more powerful profiling capabilities by collecting data from various disparate sources. The government of India has allowed businesses to gather transaction information and then use it for marketing purposes without obtaining consent from the individuals. This risks protection of individual privacy.
There are risks of data leakage at various stages, such as collection, transmission and storage. The initial data collected and stored by registrar offices provides an huge window of opportunity for data leakages. Network Transmission of data from the registrar offices to CIDR can be intruded by hackers causing leakages, if security measures are not sufficient. Storage and maintenance of data and infrastructure would involve Database administrators to third party service providers. They can prove as vulnerable points in the system causing data leakages. Lack of state-of-the-art infrastructure at registrar offices can invite attackers to intrude and exploit the information available at these offices.
Physical copies of the documentary evidence collected at registrar's offices can be leaked out, if not stored in secure warehouses.
Since the laws and rules are not fully developed for handling these kinds of systems, the individual would find it tough to take legal actions for privacy related issues.
Suggestions for handling Privacy concerns:
Privacy Protection Policies should be legislated so that people can take legal recourse for any privacy violations and should be part of fast track courts. UIDAI could also consider having its own judicial system for settling legal issues, as part of their overall framework. The policies should have clear instructions of where all it can be used, where it cannot be, display restriction guidelines, etc. There should be clear guidelines for organizations that use UID, on protection of data, access controls, disposing of data when not required, and reporting of breach.
India can take clue from generally followed data protection laws in other developed countries and use similar frameworks.
Use latest technological Security features, wherever possible, like Biometric Encryption, storing of data in encrypted form, Strong authentication mechanisms, use of secured communication network, strong protection against virus and hacking attacks, audit trailing, etc.
Enforce rules for organization, to use UID only for internal records and not primary identification number.
Data ownership needs to be with Central government with necessary legal agreements with all stakeholders in the system. Regular Government audits are a must to ensure smooth functioning.
Must have clear policies and guidelines to avoid third party service/maintenance vendors getting access to the PII.
There should be an overall monitoring and control of the system and the information flow by the PMO.
The entire lifecycle of the UID number from generation to termination should be clearly documented and followed.
Public awareness and education is very important for this project and should include cautionary advices on the sensitivity of the data and about providing data to the authorized registrars.
Grievance redressal cells should be setup for reporting identity thefts, issues, etc.
The UID number should not be re-used after going thru the termination phase, say, after a death.
The law must include a clause on informed consent by the individuals for various agencies that plan to use the data.
The law should prohibit agencies from collecting other information from individuals such as religion, caste, etc to avoid problems like electronic profiling, etc. Penal provisions should be defined clearly to punish people/agencies involved in such activities.
References/ Sources:
Management Information Systems - Ken Laudon, Jane Laudon, Rajanish Dass
Reading Material by Prof. Raj Bandi
Caselet - http://www.fastcompany.com/magazine/99/open_customer-netflix.html
www.netflix.com
Annual Reports of Netflix - 2005, 2006, 2007, 2008, 2009, 2010
http://awillner.blogspot.com/2009/12/durable-economic-prosperity-part-2.html
Article- http://www.dsci.in/sites/default/files/security_and_privacy_challenges_in_the_uidai_project.pdf
Strategy Overview Document from UIDAI - http://uidai.gov.in/UID_PDF/Front_Page_Articles/Documents/Strategy_Overveiw-001.pdf
Www.uid.gov.in
http://www.cis-india.org/advocacy/igov/blog
