Netflix Consultant

ReportNovember 30, 2011

Stephen AllenGraham HaynesZachary Konings

Alexis MallettRachel Mitchell

The Firm• Provides users throughout

North America with low cost movie rentals

• Focuses on two major revenue streams: mail order rentals and online streaming

• Under corporate direction from Co-founder Reed Hastings

Netflix – An Overview

Resources• Employee base of 2300 ranging

from employment in distribution centers to corporate positions,

• Little long term debt, corporation is heavily solvent

• 9 U.S patents pertaining to its mail-order business model

• Suppliers includes retail wholesalers with no copyright fees

Corporate Functionality• Reduction in COGS by 2% in 2010,

important driver in Net income’s increase of 5 million to 160.9million

• Unusually simple marketing strategy, uses ads and some mail out techniques

• Laissez faire human resource strategy;

Netflix – Current Situation With over 70% of Netflix’s stock value originating from U.S

subscribers Netflix roughly doubled it’s price, resulting in 800,000 cancellations and a stock devaluation from $300/share to $80/share

Unfavourable consumer perceptions forced Netflix to cancel plans for its’ subsidiary named Quickster

Netflix has expansionary plans for Europe in 2012 and hopes to earn additional revenue to offset losses expected in US market

Recently Netflix’s Research and Development operations have optimised Android applications and are expecting Kindle Fire’s partnership with Netflix to jumpstart revenue streams

Industry & MarketplaceGrowth Trends: The demand for Netflix’s streaming services has increased twelvefold

since 2008 (Reference figure 1.1) Mail out orders have been marginally declining since 2009

(Reference figure 1.1) Annual sales in the traditional rental market have declined by 10-

15% since 2011 If Netflix were to keep its original bundled $7.99 pricing it is likely

that subscriptions by the end of 2012 could reach nearly 30 million

Industry & Marketplace

Demand Schedule:

21 21.5 22 22.5 23 23.5 24 24.5 250

5

10

15

20

Subscriptions(millions)

Pri

ce($

/Month

)

Prior to Price Change Announcement

September 30,2011

Conservative Predictions for December 31,2011

Major Competitors

• A subsidiary of Dish Network

• “Total access” service, jumps into streaming market

• Lower cost membership with more timely releases

• 500,000 new subscribers in the first month

• Membership programs provides free shipping

• Introduced free online streaming in 2011

• Kindle fire is also expected to increase subscriber base

The Broader EnvironmentDemographics: Increased access to pirated media, putting substantial

strains on sales Perception that Netflix’s operations are inherently “Green” by

its natural digital strategy Products appeal to tech savvy age groups

Technology: Introduction of blu-ray players threatens Netflix because it

lacks HD capabilities Netflix lags behind technology of modern LED televisions,

especially in 3-D capability Compatibility of Netflix to many devices like consoles and

Roku and Apple TV

The Broader EnvironmentEconomy: Netflix is a low cost alternative to traditional movie rentals Some lack the confidence to spend on unneeded luxuries Fuel costs translate into high overhead expenditures for

Netflix’s rental by mail services

Political & Legal: Increased concerns about privacy and digital rights, Netflix

kept history of users’ activities The application of The First Sales Doctrine to strictly digital

media in the United States

SWOT AnalysisStrengths

• Constantly updating inventory• Price increase has reduced

overhead costs substantially – reinvestment

• Employee loyalty unparalleled in the industry

• Industry Patents• Popular culture brand

recognition• Progressive and innovative

management

Weaknesses

• Repetitive and annoying Marketing Scheme

• High cost Fixed Assets that may prove inefficient with business plan change

• Dependency on business partners and agreements

SWOT ContinuedOpportunities

• Gaming is an untapped market with huge demand and possibility

• Recessionary consumer behavior

• Bill HR2471 could eliminate a great deal of piracy

• Purchase of television stations archives – small price to pay

• International Expansion to tech-savvy markets - Europe

Threats

• Pressure to pay more for video rights

• First Sales Doctrine• Missing Blu-ray and HD content is a

sticking point• Ease of piracy - streaming and

torrenting• Investor Confidence - Stock prices

from ~$300-60 suggests market instability

• Supplementary Services interfere

Future Steps“And posted in your guidance, are you saying that Netflix will be unprofitable on a global basis

over all of 2012? In response, they think yes.” - VP Netflix Inc.

Dwindling US subscriptions and the possibility of a hugely capital intensive FDI in Europe will quickly corrode and reduce Netflix’s current financial position

Instead Netflix is advised to diversify it’s online product offerings by adding Cloud Video Games and additional premium television series to achieve economies of scope

If such is done then a more stable domestic customer base can be established. Once domestic relations are stabilised and emphasis on capital intensive mail out rentals is reduces Netflix may begin International expansion.

Economies of Scope

Increased Domestic

Profits

International

Expansion