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netflix.com

A Strategic Management Case StudyTony Gauvin

© 2013, Tony Gauvin,UMFK 2

Overview

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Company OverviewA Brief history of NetflixExisting Mission and VisionExisting Objectives and Strategies Current Issues

New Mission and VisionExternal Assessment

Industry analysisOpportunities and threats EFE MatrixCPM Matrix

Internal AssessmentOrganizational StructureStrengths and weaknessesFinancial Condition IFE Matrix

Strategy FormulationSWOT MatrixSpace MatrixDivisional AnalysisGrand Strategy MatrixMatrix AnalysisQSPM Matrix

Strategic Plan for the FutureObjectivesStrategies

Implementation IssuesTechnology EPS/EBIT Projected Financials

EvaluationBalanced Score Card

Netflix Update


In the Beginning (1997-2007)

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http://www.google.com/url?sa=i&rct=j&q=netflix&source=images&cd=&cad=rja&docid=f2WrgHKyswAUVM&tbnid=6pdPOOv3TnoBIM:&ved=0CAUQjRw&url=http://www.getyourfilmfix.com/netflixpricehikie/&ei=MwVSUf6dE4PK0wHyk4DYAw&bvm=bv.44342787,d.dmQ&psig=AFQjCNGLEw5udTQw8twRo-sliK62HAPOJA&ust=1364416128916390


Company timeline

1997 – Reed Hastings and fellow software executive Marc Randolph co-found Netflix to offer online movie rentals.

1999 – Netflix launches the subscription service, offering unlimited rentals for one low monthly subscription.

2000 – Netflix launches the personalized movie recommendation system that uses Netflix members’ ratings to accurately predict choices for all Netflix members.

May 22, 2002 – Netflix makes its initial public offering (IPO) of 5,500,000 shares at $15.00 per share on Nasdaq under the ticker “NFLX.” Total Netflix members at the time: 600,000.

2006 – Netflix launches the Netflix Prize, promising $1 million to the first person or team who can achieve certain accuracy goals in recommending movies based on personal preferences. The company releases 100 million anonymous movie ratings ranging from one to five stars, the largest such data set ever released.

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Company Timeline

2007 – Netflix introduces streaming, which allows members to instantly watch television shows and movies on their personal computers.

2008 – Netflix partners with consumer electronics companies to stream on the Xbox 360, Blu-ray disc players, TV set-top boxes and the Apple Macintosh computer.

2009 – Netflix partners with consumer electronics companies to stream on the PS3, Internet connected TVs and other Internet connected devices.

2009 – Netflix awards the $1 million Netflix Prize to the "BellKor's Pragmatic Chaos" team of seven researchers from four countries; over three years the contest has attracted more than 40,000 teams from 186 countries.

2010 – Netflix is available on the Apple iPad, iPhone and iPod Touch, the Nintendo Wii, and other Internet connected devices.

2010 – Netflix launches in Canada.

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By The Numbers

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Pricing Plans

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Subscriber Information

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Content Libraries

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Existing Mission and Vision Statement

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Existing Growth Strategy

• Grow numbers of subscribers• Each subscribers =~ $100 - $120 revenue/year• Streaming (VOD)

– Marginal cost approaches zero • DVD by Mail

– greater inventory & delivery expense

• Increase number, quality, currency and uniqueness of Content – Content is King

• Global expansion

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Vision Statement

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To become the number one mail order and live

streaming movie company in the world.


Mission Statement

At Netflix, we seek to be the highest quality subscription business that offers Internet streaming and DVD by mail content (2). We believe in offering the best customer service possible by teaching our employees to be honest, respectful and ethical (6) while also valuing every customer’s individual needs. Our employees (9) are provided with the latest technologies, excellent benefits, and the safest working conditions in the industry. We provide outstanding customer service and in return, our customers (1) in our North American and Mexican markets (3) recommend their friends to Netflix (5). Our vast library of DVD’s and streaming service (4) provides a competitive advantage (7) as compared to offering only streaming. At Netflix, we strive to be a good corporate citizen (8).

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1. Customers2. Products or services3. Markets4. Technology5. Concern for survival, growth,

and profitability6. Philosophy7. Self-concept8. Concern for public image9. Concern for employees


External Audit

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Industry Market Analysis

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Web Entertainment Sites 2010Sites are ranked by millions of unique visitors in August 2010.YouTube 99.00iTunes 44.60Glam Media 44.50Yahoo! Sports 29.70Gorilla Nation web sites 21.70IMDB 21.20Turner Sports and Entertainment 21.20Netflix 20.60

Digital Video Streaming Market, 2010Apple is in a three-way tie for third place with a 4% market share.

%Netflix 61.00Comcast 8.00Other 31.00

DVD Rental Market, 2009-2010Market shares are shown in percent.

2009 2010 % %

Netflix 25.70 34.80Blockbuster (traditional) 22.80 19.90Coinstar (Redbox) 11.90 18.90Other traditional 28.20 16.10Other subscription 8.60 7.20Other kiosk 2.70 3.10

DVD Sales and RentalAccording to the Digital Entertainment Group (www.dvdinformation.com),

DVD Sales DVD Rental Total Spending2003: $11.6 billion $4.5 billion $16.1 billion2004: $15.5 billion $5.7 billion $21.2 billion2005: $16.3 billion $6.5 billion $22.8 billion2006: $16.6 billion $7.5 billion $24.1 billion2007: $16.0 billion $7.5 billion $23.4 billion2008: $14.5 billion $7.5 billion $21.7 billion** Includes $750 million spending to Blu-ray Disc format

http://www.dvdinformation.com/


Opportunities

1. 147 million people in the United States watch online videos.2. Digital distribution of media is growing at a rate of 30% a year.3. International markets account for over 50% of spending in US filmed

entertainment.4. US TV market accounts for less than 15% of the world's TV households.5. China's box office annual growth rate continues to grow over 10% a year.6. Rivals such as Blockbuster are struggling with their business models.7. Consumers spent over $20 billion on home video purchases in 2010.8. More people know English now than ever before.9. High price of an outing at the movie theater.10. Weak US Dollar makes global markets more attractive.

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Threats

1. Poor global economy has reduced personal spending.2. YouTube owns over 75% of the multimedia web market share.3. Time Warner Cable's movies on demand.4. Hulu, an ad based streamer, provides TV shows and movies for free.5. DVRs are in 40% of US homes as of 2011.6. Barriers to entry are low as startups can be launched for relatively low

costs.7. By law, Netflix cannot release new DVDs until 28 days after retail release.8. Increase in US postal fees would reduce profit margins.9. Infringements on Netflix patents and other proprietary assets.10. Netflix is the object of complaints regarding collusion with Wal-Mart.

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CPM

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Weight Rating Score Rating Score Rating Score0.12 3 0.36 2 0.24 4 0.480.05 3 0.15 4 0.20 2 0.100.08 2 0.16 1 0.08 4 0.320.10 3 0.30 2 0.20 4 0.400.03 4 0.12 2 0.06 3 0.090.08 3 0.24 2 0.16 4 0.320.09 2 0.18 1 0.09 3 0.270.10 3 0.30 2 0.20 4 0.400.15 4 0.60 2 0.30 3 0.450.07 3 0.21 4 0.28 2 0.140.10 3 0.30 4 0.40 1 0.100.03 3 0.09 2 0.06 4 0.121.00 3.01 2.27 3.19

AdvertisingE-CommerceCustomer ServicePrice Competitiveness

Critical Success Factors

Netflix Redbox Time Warner

Sales DistributionGlobal Expansion

Market ShareInventory SystemFinancial PositionProduct QualityCustomer Loyalty

TotalsManagement Experience


EFE

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Threats Weight Rating Weighted Score1. Poor global economy has reduced personal spending. 0.04 2 0.082. YouTube owns over 75% of the multimedia web market share. 0.10 2 0.203. Time Warner Cable's movies on demand. 0.08 3 0.244. Hulu, and ad based streamer, provides TV shows and movies for

free.0.10 2 0.20

5. DVRs are in 40% of US homes as of 2011. 0.03 2 0.066. Barriers to entry are low as startups can be launched for

relatively low costs. 0.05 3 0.15

7. By law, Netflix cannot release new DVDs until 28 days after retail release.

0.03 3 0.09

8. Increase in US postal fees would reduce profit margins. 0.03 2 0.069. Infringements on Netflix patents, and other proprietary assets by

decrease Netflix brand value.0.04 4 0.16

10. Netflix is the object of complaints regarding collusion with Wal-Mart.

0.03 4 0.12

Totals 1.00 2.63

Opportunities Weight Rating Weighted Score1. 147 million people in the United States watch online videos. 0.08 3 0.242. Digital distribution of media is growing at a rate of 30% a year. 0.06 3 0.183. International markets account for over 50% of spending in US

filmed entertainment.0.07 2 0.14

4. US TV market accounts for less than 15% of the world's TV households.

0.05 2 0.10

5. China's box office annual growth rate continues to grow over 10% a year.

0.02 1 0.02

6. Rivals such as Blockbuster are struggling with their business models.

0.04 4 0.16

7. Consumers spent over $20 billion on home video purchases in 2010.

0.05 3 0.15

8. More people know English now than ever before. 0.03 2 0.069. High price of an outing at the movie theater. 0.04 4 0.1610. Weak US Dollar makes global markets more attractive. 0.03 2 0.06


Internal Audit

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Organizational Structure

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Financial Information (Income)

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Financial Information

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Stockholders' Equity $290Net Income x 5 $805(Share Price/EPS) x Net Income $4,904Number of Shares Outstanding x Share Price $6,240Method Average $3,060

Net Worth Analysis (in millions)


Ratio Analysis

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Growth Rate Percent Netflix Industry S&P 500Sales (Qtr vs year ago qtr) 48.60 47.70 14.90Net Income (YTD vs YTD) - - -Net Income (Qtr vs year ago qtr) 64.50 51.70 65.70Sales (5-Year Annual Avg.) 25.95 25.47 8.28Net Income (5-Year Annual Avg.) 30.79 30.32 8.77Dividends (5-Year Annual Avg.) - - 5.67

Profit Margin PercentGross Margin 36.6 36.5 39.5Pre-Tax Margin 12.9 12.7 18.0Net Profit Margin 8.1 8.0 13.15Yr Gross Margin (5-Year Avg.) 35.7 35.7 39.4

Liquidity RatiosDebt/Equity Ratio 2.4 0.59 1.00Current Ratio 1.2 1.2 1.4Quick Ratio - - 0.9

Profitability RatiosReturn On Equity 82.0 80.8 28.1Return On Assets 17.4 17.1 8.8Return On Capital 32.8 32.3 11.7Return On Equity (5-Year Avg.) 28.8 28.2 23.8Return On Assets (5-Year Avg.) 14.6 14.3 8.0Return On Capital (5-Year Avg.) 22.1 21.7 10.8

Efficiency RatiosIncome/Employee 109,175 107,624 118,037Receivable Turnover - 1.4 15.2Inventory Turnover - 0.0 12.3Asset Turnover 2.1 2.1 0.8


Strengths

1. Revenues increased 29% from 2009 to 2010.2. 90% of surveyed subscribers would recommend Netflix to their friends.3. Library of choices grew 30% in 2010.4. Currently have over 100,000 DVDs available for customers.5. Netflix expanded into Canada, Mexico and Latin America in 2011.6. Netflix is the largest streaming movie company with over 25 million

subscribers as of Fall 2011.7. Recent customer satisfaction ACSI score was 85 out of 100.8. Unlimited access to internet movies and mail in DVDs for $7.99.9. Net income doubled from $83B to $161B from 2008 to 2010.10. Apple uses Netflix to stream movies to its Apple TV, iPhone, and iPad.

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http://www.theacsi.org/acsi-results/acsi-results


Weaknesses

1. Reliance on the US Mail System for delivering of DVDs in US Markets.2. Relies upon Amazon for a majority of its cloud computing services and cannot easily

switch to another cloud provider.3. Only 2 of the top 8 executives are women.4. Netflix has no publically available vision or mission statement.5. Netflix deal with Disney and Sony expires in 2011.6. In 2010, Netflix did not rank in the Top 10 among online video content providers.7. Netflix charges $95/year to Amazon's $79/year for unlimited streaming without DVDs.8. Netflix collects data from subscribers and some firms have received criticism for this

practice.9. Netflix is the object of patent infringement regarding client-server communications.10. Stock price fell 60% between July 2011 and October 2011.

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IFE

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Strengths Weight Rating Weighted Score1. Revenues increased 29% from 2009 to 2010. 0.06 4 0.242. 90% of surveyed subscribers would recommend Netflix to their

friends.0.06 4 0.24

3. Library of choices grew 30% in 2010. 0.04 4 0.164. Currently have over 100,000 DVDs available for customers. 0.04 4 0.165. Netflix expanded into Canada, Mexico and Latin America in 2011. 0.07 4 0.28

6. Netflix is the largest streaming movie company with over 25 million subscribers as of Fall 2011. 0.07 3 0.21

7. Recent customer satisfaction ASCI score was 85 out of 100. 0.04 4 0.168. Unlimited access to internet movies and mail in DVDs for $7.99. 0.08 4 0.329. Net income doubled from $83B to $161B from 2008 to 2010. 0.05 4 0.2010. Apple uses Netflix to stream movies to its Apple TV, iPhone, and

iPad.0.04 3 0.12

Weaknesses Weight Rating Weighted Score1. Reliance on the US Mail System for delivering of DVDs in US

Markets.0.05 1 0.05

2. Relies upon Amazon for a majority of its cloud computing services and cannot easily switch to another cloud provider.

0.04 1 0.04

3. Only 2 of the top 8 executives are women. 0.02 1 0.024. Netflix has no publically available vision or mission statement. 0.02 1 0.025. Netflix deal with Disney and Sony expires in 2011. 0.04 1 0.046. In 2010, Netflix did not rank in the Top 10 among online video

content providers.0.06 1 0.06

7. Netflix charges $95 to Amazon's $79 for unlimited streaming without DVDs.

0.08 1 0.08

8. Netflix collects data from subscribers and some firms have received criticism for this practice.

0.03 2 0.06

9. Netflix is the object of patent infringement regarding client-server communications.

0.03 1 0.03

10. Stock price fell 60% between July 2011 and October 2011. 0.08 1 0.08Totals 1.00 2.57


Strategy Formulation

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SWOT MATRIX

SO Strategies1. Increase advertising expenses by 15% in 2012 and 2013. (S1, S4, S5, O1, O2)2. Offer first 3 months at reduced price to take advantage of at home movie customers (S8, O7).3. Aggressively enter the Chinese market. (S9, O5, O8, O10).4. Provide free month service to any customer who recommends 5 friends. (S2, O1, O2). WO Strategies5. Extend expansion into Canada, Mexico, Latin America and China by 15% per year (W6, W10, O3, O4,

O5, O8, O10).6. Renew deals with Disney and Sony (W5, O2).ST Strategies 7. Provide a free month of service for anyone who recommends 5 friends (S2, T1).8. Increase R&D by 25% for marketing of online streaming movies (S6, S8, T6, T8).WT Strategies 9. Form a partnership with UPS to deliver all DVDs (W1, T8).10. Develop a clear mission (W4, T1, T6).

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7

6

5

4

3

2

1

-7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 7-1

-2

-3

-4

-5

-6

-7

IPCP

Defensive

AggressiveConservativeFP

CompetitiveSP

Space Matrix

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Internal Analysis: External Analysis:Financial Position (FP) Stability Position (SP)

4 -26 -24 -24 -44 -6

Financial Position (FP) Average 4.4 Stability Position (SP) Average -3.2

Rate of InflationTechnological ChangesPrice Elasticity of DemandCompetitive PressureBarriers to Entry into Market

Gross MarginDebt to EquityCurrent RatioROEROA

Internal Analysis: External Analysis:Competitive Position (CP) Industry Position (IP)

-2 6-2 4-1 2-2 2-5 5

Competitive Position (CP) Average -2.4 Industry Position (IP) Average 3.8

Growth PotentialFinancial StabilityEase of Entry into MarketResource UtilizationProfit Potential

Market ShareProduct QualityCustomer LoyaltyTechnological know-howControl over Suppliers and Distributors

Possible Strategies•Backwards, Forward, Horizontal Integration•Market Penetration•Market Development•Productions Development•Diversification (related or unrelated)


Grand Strategy Matrix

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Netflix

Strong Competitive

Position

Slow Market Growth

Weak Competitive

Position

Quadrant III Quadrant IV

Rapid Market Growth

Quadrant II Quadrant I

Possible Strategies•Backwards, Forward, Horizontal Integration•Market Penetration•Market Development•Productions Development•Diversification (related)


Divisional Analysis

• Netflix recognizes two segments – United States – International Markets

• Canada as of September, 2010• Streaming only, no DVD’s• “Substantially all of the Company’s revenues are

generated in the United States” (Netflix 2010 10-K) • Additional expansion to come in 2011

– Mexcio, Latin America, Caribbean

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Matrix Analysis

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Alternative Strategies IE SPACE GRAND BCG COUNTForward Integration x x 2Backward Integration x x 2

Horizontal Integration x x 2Market Penetration x x 2Market Development x x 2

Product Development x x 2Related Diversification x x 2Unrelated Diversification x 1

Retrenchment DivestitureLiquidation


Possible Strategies

• Integration Strategies not feasible– Short supply and delivery chain – Limited competition

• Market Penetration – SO 1 Increase advertising expenses by 15% in 2011 and 2012. (S1, S4, S5, O1, O2)– SO 2 Offer first 3 months at reduced price to take advantage of at home movie customers (S8, O7).– SO 4 & ST 1 Provide free month service to any customer who recommends 5 friends. (S2, O1, O2).

• Market Development – SO 3 Aggressively enter the Chinese market. (S9, O5, O8, O10).– WO 1 Extend expansion into Canada, Mexico, Latin America and China by 15% per year (W6, W10,

O3, O4, O5, O8, O10).

• Product Development– ST 2 Increase R&D by 25% for marketing of online streaming movies (S6, S8, T6, T8).

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QSPM

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Opportunities Weight AS TAS AS TAS1. 147 million people in the United States watch online videos. 0.08 3 0.24 1 0.082. Digital distribution of media is growing at a rate of 30% a year. 0.06 4 0.24 3 0.183. International markets account for over 50% of spending in US

filmed entertainment. 0.07 1 0.07 4 0.28

4. US TV market accounts for less than 15% of the world's TV households. 0.05 2 0.10 4 0.20

5. China's box office annual growth rate continues to grow over 10% a year. 0.02 1 0.02 4 0.08

6. Rivals such as Blockbuster are struggling with their business models.

0.04 1 0.04 2 0.08

7. Consumers spent over $20 billion on home video purchases in 2010.

0.05 2 0.10 3 0.15

8. More people know English now than ever before. 0.03 1 0.03 3 0.099. High price of an outing at the movie theater. 0.04 3 0.12 2 0.0810. Weak US Dollar makes global markets more attractive. 0.03 1 0.03 3 0.09

Expand by 15% into Latin America,

Mexico, and China

Increase advertising and R&D budgets

by 15%

Threats Weight AS TAS AS TAS1. Poor global economy has reduced personal spending. 0.04 2 0.08 1 0.042. YouTube owns over 75% of the multimedia web market share. 0.10 0 0.00 0 0.003. Time Warner Cable's movies on demand. 0.08 3 0.24 1 0.084. Hulu, and ad based streamer, provides TV shows and movies for

free.0.10 0 0.00 0 0.00

5. DVRs are in 40% of US homes as of 2011. 0.03 3 0.09 1 0.036. Barriers to entry are low as startups can be launched for

relatively low costs.0.05 0 0.00 0 0.00

7. By law, Netflix cannot release new DVDs until 28 days after retail release.

0.03 0 0.00 0 0.00

8. Increase in US postal fees would reduce profit margins. 0.03 0 0.00 0 0.009. Infringements on Netflix patents, and other proprietary assets by

decrease Netflix brand value.0.04 0 0.00 0 0.00

10. Netflix is the object of complaints regarding collusion with Wal-Mart. 0.03 0 0.00 0 0.00


QSPM

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Strengths Weight AS TAS AS TAS1. Revenues increased 29% from 2009 to 2010. 0.06 2 0.12 3 0.182. 90% of surveyed subscribers would recommend Netflix to their

friends.0.06 0 0.00 0 0.00

3. Library of choices grew 30% in 2010. 0.04 0 0.00 0 0.004. Currently have over 100,000 DVDs available for customers. 0.04 0 0.00 0 0.005. Netflix expanded into Canada, Mexico and Latin America in 2011. 0.07 1 0.07 4 0.286. Netflix is the largest streaming movie company with over 25

million subscribers as of Fall 2011.0.07 0 0.00 0 0.00

7. Recent customer satisfaction ASCI score was 85 out of 100. 0.04 0 0.00 0 0.008. Unlimited access to internet movies and mail in DVDs for $7.99. 0.08 0 0.00 0 0.009. Net income doubled from $83B to $161B from 2008 to 2010. 0.05 2 0.10 3 0.1510. Apple uses Netflix to stream movies to its Apple TV, iPhone, and

iPad. 0.04 0 0.00 0 0.00

Increase advertising and R&D budgets

by 15%

Expand by 15% into Latin America,

Mexico, and China

Weaknesses Weight AS TAS AS TAS1. Reliance on the US Mail System for delivering of DVDs in US

Markets.0.05 1 0.05 2 0.10

2. Relies upon Amazon for a majority of its cloud computing services and cannot easily switch to another cloud provider.

0.04 0 0.00 0 0.00

3. Only 2 of the top 8 executives are women. 0.02 0 0.00 0 0.004. Netflix has no publically available vision or mission statement. 0.02 2 0.04 3 0.065. Netflix deal with Disney and Sony expires in 2011. 0.04 0 0.00 0 0.006. In 2010, Netflix did not rank in the Top 10 among online video

content providers.0.06 4 0.24 2 0.12

7. Netflix charges $95 to Amazon's $79 for unlimited streaming without DVDs.

0.08 2 0.16 1 0.08

8. Netflix collects data from subscribers and some firms have received criticism for this practice.

0.03 0 0.00 0 0.00

9. Netflix is the object of patent infringement regarding client-server communications.

0.03 0 0.00 0 0.00

10. Stock price fell 60% between July 2011 and October 2011. 0.08 0 0.00 0 0.00Totals 2.18 2.43


Objective Get Big Fast

• Based on Thomas R. Eisemann’s (Harvard Business School) book “Internet Business Models: Text and Cases.”

• “Winner-take-all” dynamics apply when• Network effects (i.e., “viral”)• Scale economies (i.e., “scalable”)• Customer retention (i.e., “sticky”)

• Competitive risks are “reasonable” • Lifetime value of customer exceeds acquisition cost• You can fund aggressive growth

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Strategic Fit

• Network effects– Recommender system– Friend referrals

• Scale economies – Amortization of content library costs

• Customer retention– Subscription revenue model– Structural reliance – Switching costs high

• Competitive risks are “reasonable” – Competitors have smaller market shares

• Lifetime value of customer exceeds acquisition cost– CAC is $ 18 (two months subscription)– Based on 3 year retention CLV is ~ $300 to $350– CAC/CLV = 5-6%

• You can fund aggressive growth– Current assets exceed current liabilities by $260 million– Dept/equity ratio is 0.6 (S&P is 1.0)– Market Capitalization of $6 billion is 20 times out assets base (~$300 million)

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3 Year Goal and Annual Objectives

• In 3 years– Own 70% of the video steaming market by

• Purchasing more and better content for distribution• Increase marketing efforts• Create embedded players for any electronic device that has a video screen and a

connection to the Internet• Fuel global expansion

• Annual goals– 2011 35 million subscribers ( $3.5 billion in revenues)– 2012 55 million subscribers ( $5.5 billion in revenues) – 2013 80 million subscribers ( $8 billion in revenues)– There is 147 million potential customers in the US

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Strategy Selection with Year 1 Costs

• Increase advertising budgets by 15 percent.– 15% of $293M = $44M

• Expand by 15 percent into Latin America, Mexico, and China.– 15% of $2,162M = $324 New revenues * 92.5% (exp. ratio) = $300M

of added expenses + $500M marketing and development costs• Increase R&D by 25% for marketing and delivery of online

streaming movies (S6, S8, T6, T8).– 25% of 293M = $73.25M

• Total cost for all three– Approx. $1,000 Million

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Strategic Implementation

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http://www.google.com/url?sa=i&rct=j&q=netflix&source=images&cd=&cad=rja&docid=5IJC4Xin60k0jM&tbnid=7R67woqLsctsnM:&ved=0CAUQjRw&url=http://jayreviewsfilms.blogspot.com/2012/09/my-7-netflix-instant-picks-for-each-week.html&ei=PwRSUbqsFLK-0QHw1ICIDA&bvm=bv.44342787,d.dmQ&psig=AFQjCNFLfAvw0g3DtCtTIFCAdQX_lEcMcA&ust=1364415904484680


Technology Issues

• Reliance on a Public Internet – Network Neutrality

• NetFlix is 20-30% of ALL Internet traffic– Consumer Broadband Service– Distributed Distribution

• Intellectual Property Protection– International regulatory bodies

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EPS/EBIT

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Amount Needed: $1,000Stock Price: $120Shares Outstanding: 52 million Interest Rate: 5%Tax Rate: 36% Recession Normal Boom Recession Normal Boom

EBIT $100 $200 $300 $100 $200 $300Interest 0 0 0 50 50 50EBT 100 200 300 50 150 250Taxes 37 74 111 19 56 93EAT 63 126 189 32 95 158# Shares 60 60 60 52 52 52EPS 1.04 2.09 3.13 0.61 1.82 3.03

Common Stock Financing Debt Financing

20 Percent Stock 80 Percent StockRecession Normal Boom Recession Normal Boom

EBIT $100 $200 $300 $100 $200 $300Interest 40 40 40 10 10 10EBT 60 160 260 90 190 290Taxes 22 59 96 33 70 107EAT 38 101 164 57 120 183# Shares 54 54 54 59 59 59EPS 0.70 1.88 3.05 0.97 2.04 3.11


Projected Financials

• Assumptions– Sell stock to raise $1,000 M

• 8.33 million new shares @ $120/share• $1000M paid in capital

– 50% increase in revenues • 15% from international• 35% from domestic

– Marketing Budget increases by 15%– New R&D expense of $73.5M– No dividends

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Projected Income Statement

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Netflix, Inc.Consolidated Statements of Operations(unaudited)(in thousands, except per share data)

ProjectedDecember 31, December 31,

2010 2011

Revenues

Domestic $ 2,162,625 $ 2,919,543.75 +35%

International $ 515,213.60 +15% of total revenues

Total $ 2,162,625.00 $ 3,434,757.35

Cost of revenues $ 1,357,355.00 $ 1,832,429.25 CGS method

Marketing $ 293,839.00 $ 456,185.05 CGS method + additional 15%

Technology and development $ 163,329.00 $ 236,829.00 additional $73.5M

General and administrative $ 64,461.00 $ 87,022.35 CGS method

Legal settlement $ -

Operating income (loss) $ 283,641.00 $ 307,078.10 Other income (expense):

Interest expense $ (19,629.00) $ (19,629.00) Same

Interest and other income (expense) $ 3,684.00 $ 3,684.00 same

Income (loss) before income taxes $ 267,696.00 $ 291,133.10

Provision (benefit) for income taxes $ 106,843.00 $ 106,843.00 same

Net income (loss) $ 160,853 $ 184,290.10 add to retained earingsEarnings per share:

Basic $ 3.06 $ 3.03

Diluted $ 2.96 $ 2.94 Weighted-average common shares outstanding:

Basic 52,529 60,862additional 8.33 million sharesDiluted 54,304 62,637additional 8.33 million shares


Projected Balance Sheet

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Netflix, Inc.Consolidated Balance Sheets(unaudited)(in thousands)

ProjectedDecember 31, December 31,

2010 2011AssetsCurrent assets:

Cash and cash equivalents $ 194,499 $ 198,808 fudge numberShort-term investments $ 155,888 $ 155,888 Current content library, net $ 181,006 $ 271,509 50% additional titles Prepaid content $ 62,217 $ 62,217 Other current assets $ 43,621 $ 43,621

Total current assets $ 637,231 $ 732,043 Non-current content library, net $ 180,973 $ 271,460 50% additional titles Property and equipment, net $ 128,570 $ 128,570 sameOther non-current assets $ 35,293 $ 35,293 same

Total assets $ 982,067 $ 1,167,365 Liabilities and Stockholders' EquityCurrent liabilities:

Current content liabilities $ 174,791 $ 174,791 SameAccounts payable $ 54,129 $ 54,129 "Accrued expenses $ 32,476 $ 32,476 "Deferred revenue $ 127,183 $ 127,183 "

Total current liabilities $ 388,579 $ 388,579 "Non-current content liabilities $ 48,179 $ 48,179 "Long-term debt $ 200,000 $ 200,000 "Long-term debt due to related party $ - $ - Other non-current liabilities $ 55,145 $ 55,145 "

Total liabilities $ 691,903 $ 691,903 "Stockholders' equity:

Common stock 53 61add new stock issue Additional paid-in capital $ 51,622 $ 52,622 add 1,000m paid in capitalAccumulated other comprehensive income $ 750 $ 750 sameRetained earnings $ 237,739 $ 422,029 Add projected Net Income

Total stockholders' equity $ 290,164 $ 475,462 Total liabilities and stockholders' equity $ 982,067 $ 1,167,365


Projected Ratios

3/25/2013

Growth Rate Percent Netflix 2010 Netflix 2011 S&P 500

Sales ( YTD to YTD) 48.60 58.82% 14.90Net Income (YTD vs YTD) - 14.57% -

Profit Margin PercentGross Margin 36.6 47% 39.5Pre-Tax Margin 12. 9% 18.0Net Profit Margin 8.1 5% 13.1

Liquidity RatiosDebt/Equity Ratio 2.4 1.46 1.00Current Ratio 1.2 1.88 1.4Quick Ratio 1.2 1.88 0.9

Profitability RatiosReturn On Equity 82.0 39 28.1Return On Assets 17.4 16 8.8

Efficiency RatiosAsset Turnover 2.1 2.9 0.8


Strategic Evaluation

3/25/2013

http://www.google.com/url?sa=i&rct=j&q=netflix&source=images&cd=&cad=rja&docid=2GOGhxUhGJ5SWM&tbnid=BpUbl6Hb589aFM:&ved=0CAUQjRw&url=http://www.netflix.com/&ei=2wRSUcvUG4q30gGG7oHoAg&bvm=bv.44342787,d.dmQ&psig=AFQjCNHJ78nW9XBIsm9kZsvoPF60oTNJDw&ust=1364416068155572


Balanced Score Card

3/25/2013

Area of Objectives Measure or Target TimeExpectation Primary Responsibility

Customers

1 Satisfaction Customer Survey results Yearly Marketing Department

2 Brand Identity Industry Reports Yearly Marketing Department

Employees

1 Quality and service training On site and webinars Yearly COO

2 Employee Satisfaction Survey Yearly Human resources

Marketing

1. Number of Subscribers 2011 +15 M, 2012 +20M, 2013 +25M Yearly COO

Business Ethics/Natural Environment

1 Waste reduction volume of recyclable materials Quarterly COO

2 Ethics Training # of ethics training sessions Yearly Human resources

Financial

1 Revenues 50% increase each year Quarterly CFO

2 Ratio analysis better than Industry Avg, Yearly CFO


Netflix Update

3/25/2013

http://www.google.com/url?sa=i&rct=j&q=netflix+today&source=images&cd=&cad=rja&docid=6BRVbS79xQ9XiM&tbnid=V3N8AqexeN71HM:&ved=0CAUQjRw&url=http://www.theverge.com/2013/3/13/4098288/netflix-brings-facebook-integration-to-us-customers&ei=26hUUePcKPO-0QGt4oHQCg&bvm=bv.44442042,d.dmQ&psig=AFQjCNGsw5Y74E1AgM9FWd5la4q1PVBIKQ&ust=1364589136013008


Update

3/25/2013

http://www.google.com/url?sa=i&rct=j&q=netflix+market+share+2012&source=images&cd=&cad=rja&docid=F-V7OEMKaV5HiM&tbnid=LHpMMKA3H23eEM:&ved=0CAUQjRw&url=http://macdailynews.com/2012/06/02/netflix-gobbles-apple-share-to-take-lead-in-u-s-online-movie-business/&ei=vqBUUci0Foy70QGknoDADw&bvm=bv.44442042,d.dmQ&psig=AFQjCNGHhuqYPFSc6SJSI-y9kcfh3wrOeg&ust=1364587058945603

© 2013, Tony Gauvin,UMFK 523/25/2013

Update

http://www.google.com/url?sa=i&rct=j&q=netflix+market+share+DVD+2012&source=images&cd=&cad=rja&docid=gkZD_hwUgN9ccM&tbnid=7AsfVU3gLGKT3M:&ved=0CAUQjRw&url=http://www.businessinsider.com/chart-of-the-day-redbox-not-netflix-is-the-nations-largest-dvd-renter-2012-1&ei=FqFUUZ-KI-O_0gHstIGgDw&bvm=bv.44442042,d.dmQ&psig=AFQjCNEj3AcmYWzAbC811QivPqd0p1PJoA&ust=1364587155532893


The Quickster Fiasco

• In September 2011, Hastings announces that he will split off the DVD rental business into a new company called Qwickster

• NetFlix loses 800,000 customers• Stock prices falls from $295 to $108/share • In October 2011, Hastings decides to NOT split

off the DVD business

3/25/2013


Stock Performance

3/25/2013

Source: MorningStar®

http://quote.morningstar.com/stock/chart.aspx?t=NFLX&region=USA&culture=en-US&statePara=%7B%22comp%22:%22XNAS:AMZN%22,%22evt%22:%5B1,1,0%5D,%22period%22:%5B11,%222009-1-2%22,%222013-3-8%22%5D,%22display%22:%5B1,%22lines%22%5D,%252

http://quote.morningstar.com/stock/chart.aspx?t=NFLX&region=USA&culture=en-US&statePara=%7B%22comp%22:%22XNAS:AMZN%22,%22evt%22:%5B1,1,0%5D,%22period%22:%5B11,%222009-1-2%22,%222013-3-8%22%5D,%22display%22:%5B1,%22lines%22%5D,%252


Questions

3/25/2013

http://www.google.com/url?sa=i&rct=j&q=netflix+question&source=images&cd=&cad=rja&docid=pGWBbKMS07NUqM&tbnid=ZfQAIrwvNEPsuM:&ved=0CAUQjRw&url=http://www.platformnation.com/2011/07/13/a-simple-question-with-recap-netflix-price-change/&ei=uqlUUeJxp7jRAZKXgcgD&bvm=bv.44442042,d.dmQ&psig=AFQjCNGIAKqpYHR2rYLx1kQo6exPJjf8KQ&ust=1364589366121875


References• Uhle, Frank, and Stephen Meyer. "Netflix, Inc." International Directory of Company Histories. Ed. Derek Jacques and Paula Kepos. Vol. 115.

Detroit: St. James Press, 2010. 350-355. Business Insights: Essentials. Web. 22 Mar. 2013. Document URLhttp://bi.galegroup.com/essentials/article/GALE|CX2335800079

• "DVD Rental Market, 2009-2010." Market Share Reporter. Detroit: Gale, 2012. Business Insights: Essentials. Web. 22 Mar. 2013. Document URLhttp://bi.galegroup.com/essentials/article/GALE|I2502040158?u=maine_fortkent

• "Top Entertainment Web Sites, 2010." Market Share Reporter. Ed. Robert S. Lazich and Virgil L. Burton, III. 2012 ed. Detroit: Gale, 2012. Business Insights: Essentials. Web. 22 Mar. 2013. Document URLhttp://bi.galegroup.com/essentials/article/GALE|I2502036216?u=maine_fortkent

• "DVD Rental Market, 2009-2010." Market Share Reporter. Detroit: Gale, 2012. Business Insights: Essentials. Web. 22 Mar. 2013. Document URLhttp://bi.galegroup.com/essentials/article/GALE|I2502040158?u=maine_fortkent

• "Digital Video Streaming Market, 2010." Market Share Reporter. Ed. Robert S. Lazich and Virgil L. Burton, III. 2012 ed. Detroit: Gale, 2012. Business Insights: Essentials. Web. 22 Mar. 2013. Document URLhttp://bi.galegroup.com/essentials/article/GALE|I2502038343?u=maine_fortkent

• “The Network Neutrality and the Netflix Dispute: Upcoming Challenges for Content Providers in Europe and the United States. “ Intellectual Property & Technology Law Journal; Mar2011, Vol. 23 Issue 3, p3-6, 4p Document URL http://www.library.umaine.edu/auth/EZProxy/test/authej.asp?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=58623247&site=ehost-live

• Chapter 18: FILMED ENTERTAINMENT. Miller, Richard K. and Washington, Kelli, Leisure Market Research Handbook; 2010, p156-159, $p, 2 Charts Document URL: http://www.library.umaine.edu/auth/EZProxy/test/authej.asp?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=47565086&site=ehost-live

• Eisenmann, Thomas R., ed. Internet Business Models: Text and Cases. New York: McGraw-Hill/Irwin, 2001• Netflix, Inc. – 2011, Lori Radanovich, Bladwin-Wallace College, published in Strategic Management, Concepts and Cases 14 th edition, Fred David • Netflix– 2011, case notes, Forest David• http://ir.netflix.com/ • All images are from www.netflix.com and are the property of Netflix, Inc.

3/25/2013

http://bi.galegroup.com/essentials/article/GALE%7CCX2335800079

http://bi.galegroup.com/essentials/article/GALE%7CI2502040158?u=maine_fortkent




http://www.library.umaine.edu/auth/EZProxy/test/authej.asp?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=58623247&site=ehost-live




http://ir.netflix.com/

http://www.netflix.com/

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