A Strategic Management Case Study

Tony Gauvin

netflix.com
 Overview
Company Overview Strategy Formulation
A Brief history of Netflix SWOT Matrix
Existing Mission and Vision Space Matrix
Existing Objectives and Strategies Divisional Analysis
Current Issues Grand Strategy Matrix
New Mission and Vision Matrix Analysis
QSPM Matrix
External Assessment
Strategic Plan for the Future
Industry analysis Objectives
Opportunities and threats Strategies
EFE Matrix
CPM Matrix
Implementation Issues
Technology
Internal Assessment
EPS/EBIT
Organizational Structure Projected Financials
Strengths and weaknesses
Financial Condition Evaluation
IFE Matrix Balanced Score Card
Netflix Update
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 In the Beginning (1997-2007)

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 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

To become the number one mail

order and live streaming movie
company in the world.

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 Mission Statement
At Netflix, we seek to be the highest quality subscription 1.Customers
business that offers Internet streaming and DVD by mail 2.Products or services
content (2). We believe in offering the best customer 3.Markets
4.Technology
service possible by teaching our employees to be honest, 5.Concern for survival,
respectful and ethical (6) while also valuing every growth, and profitability
6.Philosophy
customer’s individual needs. Our employees (9) are 7.Self-concept
provided with the latest technologies, excellent benefits, 8.Concern for public image
9.Concern for employees
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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 External Audit

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 Industry Market Analysis
Web Entertainment Sites 2010 Digital Video Streaming Market, 2010
Sites are ranked by millions of unique visitors in August Apple is in a three-way tie for third place with a 4% market share.
2010.
YouTube 99.00
%
iTunes 44.60
Netflix 61.00
Glam Media 44.50
Comcast 8.00
Yahoo! Sports 29.70
Other 31.00
Gorilla Nation web sites 21.70
IMDB 21.20
Turner Sports and Entertainment 21.20
Netflix 20.60 DVD Rental Market, 2009-2010
Market shares are shown in percent.
2009 2010
% %
DVD Sales and Rental Netflix 25.70 34.80
According to the Digital Entertainment Group (www.dvdinformation.com), Blockbuster (traditional) 22.80 19.90
DVD Sales DVD Rental Total Spending Coinstar (Redbox) 11.90 18.90
2003: $11.6 billion $4.5 billion $16.1 billion Other traditional 28.20 16.10
2004: $15.5 billion $5.7 billion $21.2 billion Other subscription 8.60 7.20
2005: $16.3 billion $6.5 billion $22.8 billion Other kiosk 2.70 3.10
2006: $16.6 billion $7.5 billion $24.1 billion
2007: $16.0 billion $7.5 billion $23.4 billion
2008: $14.5 billion $7.5 billion $21.7 billion*
* Includes $750 million spending to Blu-ray Disc format

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 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
Netflix Redbox Time Warner

Critical Success Factors Weight Rating Score Rating Score Rating Score
Market Share 0.12 3 0.36 2 0.24 4 0.48
Inventory System 0.05 3 0.15 4 0.20 2 0.10
Financial Position 0.08 2 0.16 1 0.08 4 0.32
Product Quality 0.10 3 0.30 2 0.20 4 0.40
Customer Loyalty 0.03 4 0.12 2 0.06 3 0.09
Sales Distribution 0.08 3 0.24 2 0.16 4 0.32
Global Expansion 0.09 2 0.18 1 0.09 3 0.27
Advertising 0.10 3 0.30 2 0.20 4 0.40
E-Commerce 0.15 4 0.60 2 0.30 3 0.45
Customer Service 0.07 3 0.21 4 0.28 2 0.14
Price Competitiveness 0.10 3 0.30 4 0.40 1 0.10
Management Experience 0.03 3 0.09 2 0.06 4 0.12
Totals 1.00 3.01 2.27 3.19

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 EFE
Opportunities Weight Rating Weighted Score
1. 147 million people in the United States watch online videos. 0.08 3 0.24
2. Digital distribution of media is growing at a rate of 30% a year. 0.06 3 0.18
3. International markets account for over 50% of spending in US 0.07 2 0.14
filmed entertainment.
4. US TV market accounts for less than 15% of the world's TV 0.05 2 0.10
households.
5. China's box office annual growth rate continues to grow over 0.02 1 0.02
10% a year.
6. Rivals such as Blockbuster are struggling with their business 0.04 4 0.16
models.
7. Consumers spent over $20 billion on home video purchases in 0.05 3 0.15
2010.
8. More people know English now than ever before. 0.03 2 0.06
9. High price of an outing at the movie theater. 0.04 4 0.16
10. Weak US Dollar makes global markets more attractive. 0.03 2 0.06
Threats Weight Rating Weighted Score
1. Poor global economy has reduced personal spending. 0.04 2 0.08
2. YouTube owns over 75% of the multimedia web market share. 0.10 2 0.20
3. Time Warner Cable's movies on demand. 0.08 3 0.24
4. Hulu, and ad based streamer, provides TV shows and movies for
0.10 2 0.20
free.
5. DVRs are in 40% of US homes as of 2011. 0.03 2 0.06
6. Barriers to entry are low as startups can be launched for
0.05 3 0.15
relatively low costs.
7. By law, Netflix cannot release new DVDs until 28 days after retail
0.03 3 0.09
release.
8. Increase in US postal fees would reduce profit margins. 0.03 2 0.06
9. Infringements on Netflix patents, and other proprietary assets by
0.04 4 0.16
decrease Netflix brand value.
10. Netflix is the object of complaints regarding collusion with Wal-
0.03 4 0.12
Mart.
Totals 1.00 2.63

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 Internal Audit

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 Organizational Structure

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 Financial Information (Income)

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 Financial Information

Net Worth Analysis (in millions)

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

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

Profit Margin Percent

Gross Margin 36.6 36.5 39.5
Pre-Tax Margin 12.9 12.7 18.0
Net Profit Margin 8.1 8.0 13.1
5Yr Gross Margin (5-Year Avg.) 35.7 35.7 39.4

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

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

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

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 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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 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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 Strengths
IFE Weight Rating Weighted Score
1. Revenues increased 29% from 2009 to 2010. 0.06 4 0.24
2. 90% of surveyed subscribers would recommend Netflix to their
0.06 4 0.24
friends.
3. Library of choices grew 30% in 2010. 0.04 4 0.16
4. Currently have over 100,000 DVDs available for customers. 0.04 4 0.16
5. 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
0.07 3 0.21
million subscribers as of Fall 2011.
7. Recent customer satisfaction ASCI score was 85 out of 100. 0.04 4 0.16
8. Unlimited access to internet movies and mail in DVDs for $7.99. 0.08 4 0.32
9. Net income doubled from $83B to $161B from 2008 to 2010. 0.05 4 0.20
10. Apple uses Netflix to stream movies to its Apple TV, iPhone, and
0.04 3 0.12
iPad.
Weaknesses Weight Rating Weighted Score
1. Reliance on the US Mail System for delivering of DVDs in US
0.05 1 0.05
Markets.
2. Relies upon Amazon for a majority of its cloud computing
0.04 1 0.04
services and cannot easily switch to another cloud provider.
3. Only 2 of the top 8 executives are women. 0.02 1 0.02
4. Netflix has no publically available vision or mission statement. 0.02 1 0.02
5. Netflix deal with Disney and Sony expires in 2011. 0.04 1 0.04
6. In 2010, Netflix did not rank in the Top 10 among online video
0.06 1 0.06
content providers.
7. Netflix charges $95 to Amazon's $79 for unlimited streaming
0.08 1 0.08
without DVDs.
8. Netflix collects data from subscribers and some firms have
0.03 2 0.06
received criticism for this practice.
9. Netflix is the object of patent infringement regarding client-
0.03 1 0.03
server communications.
10. Stock price fell 60% between July 2011 and October 2011. 0.08 1 0.08
Totals 1.00 2.57

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 Strategy Formulation

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 SWOT MATRIX

SO Strategies
1. 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 Strategies
1. Extend expansion into Canada, Mexico, Latin America and China by 15% per year (W6, W10, O3,
O4, O5, O8, O10).
2. Renew deals with Disney and Sony (W5, O2).
ST Strategies
1. Provide a free month of service for anyone who recommends 5 friends (S2, T1).
2. Increase R&D by 25% for marketing of online streaming movies (S6, S8, T6, T8).
WT Strategies
1. Form a partnership with UPS to deliver all DVDs (W1, T8).
2. Develop a clear mission (W4, T1, T6).

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 Space Matrix
FP
Conservative Aggressive
7

Possible Strategies 6

•Backwards, Forward, Horizontal Integration 5

•Market Penetration 4

•Market Development 3

•Productions Development 2

•Diversification (related or unrelated) 1

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

-2

-3

-4

-5

Internal Analysis: External Analysis: -6

Financial Position (FP) Stability Position (SP)
Gross Margin 4 Rate of Inflation -2 -7
Debt to Equity 6 Technological Changes -2 Defensive Competitive
SP
Current Ratio 4 Price Elasticity of Demand -2
ROE 4 Competitive Pressure -4
ROA 4 Barriers to Entry into Market -6

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

Internal Analysis: External Analysis:

Competitive Position (CP) Industry Position (IP)
Market Share -2 Growth Potential 6
Product Quality -2 Financial Stability 4
Customer Loyalty -1 Ease of Entry into Market 2
Technological know-how -2 Resource Utilization 2
Control over Suppliers and Distributors -5 Profit Potential 5

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

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 Grand Strategy Matrix
Rapid Market Growth
Possible Strategies
•Backwards, Forward, Horizontal
Quadrant II Quadrant I
Integration
•Market Penetration
•Market Development Netflix
•Productions Development
•Diversification (related)

Weak Strong
Competitive Competitive
Position Position

Quadrant III Quadrant IV

Slow Market Growth

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 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
Alternative Strategies IE SPACE GRAND BCG COUNT
Forward Integration x x 2
Backward Integration x x 2
Horizontal Integration x x 2
Market Penetration x x 2
Market Development x x 2
Product Development x x 2
Related Diversification x x 2
Unrelated Diversification x 1

Retrenchment
Divestiture
Liquidation

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 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 Increase
Expand by 15%
into Latin
advertising and
America,
R&D budgets
Mexico, and
by 15%
China
Opportunities Weight AS TAS AS TAS
1. 147 million people in the United States watch online videos. 0.08 3 0.24 1 0.08
2. Digital distribution of media is growing at a rate of 30% a year. 0.06 4 0.24 3 0.18
3. International markets account for over 50% of spending in US
0.07 1 0.07 4 0.28
filmed entertainment.
4. US TV market accounts for less than 15% of the world's TV
0.05 2 0.10 4 0.20
households.
5. China's box office annual growth rate continues to grow over
0.02 1 0.02 4 0.08
10% a year.
6. Rivals such as Blockbuster are struggling with their business
0.04 1 0.04 2 0.08
models.
7. Consumers spent over $20 billion on home video purchases in
0.05 2 0.10 3 0.15
2010.
8. More people know English now than ever before. 0.03 1 0.03 3 0.09
9. High price of an outing at the movie theater. 0.04 3 0.12 2 0.08
10. Weak US Dollar makes global markets more attractive. 0.03 1 0.03 3 0.09

Threats Weight AS TAS AS TAS

1. Poor global economy has reduced personal spending. 0.04 2 0.08 1 0.04
2. YouTube owns over 75% of the multimedia web market share. 0.10 0 0.00 0 0.00
3. Time Warner Cable's movies on demand. 0.08 3 0.24 1 0.08
4. Hulu, and ad based streamer, provides TV shows and movies for
0.10 0 0.00 0 0.00
free.
5. DVRs are in 40% of US homes as of 2011. 0.03 3 0.09 1 0.03
6. Barriers to entry are low as startups can be launched for
0.05 0 0.00 0 0.00
relatively low costs.
7. By law, Netflix cannot release new DVDs until 28 days after retail
0.03 0 0.00 0 0.00
release.
8. Increase in US postal fees would reduce profit margins. 0.03 0 0.00 0 0.00
9. Infringements on Netflix patents, and other proprietary assets by
0.04 0 0.00 0 0.00
decrease Netflix brand value.
10. Netflix is the object of complaints regarding collusion with Wal-
0.03 0 0.00 0 0.00
Mart.

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 QSPM
Expand by 15%
Increase
into Latin
advertising and
America,
R&D budgets
Mexico, and
by 15%
China
Strengths Weight AS TAS AS TAS
1. Revenues increased 29% from 2009 to 2010. 0.06 2 0.12 3 0.18
2. 90% of surveyed subscribers would recommend Netflix to their
0.06 0 0.00 0 0.00
friends.
3. Library of choices grew 30% in 2010. 0.04 0 0.00 0 0.00
4. Currently have over 100,000 DVDs available for customers. 0.04 0 0.00 0 0.00
5. Netflix expanded into Canada, Mexico and Latin America in 2011. 0.07 1 0.07 4 0.28
6. Netflix is the largest streaming movie company with over 25
0.07 0 0.00 0 0.00
million subscribers as of Fall 2011.
7. Recent customer satisfaction ASCI score was 85 out of 100. 0.04 0 0.00 0 0.00
8. Unlimited access to internet movies and mail in DVDs for $7.99. 0.08 0 0.00 0 0.00
9. Net income doubled from $83B to $161B from 2008 to 2010. 0.05 2 0.10 3 0.15
10. Apple uses Netflix to stream movies to its Apple TV, iPhone, and
0.04 0 0.00 0 0.00
iPad.
Weaknesses Weight AS TAS AS TAS
1. Reliance on the US Mail System for delivering of DVDs in US
0.05 1 0.05 2 0.10
Markets.
2. Relies upon Amazon for a majority of its cloud computing
0.04 0 0.00 0 0.00
services and cannot easily switch to another cloud provider.
3. Only 2 of the top 8 executives are women. 0.02 0 0.00 0 0.00
4. Netflix has no publically available vision or mission statement. 0.02 2 0.04 3 0.06
5. Netflix deal with Disney and Sony expires in 2011. 0.04 0 0.00 0 0.00
6. In 2010, Netflix did not rank in the Top 10 among online video
0.06 4 0.24 2 0.12
content providers.
7. Netflix charges $95 to Amazon's $79 for unlimited streaming
0.08 2 0.16 1 0.08
without DVDs.
8. Netflix collects data from subscribers and some firms have
0.03 0 0.00 0 0.00
received criticism for this practice.
9. Netflix is the object of patent infringement regarding client-
0.03 0 0.00 0 0.00
server communications.
10. Stock price fell 60% between July 2011 and October 2011. 0.08 0 0.00 0 0.00
Totals 2.18 2.43

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 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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 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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Amount Needed: $1,000
EPS/EBIT
Stock Price: $120
Shares Outstanding: 52 million

Interest Rate: 5% Common Stock Financing Debt Financing

Tax Rate: 36% Recession Normal Boom Recession Normal Boom
EBIT $100 $200 $300 $100 $200 $300
Interest 0 0 0 50 50 50
EBT 100 200 300 50 150 250
Taxes 37 74 111 19 56 93
EAT 63 126 189 32 95 158
# Shares 60 60 60 52 52 52
EPS 1.04 2.09 3.13 0.61 1.82 3.03

20 Percent Stock 80 Percent Stock

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

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 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
Netflix, Inc.
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
Projected
December 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 earings
Earnings 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 shares
Diluted 54,304 62,637additional 8.33 million shares

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 Netflix, Inc.
Projected Balance Sheet
Consolidated Balance Sheets
(unaudited)
(in thousands)
Projected
December 31, December 31,
2010 2011
Assets
Current assets:
Cash and cash equivalents $ 194,499 $ 198,808 fudge number
Short-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 same
Other non-current assets $ 35,293 $ 35,293 same
Total assets $ 982,067 $ 1,167,365
Liabilities and Stockholders' Equity
Current liabilities:
Current content liabilities $ 174,791 $ 174,791 Same
Accounts 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 capital
Accumulated other comprehensive income $ 750 $ 750 same
Retained 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

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 Projected Ratios
Growth Rate Percent Netflix 2010 Netflix 2011 S&P 500
Sales ( YTD to YTD) 48.60 58.82% 14.90
Net Income (YTD vs YTD) - 14.57% -

Profit Margin Percent

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

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

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

Efficiency Ratios
Asset Turnover 2.1 2.9 0.8

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 Strategic Evaluation

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 Balanced Score Card
Time
Area of Objectives Measure or Target Primary Responsibility
Expectation

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

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 Netflix Update

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 Update

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 Update

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 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
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 Stock Performance

Source: MorningStar®

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3/25/2013 © 2013, Tony Gauvin,UMFK 55
 Questions

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•
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 URL
http://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 URL
http://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 URL
http://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 URL
http://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 URL
http://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=5862324
7&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=4756508
6&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 14th 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.

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