NORTHERN ILLINOIS UNIVERSITY
MKTG 654 - FALL 2011
Oren Amematekpo, Ozzie Moreno, Theresa Pruneda
Brad Runnion, Jason Troester
TABLE OF CONTENTS
Company Information ................................................................................................................................... 5
Company Analysis ..................................................................................................................................... 5
History ................................................................................................................................................... 5
Recognition ........................................................................................................................................... 5
Employees ............................................................................................................................................. 6
Stores and Locations ............................................................................................................................. 6
Operations ............................................................................................................................................ 6
Segments............................................................................................................................................... 6
Seasonality ............................................................................................................................................ 7
Revenue/Pricing .................................................................................................................................... 7
Promotional Partnerships ..................................................................................................................... 8
Branding ................................................................................................................................................ 8
Intellectual Property ............................................................................................................................. 9
Research and Development .................................................................................................................. 9
Competition ........................................................................................................................................ 10
Strengths and Weaknesses ..................................................................................................................... 10
Strength 1 – Brand Image & Awareness ............................................................................................. 10
Strength 2 - Infrastructure .................................................................................................................. 10
Strength 3 – Pricing (DVD) .................................................................................................................. 11
Strength 4 – Content Library ............................................................................................................... 11
Weakness 1 – Brand Loyalty ............................................................................................................... 11
Weakness 2 – Shipping Costs .............................................................................................................. 11
Financial Analysis ........................................................................................................................................ 12
Key Statistics ........................................................................................................................................... 13
Financial Summary .................................................................................................................................. 14
Competitors ............................................................................................................................................ 15
Competitor Analysis ................................................................................................................................ 16
Analyst Opinions ..................................................................................................................................... 17
Analyst Estimates .................................................................................................................................... 18
Industry Analysis ......................................................................................................................................... 19
Description of Industry............................................................................................................................ 19
Page 1
Porters Five Forces Analysis .................................................................................................................... 19
Rivalry Among Existing Industry Firms ................................................................................................ 19
Threat of New Entrants ....................................................................................................................... 20
Bargaining Power of Suppliers/Studios............................................................................................... 21
Bargaining Power of Buyers ................................................................................................................ 21
Threat of Substitute Products ............................................................................................................. 22
Critical Success Factors ........................................................................................................................... 22
Factor 1 – Largest Library .................................................................................................................... 22
Factor 2 – Best Value for its customers .............................................................................................. 23
Factor 3 – Convenience....................................................................................................................... 23
External Environment Analysis ................................................................................................................... 24
Demographics ......................................................................................................................................... 24
World Population Growth ................................................................................................................... 24
Economic Environment ........................................................................................................................... 25
Natural Environment............................................................................................................................... 26
Technological Environment..................................................................................................................... 27
Political/Legal Environment .................................................................................................................... 27
Social Environment ................................................................................................................................. 28
Customer Analysis ....................................................................................................................................... 28
Current and Potential customers ............................................................................................................ 28
What customers do with the product ..................................................................................................... 29
Where Customers Purchase .................................................................................................................... 30
When Customers Purchase ..................................................................................................................... 30
Why and how customers select .............................................................................................................. 30
Why potential customers do not purchase............................................................................................. 31
Competitor Analysis .................................................................................................................................... 31
Amazon ............................................................................................................................................... 31
Blockbuster ......................................................................................................................................... 32
Redbox ................................................................................................................................................ 33
Competitive Price Comparison................................................................................................................ 34
Current Marketing Stratgies ....................................................................................................................... 34
Free Subscriptions ................................................................................................................................... 34
Page 2
Affliate Marketing & Consumer Product Partnerships ........................................................................... 35
Marketing Strategy to Be Researched ........................................................................................................ 35
Objectives................................................................................................................................................ 36
Reacquire Customers .......................................................................................................................... 36
Increase Operating & Profit Margins .................................................................................................. 36
Market Share....................................................................................................................................... 36
Criteria..................................................................................................................................................... 37
Cost to Reacquire Customers .............................................................................................................. 37
Retention Rate .................................................................................................................................... 37
Market Share....................................................................................................................................... 37
Marketing Strategy ..................................................................................................................................... 37
E-mail to lost customers.......................................................................................................................... 37
Referral program ..................................................................................................................................... 38
Competitor Reaction ............................................................................................................................... 39
Summary ..................................................................................................................................................... 39
APPENDIX
Sample Lost Customer E-Mail ............................................................................................................. 41
E-Mail Calculations .............................................................................................................................. 42
Referral E-mail..................................................................................................................................... 43
Referral Conversion Calculations ........................................................................................................ 44
Amazon Prime E-mail .......................................................................................................................... 45
Works Cited…………………………………………………………………………………………………………………………………………46
Page 3
COMPANY INFORMATION
COMPANY ANALYSIS
History
Incorporated in Delaware in 1997, Netflix (Nasdaq: NFLX) maintains the distinction as
the world’s leader in providing movies and TV shows via a subscription service to its customers.
With approximately 23.8 million members (Netflix, 2011) in the United States and Canada,
Netflix offers its subscribers immediate access to “unlimited movies and TV episodes” streamed
over the internet to their computers, TVs, and mobile devices for a monthly fee. For those
subscribers located in the United States, Netflix also offers DVD home delivery. With consumers
placing increasing emphasis on both value and control, Netflix has become the go to online
provider of the “home entertainment experience.” (Netflix, 2011)
In May 2002, Netflix completed its initial public offering. By 2010, it had achieved a
“significant milestone with the majority” of its subscribers streaming TV shows and movies
rather than viewing them by DVD. By bringing movies directly to consumers, “Netflix has
revolutionized the way people rent movies.” (Netflix Welcome Center, 2011)
Recognition
Netflix has been the recipient of numerous industry and customer satisfaction awards.
Netflix was named “the number one e-commerce company for customer satisfaction” by the
American Customer Satisfaction Index (ACSI) in December 2010 as well as “the Retail
Innovator of the Year by the National Retail Federation” in January 2007. Netflix was
recognized with the Customers First Award in 2005 by the Fast Company and Nielsen Online
ranked Netflix as “the number online retailer” in December 2007. In addition, Netflix “has been
named the number one retail Website for customer satisfaction in 11 out of 12 surveys since
2005 by ForeSee Results.” (Netflix Welcome Center, 2011)
Page 4
Employees
Netflix employed 2,180 full-time employees and 2,149 part-time and temporary
employees as of December 31, 2010 (Netflix, 2011). The part-time and temporary employees are
used primarily to respond to any fluctuations in the demand for DVD shipments. Netflix
considers its relationship with its employees to be “good” and its employees are not covered by a
collective bargaining agreement.
Stores and Locations
Netflix maintains its principal executive offices in Los Gatos, California. It also
maintains 58 distribution centers across the United States, according to a phone interview with a
Netflix representative (October 30, 2011). Netflix also has a customer service center in
Hillsboro, Oregon, and its content acquisition and other general and administrative office can be
found in Beverly Hills, California. The company also operates a website at www.netflix.com.
Operations
Netflix obtains its content from numerous studios, distributors and “other content
providers through fixed-fee licenses, revenue sharing agreements and direct purchases.” It then
markets its service through multiple channels that include TV, radio, online advertising, and
through various other partnerships. Through the “services of third-party cloud computing
providers”, particularly those of Amazon, the company is able to stream both movies and TV
shows effectively. Netflix also receives and ships DVDs through different networks, agreements,
and distributors “for the purpose of renting such content to its subscriber and earning
subscription rental revenues.” (2011)
Segments
Netflix derives “revenues from monthly subscription fees” in two segments: the United
States and International. However, it generates almost all of its revenues and holds all of its long-
Page 5
term assets in the United States. The company expanded into the international market in
September 2010 with the offering of an “unlimited streaming plan without DVDs in Canada.”
Further, according to a Q3 Letter to its shareholders, Netflix launched into 43 Latin American
countries in September 2011 and plans to expand to the United Kingdom and Ireland in early
2012. Netflix expects to be a “primarily a global streaming business” going forward, coupled
with the feature of DVD home delivery to its U.S. customers. With the business evolving
rapidly, it anticipates that the “delivery of entertainment video over the Internet will be a very
large global market opportunity.” Specifically, it believes that its focus on one particular segment
of that market, the “consumer-paid, commercial-free streaming subscription of TV shows and
movies,” will allow Netflix to continue to “grow rapidly and profitably.”
Seasonality
The growth in Netflix subscribers is usually highest in the first and fourth quarters of a
given year due primarily to the increase in consumer video watching, as well as, the purchases of
devices capable of streaming internet content. (2011, Netflix) Consequently, subscriber growth
tends to slow during the second quarter and then begins to accelerate again during the third
quarter. In addition, the seasonality of DVD releases impacts the expenses related to DVD
shipments.
Revenue/Pricing
Netflix records nearly all of its revenues from the monthly fees charges to its subscribers.
It recognizes “subscription revenues ratably over each subscriber’s monthly subscription period.”
In the United States, Netflix offers its subscribers both streaming and DVDs by mail through a
variety of subscription plans. Plan price depends on how many DVDs a subscriber has out at any
point in time.
Page 6
•
$7.99/month – Unlimited streaming without DVDs plan
•
$7.99/month – No streaming, 1-DVD out plan
•
$11.99/month – No streaming, 2 DVD-out plan
For customers that prefer “high definition Blue-ray discs in addition to standard DVDS”
pay an additional $2 surcharge with the most popular Netflix plans.
Promotional Partnerships
Netflix relies extensively upon numerous “partners to offer instant streaming of content
from Netflix to various devices.” (2011) Currently, its customers are offered the ability to stream
content through a multitude of internet capable devices, such as PCs, Macs, TVs, game consoles,
and mobile devices. These devices are not produced and sold by Netflix; therefore, its business
can be negatively impacted if there is any fault with the manufactured product such as a bad
connection or lack of a required update that could otherwise impair the Netflix customer
experience. Agreements with the providers of these products are generally between one and three
years. Netflix also maintains “streaming content license agreements, DVD direct purchases and
DVD and streaming revenue sharing agreements with studios, distributors and other suppliers.”
(2011)
Branding
The focus at Netflix is to continue to improve the customer experience while striving to
expand streaming content, enhance its user interfaces, and extend its streaming service to more
“Internet-connected devices”, all while meeting its financial targets. The branding strategy
employed by Netflix revolves around the following three core beliefs:
•
Increased growth in subscribers allows Netflix access to additional content, resulting in
additional growth
Page 7
•
Increased growth in subscribers results in more “word-of-mouth promotion” of the
Netflix experience, resulting in additional growth without the incremental marketing
expense
•
Increased growth in subscribers allows Netflix to focus on improving its “service
offering”, resulting in additional growth
Netflix understands the importance of continuing to establish and maintain its strong
brand and is aware that its customers can fulfill their demand for entertainment video from one
of its competitors at anytime. Netflix also realizes that it will need to rely extensively upon
successfully establishing its brand when expanding internationally or its business and financial
results may be negatively impacted. (2011)
Intellectual Property
Netflix protects its “proprietary intellectual property” through the use of “a combination
of patent, trademark, copyright and trade secret laws and confidential agreements.” The company
regards its “trademarks, service marks, copyrights, patents, domain names, trade dress, trade
secrets, proprietary technologies, and similar intellectual property as important” to the success of
the company.
Research and Development
Netflix technology and development expenses consist primarily of the payroll and related
costs associated with the improvement of its service offering, such as testing, its
telecommunications systems/infrastructure and other internal systems, the technology related to
recommendation and merchandising, in addition to the maintenance and modification of its user
interfaces. Research and development expense also includes those expenses paid to certain thirdparty “Internet-based or ‘cloud’ computing services” used in its business, as well as, computer
hardware and software expense. (Netflix Annual Report, 2011).
Page 8
Competition
“The market for entertainment video is intensely competitive and subject to rapid
change.” (2011) As a result, new competitors may arise at any time with very limited investment.
In addition, Netflix customers are not necessarily loyal to any particular source of provider and
can therefore “shift spending from one provider to another.” The primary competitors of Netflix
include:
•
Cable, satellite, and telecommunication providers, such as Time Warner, Comcast,
DIRECTV, Echostar, AT&T, and Verizon
•
Providers of movies and TV via the internet, such as Apple, Amazon.com, Hulu.com, and
Google
•
Outlets and kiosks that offer DVD rental, which include Blockbuster and Redbox
•
Retailers such as Amazon.com, Walmart, and Best Buy
STRENGTHS AND WEAKNESSES
Strength 1 – Brand Image & Awareness
Netflix is a leader in its DVD-by-mail and online video streaming and has been since
1997. As a result, its brand awareness and image have become assets. As Netflix pointed out in
its annual report, “We must continue to build and maintain strong brand identity. We believe that
strong brand identity will be important in attracting subscribers who may have a number of
choices from which to obtain entertainment video. If our efforts to promote and maintain our
brand are not successful, our operating results and our ability to attract subscribers may be
adversely affected.” (2011)
Strength 2 - Infrastructure
Because Netflix was first into the DVD-by-mail market and an early innovator in online
video streaming, it harnesses strength in its infrastructure. It currently has 58 distribution centers
Page 9
throughout the United States which allows DVDs to be shipped within 1 day. Further, it invested
$163.3M (7.6% of revenue) into research and development in 2010.
Strength 3 – Pricing (DVD)
In July of 2011, Netflix separated its DVD and streaming services into two distinct
offerings. It charges new customers $7.99 to rent an unlimited number of DVDs, one at a time
each month and an additional $2 if a customer wishes to upgrade to Blu-ray discs.
Strength 4 – Content Library
Netflix currently has a large, video content library. It currently has rights to past seasons
of television shows on 95% of US cable networks and all 5 major US broadcasters according to
their Q3 letter to shareholders (2011). It does not, however, have the rights to current seasons
like Hulu Plus.
Weakness 1 – Brand Loyalty
While Netflix has a high level of brand recognition, its brand loyalty is not that great. A
series of corporate missteps caused the company to lose over 800,000 customers in 2011. “We
greatly upset many domestic Netflix members with our significant DVD-related pricing changes,
and to a lesser degree, with the proposed-and-now-cancelled rebranding of our DVD service. In
doing so, we’ve hurt our hard-earned reputation, and stalled our domestic growth.” (Q3 Letter to
Shareholders, 2011)
Weakness 2 – Shipping Costs
Netflix currently has nearly 14 million customers who receive DVDs in the mail from the
US Postal Service. With the ever increasing costs of postage due to the dire straits of the
financial viability of the US Postal Service, the shipping costs for Netflix can be a weakness.
Page 10
FINANCIAL ANALYSIS
Netflix is a publically traded company (Nasdaq: NFLX) which grossed nearly $2.162B in
2010 with a net income of $160.85M. On July 13, 2011, Netflix stock was trading over $304
and had a market cap of approximately $15.6B. In the wake of a price increase and an attempt to
spin off its DVD-rental service, the stock plummeted to $63.86 with a market cap of $3.35B in
October 2011.
On November 21, 2011, Netflix announced that it was going to raise $400M in cash by
selling $200M in stock to T. Rowe Price Associates and $200M in bonds to Technology
Crossover Ventures. (King, 2011).
As Netflix moves forward, it anticipates being profitable through 2011, but will become
unprofitable as it expands into the European market in late Q4 of 2011 and early Q1 of 2012.
Further, Netflix announced that it will remain unprofitable through 2012.
Page 11
KEY STATISTICS
Profile
Index Membership
Nasdaq 100
Sector
Services
Industry
Music & Video Stores
Full-Time Employees
2,180
Last Trade
63.86
Day's Range
62.90 - 69.62
Trade Time
25-Nov-11
52w Range
Change
4.64 (6.78)
Volume
5,434,991
9,628,200
62.90 - 304.79
Previous Close
68.50
Avg Vol (3m)
Open
68.17
Market Cap
3.35B
P/E (ttm)
14.51
EPS (ttm)
4.40
Bid
NA
Ask
70.50 x 200
1y Target Est
97.58
Div & Yield
Valuation Measures
N/A (N/A)
Stock Price History
Market Cap (intraday)
3.35B
Beta
0.65
Enterprise Value (Nov 27, 2011)
3.22B
52-Week Change
Trailing P/E (ttm, intraday)
14.51
S&P500 52-Week Change
8.61%
Forward P/E (fye Dec 31, 2012)
-51.52%
84.02
52-Week High (Jul 13, 2011)
304.79
PEG Ratio (5 yr expected)
0.72
52-Week Low (Oct 25, 2011)
74.25
Price/Sales (ttm)
1.23
50-Day Moving Average
129.82
Price/Book (mrq)
9.26
200-Day Moving Average
218.80
Enterprise Value/Revenue (ttm)
1.10
Enterprise Value/EBITDA (ttm)
7.43
Share Statistics
Dividends & Splits
Avg Vol (3 month)
9,628,200
Forward Annual Dividend Rate
N/A
Avg Vol (10 day)
7,263,040
Forward Annual Dividend Yield
N/A
Shares Outstanding
52.50M
Trailing Annual Dividend Rate
N/A
Float
51.08M
Trailing Annual Dividend Yield
N/A
5.80%
5 Year Average Dividend Yield
N/A
Payout Ratio
N/A
% Held by Insiders
% Held by Institutions
Shares Short (as of Oct 31, 2011)
85.10%
Dividend Rate
N/A
Short Ratio (as of Oct 31, 2011) 1
0.80
Ex-Dividend Rate
N/A
Short % of Float (as of Sep 30, 2011)
N/A
Last Split Factor (new per old)
2:1
Shares Short (prior month)
9.29M
8.93M
Last Split Date
Feb 12, 2004
*Source: Yahoo Finance
*As of 11/28/2011
Page 12
FINANCIAL SUMMARY
Fiscal Year
Netflix Stock Price
Dec 31
Sept 30, 2011
9/1/11
10/1/11
8/1/11
7/1/11
6/1/11
5/1/11
4/1/11
3/1/11
2/1/11
1/1/11
12/1/10
11/1/10
9/1/10
10/1/10
1/1/10
2.92B
55.61
48.60%
805.27M
433.82M
238.0M
4.40
64.50%
8/1/10
Income Statement
Revenue (ttm)
Revenue Per Share (ttm)
Quarterly Revenue Growth (yoy)
Gross Profit (ttm)
EBITDA (ttm)
Net Income Avl to Common (ttm)
Diluted EPS (ttm)
Quarterly Earnings Growth (yoy)
7/1/10
17.97%
82.02%
6/1/10
Management Effectiveness
Return on Assets (ttm)
Return on Equity (ttm)
5/1/10
8.14%
13.42%
4/1/10
Profitability
Profit Margin (ttm)
Operating Margin (ttm)
3/1/10
$300
$275
$250
$225
$200
$175
$150
$125
$100
$75
$50
$25
$-
2/1/10
Fiscal Year Ends
Most Recent Quarter (mrq)
Source: Yahoo Finance
Balance Sheet
Total Cash (mrq)
Total Cash Per Share (mrq)
Total Debt (mrq)
Total Debt/Equity (mrq)
Current Ratio (mrq)
Book Value Per Share (mrq)
365.77
6.97
234.66
60.42
1.23
7.4
Cash Flow Statement
Operating Cash Flow (ttm)
Levered Free Cash Flow (ttm)
348.46M
793.26M
*Source: Yahoo Finance
*As of 10/21/11
Selected 5-Year Financial Data
As of/For The Year Ended December 31,
2010
2,162,625
1,357,355
283,641
160,853
(in 000's, except per share data)
Revenue
Cost of Revenue
Operating Income
Net Income
Net Income Per Share
Basic
Diluted
Weighted-average Shares Outstanding
Basic
Diluted
$
$
Cash and Cash Equivalents
Working Capital
Total Assets
Long-term Debt
Total Liabilitities
Total Stockholders' Equity
Total Subscribers (ending)
Gross Subscriber Additions (during)
Net Subscriber Additions (during)
Subscriber Acquisition Cost
$
3.06
2.96
2008
1,364,661
910,234
121,506
83,026
2009
1,670,269
1,079,271
191,939
115,860
$
$
2.05
1.98
$
$
1.36
1.32
2007
1,205,340
786,168
91,773
66,608
$
$
0.99
0.97
2006
996,660
626,985
65,218
48,839
$
$
0.78
0.71
52,529
54,304
56,560
58,416
60,961
62,836
67,076
68,902
62,577
69,075
194,499
252,388
982,067
200,000
691,903
290,164
134,224
183,577
679,734
200,000
480,591
199,143
139,881
142,908
615,424
268,269
347,155
177,439
223,518
678,998
249,186
429,812
400,430
234,582
633,013
219,395
413,618
20,010
16,301
7,742
18.03 $
12,268
9,332
2,878
25.48 $
9,390
6,859
1,911
29.12 $
7,479
5,340
1,163
40.86 $
6,316
5,250
2,137
42.94
Source: 2010 Netflix Annual Report
Page 13
Direct Competitor Comparison
NFLX
Market Cap
AMZN
3.35B
Employees
Quarterly Rev Growth (yoy)
Revenue (ttm)
Gross Margin (ttm)
EBITDA (ttm)
Operating Margin (ttm)
PVT1
PVT2
Industry
106.57B
N/A
N/A
64.48M
2,180
33,700
25,000
N/A
1.89K
51.70%
51.00%
N/A
N/A
0.00%
2.66B
40.28B
3.24B
N/A
599.56M
37.38%
22.45%
N/A
N/A
35.52%
403.25M
1.83B
N/A
N/A
15.56M
13.75%
3.14%
N/A
N/A
-4.62%
213.51M
1.04B
-268.00M
N/A
N/A
EPS (ttm)
3.94
2.27
N/A
N/A
-0.33
P/E (ttm)
Net Income (ttm)
29.70
103.56
N/A
N/A
29.44
PEG (5 yr expected)
0.87
4.42
N/A
N/A
0.89
P/S (ttm)
2.20
2.63
N/A
N/A
0.11
AMZN = Amazon.com Inc.
Pvt1 = Blockbuster LLC (privately held)
Pvt2 = Redbox Automated Retail, LLC (privately held)
Industry = Music & Video Stores
Video Rental Companies Ranked By Sales
Company
Symbol
Blockbuster LLC
Private
Price
Change
Market Cap
P/E
Hastings Entertainment Inc.
HAST
1.97
4.90%
16.96M
N/A
Netflix, Inc.
NFLX
117.04
4.99%
6.15B
29.70
Barnes & Noble, Inc.
BKS
10.58
-1.31%
612.76M
N/A
US Music, Video, & Book Retail Ranked By Media Product Sales
Company
Symbol
Price
Change
Market Cap
P/E
Amazon.com Inc.
AMZN
234.78
0.50%
106.57B
103.56
Trans World Entertainment Corporation
TWMC
2.14
-1.83%
67.31M
N/A
Columbia House Company
Private
Hastings Entertainment Inc.
HAST
1.97
4.90%
16.96M
N/A
Books-A-Million Inc.
BAMM
2.23
3.49%
35.21M
N/A
*Source: Yahoo Finance
*As of 10/21/11
Page 14
COMPETITOR ANALYSIS
Netflix, Inc. (NFLX)
(in 000's)
Revenue
Cost of Revenue
Gross Margin
Operating Expenses
Research and Development
Selling General and Administrative
Other
Operating Income
Total Other Income/Expenses
Earnings Before Interest and Taxes
Interest Expense
Earnings Before Taxes
Taxes
Net Income
2010
2,162,625
1,357,355
805,270
Amazon.com Inc.(AMZN)
As of/For The Year Ended December 31,
2009
2008
2010
1,670,269
1,364,661
34,204,000
1,079,271
910,234
26,561,000
590,998
454,427
7,643,000
2009
24,509,000
18,978,000
5,531,000
2008
19,166,000
14,896,000
4,270,000
163,329
364,394
283,641
9,778
287,325
19,629
267,696
106,843
160,853
114,542
289,077
191,939
11,288
198,667
6,475
192,192
76,332
115,860
89,873
249,375
-6,327
121,506
12,452
133,958
2,458
131,500
48,474
83,026
6,237,000
1,406,000
130,000
1,536,000
39,000
1,497,000
352,000
1,152,000
4,402,000
1,129,000
66,000
1,195,000
34,000
1,161,000
253,000
902,000
3,428,000
842,000
130,000
972,000
71,000
901,000
247,000
645,000
Operating Expenses (% of Revenue)
Research and Development
Selling General and Administrative
Other
7.6%
16.8%
0.0%
6.9%
17.3%
0.0%
6.6%
18.3%
-0.5%
0.0%
18.2%
0.0%
0.0%
18.0%
0.0%
0.0%
17.9%
0.0%
Gross Margin
Operating Margin
Return on Sales
Taxes
37.2%
13.1%
7.4%
39.9%
35.4%
11.5%
6.9%
39.7%
33.3%
8.9%
6.1%
36.9%
22.3%
4.1%
3.4%
23.5%
22.6%
4.6%
3.7%
21.8%
22.3%
4.4%
3.4%
27.4%
194,499
446,468
640,967
128,570
212,530
982,067
388,579
234,123
69,201
691,903
290,164
134,224
276,789
411,013
131,653
137,068
679,734
227,436
236,572
16,583
480,591
199,143
139,881
5,617
215,949
361,447
124,948
131,551
617,946
216,017
37,988
16,786
270,791
347,155
3,777,000
1,783,000
3,202,000
4,985,000
13,747,000
2,414,000
1,349,000
1,287,000
18,797,000
10,372,000
1,561,000
11,933,000
6,864,000
3,444,000
1,260,000
2,171,000
2,922,000
9,797,000
1,290,000
1,234,000
1,492,000
13,813,000
7,364,000
1,192,000
8,556,000
5,257,000
2,769,000
1,031,000
1,399,000
958,000
6,157,000
854,000
438,000
865,000
8,314,000
4,746,000
533,000
363,000
5,642,000
2,672,000
1.65
2.38
0.70
16.4%
55.4%
1.81
2.41
0.71
17.0%
58.2%
1.67
0.78
0.44
13.4%
23.9%
1.33
1.74
0.63
6.1%
16.8%
1.33
1.63
0.62
6.5%
17.2%
1.30
2.11
0.68
7.8%
24.1%
276,401
(116,081)
(100,045)
325,063
(246,079)
(84,641)
284,037
(144,960)
(176,635)
3,495,000
(3,360,000)
181,000
3,293,000
(2,337,000)
(280,000)
1,697,000
(1,199,000)
(198,000)
(5,657)
(37,558)
(1,000)
675,000
(70,000)
230,000
Cash and Cash Equivalents
Net Receivables
Inventory
Other Current Assets
Current Assets
Property Plant and Equipment
Goodwill
Other Non-current Assets
Total Assets
Current Liabilities
Long-term Debt
Other Non-current Liabilities
Total Liabilities
Total Stockholders' Equity
Current Ratio
Total Debt/Equity
Total Debt/Assets
Return on Total Assets
Return on Equity
Cash Flows From Operating Activities
Cash Flows From Investing Activities
Cash Flows From Financing Activities
Effect of Exchange Rate Changes
Change in Cash and Cash Equivalents
60,275
17,000
333,000
*Source: Yahoo Finance
Page 15
ANALYST OPINION
Recommendation Summary
Price Target Summary
Mean Recommendation (this week)
3.1
Mean Recommendation (last week)
Mean Target
3
Change
97.58
Median Target
0.1
88.50
High Target
245.00
Low Target
45.00
No. of Brokers
(Strong Buy) 1.0 - 5.0 (Sell)
24
Upgrades & Downgrades History
Research Firm
Action
From
To
26-Oct-11
Date
Hudson Square Research
Upgrade
Hold
Buy
11-Oct-11
Hudson Square Research
Upgrade
Sell
Hold
16-Sep-11
Caris & Company
Downgrade
Above Average
Average
26-Apr-11
Maxim Group
Upgrade
Sell
Hold
23-Nov-10
Caris & Company
Downgrade
Above Average
Average
21-Oct-10
Oppenheimer
Upgrade
Underperform
Outperform
14-Oct-10
Dougherty & Company
Initiated
22-Jul-10
Canaccord Genuity
Downgrade
Buy
Hold
15-Jun-10
Stifel Nicolaus
Downgrade
Buy
Hold
14-May-10
Merriman
Downgrade
Buy
Neutral
Neutral
Recommendation Trends
Current Month
Last Month
Two Months Ago
Three Months Ago
Strong Buy
2
4
4
5
Buy
4
7
7
7
Hold
19
16
11
11
Underperform
7
5
7
6
Sell
1
0
2
3
*Source: Yahoo Finance
*As of 11/28/11
Page 16
ANALYST ESTIMATES
Earnings Est
Current Qtr.
Dec 11
Next Qtr.
Mar 12
Current Year
Dec 11
Next Year
Dec 12
Avg. Estimate
0.57
-0.24
4.08
0.76
No. of Analysts
28.00
19.00
29.00
29.00
0.42
-0.62
3.84
-0.75
High Estimate
0.74
0.14
4.25
5.20
Year Ago EPS
0.87
1.11
2.96
4.08
Low Estimate
Revenue Est
Current Qtr.
Dec 11
Avg. Estimate
Next Qtr.
Mar 12
Current Year
Dec 11
Next Year
Dec 12
858.61M
861.06
3.19B
3.63B
29
21
32
32
Low Estimate
842.08M
793.52
3.15B
3.17B
High Estimate
907.30M
1.03B
3.24B
4.34B
Year Ago Sales
595.92M
718.55M
2.16B
3.19B
44.10%
19.80%
47.40%
13.90%
No. of Analysts
Sales Growth (year/est)
Earnings History
10-Dec
11-Mar
11-Jun
11-Sep
EPS Est
0.71
1.08
1.11
0.94
EPS Actual
0.87
1.11
1.26
1.16
Difference
Surprise %
EPS Trends
0.16
0.03
0.15
0.22
22.50%
2.80%
13.50%
23.40%
Current Qtr.
Dec 11
Next Qtr.
Mar 12
Current Year
Dec 11
Next Year
Dec 12
Current Estimate
0.57
-0.24
4.08
0.76
7 Days Ago
0.58
-0.19
4.10
1.11
30 Days Ago
1.09
1.34
4.44
6.14
60 Days Ago
1.12
1.37
4.48
6.52
90 Days Ago
1.24
1.45
4.66
6.88
EPS Revisions
Current Qtr.
Dec 11
Up Last 7 Days
Next Qtr.
Mar 12
0
Up Last 30 Days
Current Year
Dec 11
1
Next Year
Dec 12
1
0
0
1
2
1
Down Last 30 Days
10
4
0
1
Down Last 90 Days
N/A
N/A
N/A
N/A
Growth Est
Current Qtr.
NFLX
Industry
Sector
S&P 500
-34.50%
75.90%
46.50%
23.20%
-121.60%
NA
215.00%
23.00%
This Year
37.80%
86.40%
39.20%
11.30%
Next Year
-81.40%
51.00%
20.80%
12.80%
Next Qtr.
Past 5 Years (per annum)
48.61%
N/A
N/A
N/A
Next 5 Years (per annum)
21.78%
16.04%
16.13%
10.99%
15.65
18.30
16.26
15.80
0.72
6.05
2.39
0.27
Price/Earnings (avg. for comparison categories)
PEG Ratio (avg. for comparison categories)
*Source: Yahoo Finance
*As of 11/28/11
Page 17
INDUSTRY ANALYSIS
DESCRIPTION OF INDUSTRY
In 1977, the Audre Blay Video Club was founded as a means to sell VHS tapes to the
200,000 VCR owners in the United States (Varian, Roehl 1996). Despite the fact that nearly
9,000 people signed up for the service, Home Theatre Systems of Los Angeles predicted that the
cost of the $1000 VCR will decline; therefore, it decided to rent its $50 tapes for $10 per day
plus an annual fee of $50.
This video rental industry eventually grew to 16,237 stores and generated nearly $9.9
billion in revenue in 2007 according to US Census Bureau. In 1997 Netflix was launched and
offered consumers the option to rent DVDs through the mail. Eventually, mail-order rentals
began to decline as consumers preferred more interactivity and the ability to instantaneously
watch programs through streaming internet or cable TV connections.
PORTERS FIVE FORCES ANALYSIS
Rivalry Among Existing Industry Firms
There is substantial competition and rivalry among the existing firms in the industry,
which include Redbox, Blockbuster (owned by Dish Network), and Amazon. This rivalry is
highlighted by the levels of advertising and marketing costs incurred by each company.
In 2008, Netflix spent over $199 million in advertising which was dominated by online
advertisements and various affiliate marketing deals. They did, however, spend $11.5 million on
TV and radio advertising. This overall advertising spending increased 19% in FY2009 to $237
million, but remained at approximately 14% of revenue. (Netflix, 2010)
Competitor Redbox, which is owned by CoinStar, spent signifantly less on advertising
and marketing at $14.7 million and $8.2 million in 2009 and 2008, respectively (Coinstar, 2011).
Page 18
Blockbuster, before being sold to Dish Network in 2011, spent $67.2 million and $85.9 million
in 2009 and 2008. Both numbers represent 2.4% of revenues. (Blockbuster, 2010)
Threat of New Entrants
In order to succeed in the online-streaming media market, it is necessary to have a large
amount of capital. In 2009, according to their annual filings, Netflix spent $144.5 million on
technology and development. Consequently, the “mom and pop” shops which once dominated
the video rental market place do not have the necessary capital to develop the necessary
infrastructure for video streaming. Several large corporations have recently started working their
way into the market. Apple has recently introduced iCloud which will allow consumers the
ability to stream content from the cloud to any Apple iOS. Because of the large quantity of
devices operating iOS, including the iPhone and iPad, many consumers may find the switch
desirable, although Netflix does offer this feature.
One of the largest obstacles that entrants into this industry is the capital required to obtain
the licensing rights to content. In a recent article in The Hollywood Reporter and on
TechnoBuffalo.com, Lizard Capital Markets analyst Barton Crockett stated that Netflix recently
agreed to pay Disney at least $150 million per year for rights to shows such as Lost, Hannah
Montana, and Desperate Housewives. Additionally, Netflix and Epix, which is comprised of
Lionsgate, MGM, and Paramount/Viacom, agreed to a $200 million per year deal to stream
Epix’s content. However, Netflix is required to wait 90 days after Epix releases its content
before Netflix can offer it to its customer.
This is not to say new entrants into streaming videos will not happen. Janus Friis, one of
the founders of Skype, recently acquired $5.6 million to launch Vdio which aims to compete
with Netflix in the streaming-video market. While this number is low compared to its
competitors, if it bases its bases model on other popular media service sites such as Rdio, it could
Page 19
cause significant disruptions to Netflix. Currently, they are preparing to launch themselves in the
United Kingdom, a market Netflix has yet to enter.
Bargaining Power of Suppliers/Studios
The major movie studios wield a large amount of power over the industry as they control
the rights to the content. Consequently, Netflix must be quite diligent when dealing with studios
and distributors. Netflix did license the right to distribute DVD content; however, according to
Netflix 10k statement, “streaming content over the internet involves the licensing of rights which
are separate from and independent of the rights we acquire when obtaining DVD content...
Unlike DVD, streaming content is not subject to the First of Sale Doctrine. As such, we are
completely dependent on the studio or other content distributor to license us content in order to
access and stream content” (2010). Furthermore, many studios, such as Fox and Warner
Brothers, require that Netflix not offer content for 28 days until its release. Some of Netflix’s
competitors like Blockbuster do not have this limitation on them.
Bargaining Power of Buyers
The domestic market for film rentals, including brick-and-mortar, kiosks, and streaming,
was $9.8 billion dollars in 2009 (Blockbuster, 2010). Needless-to-say, consumers wield a great
deal of power in this industry. There are a plethora of choices for consumers when they are
deciding how to watch videos. Consequently, customers are incredibly sensitive to price
changes. In the summer of 2011, Netflix decided to change its pricing strategy. It decided to
charge for the DVD-mail service and the streaming service independently, which essentially
raised the price on consumers by 60%. Consequently, nearly 810,000 customers cancelled their
subscriptions and the stock price of the company plummeted from nearly $300 in July to less
than $90 in October. Because Netflix relies heavily on word-of-mouth advertising, it
acknowledges “If our efforts to satisfy our existing subscribers are not successful, we may not be
Page 20
able to attract subscribers, and as a result, our revenues will be adversely affected.” (Netflix,
2010)
Threat of Substitute Products
Furthermore, because Netflix does not require users to lock into a contract, buyer
switching costs are negligible for services, such as Redbox and Hulu which have no monthly or
annual fees. If a consumer wishes to switch to Amazon Prime, however, there is a $79 annual
fee, but no monthly charge. While this is an upfront fee, it averages to $6.58 a month (compared
to Netflix’s $7.99).
One perceived difference amongst the competitors is how the content is delivered. If a
consumer wishes to utilize Redbox or the brick-and-mortar Blockbuster, they are required to
drive to the location to pick up a DVD. Netflix does offer home delivery of its DVD through the
US Postal Service. Additionally, Amazon and Netflix offer the content to be streamed to any
compatible device which does not necessarily have to be at home; Netflix has also been reported
as been developing its own streaming service.
Finally, there are serveral niche market, DVD-by-mail services which provide
competition. For example, CinFlix, which is based out of Colorado, has a collection of imported
videos from Asia, while PuritanPics.com offers Christian movie rentals.
CRITICAL SUCCESS FACTORS
In order for Netflix to remain the leader in online video streaming, it must maintain the
following critical factors:
Factor 1 – Largest Library
Consumers want to have the largest selection of television shows and movies available.
In order for Netflix to lead the market, it must continue to acquire relevant content and quickly
make it available for customers. Netflix currently has the largest library, but as newcomers,
Page 21
such as Amazon, increase their libraries, it is critical for Netflix to outpace them. Furthermore, it
must continue to acquire rights to stream videos. Currently, Netflix has over 90,000 DVD titles,
but only 12,000 titles available for streaming. As Eric Wold of Merriman Capital pointed out in
an interview with the Wall Street Journal, “we believe that content remains the most important
attribute for subscribers for an unlimited streaming service.” (2011).
Factor 2 – Best Value for its customers
Another factor which is critical for Netflix’s success is that it must continue to provide
the best value for its customers. Netflix’s current offering of titles, both online and through
DVDs, related to its low cost offers the greatest value to its customers. Consumers, however,
will continue to seek out the company which provides the greatest value.
Factor 3 – Convenience
The final factor critical to Netflix’s success is the convenience it provides its customers.
With the DVD-by-mail segment, customers can receive videos at home without ever leaving.
And because of the number of distribution centers throughout the United States, the turn-around
is incredibly fast. In regards to the online streaming segment, Netflix continues to bring videos
to numerous devices. Currently, it offers its service on Nintendo’s Wii, Xbox 360, Playstation 3,
iPad and iPhone, Android, and Windows Phone. Additionally, it has partnered with Roku to
offer a device that connects a customer’s television to their internet. Netflix currently touts that
it offers its service on over 700 devices.
Netflix was harshly reminded that its customers value convenience in the fall of 2011
when it tried to spin off its DVD-by-mail segment into Qwickster. Qwickster was aimed to be a
website that was still owned by Netflix, but would require customers to use different websites to
manage their queues and accounts. The outcry from consumers was so loud, that Netflix
scrapped the plan.
Page 22
EXTERNAL ENVIRONMENT ANALYSIS
DEMOGRAPHICS
World Population Growth
According to U.S Census Bureau, the current world population is just over 6.9 billion
people. (Census.gov, 2011) The world population is growing at a rate of 1.15 percent per year, or
approximately 77 million people per year. (Census.gov, 2011) The growth rate reached its peak
in the late 1960’s, with a growth rate of 2 percent per year. According to the Census Bureau’s
latest projections, population growth will continue into the 21st century, although at a much
slower pace. (Census.gov, 2011) The world population is projected to grow from 6 billion in
1999 to 9 billion by 2044; an increase of 50 percent in just over 40 years. (Census.gov, 2011)
According to Worldometers, the world population experienced a dramatic change during the
industrial revolution; before than it had taken all of human history up to the year 1800 for the
world population to reach 1 billion. (Worldometers.info, 2011) The second billion was achieved
in only 130 years, and the third billion in less than 30 years. During the 20th century alone, the
world population increased from 1.65 billion to 6 billion.
According to the U.S Census Bureau, the five most populated countries are: China (1.3
billion), India (1.2 billion), United States (311 million), Indonesia (246 million), and Brazil (203
million). (Census.gov, 2011) It’s important to identify the larger markets because they provide
tremendous opportunities for Netflix to increase its world market share. All five of the countries
with the largest populations have sufficient purchasing power to be Netflix customers. Aside
from the U.S., Netflix also operates in Canada and parts of Latin America. In 2012, Netflix plans
to expand their presence to Europe.
Page 23
ECONOMIC ENVIRONMENT
According to the U.S. Census Bureau, the real median household income was $49,445 in
2010, a 2.3 percent decline from the previous year. (DeNavas-Walt, Proctor, & Smith, 2011)
Since 2007, the median household income has declined 6.4 percent from $52,823. (DeNavasWalt, Proctor, & Smith, 2011) It has declined 7.1 percent below the income peak of $53, 252 that
occurred in 1999. (DeNavas-Walt, Proctor, & Smith, 2011) Between 2009 and 2010 both family
and non-family households experienced real median income declines. The income of family
households declined to $61,544 which is a decline of 1.2 percent; the income of nonfamily
households declined to $29,730, a decline of by 3.9 percent. (DeNavas-Walt, Proctor, & Smith,
2011) These statistics indicate that the disposable income of the average U.S. household has been
slowly declining over the years.
According to the Bureau of Labor, the unemployment rate is at 9.1 percent, about 14
million people. (Bureau Of Labor Statistics, 2011) The telecommunications industry saw 45,000
workers return to work after being on strike in August. In September, job gains occurred in the
following sectors; business and professional services, health care, and construction,
unfortunately, government employment continues to trend down. The number of long-term
unemployed (individuals jobless for 27 weeks and over) was 6.2 million in September. (Bureau
Of Labor Statistics, 2011)
The information below is provided by the department of labor, it breakdowns the
unemployment rate among the major worker groups.
Page 24
Group
Unemployment Rate
Adult Men
8.8%
Adult Women
8.1%
Teenagers
24.6%
Whites
8%
Blacks
16%
Hispanics
11.3%
(Bureau Of Labor Statistics, 2011)
NATURAL ENVIRONMENT
Very few industries are immune to an increase in energy costs. Benchmark crude fell 2
percent and is at $77.61 per barrel. (Gongloff, 2011) Oil hasn’t been this low since September
2010. Therefore, gasoline prices have dropped the past few months, but at a slower pace than oil.
The price of gasoline has dropped 14% since May 2011. During that same period oil is down
twice as much-32%. (Kahn, 2011) According to AAA, the national average for a gallon of
regular gas fell to $3.417, still 71 cents more than it was a year ago. (Kahn, 2011)
Subscribers of Netflix who uses the DVD’s -in –the-mail -plan, now are going to pay
more for it, up to 60% more. (Stelter, 11) Before, it cost $10 a month for online streams of
movies plus one DVD by mail at a time, now it will cost $16 a month. The company states that
the increase in prices is due to the high costs of mailing physical DVD’s. (Stelter, 11) After the
price increase many customers said they may now rely less on the physical DVD’s and more on
online streaming option. For Netflix, the adjustment in price is “the latest step in a long-term
transition toward becoming a next-generation premium television business,” said Arash Amel, a
research director for HIS Screen Digest, noting that the company has made streaming, not
DVD’s by mail, the core of its business. (Stelter, 11)
Page 25
TECHNOLOGICAL ENVIRONMENT
With any industry, continuous innovation is the key to sustainable success. This is
especially true in the online video streaming service and DVD rental industry. It seems like every
week there’s new players entering the market place. For example, Amazon entered the market
with its Amazon Prime, which offers instant streaming of movies and TV shows. (Isaac, 2011) It
works with over 100 different web-connected set-boxes and is offered at a lower yearly rate than
Netflix. Hulu Plus offers instant streaming access to a wide collection of TV shows only a day or
so after they’ve been originally aired. Unlike Netflix, they don’t offer any physical media.
Google who for years has struggled to keep up with Apple in media offerings, has recently began
to offer a movie rental service on any android device running version 2.2 and up. (Isaac, 2011)
Apple now allows consumers to purchase and rent movies from the iTunes store and stream
media on any Apple device. In 2010, Wal-Mart entered the media services market by purchasing
Vudu. This service allows consumers to stream videos the same day they’re released on DVD
without any wait time. The only downside is that it currently doesn’t offer an unlimited video
streaming option.
For Netflix to remain as the industry leader, it must continue to dedicate a large portion
of its budget to R&D in order to continue to create innovative product offerings to its customers.
POLITICAL/LEGAL ENVIRONMENT
In February 2011, The Canadian Radio-Television and Telecommunications Commission
(CRTC) passed a law that eliminated unlimited plans, which means consumers will be charged
additional fees for exceeding monthly limits. (Kastelein, 2011) Consequently, Internet Service
Providers (ISP) were required to charge customer additional fees for every gigabyte of date they
exceed over their monthly limit. Some speculate that competitors were terrified of Netflix
Page 26
entering the market, and therefore, attempted to make it more expensive for consumers to use the
service.
In October 2011, the CRTC announced that it will no longer impose restrictions on online
streaming companies including Netflix after finding “there is no clear evidence” that they had
been harming existing Canadian television providers. (Reuters, 2011) Some of the providers
argued that Netflix was receiving a free pass while they were bombarded by regulations and fees.
The CRTC went on to add that “there is no clear evidence that Canadians are reducing or
cancelling their television subscriptions” due to Netflix offering their subscription. (Reuters,
2011)
SOCIAL ENVIRONMENT
It is important for long-term success that companies be socially responsible in their local
communities. Furthermore, they should also aid in preserving our environment by providing
friendly-eco products to its customers. Netflix is a fairly new company but already has made a
huge impact in creating a positive social environment. For example, Netflix partnered with
America’s Second Harvest, the Nation’s largest hunger-relief organization to assist families in
need during the 2007 holiday season. (CSR Wire, 2007)They had food banks all around the
country in support of the effort, collecting food throughout the holiday season. In addition,
Netflix donated a portion of the proceeds generated by its holiday gift subscription program to
America’s Second Harvest.
CUSTOMER ANALYSIS
CURRENT AND POTENTIAL CUSTOMERS
Netflix targets the mass market which includes families, children. Adult singles (dual
income no kids), professionals, film makers and movie critics. Its target market must be
Page 27
comfortable with the internet since Netflix offers an Internet subscription service streaming
television shows and movies. The Netflix target audience is not limited by geography, but by the
access to technology. Netflix’s target market is internet educated people who love movies.
Netflix use a mass marketing target market strategy. Netflix targets mainstream demographics,
with the average customer an over-35 woman with family income of $75,000 or less. (Mullaney,
2006) Netflix is currently targeting consumers in the United States and Canada, and has
expanded into nearly 43 Latin American countries in 2011.
According to Netflix’s annual report, the market segment for consumer paid commercial
free Internet streaming of TV shows and movies has grown significantly. With its marketing
strategy, Netflix targets subscribers who might pay the highest monthly fee and end up with the
fewest films. Netflix also targets busy parents that are less likely to go the DVD rentals store to
get family friendly movies.
WHAT CUSTOMERS DO WITH THE PRODUCT
Netflix is a DVD rental company; therefore, customers rent DVDs in order to watch them
online or on their TV with a DVD player. With the fast growing internet industry, Netflix
introduced the option of watching movies and television series online. Customers can use Netflix
with several devices such as a Nintendo Wii, a Playstation and an Xbox 360. Several devices are
able to instantly stream from Netflix such as internet connected blu-ray players, HD television,
mobile devices such as iPhone and iPad and other devices.
According to 24/7 Wallstreet, in 2010 the majority of Netflix subscribers were watching
more of their TV shows and movies via streaming than by DVD. This is reinforced by Netflix’s
Q3 Report which indicates that it had 90% of its customers using streaming with 59% utilizing
the mail service (there is overlap because some customers utilize both services).
Page 28
WHERE CUSTOMERS PURCHASE
Customers make the purchase online where they pay a monthly fee of $7.99 in order to
watch an unlimited amount of streaming content. They can watch as often as they want and they
are free to cancel their accounts whenever they want to.
When signing up for Netflix customers can add a one DVD out option for $7.99 a month.
If customers choose, they have the option of receiving up to 8 DVD’s at a time for $43.99,
although that information is difficult to ascertain in its website. With DVDs by mail, customers
have a broader selection of movies and TV episodes; they are also allowed to exchange each
DVD as often as they want and there are no due dates or late fees. They can also access to Bluray discs at any time for an additional $2 a month.
WHEN CUSTOMERS PURCHASE
According to Netflix’s annual report, subscribers growth shows a seasonal pattern that
reflects variations in when consumers buy Internet-connected devices and when they tend to
increase video watching. Furthermore, subscriber growth is usually highest in its fourth and first
quarters which are from October through March. In the second quarter from April to June
subscriptions slow down, then accelerates in the third quarter from July through September.
Moreover, expenses associated with shipments of DVDs are impacted by the seasonal nature of
the DVD release of movies.
WHY AND HOW CUSTOMERS SELECT
Customers select the DVDs according to their situation; families are more likely to select
children friendly movies and young couple’s romantic movies. On the Netflix website customers
are able to browse the selection of movies and select what genre of movies they want to watch.
Netflix offers 20 different genres to choose from and they also have a search option where
customers could enter directly the title of a movie.
Page 29
WHY POTENTIAL CUSTOMERS DO NOT PURCHASE
Potential customers may be hesitant to purchase a Netflix membership because of the
monthly fees. Some customers do not want to have to order movies all the time and they might
be afraid that their membership would go to waste.
Potential customers do not purchase if they do not perceive value in Netflix services, or
when it introduces new services or adjusts existing ones that are not favorably received. Since
many new Netflix subscribers originate from word of mouth, failing to satisfy current customers
would deter potential subscribers and it would keep Netflix from growing.
On the other hand, subscribers can cancel their subscription to Netflix because of “the
perception that they do not use the service sufficiently, the need to cut household expenses,
availability of content is limited, DVD delivery takes too long, competitive services provide a
better value or experience and customer service issues are not satisfactorily resolved”. (Netflix
Annual Report, 2011)
COMPETITOR ANALYSIS
Netflix, among competitors, Amazon.com, Red Box and Blockbuster Video, offer videos
at a low price. Depth of movie offerings, convenience, and price were all compared among the
industry leaders. The competitive advantage most prevalent to Netflix appears to be their depth
of movie variety offering, monthly membership (which customers like) and ease of movie order
and return.
Amazon
Amazon is Netflix’s closest competitor in the streaming video segment. The Amazon
Prime feature costs $79 a year and must be paid up front. The service offers free two-day
shipping to its e-commerce customers and unlimited video streaming. In regards to the video
Page 30
streaming aspect, Amazon currently has approximately 12,000 titles available, many of which
can be streamed to Amazon’s popular Kindle. However, on October 31, 2011, Amazon
announced that it partnered with Disney-ABC to add 800 titles to its library.
Amazon benefits from having a large brand awareness associated from its e-commerce
business; consequently, it has a lot of capital ($3.77B in cash for 2010). While it does not
currently have as broad of a selection as Netflix, its large capital resources offer it the ability to
purchase content. Also, its current infrastructure, specifically its cloud computing services, has
allowed Amazon to move into the streaming video market. While it does not offer DVDs-bymail, Amazon does have distribution centers in place. Because it is trying to avoid collecting
sales tax on the e-commerce side of its business, establishing distribution centers comparable to
Netflix in order to compete solely with Netflix’s DVD-by-mail segment, would prove far too
costly.
Blockbuster
Blockbuster is the former market leader in the video rental industry. Despite this,
Blockbuster did not foresee the shift in how videos were viewed and did not adapt.
Consequently, it lost customers and market share and declared bankruptcy in 2010. It was
subsequently purchased by Dish Network in the spring of 2011.
Blockbuster currently operates 4,000 stores throughout the United States where
customers can rent DVDs and video games, a segment Netflix has not entered. In order to
capture part of the market for streaming video, Blockbuster offers unlimited video streaming for
$10 per month which also includes a 1-DVD-out rental policy and does not charge a upgrade fee
for Blu-ray. This pricing strategy is designed to compete directly with Netflix. Its 100,000 title
DVD library is actually greater than Netflix. Customers are able to return discs via the US Postal
Service much like Netflix, but it also allows customers to return them to a Blockbuster store for
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quicker turn around. Furthermore, in order to compete against the kiosks of Redbox,
Blockbuster partnered with NCR Corporation and placed 9,500 kiosks throughout the United
States. These kiosks contain 500 titles and more than 900 disks each (Blockbuster Express,
2011).
One significant advantage that Blockbuster possesses is that it already has developed
deep relationships with studios and distributors. Because of this existing relationship, many
videos are available 28 days before they appear on Netflix or Redbox. If a customer wishes to
rent a DVD from a Blockbuster Express kiosk during this 28 period, customers are charged $3
per night ($1 additional for Blu-ray). Additionally, in 2009, the year prior to declaring
bankruptcy, Blockbuster had nearly $188M cash on hand which could be used to further acquire
content.
Redbox
Redbox, which is based out of Oak Brook, Illinois, offers a different take on movie
rentals that is quite unique to the industry. It has 28,000 kiosks situated throughout the United
States at convenient locations, such as McDonalds, grocery stores, and pharmacies and allows
customers to rent DVDs on a per-night basis. Approximately 68% of Americans live within a
five-minute drive of a Redbox kiosk. (Redbox, 2011). Each kiosk is limited to 630 discs and a
selection of 200 titles, which are predominately newer releases. On October 1, 2011, Redbox
increased the price of its DVD rentals from $1.00 a night to $1.20 in order to offset increases in
debit card fees. Video game rentals are $2.00 a night. Each subsequent night is $1.20 plus
additional taxes.
One advantage for customers is that because it is a nightly service, there is no contract
which customers are bound to. Conversely, a disadvantage to Redbox is that it does not offer
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streaming, but reports have indicated that the company is currently developing that service
(Hoovers, 2011).
COMPETITIVE PRICE COMPARISON
Price – DVD
Selection
PriceStreaming
Selection
$7.99/month + $
Blu-ray
90,000
$7.99
12,000
$1.20/night
200 titles/kiosk
NA (in
development)
NA
$9.99
$0 Blu-ray
100,000
Included with
DVD plan
NA
None
$79.99/year
12,000
CURRENT MARKETING STRATGIES
In 2010, Netflix spent $293.8M (13.6% of revenue) on marketing. It uses a variety of
channels in order to have customers sign-up, including TV advertisements, online banner ads,
affiliate marketing, direct mailings, and free subscriptions. Two of the most successful
marketing strategies that Netflix employs are free subscriptions and affiliate marketing &
consumer product partnerships.
FREE SUBSCRIPTIONS
One method that has proven quite successful for Netflix is its offering of a free-one
month subscription to new subscribers and certain rejoining subscribers. Potential customers can
visit Netflix.com and are immediately presented with the ability to register for a free month of
service. New members are given the option of having the DVD delivery as a $7.99 add-on to the
free service – an indication that Netflix is definitely pushing its customers to the streaming
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option because of the lower associated costs. In 2010, over 1.7 million customers utilized this
feature at a cost of $21 million and accounted for 8.7% of its total yearly subscribers. This
number increased 5.6% points from 2009 (376,000 free subscribers) because Netflix did expand
on this marketing strategy. In this same time period, overall customer subscriptions increased
63.1% (Netflix Annual Report, 2011)
AFFLIATE MARKETING & CONSUMER PRODUCT PARTNERSHIPS
Because Netflix revolves its strategy around offering content online, it maintains a strong
presence on the Internet through banner ads and affiliate marketing. Affiliate websites and
consumer product manufacturers, such as Nintendo and Sony, receive a commission for every
customer that signs up for Netflix. Some of these fees may be fixed or as a percentage of
revenue. In 2009, Netflix paid affiliates over $21 million and that increased to $32.9 million in
2010. The cause for this increase can be attributed to the fact that Netflix expanded the number
of devices it offers its service on thereby increasing payments to its consumer product partners.
MARKETING STRATEGY TO BE RESEARCHED
In July 2011, Netflix announced via its company blog, that it would no longer offer one
plan for its streaming and DVD-by-mail services. Instead, each service would cost consumers
$7.99 per month. It its explanation, Netflix tried to explain that the change stating that the
change makes the most sense for consumers who want either DVD or streaming. Jessie Becker,
Vice President of Marketing, wrote, “we are separating unlimited DVDs by mail and unlimited
streaming into separate plans to better reflect the costs of each and to give our members a choice:
a streaming only plan, a DVD only plan or the option to subscribe to both.” The change in
pricing essentially raised the cost for existing customers 60%, and as a result, Netflix lost nearly
810,000 customers in Q3.
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According to Netflix, each customer generated revenues of $12.19 per month or $146.28
annually (net $4.54 monthly; $54.48 annually). The loss of 810,000 customers, therefore,
represents a $44.45M loss in profits per year.
Therefore, the marketing strategy that will be researched is how should Netflix go about
reacquiring its lost customers.
OBJECTIVES
Reacquire Customers
The primary objective of this marketing strategy will be to reacquire customers Netflix
lost as a result of raising its prices. Further, this strategy will aim to repair the brand image of
Netflix which was damaged by the price hike and the failed Qwickster spin off.
Increase Operating & Profit Margins
Netflix has steadily increased its operating margins from 8.9% in 2008 to 13.1% in 2010
and had a profit margin of 8.04% in 2010. Because its margins are greater than those of its
competitors, Netflix’s marketing strategies need to not only maintain higher margins, but also
increase them.
Market Share
The NPD Group evaluated the streaming and video-on-demand market and determined
that Netflix commanded 61% market share as of March 2011. With the loss of 810,000
customers and accounting for new subscribers, Netflix’s share decreased to approximately 59%.
While not a major decrease in market share, Netflix would undoubtedly like to not only bring
that number back to previously levels, but increase it, as well.
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CRITERIA
Cost to Reacquire Customers
Netflix has been able to bring its subscriber acquisition cost down from $42.94 in 2006 to
$18.03 in 2010. In getting previous customers to sign-up again, the total cost expended should
not exceed $18 per customer.
Retention Rate
Because Netflix lost so many customers in Q3 of 2011, its customer retention rate was
severely impacted. Moving forward, in order to increase margins, customer satisfaction needs to
be improved in order to increase Netflix’s retention rate.
Market Share
The NPD Group evaluated the streaming and video-on-demand market and determined
that Netflix commanded 61% market share as of March 2011. With the loss of 810,000
customers and accounting for new subscribers, Netflix’s share decreased to approximately 59%.
MARKETING STRATEGY
E-MAIL TO LOST CUSTOMERS
After CEO Reed Hastings announced on Netflix’s company blog that it was raising
prices, the company lost thousands of customers and it did little to stop the hemorrhaging.
Finally, in September Hastings took to the blog to pen “I messed up. I owe everyone an
explanation. It is clear from the feedback over the past two months that many members felt we
lacked respect and humility in the way we announced the separation of DVD and streaming, and
the price changes. That was certainly not our intent, and I offer my sincere apology.”
While Hastings and Netflix did acknowledge the mistake, it was two months too late and
it announced it solely on its blog, not to its former customers. Moving forward, Netflix should
send an e-mail to these customers and reiterate their importance to Netflix (see Appendix 1). In
Page 36
it, Netflix could offer two months of free service if they return to Netflix. This e-mail should be
followed up to remaining customers after a pre-determined time period. It should be noted that
offering a free subscription is a marketing strategy that Netflix has had success with.
Because Netflix already has the contact information for these customers, the cost of
employing this strategy will be negligible. If Netflix is able to reach just 5% of its lost customers
with its e-mail campaign, it will reacquire nearly 79,000 customers which would be worth nearly
$6.3M to the company over the course of the first year (10 months at $7.99). If, however,
Netflix were able to reach 15% of its customers with each e-mail, it would regain over 224,000
customers (28% of what it lost) and would generate nearly $18M. (Appendix 2)
REFERRAL PROGRAM
It is of utmost importance that Netflix stops losing customers. In order to accomplish
this, it is necessary for Netflix to show that it appreciates them. Again, Netflix can utilize its
large collection of customers e-mail addresses and launch an e-mail campaign which expresses
the value of its customers and asks for a referral. For example, customers could be offered a
month free for every customer they get to sign up for Netflix. (Appendix 3). Netflix could also
create an application for Facebook and Twitter as a vehicle to disseminate the referral
information.
Because Netflix currently has approximately 23 million customers, if 0.5% of the e-mails
were to convert to a referral, Netflix would acquire 115,000 new customers for $919,000 and
would net $8.2M in profit. At a 1% conversion rate, Netflix would have 230,000 new customers
for a cost of $1.8M and a net of $16.5M. Finally, if Netflix were able to achieve a 3%
conversion, it would see over 575,000 customers at a price of $4.5M and a net profit of over
$41M. (Appendix 4)
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COMPETITOR REACTION
Undoubtedly, competitors such as Redbox, Blockbuster, and Amazon may try to react to
these promotions. Because so many people have purchased from Amazon, it would be very easy
for the company to send out an e-mail touting the value of Amazon Prime. Indeed, Amazon has
already been pushing its service through this medium (appendix 5).
When a customer a customer rents a disc from a Redbox station, they enter in their e-mail
address. According to Redbox’s privacy policy, these e-mail addresses can be used for
marketing purposes. It would be quite easy for Redbox to respond to a referral program similar
to Netflix’s. In fact, Redbox readily provides free rentals to customers via the internet. One
danger, however, is that unlike Netflix or Amazon, Redbox is not a subscription service;
therefore, there is not nearly the same level of brand loyalty.
SUMMARY
Netflix is a company whose business model did indeed disrupt the video rental industry.
It was able to identify a severe weakness and capitalize on it with its DVD-by-mail program. As
the standard brick-and-mortar aspect of the industry began to dwindle, Netflix saw amazing
growth rates, not only in its customer base, but also financially.
As Netflix matured, it introduced a streaming service to its offering which became
incredibly popular. Because it offered lower costs and had different contracts with
studios/distributors, Netflix decided to move more toward the streaming segment of the market.
In order to accomplish this, it decided to change its pricing structure and spin-off the DVD-bymail service. Unfortunately, this decision was met with strong resistance in which the company
was lambasted as 810,000 customers left. During this time period, the company saw its stock
plummet from $300 to less than $65.
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If Netflix wishes to remain a dominant leader in the video streaming/rental industry, it
must stop losing customers and repair the damage to its brand. While there is no single solution
for either, it is recommended that Netflix reach out to its lost customers. Additionally, it should
show its appreciation to its current customers and leverage them in order to create a broader
customer base.
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Appendix
APPENDIX 1
Sample Lost Customer E-Mail
Page 40
APPENDIX 2
E-Mail Calculations
1st Round of E-Mails
Reacquisition Rate
# of Customers
Value for year*
5%
40,500
$ 3,235,950
10%
81,000
$ 6,471,900
15%
121,500
$ 9,707,850
2nd Round of E-Mails
Reacquisition Rate
# of Customers
Value for Year
Total Value
5%
38,475
$
3,074,153
$
10%
72,900
$
5,824,710
$ 12,296,610
15%
103,275
$
8,251,673
$ 17,959,523
6,310,103
* 10 months at $7.99 (assuming 2 months free)
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APPENDIX 3
Referral E-mail
Page 42
APPENDIX 4
Referral Conversion Calculations
Conversion Rate
New Customers
Cost
Revenue
Profit
0.5%
115,000 $
918,850 $
9,188,500 $ 8,269,650
0.6%
138,000 $
1,102,620 $
11,026,200 $ 9,923,580
0.7%
161,000 $
1,286,390 $
12,863,900 $ 11,577,510
0.8%
184,000 $
1,470,160 $
14,701,600 $ 13,231,440
0.9%
207,000 $
1,653,930 $
16,539,300 $ 14,885,370
1.0%
230,000 $
1,837,700 $
18,377,000 $ 16,539,300
1.5%
345,000 $
2,756,550 $
27,565,500 $ 24,808,950
2.0%
460,000 $
3,675,400 $
36,754,000 $ 33,078,600
2.5%
575,000 $
4,594,250 $
45,942,500 $ 41,348,250
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APPENDIX 5
Amazon Prime E-mail
Page 44
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