Overview
Netflix, Inc. is an online subscription service streaming television (TV) shows and
movies to more than 33 million members in over 40 countries. The company's
subscribers can watch unlimited TV shows and movies streamed over the Internet to
their TVs, computers and mobile devices, as well as receive digital versatile discs (DVDs)
and Blu-Ray discs, delivered to their homes. The company primarily operates in the US
in three segments: Domestic streaming, International streaming and Domestic DVD. It is
headquartered in Los Gatos, California and employed 2,927 people as of December 31,
2011, of whom 579 were part-time employees.
The company recorded revenues of $3,204.6 million during the financial year
ended December 2011 (FY2011), an increase of 48.2% over FY2010. The operating profit
of the company was $376.1 million in FY2011, an increase of 32.6% over FY2010. The
net profit was $226.1 million in FY2011, an increase of 40.6% over FY2010. Domestic
and International streaming segments derive revenues from monthly subscription
services consisting solely of streaming content. The Domestic DVD segment derives
revenues from monthly subscription services consisting solely of DVD-by-mail.
Vision
Netflix does not have a clear mission statement, but they do have some key visions for
the company. Those are:
 Becoming the best global entertainment distribution service.
 Licensing entertainment content around the world.
 Creating markets that are accessible to film makers.
 Helping content creators around the world to find a global audience
Corporate Strategy
Reed Hastings founded Netflix in 1997. Netflix opened the world's first Internet
store to offer DVD rentals in early 1998. Netflix's inventories of DVD movies available
for rental surpassed the 2,000 titles mark in 1998, making the company the world's
largest DVD rental store. In the same year, Netflix and Amazon.com entered into a
marketing relationship under which Netflix would direct its customers to Amazon.com
for DVD purchases and Amazon.com would offer its customers special promotions for
DVD rentals at Netflix.
Netflix secured a $30 million investment from the internationally known luxury
products group, Group Arnault, in 1999. The company launched its subscription service
in the same year. The company opened two distribution centers, one each in Dallas,
Texas and Stamford, Connecticut in 2002. In the following year, Netflix opened two
shipping centers to serve the greater Greensboro and Rochester areas.
Netflix and TiVo signed an agreement in 2004 to develop a joint entertainment
offering under which the two companies would develop technology and work with
Hollywood studios to secure content for digital distribution. During the same year,
Netflix opened new shipping centers including those in Las Vegas, Louisville, Kansas City
and Lakeland (Florida).
In 2005, Netflix introduced Profiles, a family-friendly feature which allows Netflix
members to create separate movie queues for individual family members using a single
account. As per an agreement Netflix entered with Wal-Mart in 2005, Wal-Mart.com's
movie sales and Netflix's DVD rentals participated in joint promotional activities. The
company sold 3.5 million shares of common stock pursuant to an effective registration
statement at a public offering price of $30 per share in 2006.
In 2006, the company introduced a new feature, ‘ Previews’, on its website that
enables Netflix members to instantly watch movie trailers personalized for them based
on their movie tastes. In the same year, the company opened a new customer service
division in Hillsboro, Oregon. Netflix offered its subscribers the option of instantly
watching movies on their personal computers (PCs) in 2007. Netflix entered into an
exclusive TV, retail and worldwide distribution agreements through partnerships with
Thirteen/WNET New York, Target and Warner Home Video for the multi-platform
campaign for the release of ‘ Tony Bennett: The Music Never Ends’, in the same year.
During 2007, the company and LG Electronics entered into a partnership to develop a
set-top box for consumers to stream movies and other programming from the Internet
to high definition TVS (HDTVs).
The company, along with Roku, an innovator in digital media streaming
technology, introduced ‘ The Netflix Player’ by Roku, priced at $99.99, in 2008. The
Netflix Player is a device that enables Netflix subscribers to instantly stream a growing
library of movies and TV episodes from Netflix directly to the TV.
Microsoft and Netflix entered into an exclusive partnership to offer consumers
the ability to instantly stream movies and TV episodes from Netflix to TV via the Xbox
360 video game and entertainment system, in 2008. In the same year, LG Electronics
and Netflix introduced the first Blu-ray disc player. Also, Netflix closed Envelope
Entertainment, the company's film financing and acquisition division. In 2008, the
company rolled out a media player to stream movies directly on Windows PCs and Intel
Macs. It also partnered with Samsung to instantly stream movies and with TiVo to
stream content directly to TV through TiVo digital video recorders.
Extending its partnerships with various consumer electronics manufacturers to
stream Netflix's content through them, in 2009, the company unveiled new devices
partnering with LG and VIZIO. Netflix also entered into deals with many content
providers like MTV and Nickelodeon to increase the content offered for streaming.
During the same year, the company announced its movie and television streaming
services being available on Sony's PlayStation (PS3).
In early 2010, the company entered into a partnership with Nintendo of America
under which Netflix's movie and TV streaming service will be available on Nintendo WII
gaming consoles. Subsequently, the company entered into an agreement with Warner
Bros Home Entertainment Group under which new release titles on DVD and Blu-ray
were made available to Netflix members after a 28-day window from the new release
street date. In the same year, Netflix entered into agreements with Funai (which
distributes the Philips, Magnavox, Sylvania and Emerson brands in the US), Panasonic,
Sanyo, Sharp and Toshiba to introduce Netflix ready devices. The company signed deals
with a number of leading distributors of independent film, including The Criterion
Collection, Gravitas Ventures, Kino Lorber, Music Box Films, Oscilloscope Laboratories
and Regent Releasing in 2010. The deals provide Netflix with non-exclusive licensing
agreements to instantly stream films from these distributors.
Later in 2010, Netflix entered into an agreement with Universal Studios Home
Entertainment covering the distribution of Universal new release DVD and Blu-ray titles
at Netflix. Netflix also introduced its free Netflix App for iPhone and iPod touch, enabling
members to watch a selection of TV episodes and movies streamed to their iPhone or
iPod touch instantly. The company launched its services in Canada in the year 2010 with
an offering that enables Canadians to instantly watch unlimited movies and TV episodes
streamed from Netflix to their TVs and computers. This move marked the first
availability of Netflix services outside the US.
Further in 2010, Netflix selected Dolby Digital Plus to deliver 5.1-channel
surround sound for its content streamed instantly over the Internet. Later, Netflix
announced that members in Canada can watch content streamed from Netflix to the TV
via Xbox 360.Towards the end of 2010, the company announced new licensing
agreements with CBC and FremantleMedia Enterprises and extensions of its agreements
with New Video, Maple and Sony to significantly increase the content available to
members in Canada.
The company, in May 2011, entered into a multi-year licensing agreement with
Paramount Pictures, adding several new movie titles for Canadian Netflix members.
During the same month, Netflix also entered into a multi-year agreement with Miramax,
under which its US members can instantly watch motion pictures from the Miramax film
library. It marks the first time Miramax titles became available through a digital
subscription service. In June 2011, Netflix and Open Road Films entered into a multiyear agreement to provide theatrically distributed movies by Open Road Films
exclusively to Netflix for digital streaming in the ‘ pay TV window,’ after their release on
DVD. In July 2011, Netflix announced a multi-year renewal of its licensing agreement
with NBCUniversal Domestic Television Distribution, expanding the selection of nonexclusive NBCU film and TV library titles available to watch instantly streaming from
Netflix.
In September 2011, the company started offering its services in Mexico, Central
America and the Caribbean, completing its regional launch. Netflix launched its services
in 43 countries in Latin America and the Caribbean. In the same month, the company
entered into a new multi-year licensing agreement with DreamWorks Animation to
become exclusive subscription TV service for first-run feature films and select TV
specials from DreamWorks Animation.
In October 2011, the company launched a new Netflix app for android
smartphones and tablets, enabling Netflix members in Canada and Latin America
instantly watch TV episodes and movies streaming from Netflix on their Androidpowered phones and tablets. Netflix extended its existing licensing agreement with
Disney-ABC television Group in the same month. The extension allows Netflix to
continue to stream library episodes from ABC Studios, Disney Channel and ABC Family
over the Internet. As part of the deal, Netflix is also adding new content to its lineup of
Disney-ABC series and TV movies.
In November 2011, the company entered into a new multi-year licensing
agreement with Metro-Goldwyn-Mayer Studios (MGM) to provide exclusive
subscription streaming service in the UK and Ireland for most first-run feature films from
MGM. In the same month, Netflix entered into a multi-year licensing agreement with
Lionsgate UK, a subsidiary of Lions Gate Entertainment Corp, to provide exclusive
subscription streaming service in the UK and Ireland for first-run feature films from the
studio. Netflix launched a new interface for Android-powered tablets in the same
month.
Further in November 2011, the company entered into a new multi-year digital
licensing agreement with Miramax to bring a broad range of acclaimed Miramax films to
Netflix members in the UK and Ireland. The company launched Just for Kids section for
Netflix members in the US on the Wii game console in the same month. The company
launched its streaming services in the UK and Ireland in January 2012. The company
entered into a new multi-year licensing agreement with The Weinstein Company in
February 2012, through which foreign language, documentary and certain other movies
from The Weinstein Company were made exclusively available for Netflix members in
the US to watch instantly.
In April 2012, the company’ s services were made available on Windows Phones
for its customers in Latin America, the UK and Ireland. The company entered into a new
multi-year licensing agreement with Twentieth Century Fox in May 2012 to make its TV
series and films available for Netflix members to instantly watch in Latin America and
Brazil. The company, in October 2012, announced the availability of Just for Kids on
iPad. In the same month, the company launched its services in Sweden, Norway,
Denmark and Finland.
In December 2012, the company entered into a new multi-year licensing
agreement with The Walt Disney Studios to become exclusive US subscription television
service provider for first-run live-action and animated feature films from The Walt
Disney Studios.
Policies
Insider Trading Policy
In order to take an active role in the prevention of insider trading violations by its
officers, directors, employees and other related individuals, Netflix, Inc. (the
“Company”) has adopted this Insider Trading Policy (the “Policy”).
The Company opposes the misuse of material nonpublic information in the
trading of securities and it is the intent of this Policy to implement procedures designed
to prevent trading based on material nonpublic information regarding the Company,
including any of its subsidiaries.
The Policy covers officers, directors and all other employees of, or consultants or
contractors to, the Company or its subsidiaries, as well as their immediate families, and
members of their households (“Insider(s)”).
This Policy applies to all transactions in the Company’s securities, including
common stock, options for common stock and any other securities the Company may
issue from time to time, such as preferred stock, warrants and convertible debentures,
as well as to derivative securities relating to the Company’s stock, whether or not issued
by the Company, such as publicly-traded options.
No Insider shall engage in any transaction involving a purchase or sale of the
Company’s securities, including any offer to purchase or offer to sell, during any period
commencing with the date that the Insider possesses material nonpublic information
concerning the Company or its subsidiaries, and ending at the beginning of the trading
day following the date of public disclosure of that information, or at such time as such
nonpublic information is no longer material.
No Insider shall disclose (“tip”) material nonpublic information about the
Company or its subsidiaries to any other person where such information may be used by
such person to his or her profit by trading in the securities of companies to which such
information relates, nor shall such Insider or related person make recommendations or
express opinions on the basis of material nonpublic information as to trading in the
Company’s securities.
No Insider shall engage in any transaction involving the purchase or sale of
another company’s securities while in possession of material nonpublic information
about such company when that information is obtained in the course of employment
with, or the performance of services on behalf of, the Company and for which there is a
relationship of trust and confidence concerning the information.
While employees are not prohibited by law from using Company securities as
collateral for loans or in margin accounts or from engaging in transactions involving
publicly-traded options, such as puts and calls, or other derivatives securities with
respect to the Company’s securities, the Company discourages employees from such
activity because, among other problems, these types of transactions (i) may result in
transactions in Company securities occurring outside the Open Window (defined below)
and (ii), in the case of publicly-traded options, create an appearance of impropriety in
that these types of transactions often focus on short-term and speculative interest in
the Company’s securities or otherwise result in individual profit arising from poor
Company performance. Limit orders with brokers should not extend beyond any Open
Window and be cancellable upon an imposition of a blackout period. Employees
interested in trading outside of the Open Window should look into adopting a 10b5-1
trading plan, as described below. Exercising and selling stock options issued pursuant to
the Company’s stock option plan, as otherwise permitted under this Policy, are not
considered problematic.
The Company has determined that all officers, directors, and those other
persons identified on Attachment 1 (as may be amended from time to time by the
Compliance Officer), shall be prohibited from buying, selling or otherwise effecting
transactions in any stock or other securities of the Company or derivative securities
thereof EXCEPT during the following trading window:
Beginning at the open of market on the trading day following the date of public
disclosure of the Company’s financial results for a preceding calendar quarter or
year and ending at the close of market on the 10th day of the second calendar
month of the current calendar quarter (the “Open Window”).
In addition, the Company, through the Compliance Officer, may authorize longer
or additional trading windows in which buying, selling or otherwise effecting
transactions in the Company’s securities shall be permitted pursuant to this Policy as if it
were the “Open Window.” Similarly, the Company, through the Compliance Officer, may
impose special black-out periods during which certain persons will be prohibited from
buying, selling or otherwise effecting transactions in any stock or other securities of the
Company or derivative securities thereof, even though the trading window would
otherwise be open. If a special blackout period is imposed, the Company will notify
affected individuals, who should thereafter not engage in any transaction involving the
purchase or sale of the Company’s securities and should not disclose to others the fact
of such suspension of trading.
It should be noted that even during the Open Window, any person possessing
material nonpublic information should not engage in any transactions in the Company’s
securities until the beginning of the trading day following the date of public disclosure of
such information, whether or not the Company has recommended a suspension of
trading to that person.
All executive officers and directors of the Company must refrain from trading in
the Company’s securities, even during the Open Window, without first contacting the
Company’s Compliance Officer (defined below) and obtaining pre-clearance to
commence trading in the Company’s securities. In addition, all executive officers and
directors are required to comply with Section 16 of the Securities and Exchange Act of
1934, and related rules and regulations which set forth reporting obligations as well as
limitations on “short swing” transactions. The Company is available to assist in filing
Section 16 reporting, however, the obligation to comply with Section 16 is personal.
Please direct any inquiries concerning compliance to the Compliance Officer.
The Company permits all directors, officers and other employees to adopt
trading plans in accordance with Securities and Exchange Commission Rule 10b5-1(c)
(17 C.F.R. § 240.10b5-1(c)) and otherwise pursuant to the Company’s procedure for
adopting such a trading plan (a “10b5-1 trading plan”). The restrictions on trading set
forth in this Policy shall not apply to trades made pursuant to a 10b5-1 trading plan.
More information concerning trading plans is available from the Compliance Officer.
The exercise of stock options for cash under the Company’s stock option plan are
exempt from this Policy, since the other party to these transactions is the Company
itself and the price does not vary with the market, but is fixed by the terms of the option
agreement. This exemption does not apply to the sale of any shares issued upon such
exercise and it does not apply to a cashless exercise of options, which is accomplished
by a sale of a portion of the shares issued upon exercise of an option. In addition, bona
fide gifts of the securities of the Company are exempt from this Policy.
Employees who violate this Policy shall also be subject to disciplinary action by
the Company, which may include ineligibility for future participation in the Company’s
equity incentive plans or termination of employment.
Pursuant to federal and state securities laws, Insiders may be subject to criminal
and civil fines and penalties as well as imprisonment for engaging in transactions in the
Company’s securities at a time when they have knowledge of material nonpublic
information regarding the Company or its subsidiaries. In addition, Insiders may be liable
for improper transactions by any person (commonly referred to as a “tippee”) to whom
they have disclosed material nonpublic information regarding the Company or its
subsidiaries or to whom they have made recommendations or expressed opinions on
the basis of such information as to trading in the Company’s securities.
Every officer, director and other employee, consultant and contractor has the
individual responsibility to comply with this Policy. An Insider may, from time to time,
have to forego a proposed transaction in the Company’s securities even if he or she
planned to make the transaction before learning of the material nonpublic information
and even though the Insider believes he or she may suffer an economic loss or forego
anticipated profit by waiting. Trading in the Company’s securities during the trading
window should not be considered a “safe harbor,” and all directors, officers and other
persons should use good judgment at all times.
The Company’s General Counsel shall serve as the Insider Trading Compliance
Officer (the “Compliance Officer”). The duties of the Compliance Officer shall include,
but not be limited to, the following:
 Pre-clearing transactions as required under this Policy.
 Assisting in the preparation and filing of Section 16 reports (Forms 3, 4 and 5) for
Section 16 reporting persons.
 Serving as the designated recipient at the Company of copies of reports filed
with the Securities and Exchange Commission by Section 16 reporting persons
under Section 16 of the Exchange Act.
 Periodically reminding all Section 16 reporting persons regarding their
obligations to report and quarterly reminders of the dates that the trading
window described above begins and ends.
 Circulating the Policy (and/or a summary thereof) to all employees, including
Section 16 reporting persons, on an annual basis.
 Assisting the Company in implementation of the Policy.
 Coordinating with Company counsel regarding compliance activities with respect
to Rule 144 requirements and regarding changing requirements and
recommendations for compliance with Section 16 of the Exchange Act and
insider trading laws to ensure that the Policy is amended as necessary to comply
with such requirements.
It is not possible to define all categories of material information. However,
information should be regarded as material if there is a substantial likelihood that it
would be considered important to a reasonable investor in making an investment
decision regarding the purchase or sale of the Company’s securities. Put another way,
there must be a substantial likelihood that the information would be viewed by the
reasonable investor as having significantly altered the total mix of information available
in the market concerning the Company.
While it may be difficult under this standard to determine whether particular
information is material, there are various categories of information that are particularly
sensitive and therefore more likely to be considered material. Examples of such
information include:
 Quarterly financial results
 Known but unannounced future earnings or losses
 News of a pending or proposed merger
 News of the disposition or acquisition of significant assets
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Changes in dividend policy
Stock splits
New equity or debt offerings
Either positive or negative information may be material. Questions concerning whether
nonpublic information is material can be directed to the Compliance Officer.
Code of Ethics
The Board of Directors of Netflix, Inc. (the "Company") has adopted this Code of
Ethics (this "Code") for its directors, officers and other employees (individually, "Netflix
Party" and collectively, "Netflix Parties"). As used herein, the principal executive officer,
principal financial officer, principal accounting officer or controller, or persons
performing similar functions are sometimes also referred to as the "Senior Financial
Officers".
This Code has been reasonably designed to deter wrongdoing and to promote:
 Honest and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationships;
 Full, fair, accurate, timely, and understandable disclosure in reports and
documents that a registrant files with, or submits to, the Securities and Exchange
Commission and in other public communications made by the Company;
 Compliance with applicable governmental laws, rules and regulations;
 The prompt internal reporting to an appropriate person or persons identified in
this Code of violations of this Code; and
 Accountability for adherence to this Code.
I.
Honest and Ethical Conduct
Netflix Parties are expected to act and perform their duties ethically and
honestly and with the utmost integrity. Honest conduct is considered to be conduct that
is free from fraud or deception. Ethical conduct is considered to be conduct conforming
to accepted professional standards of conduct. Ethical conduct includes the ethical
handling of actual or apparent conflicts of interest between personal and professional
relationships as discussed in below.
II.
Conflicts of Interest
A conflict of interest exists where the interests or benefits of one person or
entity conflict or appear to conflict with the interests or benefits of the Company. While
it is not possible to describe every situation in which a conflict of interest may arise,
Netflix Parties must never use or attempt to use their position with the Company to
obtain improper personal benefits. Any Netflix Party who is aware of a conflict of
interest, or is concerned that a conflict might develop, is required to discuss the matter
with a higher level of management or the General Counsel promptly. Senior Financial
Officers may, in addition to speaking with the General Counsel, also discuss the matter
with the Audit Committee.
III.
Disclosure
Senior Financial Officers are responsible for ensuring that the disclosure in the
Company's periodic reports is full, fair, accurate, timely and understandable. In doing so,
Senior Financial Officers shall take such action as is reasonably appropriate to (i)
establish and comply with disclosure controls and procedures and accounting and
financial controls that are designed to ensure that material information relating to the
Company is made known to them; (ii) confirm that the Company's periodic reports
comply with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and (iii) ensure that information contained in the Company's periodic reports
fairly presents in all material respects the financial condition and results of operations of
the Company.
Senior Financial Officers will not knowingly (i) make, or permit or direct another
to make, materially false or misleading entries in the Company's, or any of its
subsidiary's, financial statements or records; (ii) fail to correct materially false and
misleading financial statements or records; (iii) sign, or permit another to sign, a
document containing materially false and misleading information; or (iv) falsely
respond, or fail to respond, to specific inquiries of the Company's independent auditor
or outside legal counsel.
IV.
Compliance
It is the Company's policy to comply with all applicable laws, rules and
regulations. It is the personal responsibility of each Netflix Party to adhere to the
standards and restrictions imposed by those laws, rules and regulations, and in
particular, those relating to accounting and auditing matters. Any Netflix Party who is
unsure whether a situation violates any applicable law, rule, regulation or Company
policy should discuss the situation with the General Counsel.
V.
Internal Reporting
Netflix Parties shall take all appropriate action to stop any known misconduct by
fellow Netflix Parties that violate this Code. To this end, Netflix Parties shall report any
known or suspected misconduct to the General Counsel or, in the case of misconduct by
a Senior Financial Officer, also to the Chair of the Company's Audit Committee. In
addition, Netflix Parties are encouraged to use the Company's confidential internal
reporting system to report breaches of this Code. Information concerning the
Company's confidential internal reporting system can be located on the Company's
Intranet. The Company will not retaliate or allow retaliation for reports made in good
faith.
VI.
Accountability
Any violation of this Code may result in disciplinary action, including termination,
and if warranted, legal proceedings. This Code is a statement of certain fundamental
principles, policies and procedures that govern the Netflix Parties in the conduct of the
Company's business. It is not intended to and does not create any rights in any
employee, customer, supplier, competitor, shareholder or any other person or entity.
The General Counsel and/or the Audit Committee will investigate violations and
appropriate action will be taken in the event of any violation of this Code.
VII.
Waivers and Amendments of the Code
The Company is committed to continuously reviewing and updating our policies
and procedures. Therefore, this Code is subject to modification. Any amendment or
waiver of any provision of this Code must be approved in writing by the Company's
Board of Directors and promptly disclosed pursuant to applicable laws and regulations.
Any waiver or modification of the Code by a Senior Financial Officer will be promptly
disclosed to stockholders if and as required by law or the rules of the stock exchange or
over the counter trading system on which Netflix's stock is traded or quoted.
Suppliers
Re:fine, TVT and Deluxe are among the firms to be placed on the Internet subscription
service’s list of preferred suppliers.
Netflix director of content partners operations Chris Fetner said: “We’re looking for the
top providers in the digital supply chain to streamline workflows and help us accelerate
the streaming VOD transformation.
“Netflix seeks to digitize content quickly, while still maintaining the highest
quality possible. Matching content providers with the best service providers
accomplishes that.”
As part of the selection process the firms had to demonstrate their capabilities in the
areas of file storage, video restoration, file transcoding and encoding, subtitling, quality
control, file transportation, standards conversion and file manipulation and scalable
workflow management.
Re:fine chairman Symon Roue said: ”Our robust approach to content supply chain
procedures and quality control have been given endorsement by one the world’s most
exciting players in true on demand.”
Kim Thesiger, managing director of TVT, added: “As one of only three UK preferred
vendors, TVT will be building on its reputation as a global company with local
knowledge.
“From our offices in London, Sydney, LA, Singapore and Tokyo we will service
media content owners with all the tools they need to deliver in the correct
format to Netflix across any of its territories.”
Human Resources
Arthur Mola/Invision/AP
Silicon Valley is known for its technology, not its management, innovations. But some of
its management innovations are worth looking at. Netflix’s human resources policies
rank right up there, since the company threw out the standard playbook.
Former Netflix chief talent officer, Patty McCord, describes the company’s key talent
management tenets in a recent Harvard Business Review article. While Netflix’s
approach may not be suited to other companies or the work of the public sector, they
are worth highlighting for no other reason than to spark reflection and discussion.
McCord and Netflix CEO and founder, Reed Hastings, created a 126-page document
describing the approach to talent and culture at Netflix. McCord’s article highlights the
five tenets that Netflix has developed to attract, retain and reward talent:
1. Hire, reward and tolerate only fully formed adults. “Over the years we learned that if
we asked people to rely on logic and common sense instead of formal policies, most of
the time we would get better results, and at lower costs,” McCord writes. If you hire
carefully, she says, 97 percent of your employees will do the right thing. “We tried hard
to not hire those people, and we let them go if it turned out we’d made a hiring
mistake” according to McCord.
2. Tell the truth about performance. Netflix eliminated formal individual performance
reviews and asked managers and employees to have conversations about performance
as an organic part of their work. They instituted 360-degree reviews under the theory
that people can handle anything as long as they are told the truth. Netflix does not try
to identify the top 10 percent or bottom 30 percent in their company; they look at the
entire field of talent—inside and outside their company—and rate them in that context.
3. Managers own the job of creating great teams. We didn’t measure them on whether
they were excellent coaches or mentors or got their paperwork done on time. Great
teams accomplish great work, and recruiting the right team was the top priority.
4. Leaders own the job of creating the company culture. Leaders need to live the values
they promote, or no one else will. She also says leaders have to ensure that employees
understand the levers that drive the business and provide context and transparency so
that can happen. In addition, she says, leaders need to understand the subcultures
within an organization that might require different management approaches.
5. Good talent managers think like business people and innovators first and like HR
people last. McCord also offers insights to her peers in the HR profession, noting that
too many devote time to morale improvement initiatives. With tenets like this in place,
Netflix’s operating policies tell salaried employees to take whatever time off they feel is
appropriate. They have no vacation policy; employees and bosses are asked to work it
out with each other. Similarly, Netflix’s expense policy is “Act in Netflix’s best interest”—
there is no elaborate travel and expense guidance. While this approach of setting clear
expectations and trust may not work well broadly in a public sector context, it clearly
provides some foundational ideas for how innovative leaders on the front line of their
agencies can frame how they approach their job of leading and encouraging high
performance.
This information was according to an article former Human Resource Director Patty
McCord wrote in Harvard Business Review.
Strategic Managers and Board
Sr. Level Executives
Add Pictures of each Executive
 Reed Hastings - Founder and CEO
o Reed is an active educational philanthropist and served on the California
State Board of Education from 2000 to 2004. He is currently on the board
of several educational organizations including CCSA, Dreambox Learning,
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KIPP and Pahara. Reed is also a board member of Facebook and was on
the board of Microsoft from 2007 to 2012.
Kelly Bennett - Chief Marketing Officer
o Became the Chief Marketing Officer in 2012 after nearly a decade at
Warner Bros. where he was most recently Vice President Ineractive,
World Wide Marketing with the pictures group, leading international
online campaigns for Warner Bros. movies.
Tawni Cranz - Chief Talent Officer
o Tawni leads the team that maintains the company’s unique corporate
culture, hires new talent and keeps the organization lean and flexible
despite enormous growth. Prior to Netflix, she was HR director at Bausch
and Lomb and held various human resources positions at FedExKinko’s.
Jonathan Friedland - Chief Communications Officer
o Joined Netflix in February 2011 from The Walt Disney Company, where
he was SVP, Corporate Communications. He was a member of the Wall
Street Journal team that won the Pulitzer Prize for its coverage of the
9/11 attacks.
Neil Hunt - Chief Product Officer
o Neil has been with the company since 1999, leading the product team,
which designs, builds and optimizes the Netflix experience. He is a nonexecutive member of Logitech’s board of directors since September 2010.
He holds a Doctorate in Computer Science from the University of
Aberdeen, U.K. and a Bachelor’s degree from the University of Durham,
U.K.
David Hyman - General Counsel
o He has served as the General Counsel since 2002, along with being the
Company’s Secretary. David practiced law at Morrison & Foerster in San
Francisco and Arent Fox in Washington, D.C.
Greg Peters - Chief Streaming & Partnerships Officer
o Greg is responsible for the global partnerships with consumer electronics
companies, Internet service providers and multi-channel video
programming distributors that enable Netflix to deliver movies and TV
shows across a full range of devices and platforms. He holds a degree in
physics and astronomy from Yale University.
Ted Sarandos - Chief Content Officer
o Ted has led content acquisition since 2000. With more than 20 years’
experience in home entertainment, Ted is recognized in the industry as
an innovator in film acquisition and distribution. He also serves on the
Film Advisory Board for Tribeca and Los Angeles Film Festival, the retail
advisory board for the Digital Entertainment Group and is a Henry Crown
Fellow at the Aspen Institute.
David Wells - Chief Financial Officer
o David has been the CFO since December 2010. From August 2008 to
December 2010, he served as Vice President of Financial Planning &
Analysis and Director of Operations Planning from March 2004 to August
2008. Prior to Netflix, David had many roles within Deloitte Consulting
from August 1998 to March 2004.
Corporate governance
 Richard Barton (Independent Director) - Member of Audit and Nominating &
Governance Committee
o Co-founder of Zillow, Inc. where he is now Executive Chairman of the
Board. Barton is also a Venture Partner with Benchmark Capital.
 A. George (Skip) Battle (Independent Director) - Member of Compensation
Committee
o Battle has been one of the Company’s directors since June 2005. He was
previously Executive Chairman of the Board of Ask Jeeves, Inc., where he
was CEO from 2000 from 2003.
 Timothy Haley (Independent Director) - Member of Audit Committee and Chair
of Compensation Committee
o Timothy has been a member of the directors since June 1998. He is the
co-founder of Redpoint Ventures, a venture capital firm, and has been a
Managing Director of the firm since October 1999.
 Reed Hastings
 Jay Hoag (Lead Independent Director) - Member of Compensation Committee
and Chair of Nominating & Governance Committee
o Since 1999, Hoag has been one of the Company’s directors. Since June
1995, Jay Hoag has served as the founding General Partner at Technology
Crossover Ventures, a private equity and venture capital firm.
 Leslie Kilgore
o Leslie was the Chief Marketing Officer from 2000 until 2012, were before
that from February 1999 to March 2000, she was the Director of
Marketing for Amazon.com Inc. She was also the brand manager for the
Proctor & Gamble Company from August 1992 to February 1999.
 Ann Mather (Independent Director) - Chair of Audit Committee
o Has been a member of the Board since 2010. Other committees and
boards she is on include; Glu Mobile Inc. on its nominating and
governance committee since September 2005, Google, Inc. since
November 2005 and serves as chair of its audit committee, MGM
Holdings Inc. since December 2010, Solazyme, Inc. since April 2011 as
chair of its audit committee, and Shutterfly, Inc. since May 2013 to name
a few.
Board Committees and Responsibilities
Audit Committee
CHARTER FOR THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS OF NETFLIX, INC.
I.
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PURPOSE
The purpose of the Audit Committee of the Board of Directors (the “Board”) of
Netflix, Inc., a Delaware corporation (the “Company”) shall be:
to provide oversight and monitoring of (i) the Company’s accounting and
financial reporting process (ii) the Company’s systems of internal controls over
financial reporting, (iii) the integrity of the Company’s financial statements, (iv)
audits of the Company’s financial statements and (v) the independent auditors’
qualifications, independence and performance;
to provide the Board with the results of its monitoring and recommendations
derived therefrom;
to assist the Board in ensuring the Company’s compliance with legal and
regulatory requirements in connection with the Company’s financial reporting
process; and
to provide to the Board such additional information and materials as it may
deem necessary to make the Board aware of significant financial matters that
require the attention of the Board.
II.
MEMBERSHIP
The Audit Committee members will be appointed from time to time by, and will
serve at the discretion of, the Board. The Audit Committee will be comprised of
at least three directors determined by the Board to satisfy the requirements of
the NASDAQ Stock Market, Inc. (“NASDAQ”) and applicable federal law, including
those that relate to independence. Appointment to the Audit Committee,
including the designation of the Chair of the Committee and the designation of
any member as an “audit committee financial expert” shall be made by the full
Board.
III.
SCOPE OF RESPONSIBILITIES
The scope of the responsibilities of the Audit Committee shall include:
Providing oversight and monitoring of the activities of Company management,
including without limitation, the chief financial officer and principal accounting
officer and controller, and the independent auditors with respect to the
Company’s financial reporting and compliance process;
Reviewing on a continuing basis the adequacy and effectiveness of the
Company’s system of internal controls over financial reporting as well as the
Company’s disclosure controls and procedures;
Appointing, compensating, retaining, terminating and overseeing the Company’s
independent auditors (including resolving disagreements between management
and the independent auditors regarding financial reporting), for the purpose of
preparing or issuing an audit report or performing other audit, review or attest
services for the Company, for which the Audit Committee shall have sole and
absolute authority;
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Pre-approving audit and non-audit services provided to the Company by the
Company’s independent auditors either (i) before the auditors are engaged by
the Company for such services or (ii) pursuant to pre-approval policies and
procedures established by the Audit Committee, provided that the Audit
Committee is informed of each specific service;
Reviewing the independent auditors’ proposed audit scope, approach and
independence;
Ensuring that the independent auditors must report directly to the audit
committee and reviewing the performance of the independent auditors, who
shall be accountable to the Board and the Audit Committee as the
representatives of the stockholders of the Company, and recommending to the
Board and stockholders the appointment of the independent auditors;
Requesting and receiving from the independent auditors on a periodic basis a
formal written statement delineating all relationships between the auditor and
the Company which may adversely impact the auditors’ independence and based
on such review, assessing the independence of the auditors, actively engaging in
a dialogue with the independent auditor with respect to any disclosed
relationships or services that may impact the objectivity and independence of
the auditor and for taking, or recommending that the full board take,
appropriate action to oversee the independence of the outside auditor;
Obtaining and reviewing on a periodic basis a report from the independent
auditors describing the auditors’ internal quality-control procedures, any
material issues raised by the most recent internal quality-control review or peer
review or by any inquiry or investigation by governmental or professional
authorities, within the preceding five years, respecting one or more independent
audits carried out by the firm and any steps taken to deal with such issues;
Establishing a policy regarding the Company’s hiring of current or former
employees of the Company’s independent auditors;
Directing the Company’s independent auditors to review before filing with the
Securities and Exchange Commission the Company’s interim financial statements
included in Quarterly Reports on Form 10-Q, using professional standards and
procedures for conducting such reviews;
Reviewing before release the unaudited quarterly and audited annual operating
results in the Company’s quarterly and annual earnings releases;
Discussing with the Company’s independent auditors the financial statements
and audit findings, including any significant adjustments, management
judgments and accounting estimates, significant new accounting policies and
disagreements with management and any other matters required to be
discussed by Statement on Auditing Standards No. 61, as it may be modified or
supplemented;
Reviewing with management, before release, the audited financial statements
and Management’s Discussion and Analysis included in the Company’s Annual
Report on Form 10-K, and recommending to the Board following such review, if
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IV.
appropriate, that the audited financial statements be included in such Annual
Report on Form 10-K;
Providing a report in the Company’s proxy statement in accordance with the
requirements of Item 407 of Regulation S-K and Item 7 of Schedule 14A, or any
successor provisions;
Reviewing, in conjunction with legal counsel, any legal matters that could have a
significant impact on the Company’s financial statements;
Establishing procedures for receiving, retaining and treating complaints received
by the Company regarding accounting, internal accounting controls, auditing
matters or fraudulent financial reporting and procedures for the confidential,
anonymous submission by employees of concerns regarding questionable
accounting internal controls or auditing matters;
Reviewing at least annually the Audit Committee’s own structure, processes and
membership requirements;
Providing oversight and review of the Company’s asset management policies,
including without limitation an annual review of the Company’s investment
policies and performance for cash and short-term investments;
Reviewing and approving related party transactions for potential conflicts of
interests;
If necessary, instituting special investigation(s) and, as appropriate, hiring special
counsel or experts to assist in such investigation(s);
Reviewing and reassessing the adequacy of this Charter on not less than an
annual basis; and
Performing such other duties as may be requested by the Board.
MEETINGS
The Audit Committee shall meet at least quarterly. The Audit Committee may
establish its own schedule, which it shall provide to the Board in advance.
The Audit Committee shall meet separately with the independent auditors,
without management present, and shall meet with members of management,
without the independent auditors present, as it deems appropriate.
V.
MINUTES
The Audit Committee shall maintain written minutes of its meetings, which
minutes shall be filed with the minutes of the meetings of the Board.
VI.
REPORTS
Apart from the report prepared for the Company’s proxy statement pursuant to
Item 407 of Regulation S-K and Item 7 of Schedule 14A, the Audit Committee
shall summarize its examinations and recommendations to the Board from time
to time as may be appropriate, consistent with this Charter.
VII.
COMPENSATION
Members of the Audit Committee shall receive such fees, if the Board of
Directors in its sole discretion may determine any, for their service as Audit
Committee members as. Such fees may include retainers or per meeting fees.
Fees may be paid in such form of consideration as is determined by the Board of
Directors. Members of the Audit Committee may not receive any compensation
from the Company except the fees that they receive for service as a member of
the Board of Directors or any committee thereof.
VIII.
DELEGATION OF AUTHORITY
The Audit committee may delegate to one or more designated members of the
Audit Committee the authority to pre-approve audit and permissible non-audit
services, provided such pre-approval decision is presented to the full Audit
Committee at is scheduled meetings. The Audit Committee may delegate its
authority to subcommittees or the Chair of the Audit Committee when it deems
appropriate and in the best interest of the Company.
IX.
FUNDING OF THE AUDIT COMMITTEE’S FUNCTIONS
The Company shall provide appropriate funding, as determined by the Audit
Committee, for payment of: (i) compensation to any registered public accounting
firm 5 engaged for the purpose of preparing or issuing an audit report or
performing other audit, review or attest services for the Company; (ii)
compensation to any advisers employed by the audit committee; and (iii)
ordinary administrative expenses of the audit committee that are necessary or
appropriate in carrying out its duties.
Compensation Committee
Compensation Committee Charter
I.
Purpose
The purpose of the Compensation Committee of the Board of Directors (the
"Board") of Netflix, Inc., a Delaware corporation (the "Company") shall be to
review and approve all forms of compensation to be provided to the executive
officers and directors of the Company.
The Compensation Committee has the authority to undertake the specific duties
and responsibilities listed below and will have the authority to undertake such
other specific duties as the Board may from time to time prescribe.
II.
Statement of Philosophy
The Company's philosophy in setting its compensation policies for executive
officers is to attract and retain key executive talent that maximizes shareholder
value over time. The Compensation Committee believes that executive officers
should have sufficient equity or equity-linked compensation so as to align the
interests of executive officers with those of the Company's shareholders.
III.
Membership
The Compensation Committee shall consist of a minimum of two non-employee
directors of the Company as such members are appointed from time to time by
the Board and such members shall serve at the discretion of the Board. The nonemployee director members shall be "non-employee directors" within the
meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and shall also be "outside directors" within the meaning of
Section 162(m) of the Internal Revenue Code of 1986, as amended.
In addition, the members of the Compensation Committee shall meet the
independence requirements of the Nasdaq Stock Market, including any
enhanced independence requirements under the rules of the Nasdaq Stock
Market related to compensation committee members (except to the extent that
the Company has chosen to avail itself of the "exceptional and limited
circumstances" exemption from Nasdaq's independence requirement, as set
forth in Nasdaq Listing Rule 5605(d)(3)).
IV.
Scope of Responsibilities
The responsibilities of the Compensation Committee include:
1. Reviewing and approving the compensation and compensation policy for
executive officers of the Company, and such other employees of the
Company as directed by the Board;
2. Reviewing and approving all forms of compensation (including all "plan"
compensation, as such term is defined in Item 402(a)(7) of Regulation S-K
promulgated by the Securities and Exchange Commission, and all non-plan
compensation) to be provided to the executive officers of the Company. The
chief executive officer shall not be present during voting or deliberations on
his or her compensation;
3. Acting as Administrator (as defined therein) of each of the Company's (i)
2002 Employee Stock Purchase Plan, (ii) 2002 Stock Plan, (iii) 2011 Stock Plan
and (iv) such other plans as may be enacted by the Company (collectively,
the "Plans"). The Compensation Committee may (i) grant stock options and
stock purchase rights and other awards to individuals eligible for such grants,
including grants to individuals subject to Section 16 of the Exchange Act in
compliance with Rule 16b-3 promulgated thereunder, and (ii) amend such
stock options and stock purchase rights and other awards. The Compensation
Committee shall also make recommendations to the Board with respect to
amendments to the Plans and changes in the number of shares reserved for
issuance under the each Plan;
4. Reviewing and making recommendations to the Board regarding other plans
that are proposed for adoption or adopted by the Company for the provision
5.
6.
7.
8.
of compensation to employees of, directors of and consultants to the
Company;
Preparing a report (to be included in the Company's proxy statement) which
describes: (i) that the Compensation Committee has reviewed and discussed
the Compensation Discussion and Analysis with management and (ii) that
based on the review and discussions, the Compensation Committee
recommended to the Board that the Compensation Discussion and Analysis
be included in the Proxy Statement and incorporated into the Company's
upcoming Annual Report ; and
Authorizing the repurchase of shares from terminated employees pursuant
to applicable law.
Reviewing and reassessing the adequacy of this Charter periodically, as
appropriate and no less than annually, and making recommendations to the
Board for any proposed changes.
The Compensation Committee shall have the authority, in its sole discretion,
to retain or obtain the advice of a compensation consultant, independent
legal counsel or other adviser. The Compensation Committee shall be directly
responsible for the appointment, compensation and oversight of the work of
any compensation consultant, independent legal counsel and other adviser
retained by the Compensation Committee. The Compensation Committee
may select a compensation consultant, legal counsel (other than in-house
counsel) or other adviser only after taking into consideration the following
factors, as well as any other factors identified by Nasdaq (excluding in-house
counsel): (1) the provision of other services to the Company by the person
that employs the compensation consultant, legal counsel or other adviser; (2)
the amount of fees received from the Company by the person that employs
the compensation consultant, legal counsel or other adviser, as a percentage
of the total revenue of the person that employs the compensation
consultant, legal counsel or other adviser; (3) the policies and procedures of
the person that employs the compensation consultant, legal counsel or other
adviser that are designed to prevent conflicts of interest; (4) any business or
personal relationship of the compensation consultant, legal counsel or other
adviser with a member of the Compensation Committee; (5) any stock of the
Company owned by the compensation consultant, legal counsel or other
adviser; and (6) any business or personal relationship of the compensation
consultant, legal counsel, other adviser or the person employing the adviser
with an executive officer of the Company. Nothing herein shall require any
compensation consultant, legal counsel or other adviser to be independent,
only that the Compensation Committee consider the six independence
factors enumerated above before selecting, or receiving advice from, such a
compensation adviser. However, the Compensation Committee is not
required to consider the foregoing factors if the compensation consultant,
legal counsel or other adviser's services are limited to consulting on any
broad-based plan that does not discriminate in scope, terms or operation in
favor of executive officers or directors and that is generally available to all
salaried employees or providing information that is either not customized for
the Company or that is customized based on parameters that are not
developed by the adviser, and about which the adviser does not provide
advice.
V.
Meetings
The Compensation Committee shall meet at least one time each year. The
Compensation Committee may establish its own meeting schedule.
VI.
Minutes
The Compensation Committee shall maintain written minutes of its meetings,
which minutes will be filed with the minutes of the meetings of the Board.
VII.
Reports
The Compensation Committee will provide reports to the Board from time to
time as appropriate, regarding recommendations of the Compensation
Committee submitted to the Board for action, and copies of the written minutes
of its meetings.
VIII.
Funding of the Compensation Committee's Functions
The Company shall provide appropriate funding (as determined by the
Compensation Committee) for the Compensation Committee in its capacity as a
committee of the Board in such amounts as determined by the Compensation
Committee for payment of reasonable compensation to a compensation
consultant, independent legal counsel or any other adviser retained by the
Compensation Committee.
Nominating & Governance Committee
Nominating and Governance Committee Charter
I.
Purpose
The Nominating and Governance Committee (the "Committee") shall, (i) in
consultation with the Chief Executive Officer (CEO), evaluate, nominate and
approve director nominees for election by the stockholders and for appointment
by the Board to fill vacancies and (ii) provide a leadership role with respect to
corporate governance of the Company.
II.
Committee Membership and Organization
 The Committee shall be comprised of no fewer than two (2) members, each
of whom are members of the Board.
 The members of the Committee shall meet the applicable independence
requirements of Nasdaq Stock Market.
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III.
The members of the Committee shall be appointed and may be replaced at
any time by the Board.
Committee Responsibilities and Authority
The responsibilities of the Committee include:
 Determine periodically, as appropriate, desired Board qualifications,
expertise and characteristics, including such factors as business experience,
diversity as well as skills and knowledge with respect to technology, finance,
marketing, financial reporting and any other areas as may be expected to
contribute to an effective Board. With respect to diversity, the Committee
may consider such factors as differences of viewpoint, professional
experience, education, skill, and other individual qualities and attributes that
contribute to board heterogeneity, including characteristics such as race,
gender, and national origin.
 Review from time to time and report to the Board on general corporate
governance matters.
 Recommend to the Board, as appropriate, policies, procedures and practices
regarding corporate governance for the Company as may be consistent with
any applicable laws, regulations and listing standards.
 Evaluate, propose and approve nominees for election or appointment to the
Board.
 Consider, evaluate and, as applicable, propose and approve, stockholder
nominees for election to the Board.
 In performing its duties, the Committee shall have the authority to retain,
compensate and terminate any search firm to be used to identify director
candidates.
 Form and delegate authority to subcommittees when appropriate.
 Report to the Board on major items covered in Committee meetings.
 Review and re-examine this Charter periodically, as appropriate, and make
recommendations to the Board for any proposed changes.
 Periodically review and evaluate, as appropriate, the performance of the
Committee.
 In performing its responsibilities, the Committee shall have the authority to
engage and obtain advice, reports or opinions from internal or external
counsel and expert advisors.
 Consider and/or adopt a policy regarding the consideration of candidates for
the Board recommended by stockholders, including, if adopted, procedures
to be followed by stockholders in submitting recommendations.
 The Committee shall review the disclosure in the Company's proxy statement
for its annual meeting of stockholders relating to Committee functions and
shall inform management whether there are any changes that are necessary
or appropriate with respect to such disclosure in the proxy statement.
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Perform such other activities consistent with this Charter, the Company's
Bylaws and governing law as the Nominating Committee or the Board deems
necessary or appropriate.
IV.
Meetings
The Committee shall meet periodically as necessary to act upon any matter
within its jurisdiction.
V.
Minutes
The Committee shall maintain written minutes of its meetings, which minutes
will be filed with the minutes of the meetings of the Board.
VI.
Reports
The Committee will provide reports to the Board from time to time as
appropriate.
The Company's Lead Independent Director is responsible for:
 Coordinating the activities of the independent directors, and is authorized
to call meetings of the independent directors;
 Coordinating with the Chief Executive Officer and Corporate Secretary to
set the agenda for Board meetings, soliciting and taking into account
suggestions from other members of the Board;
 Chairing executive sessions of the independent directors; providing
feedback and perspective to the Chief Executive Officer about discussions
among the independent directors; and helping facilitate communication
between the Chief Executive Officer and the independent directors;
 Presiding at Board meetings where the Chair is not present; and,
 Performing other duties assigned from time to time by the Board
Committees
Executive Officer and Director Compensation
 Reed Hastings - CEO and Chairman of the Board
o Annual Salary - $2,000,000
o Annual Stock Option Allowance - $2,000,000
o Monthly Stock Option Allowance - $166,667
 Neil Hunt - Chief Product Officer
o Annual Salary - $1,750,000
o Annual Stock Option Allowance - $1,250,000
o Monthly Stock Option Allowance - $104,167
 David Hyman - General Counsel and Secretary
o Annual Salary - $848,000
o Annual Stock Option Allowance - $552,000
o Monthly Stock Option Allowance - $46,000
 Ted Sarandos - Chief Content Officer
Annual Salary - $2,200,000
Annual Stock Option Allowance - $1,800,000
Monthly Stock Option Allowance - $150,000
David Wells - Chief Financial Officer
o Annual Salary - $770,000
o Annual Stock Option Allowance - $330,000
o Monthly Stock Option Allowance - $27,500
Richard Barton - Audit and Nominating & Governance Committee Member
o Total Compensation - $370,903
A. George (Skip) Battle - Compensation Committee Member
o Total Compensation - $415,903
Timothy Haley - Audit Committee Member & Compensation Committee Chair
o Total Compensation - $370,903
Jay Hoag - Compensation Committee Member and Nominating & Governance
Committee Chair
o Total Compensation - $370,903
Leslie Kilgore
o Total Compensation - $370,196
Ann Mather - Audit Committee Chair
o Total Compensation - $404,558
o
o
o
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Generic Industry Type
Industry
The DVD, Game and Video Rental industry in the United States is a shrinking
market. With recent technological advances and having the ability to easily stream and
download content the industry has been struggling. Consumers are choosing the more
convenient alternatives to the detriment of the DVD, Game and Video Rental industry.
There has been a decline by 13.7% in the industry from 2008-2013, with an even greater
expected decline by 21.2% for 2013-2018.
However, it is still a $4.5 billion market with profits of $156.4 million in 2012.
The market is highly concentrated with the top three providers owning 79.3% market
share, with Netflix Inc. owning 24.3% and top two rivals, Redbox and Blockbuster,
owning 45.5% and 9.5% respectively. There are currently 4,294 businesses within the
industry spreading out over 10,021 establishments. The products and services that are
offered in this industry are shown
to the right. Nearly 50% of physical
rentals are by kiosks, which explain
why Redbox is the market leader.
The services are also divided into
subscription based rentals, and the
traditional brick and mortar rentals.
The penetration of
streaming media is projected to
continue its growth, causing the rental industry to continue its slide. As more and more
stores close due to the intense price competition, consumers will begin to migrate to
online media, which will further the industry decline.
Competition and Driving Factors
Netflix Inc.’s competitive rivalry has two sides, internal and external competition.
Internal competition stems from stores competing on rental prices and increasing their
focus on improved customer service. Companies within this industry promote new
releases through TV advertising, holding competition between customers and offering
special deals to loyal renters. Discounted rental prices are also offered to customers on
days in which are slow and are in low demand.
There are many external alternatives that are causing consumers to stop renting the
actual copies of videos and games. First would be the option to stream and download
that media. This external competition is expected to increase over the next few years,
posing a real threat to the industry.
The industry is directly
affected by consumer
spending. During the
recession of 2008-09
the industry took a
large hit because of the
decrease in consumer
spending. As the
economy begins its rise
out of the recession,
consumer spending is
expected to slowly rise,
posing a potential
opportunity for the industry.
Another driving factor would be the time that consumers spend of leisure and
sports. When people spend more time on leisure they are inherently more likely to rent
movies that those that don’t. As unemployment continues to decline from the nearly
10% in 2009, the time that consumers will spend on leisure is expected to decrease as
they will be more likely to choose more efficient ways to view different media.
Barriers to Entry
In this industry barriers to entry are medium, but they are increasing. The
market is currently shrinking which makes it tough for a new company to enter. It is
also highly concentrated which adds to the difficulty of new market entrants. Factors
that are affecting entry into this industry include establishing supply agreements and
rising competition from other forms of digital media. Supply agreements may limit the
release of new rentals because some may be tied to release to certain video chains only,
which will make growth conditions difficult for new entrants. Overall, unless there is a
drastic overhaul of the system it is unlikely that there will be many new players in the
DVD, Game and Video Rental industry.
Market Segmentation
The market segmentation of this industry is pretty widespread. This is due to the
products – physical DVDs,
Blu-ray discs and games –
are consumed by households
and individuals. They are
actually most popular with
the younger age groups.
However, the elder
demographics may be more
enticing for the long-run
because they will be less
willing to convert to online
streaming and downloading
content.
Consumption Trends
The trends for consumption do not look good for the physical media industry. A
2013 study by Nielsen found that an increasing number of households were opting for
different viewing devices as opposed to the traditional television viewing. Another
study by Nielsen in 2013 found that two of the home entertainment choices that were
growing the fastest were streaming from the Internet for a one-time fee and streaming
through Internet subscriptions.
These trends are to the detriment of the industry. The more convenient and
more efficient ways to watch different media is hurting this market. The streaming
industry is growing while the physical rental industry is declining and both trends are
expected to continue over the coming years.
Regulation/Deregulation
This industry and its players are subject to a light level of regulation, with no
large changes in the foreseeable future. There are provisions on the copying, rental and
sale of the physical media. Piracy is still a large problem for the industry because it has
such a negative impact on sales and revenue.
Product Innovation
The products within the industry – physical DVDs, Blu-ray discs and games – are
consumed by households and individuals. The video rental stores are generally more
attractive to the younger demographics, teenagers and families. There has been a
change in technology over the past few years and the industry has been shaped
immensely by it, with the introduction of Blu-ray players and the option to stream
media.
Key Success Factors
In order for a company to succeed in this industry they are going to have to
manage many different areas.
 Ensure appropriate pricing policy – it is crucial for a company to maintain
competitive prices to be successful.
 Supply contracts for key inputs – having movie supply contracts in place will
ensure prompt delivery of products to consumers
 Being part of a group buying, promotion and marketing scheme – companies
within a group will have more hassle-free access to major movie release titles.
 Selling and renting from high profile outlets – working from a high-profile site in
an area with easy access, ample parking facilities and extended trading hours will
give a competitive advantage.
 Having top of the line customer service – being able to cater to the unique needs
of the buyer base will be important in a largely commodity industry.
 Ability to effectively manage debts from late returns of rental products – firms
must be able to manage debt accumulated from people who do not return their
products on time. This can be accomplished through the issuance of late fees.
Globalization
There is a low level of globalization in the industry due to the fact that the
majority of companies are US owned and earns most of their revenue from domestic
activities. This level of globalization is expected to decrease in the future along with the
industry as a whole. Despite Netflix and Redbox beginning to expand internationally,
there are few foreign companies that are participating in this industry.
Analysis of Stage in Life Cycle
This industry is in the decline stage of the
product life cycle. The industry is rapidly shrinking
due to rises in more tech savvy and convenient
alternatives.
There is also a significant
consolidation amongst major industry operators.
The key features of a declining industry are revenue
growing slower than the economy; falling company
numbers, while large firms dominate; little
technology and process change; declining per
capita consumption of good; and stable and clearly
segmented products and brands. Netflix would be
in the decline stage too, if not for its streaming services that have struck life back into
the company.
Economies of Scale
Netflix currently cannot take advantage of the economies of scale because of the
negative growth rate in the industry. They would be able to take advantage if they
added more subscribers so they were able to spread their costs out amongst the new
additions.
Learning Curve Effects
Netflix, as well as Redbox, has adapted to the change in the industry. Netflix has
been the leader on streaming online content – which has made the company what it is
today. Streaming services have been growing exponentially and are expected to
continue. Redbox was also one of the first
with the kiosk services, which provides very
little cost to the company while maintaining
most of the revenues.
Netflix Vertical Integration
Netflix Inc. is participating in
forward vertical integration. They are
starting to partake in more of the stages
along the supply chain. An example would
be with their creation of their own series;
this allows them to enter into the television
production market in addition to their place in the distribution market.
Overall Assessment
In whole, this industry is on the decline. The external competition is heated
which is diminishing the industry’s relevance. The high concentration and deteriorating
revenues make new market entries nearly impossible. The trends also point to the
future of this industry not looking too bright, physical rentals are projected to decrease,
while alternative means are projected to increase. In order for a company to be
successful in this industry they have to revolutionize and be ahead of the technological
advances, Redbox did this with the kiosks, and Netflix has done it with its streaming
services. It is not impossible for a company to become a success in the DVD, Game and
Rental Industry; it just requires an intense focus to product innovation and quality
control.
Industry: DVD, Game & Video Rental in the U.S.
Industry Definition
Market Size and Growth
Rate
This industry consists of companies that primarily rent
prerecorded physical media, usually discs that contain
movies or video games. The industry includes subscriptions
for mail-distributed and in-store media rentals, but it
excludes on-demand and web streaming rentals. Revenue
also includes media sales due to built-up late fees. The
industry expends surplus copies of media once initial
demand for some movie and game rentals dies down,
which contributes to revenue.
There are 4,294 businesses within the industry with an
annual growth rate from 2008-2013 of -13.7%. The
industry is expected to shift to an annual growth rate for
the next 5 years from 2013-2018 of -21.2%.
Key Rivals & Market
Share
There are two main rivals within the industry for Netflix
Inc., Redbox and Blockbuster. Redbox holds the majority of
market share with 45.5%; Netflix has 24.3%, Blockbuster
with 9.5% and other companies with the remaining 20.7%.
Scope of Competitive
Rivalry
The competitive rivalry has two sides, internal and external
competition. Internal competition stems from stores
competing on rental prices and increasing their focus on
improved customer service. Companies within this industry
promote new releases through TV advertising, holding
competition between customers and offering special deals
to loyal renters. Discounted rental prices are also offered
to customers on days in which are slow and are in low
demand.
External competition for the industry is where operators
benefit from agreements with major motion picture
distributors related to releasing films for rental directly
after they feature in the theatres. The emergence of digital
cable and satellite networks that offer movies on-demand
and pay per view where you are able to purchase movies in
which just were released in the theatres. Online services
offer streaming movies with a subscription basis with no
limits on borrowing or late penalties. The ability of
streaming media and data with new products such as
smartphones and tablets make it instantly available and at
a cheaper rate to watch movies.
Concentration vs.
Fragmentation
The industry is highly concentrated. There are 3 major
companies dominating the industry, Blockbuster, Redbox,
and Netflix.
Number of Buyers
There are 4,294 businesses within the industry spreading
out over 10,021 establishments.
Demand Determinants
The underlying determinants of demand for the rental
purchases of DVDs include economic conditions, changes in
technology, consumer needs, movie releases and issues of
piracy. Changes of household disposable income can result
from fluctuating interest and tax rates. Increased
unemployment and rising gas prices have deflated
disposable income.
Increased competition from similar new services, which
serves as direct substitutes to the industry’s
offerings. Demand in video-on-demand has enabled
higher-quality video to be transmitted to consumers
causing them to have alternatives to physical media
rentals. The introductions of Blu-ray DVD players have
changed the industry performance. As households adopt
the newer technologies, the price of newer products for
rental and purchases decreases, deflating the industry.
Degree of Product
Differentiation
The industry has three different product and service
segmentations, kiosk video rentals, subscription based
rentals, and brick and mortar rentals. Kiosk rentals make
up 49.2% of the industry revenue, with subscription-based
rentals at 26.5% and brick and mortar rentals at 24.3%. The
kiosk video rentals are looking to increase marginally over
the next few years as the convenient locations and low
operating costs continue to benefit consumers and
companies alike. Brick and mortar rentals are expected to
decline drastically due to the increase in kiosk rentals
increasing.
Product Innovation
The products within the industry – physical DVDs, Blu-ray
discs and games – are consumer by households and
individuals. Video rental stores are more attractive to
younger demographics, teenagers and families. The change
in technology over the past few years have shaped the
industry immensely, from Blu-ray players to live streaming
media.
Key Success Factors
· Ensuring pricing policy is appropriate – making sure
prices are competitive to be successful in the industry.
· Being part of a group buying, promotion and marketing
scheme – companies within a group will have more hasslefree access to major movie release titles.
· Selling and renting from high profile outlets – working
from a high-profile site in an area with easy access, ample
parking facilities and extended trading hours will give a
competitive advantage.
· Supply contracts in place for key inputs – having movie
supply contracts in place will ensure prompt delivery of
products to consumers.
· Ability to effectively manage debts from late returns of
rental products – firms must be able to manage debt
accumulated from people who do not return their products
in time. Possibly accomplished through the issuance of late
fees.
Supply/Demand
Conditions
The demand for the products within this industry are not
declining; the way they are delivered to consumers is
changing drastically. Consumers are looking for ease and
convenience to rent DVDs, games and videos. The supply
end of the industry has changed to where there are now
kiosk video rentals, subscription-based rentals and brick
and mortar rentals. The industry is offering an array of
outlets to get the product customers want. A huge impact
on the supply conditions is the introduction of kiosk video
rentals, which is projected to make up 49.2% of the
industry revenues. Subscription-based rentals and brick
and mortar rentals are surprisingly close in relation to
industry revenue sharing. The subscription-based rentals
have slowed drastically due mainly to the many different,
convenient online streaming services.
Analysis of Stage in Life
Cycle
Netflix is in the decline stage of the product life cycle. The
industry is rapidly shrinking as a share of the
economy. There is an increase in external competition,
which is diminishing the industry’s relevance. There is a
significant consolidation amongst major industry
operators. The key features of a decline industry are
revenue grows slower than economy; falling company
numbers, while large firms dominate; little technology and
process change; declining per capita consumption of good;
and stable and clearly segmented products and
brands. Netflix is shrinking in economic importance.
Pace of Technological
Change
IBISWorld indicates this industry is experiencing high
technological change. Companies are experimenting with
different methods of delivering videos to consumers with a
broad array of possibilities. Web downloads and industry
participants for consumers to stream or rent DVDs are
using viewings over the Internet. Computerized stock
controls are used to increase efficiency of operations and
the majority of stores use them to control stock. Vending
machines and kiosks have risen in popularity as technology
for the machine has evolved. The increased technology has
made the ease of use for a customer the best it has been.
Vertical Integration
Netflix is participating in forward vertical integration. They
are starting to partake in more staged within the supply
chain. One example of this is the creation of their own
television shows. This allows Netflix to enter into the
television production market in addition to their place in
the distribution market.
Economies of Scale
Netflix currently cannot take advantage of the economies
of scale because of the negative growth rate. The way they
would be able to take advantage of them would be by
adding subscribers, the more subscribers the more the
costs are spread out.
Learning/Experience
Curve Effects
Netflix has adapted to the change in the DVD, Game and
Video Rental industry, as has Redbox. Netflix has
pioneered streaming online movie “rentals.” In 2010,
Netflix reported that the majority of its subscribers viewed
more streaming videos than ordered DVDs through the
mail
Barriers to Entry
Barriers to entry within this industry are currently medium
but are increasing. Factors affecting entry into this industry
include establishing supply agreements and rising
competition from other forms of digital media. The rental
market is increasingly shrinking making it hard for new
companies to enter the market. Supply agreements may
limit the release of new rentals because some may be tied
to release to certain video chains only, which will make
growth conditions difficult for new players.
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Regulation/Deregulation
Globalization
Trends
Competition – High
Concentration – High
Life Cycle Stage – Decline
Capital Intensity – Medium
Technology Change – High
Regulation and Policy – Light
Industry Assistance – Medium
The industry is subject to a light and steady level of
regulation. It is subject to provisions on the copying, rental
and sale of physical media. Piracy is still a significant
problem on the industry due to its negative impact on sales
and revenue.
This industry has a low level of globalization since the
majority of companies are US owned and earns most
revenue from domestic activity. This industry will be
subject to a decreasing level of globalization in the
future. Despite Netflix and Redbox expanding
internationally, there are no foreign companies
participating in this industry.
Consumer spending has decreased over the past 2 years,
but is still not negative. The industry revenue has increased
since 2 years ago, but still is not back to normal
levels. Consumption trends are not in the favor of physical
media. The competition level is high and the trend is
increasing. The barriers to entry are medium and the trend
is increasing. Globalization in the industry is low and the
trend is steady. The level of regulation is light and the
trend is steady. The level of industry assistance is medium
and the trend is steady.
Organizational Structure
Netflix, Inc,
Domestic
Streaming
International
Streaming
Domestic DVD
Revenue by Segment
$2,184,868,000
60.53%
$1,136,872,000
31.50%
$287,542,000
7.97%
Netflix Inc. Sales by Segment
$287,542,000.00
Domestic Streaming
$1,136,872,000.00
$2,184,868,000.00
Financial Analysis
Ratios/Graphs
Please refer to exhibit A for financial ratio comparisons and graphs.
International Streaming
Domestic DVD
Netflix’s Altman Z-Score Formula
Z = 1.2T1 + 1.4T2 + 3.3T3 + 0.6T4 + .999T5
=1.2(0.1671223) + 1.4(0.1020746) + 3.3(0.037546) + 0.6(0.0061834) + .999(0.8082238)
=0.20055 + 0.142904 + 0.123902 + 0.00371 + 0.8074156
= 1.278482
T1 = Working Capital/Total Assets
904,560/5,412,563 = 0.1671223
T2 = Retained Earnings/Total Assets
552,485/5,412,563 = 0.1020746
T3 = Earnings Before Interest and Taxes/Total Assets
203,218/5,412,563 = 0.037546
T4 = Market Value of Equity/Book Values of Total Liabilities
25,222.20/4,079,002 = 0.0061834
T5 = Sales/Total Assets
4,374,562/5,412,563 = 0.8082238
According to the Altman Z-Score calculated for Netflix of 1.278482, this indicates the
Company is in the distress zone for bankruptcy.
Amazon.com’s Altman Z-Score Formula
Z = 1.2T1 + 1.4T2 + 3.3T3 + 0.6T4 + .999T5
= 1.2(0.0409622) + 1.4(0.054533) + 3.3(0.016111) + 0.6(0.0619817) + .999(1.8539306)
= 0.049155 + 0.07635 + 0.053166 + 0.037189 + 1.8520767
= 2.067937
T1 = Working Capital/Total Assets
1,645,000/40,159,000 = 0.0409622
T2 = Retained Earnings/Total Assets
2,190,000/40,159,000 = 0.0545332
T3 = Earnings Before Interest and Taxes/Total Assets
647,000/40,159,000 = 0.0161110
T4 = Market Value of Equity/Book Values of Total Liabilities
1,885,050/30,413,000 = 0.0619817
T5 = Sales/Total Assets
74,452,000/40,159,000 = 1.8539306
Amazon.com’s Altman Z-Score indicates it is in the “grey” zone for bankruptcy. They are
neither in distress nor in the safe zone.
Best Buy, Inc.’s Altman Z-Score Formula
Z = 1.2T1 + 1.4T2 + 3.3T3 + 0.6T4 + .999T5
= 1.2(0.217584) + 1.4(0) + 3.3(0.084707) + 0.6(0) + .999(2.955113)
= 0.2611008 + 0 + 0.2795331 + 0 + 2.9521589
= 3.492793
T1 = Working Capital/Total Assets
3,049,000/14,013,000 = 0.217584
T2 = Retained Earnings/Total Assets
0/14,013,000 = 0
T3 = Earnings Before Interest and Taxes/Total Assets
1,187,000/14.013,000 = 0.084707
T4 = Market Value of Equity/Book Values of Total Liabilities
0/10,024,000 = 0
T5 = Sales/Total Assets
42,410,000/14,013,000 = 2.955113
Best Buy is in the high range of the safe zone for bankruptcy. They are doing the best
out of the competitors in the industry.
Netflix’s Tobin’s Q Ratio
Q Ratio = Total Market Value of Firm/Total Asset Value
= 25,222.20/5,412,563
= 0.00465994
Netflix’s Tobin q ratio reflects that the cost to replace its assets is more than the value of
the stock. This implies the stock is undervalued.
Amazon.com’s Tobin’s Q Ratio
Q Ratio = Total Market Value of Firm/Total Asset Value
= 1,885,050/40,159,000
= 0.0469597
Amazon’s Tobin q ratio reflects the stock for Amazon is undervalued.
Best Buy, Inc.’s Tobin’s Q Ratio
Q Ratio = Total Market Value of Firm/Total Asset Value
= 0/5,412,563
=0
As of February 2014, Best Buy has no common or preferred stock outstanding.
Therefore, their stock prices cannot be valued based on this ratio.
Industry Market Share
Netflix Inc.
Red Box
Blockbuster
Other
Du Pont Chart for Netflix, Inc. (in millions)
Return on Equity
10.82%
Assets/Equity =
3.59
ROA
2.86%
Total Assets Turnover
0.808
Profit Margin:
2.57%
Net Income
$112,403
Revenues
$4,374,562
Revenues
$4,374,562
Total Costs
$4,262,159
Other Operating
Costs
$1,919,367
Deprectiation
$2,193,306
Total Assets
$5,412,563
Sales
$4,374,562
Fixed Assests
$2,353,800
Current Assets
$3,058,763
Cash and Marketable
Securities
$1,200,405
Taxes
$117,34
2
Interest Plus
Preferred
Dividends
$32,144
Other Current
Assets
$1,858,358
A/R
$0
Inventories
$0
Du Pont Chart for Amazon.com (in millions)
Return on Equity
3.05%
Assets/Equity =
3.02
ROA
1.01%
Total Assets Turnover
1.85
Profit Margin:
0.37%
Net Income
$274,000
Revenues
$74,452,000
Total Costs
$74,178,000
Other Operating
Costs
$70,294,000
Deprectiation
$3,421,000
Fixed Assests
$15,534,000
Revenues
$74,452,000
Taxes
$322,000
Total Assets
$40,159,000
Sales
$74,452,000
Interest Plus
Preferred
Dividends
$141,000
Current Assets
$24,625,000
Cash and Marketable
Securities
$12,447,000
Other Current
Assets
$0
Du Pont Chart for Best Buy (in millions)
A/R
$4,767,000
Inventories
$7,411,000
Return on Equity
15.09%
Assets/Equity =
3.89
ROA
3.88%
Total Assets Turnover
3.03
Profit Margin:
1.25%
Net Income
$532,000
Revenues
$42,410,000
Total Costs
$41,878,000
Other Operating
Costs
$40,662,000
Deprectiation
$716,,000
Fixed Assests
$3,528,000
Revenues
$42,410,000
Taxes
$398,000
Total Assets
$14,013000
Sales
$42,410,000
Interest Plus
Preferred
Dividends
$102,000
Current Assets
$10,485,000
Cash and Marketable
Securities
$2,901,000
Other Current
Assets
$7,584,000
A/R
$0
Inventories
$0
Stock Analysis
SWOT Analysis
Strengths
Strong business model provides a superior value proposition
Netflix is the world's largest subscription service sending DVDs by mail and streaming
movies and TV episodes over the Internet with 30 million subscribers. The company
operates an internet-based subscription model, which has done away with many
disadvantages experienced in traditional outlets. The number of customers opting for
Netflix over the traditional model is on the rise as it offers greater convenience. Netflix
also enjoys additional competitive advantages. The company provides more than
100,000 DVD titles, which are not possible for outlets as they cannot stock such a large
number of DVDs. Outlets, devote larger space for newer releases and alternatively
Netflix can offer old and new titles simultaneously without incurring additional costs.
Technology enables customers to sort through the titles easily, which is almost
impossible to do so in the traditional model. With Netflix, pay a fixed monthly
subscription fee, eliminating due dates, late payment fees, shipping fees and pay-perview fees. Netflix's merchandising practices coupled with its recommendation services
provide tools for subscribers to select titles that appeal to individual preferences.
Netflix's instant streaming service over the Internet is witnessing escalating growth.
There are over 800 devices worldwide that can stream content from Netflix instantly.
These include the Microsoft Xbox 360, Nintendo Wii and Sony PS3 consoles; Blu-ray disc
players, Internet-connected TVs, home theater systems, digital video recorders and
Internet video players; Apple iPhone, iPad and iPod touch, Android devices, as well as
Apple TV and Google TV. Devices such as the iPhone, iPad and iPod touch enable
viewers to watch movies and TV shows while on the move. Netflix's business model
provides customers with the most convenient way to view DVDs as they are delivered to
their addresses and the subscribers can return them through pre-paid postage
envelopes. The business model that Netflix operates gives it a competitive advantage.
Revenue sharing relationships with distributors reduced investments for content
acquisition
Netflix has several revenue sharing agreements with distributors and content providers.
Under these agreements, the company pays a low initial amount to obtain content and
then shares the revenues from subscription fees with the content providers or pays a
fee based on the usage of the content. This gives the company the advantage of
procuring content at a low cost and an additional amount has to be paid only if the
subscribers rent the DVD. Netflix is able to provide subscribers with a larger selection of
DVDs as the risk of losing investment is less. Such revenue sharing agreements reduce
investments for content acquisition and a wide selection offers more choice to
customers.
Effective marketing and improving customer experience helps in increasing the number
of subscriptions
Netflix promotes services through various marketing programs, which include online
promotions, TV and radio advertising, package inserts and other promotions with third
parties. The company also provides a free trial period as a promotional offer to attract
new customers. Netflix's consumer electronics partners also help generate new
subscribers. In addition, Netflix continues to improve its customer experience by
expanding its streaming content, improving user interfaces, as well as expanding its
streaming service to more Internet-connected devices. These efforts enable the
company to drive additional subscriber growth. The average number of paying
subscribers grew from 14,744,000 in 2010 to 21,977,000 in 2011, an increase of 49.1%
in the US. Subscriber growth leads to word-of-mouth promotion for Netflix's services,
which, in turn, leads to more new subscribers. The increase in total number of
subscribers, as well as net subscriber additions leads to increased revenues for the
company.
Weaknesses
Netflix is subject to various legal proceedings.
The company is involved in litigation matters and claims, such as claims relating to
business practices and patent infringement. In January 2012, a shareholder class action
suit was filed in the US District Court for the Northern District of California against the
company and certain of its officers and directors alleging that the company issued
materially false and misleading statements regarding its business practices and its
contracts with content providers. In the same month, another suit was filed against the
company alleging virtually identical claims. The complaints allege violation of the federal
securities laws and seek unspecified compensatory damages and other relief. Similarly,
in March 2010, Parallel Networks filed a complaint for patent infringement against
Netflix in the US District Court for the Eastern District of Texas. The complaint alleged
that the company infringed a patent entitled ‘method and apparatus for client-server
communication using a limited capability client over a low-speed communication link’.
Previously, in September 2009, Alcatel-Lucent USA filed a complaint for patent
infringement against the company. Between January and April 2009, a number of
alleged anti-trust class action suits were filed against Netflix in various US Federal
Courts. The complaints alleged that Netflix and Wal-Mart entered into an agreement to
divide the market for sales and online rentals of DVDs, which led to higher subscription
prices at Netflix. Litigations can be expensive and can disrupt business operations. Legal
issues such as these would not only impact the brand image but would also affect
Netflix's financial position and results of operations.
Opportunities
Growing demand for online video streaming has already increased viewership
Netflix has been aggressively investing in streaming of movies, TV programs and other
videos in high definition to subscribers. Netflix enables subscribers to watch movies and
TV shows through the Internet via online streaming. Consumers can stream content
through Netflix-ready-internet-enabled devices such as the Microsoft Xbox 360,
Nintendo Wii and Sony PS3 consoles; Blu-ray disc players, Internet-connected TVs, home
theater systems, digital video recorders and Internet video players; Apple iPhone, iPad
and iPod touch; and Android devices. According to industry sources, the total video
streams increased by more than 20% in August 2012, compared to December 2011.
According to industry sources, in August 2012, Netflix was the top brand in terms of
time spent as the average US video viewer spent more than 10 hours watching videos
on the site. In FY2011, approximately 73.6% of all new gross domestic unique
subscribers chose the unlimited streaming plan. At December 31, 2011, 88.9% of the
company’s total domestic unique subscribers had a streaming subscription while less
than half (11.1 million) had a DVD subscription. Online video streaming is a high
potential market and by investing in this market, Netflix can differentiate itself from
competitors. It also leads to faster subscription growth, lower subscription acquisition
costs and higher profits. As the market for online streaming grows, Netflix will reap
increased benefits, with a positive impact on margins and profits.
Growth in online spending will strengthen Netflix's core market
Netflix's core business is based on the Internet and is directly related to online
consumer spending. According to the US Department of Commerce, online retail sales in
the US increased from $144.6 billion in 2009 to $193.7 billion in 2011, representing a
compound annual growth rate of 15.7%. e-commerce sales accounted for 4.7% of the
total retail sales in the US in 2011 compared to 3% in 2006. Furthermore, in the third
quarter of 2012, the online retail sales reached $57 billion, an increase of 3.7% from the
second quarter of 2012.With 30 million subscribers, Netflix is the largest company
providing Internet based DVD rental service. As Netflix only operates on the online
platform, its growth is directly linked to the online spending potential of the consumers.
As the outlook in this arena is positive in the longer term, Netflix can penetrate the
market effectively by leveraging its dominant position in the e-commerce segment.
Strategic partnerships expand subscriber base
Netflix has entered into a number of strategic partnerships in the recent past. In
December 2012, the company entered into a new multi-year licensing agreement with
The Walt Disney Studios to become exclusive US subscription television service provider
for first-run live-action and animated feature films from The Walt Disney Studios.
Beginning with its 2016 theatrically released feature films, new Disney, Walt Disney
Animation Studios, Pixar Animation Studios, Marvel Studios and Disney nature titles will
be made available for Netflix members to watch instantly in the pay TV window on
multiple platforms. Netflix entered into a new multi-year licensing agreement with The
Weinstein Company in February 2012 that makes foreign language, documentary and
certain other movies from The Weinstein Company exclusively available for Netflix
members in the US to watch instantly. In May 2012, the company entered into a new
multi-year licensing agreement with Twentieth Century Fox Distribution to make its TV
series and films available for Netflix members to instantly watch in Latin America and
Brazil. In November 2011, Netflix entered into a multi-year licensing agreement with
Lionsgate UK, a subsidiary of Lions Gate Entertainment Corp, to provide exclusive
subscription streaming service in the UK and Ireland for first-run feature films from the
studio. Further, in the same month, the company entered into a new multi-year digital
licensing agreement with Miramax to bring a broad range of Miramax films to Netflix
members in the UK and Ireland. The company, in January 2011, announced the
introduction of Netflix One-click remote, which enables subscribers to instantly watch
movies and TV shows streamed from Netflix. Major consumer electronics manufacturers
such as Haier, Memorex, Panasonic, Samsung, Sharp, Sony, and Toshiba are to place the
Netflix one-click button on remote controls. Remote controls for the Boxee, Iomega and
Roku set-top boxes also will feature the Netflix one-click remote. This move increases
convenience as well as brand awareness of Netflix, which in turn will lead to increase in
subscriptions. Strategic partnerships such as these would increase the subscriber base
and enhance the topline for Netflix.
Threats
Cost of delivering DVDs on the rise
Netflix delivers DVDs directly to the members' addresses by mail with a postage-paid
return envelope. The US Postal Service has increased the postage charges in recent
times. The US Postal Service increased the rate for first class postage to 42 cents in May
2008, to 44 cents in May 2009 and to 45 cents again in January 2012.The US Postal
Service is expected to raise rates again in subsequent years. Moreover the US Postal
Service recently announced changes to its service that would close many of its mail
processing facilities and eliminates next day service for first class mail, which will result
in slower delivery of the company’s DVDs. If the US Postal Service changes any policies
relative to the requirements of first-class mail, including changes in size, weight or
machinability qualifications of the company’s DVD envelopes, such changes could result
in increased shipping costs or higher breakage for DVDs and could adversely affect the
company’s gross margin.
Price increases affect subscriber base
In the third quarter of 2011, Netflix introduced DVD only plans and separated the
unlimited DVDs
by mail and unlimited streaming into separate plans. This change enables subscribers to
subscribe to a streaming only plan, a DVD only plan or both. As a result, the plan that
includes both unlimited streaming and DVDs by mail is no longer on offer. Subscribers
who want to subscribe to both streaming and DVD plans need to pay separately for each
plan, paying more than its earlier offering. This move resulted in higher than expected
customer cancellations with negative reactions from consumers. This could affect
market share of the company as customers may cancel their subscriptions and look for
alternatives from competitors. The company's results of operations may be adversely
impacted.
Increasing Internet frauds caution customers and dampen growth rates
Netflix maintains personal data on subscribers including billing data and has taken
stringent measures to protect its systems from frauds like hacking and credit card fraud.
However, in recent times, according to the Internet Crime Complaint Center's (IC3)
statistics, Internet fraud has been on a rise. The IC3 is a partnership between the Federal
Bureau of Investigation (FBI) and the National White Collar Crime Center (NWC3). It
receives Internet related criminal complaints, and after further research, refers them to
appropriate law enforcement agencies. During 2011, IC3 registered more than 300,000
complaints, an increase of 3.4% over 2010. According to IC3, in 2011 it has received and
processed, on an average, more than 26,000 complaints per month. The trend of
increasing Internet frauds tends to increase caution among customers and this will deter
the market from growing at a fast pace. According to industry sources, a fake Netflix
Android App was in circulation very recently. It looks like the real app but is a fake that
steals account information. Using the stolen login information, the accounts of the users
could be hacked. Netflix's reputation could be affected and there could be a loss of
confidence among consumers due to such incidents. Netflix has to incur high expenses
to curb Internet frauds given the trend of their increase in recent times coupled with
increase in privacy concerns among customers. In spite of the measures taken, Netflix is
still exposed to the risk of hacking and other such related frauds.
Market Share Data Graphs
Focal Points for Action
Short Range
If studios and other content providers refuse to license streaming content to us upon
acceptable terms, our business could be adversely affected.
Our ability to provide our subscribers with content they can watch instantly depends on
studios and other content providers licensing us content specifically for Internet
delivery. The license periods and the terms and conditions of such licenses vary. If the
studios and other content providers change their terms and conditions or are no longer
willing or able to license us content, our ability to stream content to our subscribers will
be adversely affected. Unlike DVD, streaming content is not subject to the First Sale
Doctrine. As such, we are completely dependent on the various content providers to
license us content in order to access and stream content. Many of the licenses provide
for the studios or other content providers to withdraw content from our service
relatively quickly. Because of these provisions as well as other actions we may take,
content available through our service can be withdrawn on short notice. In addition, the
studios and other content providers have great flexibility in licensing streaming content.
They may elect to license content exclusively to a particular provider or otherwise limit
the types of services that can deliver streaming content. For example, HBO licenses
content from studios like Warner Bros. and the license provides HBO with the exclusive
right to such content against other subscription services, including Netflix. As such,
Netflix cannot license certain Warner Bros. content for delivery to its subscribers while
Warner Bros. may nonetheless license the same content on a transactional basis.
Conversely, content providers may license the same content to multiple subscriptionbased services and may do so on different terms and conditions. As such, Netflix and its
competitors may offer consumers many of the same content titles but license these at
different rates. As competition increases, we may see the cost for programming
increase. As we seek to differentiate our service, we are increasingly focused on
securing certain exclusive rights when obtaining content. We are also focused on
programming an overall mix of content that delights our members in a cost efficient
manner. Within this context, we are selective about the titles we add and renew our
service. If we do not maintain a compelling mix of content, our subscriber acquisition
and retention may be adversely affected.
If we are unable to secure and maintain rights to streaming content or if we cannot
otherwise obtain such content upon terms that are acceptable to us, including on an
exclusive basis in some cases, our ability to stream TV shows and movies to our
subscribers will be adversely impacted, and our subscriber acquisition and retention
could also be adversely impacted.
We rely upon a number of partners to offer instant streaming of content from Netflix
to various devices.
We currently offer subscribers the ability to receive streaming content through their
PCs, Macs and other Internet-connected devices, including Blu-ray players and TVs,
digital video players, game consoles and mobile devices. We intend to continue to
broaden our capability to instantly stream TV shows and movies to other platforms and
partners over time. If we are not successful in maintaining existing and creating new
relationships, or if we encounter technological, content licensing or other impediments
to our streaming content, our ability to grow our business could be adversely impacted.
Our agreements with our consumer electronics partners are typically between one and
three years in duration and our business could be adversely affected if, upon expiration,
a number of our partners do not continue to provide access to our service or are
unwilling to do so on terms acceptable to us, which terms may include the degree of
accessibility and prominence of our service. Furthermore, devices are manufactured and
sold by entities other than Netflix and while these entities should be responsible for the
devices' performance, the connection between these devices and Netflix may
nonetheless result in consumer dissatisfaction toward Netflix and such dissatisfaction
could result in claims against us or otherwise adversely impact our business. In addition,
technology changes to our streaming functionality may require that partners update
their devices. If partners do not update or otherwise modify their devices, our service
and our subscribers' use and enjoyment could be negatively impacted.
If subscriptions to our Domestic DVD segment decline faster than anticipated, our
business could be adversely affected.
The number of subscriptions to our DVD-by-mail offering is declining, and we anticipate
that this decline will continue. We believe, however, that the domestic DVD business
will continue to generate significant contribution profit for our business. In addition, we
believe that DVD will be a valuable consumer proposition and studio profit center for
the next several years, even as DVD sales decline. The contribution profit generated by
our domestic DVD business will help provide capital resources to fund losses arising
from our growth internationally. To the extent that the rate of decline in our DVD-bymail business is greater than we anticipate, our business could be adversely affected.
Because we are primarily focused on building a global streaming service, the resources
allocated to maintaining DVD operations and the level of management focus on our DVD
business are limited. We do not anticipate increasing resources to our DVD operations
and the technology used in its operations will not be meaningfully improved. To the
extent that we experience service interruptions or other degradations in our DVD-bymail service, subscribers' satisfaction could be negatively impacted and we could
experience an increase in DVD-by-mail subscriber cancellations, which could adversely
impact our business.
Any significant disruption in our computer systems or those of third parties that we
utilize in our operations could result in a loss or degradation of service and could
adversely impact our business.
Our reputation and ability to attract, retain and serve our subscribers is dependent upon
the reliable performance of our computer systems and those of third parties that we
utilize in our operations. Interruptions in these systems, or with the Internet in general,
could make our service unavailable or degraded or otherwise hinder our ability to
deliver streaming content or fulfill DVD selections. From time to time, we experience
service interruptions and have voluntarily provided affected subscribers with a credit
during periods of extended outage. Service interruptions, errors in our software or the
unavailability of computer systems used in our operations could diminish the overall
attractiveness of our subscription service to existing and potential subscribers.
Our servers and those of third parties we use in our operations are vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions and
periodically experience directed attacks intended to lead to interruptions and delays in
our service and operations as well as loss, misuse or theft of data. Any attempt by
hackers to disrupt our service or otherwise access our systems, if successful, could harm
our business, be expensive to remedy and damage our reputation. We have
implemented certain systems and processes to thwart hackers and to date hackers have
not had a material impact on our service or systems however this is no assurance that
hackers may not be successful in the future. Our insurance does not cover expenses
related to such disruptions or unauthorized access. Efforts to prevent hackers from
disrupting our service or otherwise accessing our systems are expensive to implement
and may limit the functionality of or otherwise negatively impact our service offering
and systems. Any significant disruption to our service or access to our systems could
result in a loss of subscribers and adversely affect our business and results of operation.
We utilize our own communications and computer hardware systems located either in
our facilities or in that of a third-party Web hosting provider. In addition, we utilize
third-party Internet-based or “cloud” computing services in connection with our
business operations. We also utilize our own and third-party content delivery networks
to help us stream TV shows and movies in high volume to Netflix subscribers over the
Internet. Problems faced by us or our third party Web hosting, "cloud" computing, or
content delivery network providers, including technological or business-related
disruptions, could adversely impact the experience of our subscribers. In addition, fires,
floods, earthquakes, power losses, telecommunications failures, break-ins and similar
events could damage these systems and hardware or cause them to fail completely. As
we do not maintain entirely redundant systems, a disrupting event could result in
prolonged downtime of our operations and could adversely affect our business.
We rely upon Amazon Web Services to operate certain aspects of our service and any
disruption of or interference with our use of the Amazon Web Services operation
would impact our operations and our business would be adversely impacted.
Amazon Web Services ("AWS") provides a distributed computing infrastructure platform
for business operations, or what is commonly referred to as a "cloud" computing
service. We have architected our software and computer systems so as to utilize data
processing, storage capabilities and other services provided by AWS. Currently, we run
the vast majority of our computing on AWS. Given this, along with the fact that we
cannot easily switch our AWS operations to another cloud provider, any disruption of or
interference with our use of AWS would impact our operations and our business would
be adversely impacted. While the retail side of Amazon competes with us, we do not
believe that Amazon will use the AWS operation in such a manner as to gain competitive
advantage against our service.
If we experience difficulties with the operation and implementation of Open Connect,
our single-purpose Netflix content delivery network (“CDN”), our business and results
of operation could be adversely impacted.
In addition to general-purpose commercial CDNs, we have enabled Internet service
providers ("ISPs") to obtain our streaming content from Open Connect, a single-purpose
Netflix content delivery network that we have established. Given our size and growth,
we believe it makes economic sense to have our own specialized CDN. We will continue
to work with our commercial CDN partners for the next few years, but eventually we
expect Open Connect will serve the vast majority of our streaming bits. Open Connect
will provide the Netflix bits at no cost to the locations the ISP desires, or ISPs can choose
to get the Netflix bits at common Internet exchanges. To the extent ISPs do not
interconnect with Open Connect or if we experience difficulties in operating the Open
Connect CDN service, our ability to efficiently and effectively deliver our streaming
content to our subscribers could be adversely impacted and our business and results of
operation could be adversely affected. Failure to implement Open Connect could
require us to engage third-party solutions to deliver our content to ISPs, which could
increase our costs and negatively affect our operating results.
If we are unable to effectively utilize our recommendation and merchandising
technology or develop user interfaces that maintain or increase subscriber
engagement with our service, our business may suffer.
Our proprietary recommendation and merchandising technology enables us to predict
and recommend titles and effectively merchandise our library to our subscribers. We
also develop, test and implement various user interfaces across multiple devices, in an
effort to maintain and increase subscriber engagement with our service.
We are continually refining our recommendation and merchandising technology as well
as our various user interfaces in an effort to improve the predictive accuracy of our TV
show and movie recommendations and the usefulness of and engagement with our
service by our subscribers. We may experience difficulties in implementing refinements
or other, third party recommendation or merchandising technology or interfaces may
become more popular with or useful to our subscribers. In addition, we cannot assure
that we will be able to continue to make and implement meaningful refinements to our
recommendation technology.
If our recommendation and merchandising technology does not enable us to predict and
recommend titles that our subscribers will enjoy or if we are unable to implement
meaningful improvements thereto or otherwise improve our user interfaces, our service
may be less useful to our subscribers. Such failures could lead to the following:

Our subscriber satisfaction may decrease, subscribers may perceive our service
to be of lower value and our ability to attract and retain subscribers may be
adversely affected; and

Our ability to effectively merchandise and utilize our library will be adversely
affected.
We rely heavily on our proprietary technology to stream TV shows and movies and to
manage other aspects of our operations, and the failure of this technology to operate
effectively could adversely affect our business.
We continually enhance or modify the technology used for our operations. We cannot
be sure that any enhancements or other modifications we make to our operations will
achieve the intended results or otherwise be of value to our subscribers. Future
enhancements and modifications to our technology could consume considerable
resources. If we are unable to maintain and enhance our technology to manage the
streaming of TV shows and movies to our subscribers in a timely and efficient manner
and/or the processing of DVDs among our shipping centers, our ability to retain existing
subscribers and to add new subscribers may be impaired. In addition, if our technology
or that of third parties we utilize in our operations fails or otherwise operates
improperly, our ability to retain existing subscribers and to add new subscribers may be
impaired. Also, any harm to our subscribers' personal computers or other devices
caused by software used in our operations could have an adverse effect on our business,
results of operations and financial condition.
Long Range
If our efforts to attract and retain subscribers are not successful, our business will be
adversely affected.
We have experienced significant subscriber growth over the past several years. Our
ability to continue to attract subscribers will depend in part on our ability to consistently
provide our subscribers with a valuable and quality experience for selecting and viewing
TV shows and movies. Furthermore, the relative service levels, content offerings, pricing
and related features of competitors to our service may adversely impact our ability to
attract and retain subscribers. Competitors include multichannel video programming
distributors ("MVPDs") with free TV Everywhere and other on demand content, Internet
movie and TV content providers, including both those that provide legal and illegal (or
pirated) entertainment video content, DVD rental outlets and kiosk services and
entertainment video retail stores. If consumers do not perceive our service offering to
be of value, or if we introduce new or adjust existing features or change the mix of
content in a manner that is not favorably received by them, we may not be able to
attract and retain subscribers. In addition, many of our subscribers are rejoining our
service or originate from word-of-mouth advertising from existing subscribers. If our
efforts to satisfy our existing subscribers are not successful, we may not be able to
attract subscribers, and as a result, our ability to maintain and/or grow our business will
be adversely affected. Subscribers cancel their subscription to our service for many
reasons, including a perception that they do not use the service sufficiently, the need to
cut household expenses, availability of content is unsatisfactory, competitive services
provide a better value or experience and customer service issues are not satisfactorily
resolved. We must continually add new subscribers both to replace subscribers who
cancel and to grow our business beyond our current subscriber base. If too many of our
subscribers cancel our service, or if we are unable to attract new subscribers in numbers
sufficient to grow our business, our operating results will be adversely affected. If we
are unable to successfully compete with current and new competitors in both retaining
our existing subscribers and attracting new subscribers, our business will be adversely
affected. Further, if excessive numbers of subscribers cancel our service, we may be
required to incur significantly higher marketing expenditures than we currently
anticipate replacing these subscribers with new subscribers.
If we are unable to compete effectively, our business will be adversely affected.
The market for entertainment video is intensely competitive and subject to rapid
change. New technologies and evolving business models for delivery of entertainment
video continue to develop at a fast pace. The growth of Internet-connected devices,
including TVs, computers and mobile devices has increased the consumer acceptance of
Internet delivery of entertainment video. Through these new and existing distribution
channels, consumers are afforded various means for consuming entertainment video.
The various economic models underlying these differing means of entertainment video
delivery include subscription, transactional, ad-supported and piracy-based models. All
of these have the potential to capture meaningful segments of the entertainment video
market. Several competitors have longer operating histories, larger customer bases,
greater brand recognition and significantly greater financial, marketing and other
resources than we do. They may secure better terms from suppliers, adopt more
aggressive pricing and devote more resources to technology, fulfillment, and marketing.
New entrants may enter the market with unique service offerings or approaches to
providing entertainment video and other companies also may enter into business
combinations or alliances that strengthen their competitive positions. If we are unable
to successfully or profitably compete with current and new competitors, programs and
technologies, our business will be adversely affected, and we may not be able to
increase or maintain market share, revenues or profitability.
The increasingly long-term and fixed cost nature of our content acquisition licenses
may limit our operating flexibility and could adversely affect our liquidity and results
of operation.
In connection with obtaining streaming content, we typically enter into multi-year
licenses with studios and other content providers, the payment terms of which are not
tied to subscriber usage or the size of our subscriber base (“fixed cost”) but which may
be tied to such factors as titles licensed and/or theatrical exhibition receipt. Such
contractual commitments are included in the Contractual Obligations section of Item
7Management's Discussion and Analysis of Financial Condition and Results of
Operations. Given the multiple-year duration and largely fixed cost nature of content
licenses, if subscriber acquisition and retention do not meet our expectations, our
margins may be adversely impacted. Payment terms for streaming licenses, especially
programming that initially airs in the applicable territory on our service (“original
programming”) or that is considered output content, will typically require more up-front
cash payments than other licensing agreements. To the extent subscriber and/or
revenue growth do not meet our expectations, our liquidity and results of operations
could be adversely affected as a result of content licensing commitments and
accelerated payment requirements of certain licenses. In addition, the long-term and
fixed cost nature of our streaming licenses may limit our flexibility in planning for, or
reacting to changes in our business and the market segments in which we operate. As
we expand internationally, we must license content in advance of entering into a new
geographical market. If we license content that is not favorably received by consumers
in the applicable territory, acquisition and retention may be adversely impacted and
given the long-term and fixed cost nature of our commitments, we may not be able to
adjust our content offering quickly and our results of operation may be adversely
impacted.
Changes in consumer viewing habits, including more widespread usage of TV
Everywhere or other similar on demand methods of entertainment video consumption
could adversely affect our business.
The manner in which consumers view entertainment video is changing rapidly. Digital
cable, wireless and Internet content providers are continuing to improve technologies,
content offerings, user interface, and business models that allow consumers to access
on demand entertainment with interactive capabilities including start, stop and rewind.
The devices through which entertainment video can be consumed are also changing
rapidly. Today, content from MVPDs may be viewed on laptops and content from
Internet content providers may be viewed on TVs. Although we provide our own
Internet-based delivery of content allowing our subscribers to stream certain TV shows
and movies to their Internet-connected televisions and other devices, if other providers
of entertainment video address the changes in consumer viewing habits in a manner
that is better able to meet content distributor and consumer needs and expectations,
our business could be adversely affected.
If we are not able to manage change and growth, our business could be adversely
affected.
We are currently engaged in an effort to expand our operations internationally, scale
our streaming service to effectively and reliably handle anticipated growth in both
subscribers and features related to our service, as well as continue to operate our DVD
service within the U.S. As we expand internationally, we are managing our business to
address varied content offerings, consumer customs and practices, in particular those
dealing with e-commerce and Internet video, as well as differing legal and regulatory
environments. As we scale our streaming service, we are developing technology and
utilizing relatively new third-party Internet-based or “cloud” computing services. We
have also chosen to separate the technology that operates our DVD-by-mail service
from that which runs our streaming operations. If we are not able to manage the
growing complexity of our business, including maintaining our DVD operations, and
improving, refining or revising our systems and operational practices related to our
streaming operations, our business may be adversely affected.
If the market segment for online subscription-based entertainment video saturates,
our business will be adversely affected.
The market segment for online subscription-based entertainment video has grown
significantly. Much of the increasing growth can be attributed to the ability of our
subscribers to stream TV shows and movies on their TVs, computers and mobile devices.
As we face more competition in our market segment, our rate of growth relative to
overall growth in the segment may decline. Further, a decline in our rate of growth
could indicate that the market segment for online subscription-based entertainment
video is beginning to saturate. While we believe that this segment will continue to grow
for the foreseeable future, if this market segment were to saturate, our business would
be adversely affected.
If our efforts to build strong brand identity and improve subscriber satisfaction and
loyalty are not successful, we may not be able to attract or retain subscribers, and our
operating results may be adversely affected.
We must continue to build and maintain strong brand identity. We believe that strong
brand identity will be important in attracting and retaining subscribers who may have a
number of choices from which to obtain entertainment video. To build a strong brand
we believe we must continue to offer content and service features that our subscribers
value and enjoy. We also believe that these must be coupled with effective consumer
communications, such as marketing, customer service and public relations. If our efforts
to promote and maintain our brand are not successful, our ability to attract and retain
subscribers may be adversely affected. Such a result, coupled with the increasingly longterm and fixed cost nature of our content acquisition licenses, may adversely affect our
operating results.
From time to time, our subscribers express dissatisfaction with our service, including
among other things, our title selection, pricing, and delivery speed and service
interruptions. Furthermore, third-party devices that enable instant streaming of TV
shows and movies from Netflix may not meet consumer expectations. To the extent
dissatisfaction with our service is widespread or not adequately addressed, our brand
may be adversely impacted and our ability to attract and retain subscribers may be
adversely affected. In 2011, we made a series of announcements regarding our
business, including the separation of our DVD-by-mail and streaming plans with a
corresponding price change for some of our customers, the rebranding of our DVD-bymail service, and the subsequent retraction of our plans to rebrand our DVD-by-mail
service. Consumers reacted negatively to these announcements, adversely impacting
our brand and resulting in higher than expected customer cancellations, which
negatively affected our operating results. While we have seen significant improvements
to our brand since the events of 2011, we nonetheless believe that it will continue to
take time to repair our brand to the levels we enjoyed prior to the events of 2011. With
respect to our expansion into international markets, we will also need to establish our
brand and to the extent we are not successful, our business in new markets would be
adversely impacted.
Changes in our subscriber acquisition sources could adversely affect our marketing
expenses and subscriber levels may be adversely affected.
We utilize a broad mix of marketing programs to promote our service to potential new
subscribers. We obtain new subscribers through our online marketing efforts, including
paid search listings, banner ads, text links and permission-based e-mails, as well as our
affiliate program. We also engage our consumer electronics partners to generate new
subscribers for our service. In addition, we have engaged in various offline marketing
programs, including TV and radio advertising, direct mail and print campaigns, consumer
package and mailing insertions. We also acquire a number of subscribers who rejoin our
service having previously cancelled their membership. We maintain an active public
relations program, including through social media sites such as Facebook and Twitter, to
increase awareness of our service and drive subscriber acquisition. We opportunistically
adjust our mix of marketing programs to acquire new subscribers at a reasonable cost
with the intention of achieving overall financial goals. If we are unable to maintain or
replace our sources of subscribers with similarly effective sources, or if the cost of our
existing sources increases, our subscriber levels and marketing expenses may be
adversely affected.
We may not be able to continue to support the marketing of our service by current
means if such activities are no longer available to us, become cost prohibitive or are
adverse to our business. If companies that currently promote our service decide that we
are negatively impacting their business, that they want to compete more directly with
our business or enter a similar business or decide to exclusively support our
competitors, we may no longer be given access to such marketing channels. In addition,
if ad rates increase, we may curtail marketing expenses or otherwise experience an
increase in our marketing costs. Laws and regulations impose restrictions on or
otherwise prohibit the use of certain acquisition channels, including commercial e-mail
and direct mail. We may limit or discontinue use or support of certain marketing sources
or activities if we become concerned that subscribers or potential subscribers deem
such practices intrusive or damaging to our brand. If the available marketing channels
are curtailed, our ability to attract new subscribers may be adversely affected.
If we become subject to liability for content that we distribute through our service, our
results of operations would be adversely affected.
As a distributor of content, we face potential liability for negligence, copyright, or
trademark infringement or other claims based on the nature and content of materials
that we distribute. We also may face potential liability for content used in member
reviews. If we become liable, then our business may suffer. Litigation to defend these
claims could be costly and the expenses and damages arising from any liability could
harm our results of operations. We cannot assure that we are indemnified to cover
claims of these types or liability that may be imposed on us, and we may not have
insurance coverage for these types of claims.
Changes in U.S. Postal rates or operations could adversely impact our operating results
and subscriber satisfaction.
We rely exclusively on the U.S. Postal Service to deliver DVDs from our shipping centers
and to return DVDs to us from our subscribers. Increases in postage delivery rates could
adversely affect our Domestic DVD segment's contribution profit. The U.S. Postal
Service increased the rate for first class postage on January 23, 2013 to 46 cents. It is
expected that the U.S. Postal Service will raise rates again in subsequent years, which
would result in increased shipping costs. If the U.S. Postal Service were to change any
policies relative to the requirements of first-class mail, including changes in size, weight
or machinability qualifications of our DVD envelopes, such changes could result in
increased shipping costs or higher breakage for our DVDs, and our contribution margin
could be adversely affected. For example, the United States Court of Appeals for the
District of Columbia recently instructed the Postal Regulatory Commission (PRC) to
remedy discrimination by the Postal Service in the processing of DVDs by mail, or to
explain adequately why such discrimination is reasonable. While we do not anticipate
any material impact to our operations arising from this case, if the PRC institutes a
remedy that results in an increase in postage rates or changes the manner in which our
DVD shipments are processed, our contribution margin could be adversely affected. If
the U.S. Postal Service were to implement other changes to improve its financial
position, such as closing mail processing facilities or service reductions, such changes
could lead to a decrease in customer satisfaction and our results of operations could be
adversely affected.
If government regulations relating to the Internet or other areas of our business
change, we may need to alter the manner in which we conduct our business, or incur
greater operating expenses.
The adoption or modification of laws or regulations relating to the Internet or other
areas of our business could limit or otherwise adversely affect the manner in which we
currently conduct our business. In addition, the growth and development of the market
for online commerce may lead to more stringent consumer protection laws, which may
impose additional burdens on us. If we are required to comply with new regulations or
legislation or new interpretations of existing regulations or legislation, this compliance
could cause us to incur additional expenses or alter our business model.
The adoption of any laws or regulations that adversely affect the growth, popularity or
use of the Internet, including laws limiting Internet neutrality, could decrease the
demand for our subscription service and increase our cost of doing business. For
example, in late 2010, the Federal Communications Commission adopted so-called net
neutrality rules intended, in part, to prevent network operators from discriminating
against legal traffic that transverse their networks. The rules are currently subject to
legal challenge. To the extent that these rules are interpreted to enable network
operators to engage in discriminatory practices or are overturned by legal challenge, our
business could be adversely impacted. As we expand internationally, government
regulation concerning the Internet, and in particular, network neutrality, may be
nascent or non-existent. Within such a regulatory environment, coupled with potentially
significant political and economic power of local network operators, we could
experience discriminatory or anti-competitive practices that could impede our growth,
cause us to incur additional expense or otherwise negatively affect our business.
Changes in how network operators handle and charge for access to data that travel
across their networks could adversely impact our business.
We rely upon the ability of consumers to access our service through the Internet. To the
extent that network operators implement usage based pricing, including meaningful
bandwidth caps, or otherwise try to monetize access to their networks by data
providers, we could incur greater operating expenses and our subscriber acquisition and
retention could be negatively impacted. For example, in late 2010, Comcast informed
Level 3 Communications that it would require Level 3 to pay for the ability to access
Comcast's network. Given that much of the traffic being requested by Comcast
customers is Netflix streaming content stored with Level 3, many commentators have
looked to this situation as an example of Comcast either discriminating against Netflix
traffic or trying to increase Netflix's operating costs. Furthermore, to the extent network
operators were to create tiers of Internet access service and either charge us for or
prohibit us from being available through these tiers, our business could be negatively
impacted.
Most network operators that provide consumers with access to the Internet also
provide these consumers with multichannel video programming. As such, companies
like Comcast, Time Warner Cable and Cablevision have an incentive to use their network
infrastructure in a manner adverse to our continued growth and success. For example,
Comcast exempted certain of its own Internet video traffic (e.g., Streampix videos to the
Xbox 360) from a bandwidth cap that applies to all unaffiliated Internet video traffic
(e.g., Netflix videos to the Xbox 360). While we believe that consumer demand,
regulatory oversight and competition will help check these incentives, to the extent that
network operators are able to provide preferential treatment to their data as opposed
to ours or otherwise implement discriminatory network management practices, our
business could be negatively impacted. In international markets, especially in Latin
America, these same incentives apply however, the consumer demand, regulatory
oversight and competition may not be as strong as in our domestic market.
Privacy concerns could limit our ability to leverage our subscriber data and our
disclosure of subscriber data could adversely impact our business and reputation.
In the ordinary course of business and in particular in connection with merchandising
our service to our subscribers, we collect and utilize data supplied by our subscribers.
We currently face certain legal obligations regarding the manner in which we treat such
information. Privacy groups and governmental bodies for attempts to link personal
identities and other information to data collected on the Internet regarding users’
browsing and other habits have criticized other businesses. Increased regulation of data
utilization practices, including self-regulation or findings under existing laws, that limit
our ability to use collected data, could have an adverse effect on our business. In
addition, if we were to disclose data about our subscribers in a manner that was
objectionable to them, our business reputation could be adversely affected, and we
could face potential legal claims that could impact our operating results. As our business
evolves and as we expand internationally, we may become subject to additional and/or
more stringent legal obligations concerning our treatment of customer information.
Failure to comply with these obligations could subject us to liability, and to the extent
that we need to alter our business model or practices to adapt to these obligations, we
could incur additional expenses.
Our reputation and relationships with subscribers would be harmed if our subscriber
data, particularly billing data, were to be accessed by unauthorized persons.
We maintain personal data regarding our subscribers, including names and, in many
cases, mailing addresses. With respect to billing data, such as credit card numbers, we
rely on licensed encryption and authentication technology to secure such information.
We take measures to protect against unauthorized intrusion into our subscribers' data.
If, despite these measures, we, or our payment processing services, experience any
unauthorized intrusion into our subscribers' data, current and potential subscribers may
become unwilling to provide the information to us necessary for them to become
subscribers, we could face legal claims, and our business could be adversely affected.
Similarly, if a well-publicized breach of the consumer data security of any other major
consumer Web site were to occur, there could be a general public loss of confidence in
the use of the Internet for commerce transactions, which could adversely affect our
business.
In addition, we do not obtain signatures from subscribers in connection with the use of
credit and debit cards (together, “payment cards”) by them. Under current payment
card practices, to the extent we do not obtain cardholders' signatures, we are liable for
fraudulent payment card transactions, even when the associated financial institution
approves payment of the orders. From time to time, fraudulent payment cards are used
on our Web site to obtain service and access our DVD inventory and streaming.
Typically, these payment cards have not been registered as stolen and are therefore not
rejected by our automatic authorization safeguards. While we do have a number of
other safeguards in place, we nonetheless experience some loss from these fraudulent
transactions. We do not currently carry insurance against the risk of fraudulent credit
card transactions. A failure to adequately control fraudulent credit card transactions
would harm our business and results of operations.
Increases in payment processing fees, changes to operating rules or the acceptance of
new types of payment methods could increase our operating expenses and adversely
affect our business and results of operations.
Our subscribers pay for our subscription services predominately using payment cards.
Our acceptance of these payment methods requires our payment of certain fees. From
time to time, these fees may increase, either as a result of rate changes by the payment
processing companies or as a result of a change in our business practices, which
increase the fees on a cost-per-transaction basis. Such increases may adversely affect
our results of operations.
We are subject to rules, regulations and practices governing our accepted payment
methods. These rules, regulations and practices could change or be reinterpreted to
make it difficult or impossible for us to comply. If we fail to comply with these rules or
requirements, we may be subject to fines and higher transaction fees and lose our
ability to accept these payment methods, and our business and results of operations
would be adversely affected.
We accept payment methods other than payment cards. As our service continues to
evolve and expand internationally, we will likely continue to explore accepting various
forms of payment, which may have higher fees and costs than our currently accepted
payment methods. If more consumers utilize higher cost payment methods, our
payment costs could increase and our results of operations could be adversely
impacted.
If our trademarks and other proprietary rights are not adequately protected to
prevent use or appropriation by our competitors, the value of our brand and other
intangible assets may be diminished, and our business may be adversely affected.
We rely and expect to continue to rely on a combination of confidentiality and license
agreements with our employees, consultants and third parties with whom we have
relationships, as well as trademark, copyright, patent and trade secret protection laws,
to protect our proprietary rights. We may also seek to enforce our proprietary rights
through court proceedings. We have filed and we expect to file from time to time for
trademark and patent applications. Nevertheless, these applications may not be
approved, third parties may challenge any patents or trademarks issued to or held by us,
third parties may knowingly or unknowingly infringe our patents, trademarks and other
proprietary rights, and we may not be able to prevent infringement or misappropriation
without substantial expense to us. If the protection of our proprietary rights is
inadequate to prevent use or appropriation by third parties, the value of our brand and
other intangible assets may be diminished, competitors may be able to more effectively
mimic our service and methods of operations, the perception of our business and
service to subscribers and potential subscribers may become confused in the
marketplace, and our ability to attract subscribers may be adversely affected.
Intellectual property claims against us could be costly and result in the loss of
significant rights related to, among other things, our Web site, streaming technology,
our recommendation and merchandising technology, title selection processes and
marketing activities.
Trademark, copyright, patent and other intellectual property rights are important to us
and other companies. Our intellectual property rights extend to our technology,
business processes and the content on our Web site. We use the intellectual property of
third parties in merchandising our products and marketing our service through
contractual and other rights. From time to time, third parties allege that we have
violated their intellectual property rights. If we are unable to obtain sufficient rights,
successfully defend our use, or develop non-infringing technology or otherwise alter our
business practices on a timely basis in response to claims against us for infringement,
misappropriation, misuse or other violation of third-party intellectual property rights,
our business and competitive position may be adversely affected. Many companies are
devoting significant resources to developing patents that could potentially affect many
aspects of our business. There are numerous patents that broadly claim means and
methods of conducting business on the Internet. We have not searched patents relative
to our technology. Defending us against intellectual property claims, whether they are
with or without merit or are determined in our favor, results in costly litigation and
diversion of technical and management personnel. It also may result in our inability to
use our current Web site, streaming technology, our recommendation and
merchandising technology or inability to market our service or merchandise our
products. As a result of a dispute, we may have to develop non-infringing technology,
enter into royalty or licensing agreements, adjust our merchandising or marketing
activities or take other actions to resolve the claims. These actions, if required, may be
costly or unavailable on terms acceptable to us.
If we are unable to protect our domain names, our reputation and brand could be
adversely affected.
We currently hold various domain names relating to our brand, including Netflix.com.
Failure to protect our domain names could adversely affect our reputation and brand
and make it more difficult for users to find our Web site and our service.
Governmental agencies and their designees generally regulate the acquisition and
maintenance of domain names. Governing bodies may establish additional top-level
domains, appoint additional domain name registrars or modify the requirements for
holding domain names. As a result, we may be unable to acquire or maintain relevant
domain names. Furthermore, the relationship between regulations governing domain
names and laws protecting trademarks and similar proprietary rights is unclear. We may
be unable, without significant cost or at all, to prevent third parties from acquiring
domain names that are similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights.
Develop Alternatives
Netflix - SWOT Analysis converted to a 9-Cell Matrix
STRENGTHS
Strong business model
provides a superior
business proposition.
Revenue sharing
relationships with
distributors reduced
investments for content
acquisition. Effective
marketing and
improved customer
experience helps in
increasing the number
of subscriptions.
OPPORTUNITIES
Capitalize on growing
Growing demand for
demand for streaming
online video streaming by increasing revenuehas already increased
sharing relationships.
viewership. Growth in
Capitalize on growing
online spending will
subscriber base by
strengthen Netflix’s
creating new original
core market. Strategic
content (ie House of
partnerships increase
Cards). Increase
subscriber base.
subscriber base by
partnerships with Roku,
etc.
THREATS
Focus on growing and
Cost of delivering DVDs creasing streaming
on the rise. Price
content and pahse out
increases affect
less-profitable
subscriber base.
activities, such as the
Increasing internet
DVD market. As
frauds caution
subscriber base
customers and dampen increases, keep prices
growth rates.
low to attract as many
new subscribers as
possible.
WEAKNESSES
Litigations impact
brand image and
financial position.
Outdated content.
Continue to create new
content such as House
of Cards and Orange is
the New Black. Increase
subscriber base so as to
improve free cash flow.
Keep prices attractive
to prospective
subscribers. Work to
decrease internet fraud,
thereby lowering legal
risk.
Netflix - Boston Consulting Group Matrix
Rumelt’s Classifications
According to Richard Rumelts classifications of businesses and multibusiness firms, Netflix would be considered a dominant business. While it
has partnerships with other companies and is linked to other businesses
which allow it to provide titles and give numerous options as to how they
are provided to consumers, Netflix still generates more than 75% of
revenues and has not participated in acquisitions as of now.
DECISION AND RECOMMENDATION
Corporate Level
Netflix’s management has continuously executed a successful strategy to accomplish it’s
most-important goal: maximizing shareholder value. Netflix is the world’s leading
Internet TV network, with more than 44 million members in more than 40 countries
around the globe.
Members of the company’s service can watch as many movies (and original-content
television shows) as they choose, anywhere and at any time on almost any Internetconnected screen, including desk-top and notebook computers, as well as various types
of mobile electronic devices. Members can play, pause, and resume watching any of the
company’s content without the distraction of commercial advertisements. Through
Netflix’s DVD-by-mail service, the company’s members can also receive DVDs and Blueray discs delivered directly to their homes.
The Los Gatos, California-based company derives its revenues from monthly
membership fees that it charges for its services. Its U.S. streaming membership plans
are priced at $7.99 per month for a basic plan, or at $11.99 per month for members who
want to watch the company’s videos on up to four devices concurrently. Its foreigncountry streaming membership plans, which are offered in Canada, Latin America, the
United Kingdom, Ireland, Finland, Denmark, Sweden and Norway, are priced in terms of
a given country’s currency at the equivalent of $7 to $14 per month.
The company’s DVD-by-mail membership service ranges from $4.99 to $43.99 per
month according to the plan chosen by the member. Members electing access to highdefinition Blu-ray discs in addition to standard-definition DVDs pay a surcharge ranging
from $2 to $4 per month for the company’s most popular plans.
Netflix has boosted its revenues at a fast pace ever since its founding on Aug. 29, 1997.
Except for the year 2012, the company has increased its net profits every year since the
company went public during 2002. After growing its revenues to $1.7 billion during
2009, from $1.4 million during 2000, Netflix began offering its services in Canada during
September 2010.
In 2011, the company launched its streaming services in Latin America, followed by
launches in the United Kingdom and Ireland during January 2012; Finland, Denmark,
Sweden and Norway in October 2012; and the Netherlands during September 2013.
Our research indicates that Netflix will continue to increase its revenues and earnings at
a fast pace for at least the next several years. However, that same research indicates
that stock market participants are overvaluing the company’s stock substantially at this
time.
During the next several years, the company plans to continue to expand its services
internationally, including a substantial expansion this year in Europe. In addition, the
company plans to continue to offer exclusive, original TV shows, like its Emmy and
Golden Globe winning House of Cards series, staring Kevin Spacey, that the company
launched during 2013.
Unlike traditional television networks, Netflix has a major advantage over its
competitors in regard to launching a TV show: While the networks need to attract an
audience on a given night and at a given time, Netflix can be much more flexible. And,
because shows offered via the company’s streaming video service don’t need to
compete for scarce prime-time slots like those offered on traditional TV networks,
Netflix can allow much more time for its audiences to become familiar with and to enjoy
its shows. Hence, the company can offer any of its original content over the course of an
entire season instead of providing only pilot episodes of those shows.
Business Level
We expect to continue to make significant investments to license streaming content
both domestically and internationally and will continue to expand our investments in
original content. In 2014, we expect to substantially increase our investment in original
content (though still representing less than 10% of our overall global content expense).
Original content or content that is licensed in an earlier window through an output
arrangement will typically, depending upon the terms, require more up-front cash
payments relative to the expense and, therefore, future investments could impact our
liquidity and result in a use of operating cash.
We expect to significantly increase our investments in international expansion, including
substantial expansion in Europe in 2014, and in original content. As a result, and to take
advantage of the current favorable interest rate environment, we plan to obtain
approximately $400 million in long-term debt in the first quarter of 2014. Our ability to
obtain this, or any additional financing that we may choose to or need to obtain, will
depend on, among other things, our development efforts, business plans, operating
performance and the condition of the capital markets at the time we seek financing. We
may not be able to obtain such financing on terms acceptable to us or at all. If we raise
additional funds through the issuance of equity or debt securities, those securities may
have rights, preferences or privileges senior to the rights of our common stock, and our
stockholders may experience dilution.
Functional Level
Our core strategy is to grow our streaming subscription business domestically and
internationally. We are continuously improving our members' experience - expanding
our streaming content, with a focus on programming an overall mix of content that
delights our customers, enhancing our user interface and extending our streaming
service to even more Internet-connected devices while staying within the parameters of
our consolidated net income (loss) and operating segment contribution profit (loss)
targets.
We continue to grow our streaming service both domestically and internationally. We
began our international expansion with Canada in 2010 and have since launched our
service in Latin America and several European territories. We anticipate a substantial
expansion of our service in Europe in late 2014. We have also expanded our streaming
content offering to include more exclusive and original programming, including several
Emmy and Golden Globe nominated original series in 2013.
Implementation
Who will implement strategy?
The c-suite executives and upper level managers will initially implement strategy.
These are the people that are making the strategic goals for the company so they
have to be the first to show the implementation. Lead by example. Crafting and
executing strategy are the core management functions. Among all the things that a
manager does, nothing affects the success or failure of a company than how well the
management team charts the direction of the company, develop competitively
effective strategic moves and business approaches, and pursue internal day-to-day
strategic operating excellence.
How will the strategy achieve organization-wide commitment?
Getting the entire organization to buy-in to the strategic goals is one of the tougher
jobs of managers. It is important to first have a compelling vision that is clear and
easy to communicate. This will go a long way in dictating the goals to the company.
Secondly it needs to be driven from the top. There needs to be a leader that believes
that the strategy will work and can motivate and inspire others to want to see it
through. Modifying the employee’s beliefs, perceptions and attitudes versus trying
to change their behavior by mandate will be crucial in the success of failure of a
commitment organization-wide.
Are structuring mechanism properly aligned?
Are functional area conflicts reconciled to strategy
requirements?
Does leadership inspire strategy?
Leadership can inspire strategy. When employees are inspired they are in turn
motivated. Work does not feel like a job anymore but it becomes a passion, and
when that point is reached the manager has done his job. Employees become
actively engaged and sustained and the organization has the building blocks to
really flourish.
Do reward systems reinforce appropriate behavior?
Reward systems do reinforce appropriate behavior to a certain extent. Employees love
to receive rewards for a job well done. Reward systems could be as little as a pat on the
back, all the way to monetary incentives. Reward Systems also could negatively affect
an employees performance. Employees may take the reward incentive and lose their
ethical standards in the process. Monetary rewards make people do unethical actions,
which ultimately would be more detrimental to the company in the long run.
Are functional issues addressed and resolved in
implementation?
Yes, and to reiterate; in the short-term our fundamental business has been highly
profitable. However, to be profitable over the long-term we must recognize that our
profitability will attract competition. We recognize that that we are at the mercy of
content providers who have a number of options. They can sell their content directly to
the end customers or they can auction it to the highest bidder (streaming-video
companies), allowing each to earn a “normal profit”.
Is the strategy communicated properly?
Yes. We promote discipline, accountability and strategic alignment with clear
communication. Netflix recognizes that clear communication is the most important key
to our manager’s success.
Exhibit A
Ratios/Graphs
Quick Ratio
2013
2012
2011
Netflix Inc.
Amazon.com
Best Buy Co. Inc.
0.56
0.75
0
0.45
0.78
0.45
0.65
0.82
0.46
The quick ratio for each year shows that Netflix occupies
the middle ranking for liquidity, or its ability to meet
its short-term obligations.
Sales (in 000s)
Netflix Inc.
Amazon.com
Best Buy Co. Inc.
2013
$
$
$
4,374,562 $
74,452,000 $
42,410,000 $
2012
3,609,282 $
61,093,000 $
49,183,677 $
2011
3,204,577
48,077,000
50,272,000
We see that Netflix sales pale in comparison to Netflix to
Amazon and Best Buy. However, it should be noted that
Netflix seels a service and not retail items.
Net Income (in 000s)
Netflix Inc.
Amazon.com
Best Buy Co. Inc.
2013
$
$
$
112,403 $
274,000 $
532,000 $
2012
17,347 $
(39,000) $
(367,363) $
2011
226,126
631,000
1,277,000
This shows us the volatility of Netflix sales for the last
three years.
International Sales (in 000s)
Netflix Inc.
Amazon.com
Best Buy Co. Inc.
2013
$
$
$
1,623,187 $
29,935,000 $
$
2012
$
26,280,000 $
(467,000) $
2011
21,372,000
449,000
These international sales figures show the dominance of
Amazon over its competitors.
International Assets (in 000s)
Netflix Inc.
Amazon.com
Best Buy Co. Inc.
2013
$
$
$
$
14,051,000 $
$
2012
$
11,852,000 $
866,000 $
2011
8,817,000
1,082,000
Here again we see the dominance of Amazon over its
competitors. However, it has to be noted that Netflix is
not in the retail business. Netflix doesn’t have assets but
sells a service.
International Operating Income (in 000s)
Netflix Inc.
Amazon.com
Best Buy Co. Inc.
2013
$
$
$
164,650 $
107,000 $
$
2012
2011
$
76,000 $
(467,000) $
640,000
449,000
This figure shows Netflix growing international sales.
Selling, Gen. Admin. Expense/Sales
Netflix Inc.
Amazon.com
Best Buy Co. Inc.
Dividend Yield on Common Stock
Netflix Inc.
Amazon.com
Best Buy Co. Inc.
2013
$
$
$
15.64 $
17.26 $
$
2012
16.75 $
15.92 $
19.23 $
2011
16.24
14.28
18.64
2013
2012
2011
N/A
N/A
16.17%
N/A
N/A
14.15%
N/A
N/A
31.94%
Price-Earnings Ratio
2013
2012
$9.71
N/A
N/A
($1.00)
N/A
N/A
Dividend Payout Ratio
2013
2012
2011
Netflix Inc.
Amazon.com
Best Buy Co. Inc.
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
-18.12%
Internal Cash Flow (in 000s)
2013
2012
2011
2,305,709 $
3,695,000 $
769,200 $
1,719,430 $
2,120,000 $
540,274 $
1,065,745
1,714,000
2,255,000
2013
2012
2011
Netflix Inc.
Amazon.com
Best Buy Co. Inc.
Netflix Inc.
Amazon.com
Best Buy Co. Inc.
Free Cash Flow (in 000s)
Netflix Inc.
Amazon.com
Best Buy Co. Inc.
$
$
$
$1,932,982.23 $1,729,960.22
$899,124.60 ($1,190,404.80)
($1,059,560.70)
$768,305.08
2011
$1.71
($3.78)
($0.57)
$675,258.06
$591,711.60
$1,351,106.00