A Strategic Management Case Study
Tony Gauvin
netflix.com
Overview
Company Overview
A Brief history of Netflix
Existing Mission and Vision
Existing Objectives and Strategies
Current Issues
New Mission and Vision
External Assessment
Industry analysis
Opportunities and threats
EFE Matrix
CPM Matrix
Internal Assessment
Organizational Structure
Strengths and weaknesses
Financial Condition
IFE Matrix
3/25/2013
Strategy Formulation
SWOT Matrix
Space Matrix
Divisional Analysis
Grand Strategy Matrix
Matrix Analysis
QSPM Matrix
Strategic Plan for the Future
Objectives
Strategies
Implementation Issues
Technology
EPS/EBIT
Projected Financials
Evaluation
Balanced Score Card
Netflix Update
© 2013, Tony Gauvin,UMFK
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In the Beginning (1997-2007)
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Company timeline
1997 – Reed Hastings and fellow software executive Marc Randolph
co-found Netflix to offer online movie rentals.
1999 – Netflix launches the subscription service, offering unlimited
rentals for one low monthly subscription.
2000 – Netflix launches the personalized movie recommendation
system that uses Netflix members’ ratings to accurately predict
choices for all Netflix members.
May 22, 2002 – Netflix makes its initial public offering (IPO) of
5,500,000 shares at $15.00 per share on Nasdaq under the ticker
“NFLX.” Total Netflix members at the time: 600,000.
2006 – Netflix launches the Netflix Prize, promising $1 million to the
first person or team who can achieve certain accuracy goals in
recommending movies based on personal preferences. The
company releases 100 million anonymous movie ratings ranging
from one to five stars, the largest such data set ever released.
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Company Timeline
2007 – Netflix introduces streaming, which allows members to instantly
watch television shows and movies on their personal computers.
2008 – Netflix partners with consumer electronics companies to stream on
the Xbox 360, Blu-ray disc players, TV set-top boxes and the Apple
Macintosh computer.
2009 – Netflix partners with consumer electronics companies to stream on
the PS3, Internet connected TVs and other Internet connected devices.
2009 – Netflix awards the $1 million Netflix Prize to the "BellKor's Pragmatic
Chaos" team of seven researchers from four countries; over three years
the contest has attracted more than 40,000 teams from 186 countries.
2010 – Netflix is available on the Apple iPad, iPhone and iPod Touch, the
Nintendo Wii, and other Internet connected devices.
2010 – Netflix launches in Canada.
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By The Numbers
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Pricing Plans
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Subscriber Information
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Content Libraries
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Existing Mission and Vision Statement
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Existing Growth Strategy
• Grow numbers of subscribers
• Each subscribers =~ $100 - $120 revenue/year
• Streaming (VOD)
– Marginal cost approaches zero
• DVD by Mail
– greater inventory & delivery expense
• Increase number, quality, currency and
uniqueness of Content
– Content is King
• Global expansion
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Vision Statement
To become the number one mail
order and live streaming movie
company in the world.
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Mission Statement
At Netflix, we seek to be the highest quality subscription 1.Customers
business that offers Internet streaming and DVD by mail 2.Products or services
3.Markets
content (2). We believe in offering the best customer
4.Technology
service possible by teaching our employees to be honest, 5.Concern for survival,
growth, and profitability
respectful and ethical (6) while also valuing every
6.Philosophy
customer’s individual needs. Our employees (9) are
7.Self-concept
for public image
provided with the latest technologies, excellent benefits, 8.Concern
9.Concern for employees
and the safest working conditions in the industry. We
provide outstanding customer service and in return, our
customers (1) in our North American and Mexican markets
(3) recommend their friends to Netflix (5). Our vast library
of DVD’s and streaming service (4) provides a competitive
advantage (7) as compared to offering only streaming. At
Netflix, we strive to be a good corporate citizen (8).
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External Audit
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Industry Market Analysis
Web Entertainment Sites 2010
Digital Video Streaming Market, 2010
Sites are ranked by millions of unique visitors in August
2010.
YouTube
iTunes
Glam Media
Yahoo! Sports
Gorilla Nation web sites
IMDB
Turner Sports and Entertainment
Netflix
Apple is in a three-way tie for third place with a 4% market share.
99.00
44.60
44.50
29.70
21.70
21.20
21.20
20.60
Netflix
Comcast
Other
%
61.00
8.00
31.00
DVD Rental Market, 2009-2010
Market shares are shown in percent.
DVD Sales and Rental
According to the Digital Entertainment Group (www.dvdinformation.com),
2003:
2004:
2005:
2006:
2007:
2008:
DVD Sales
$11.6 billion
$15.5 billion
$16.3 billion
$16.6 billion
$16.0 billion
$14.5 billion
DVD Rental
$4.5 billion
$5.7 billion
$6.5 billion
$7.5 billion
$7.5 billion
$7.5 billion
Total Spending
$16.1 billion
$21.2 billion
$22.8 billion
$24.1 billion
$23.4 billion
$21.7 billion*
Netflix
Blockbuster (traditional)
Coinstar (Redbox)
Other traditional
Other subscription
Other kiosk
2009
%
25.70
22.80
11.90
28.20
8.60
2.70
2010
%
34.80
19.90
18.90
16.10
7.20
3.10
* Includes $750 million spending to Blu-ray Disc format
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Opportunities
1.
2.
3.
147 million people in the United States watch online videos.
Digital distribution of media is growing at a rate of 30% a year.
International markets account for over 50% of spending in US filmed
entertainment.
4. US TV market accounts for less than 15% of the world's TV households.
5. China's box office annual growth rate continues to grow over 10% a year.
6. Rivals such as Blockbuster are struggling with their business models.
7. Consumers spent over $20 billion on home video purchases in 2010.
8. More people know English now than ever before.
9. High price of an outing at the movie theater.
10. Weak US Dollar makes global markets more attractive.
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Threats
1.
2.
3.
4.
5.
6.
Poor global economy has reduced personal spending.
YouTube owns over 75% of the multimedia web market share.
Time Warner Cable's movies on demand.
Hulu, an ad based streamer, provides TV shows and movies for free.
DVRs are in 40% of US homes as of 2011.
Barriers to entry are low as startups can be launched for relatively low
costs.
7. By law, Netflix cannot release new DVDs until 28 days after retail release.
8. Increase in US postal fees would reduce profit margins.
9. Infringements on Netflix patents and other proprietary assets.
10. Netflix is the object of complaints regarding collusion with Wal-Mart.
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CPM
Netflix
Critical Success Factors
Market Share
Inventory System
Financial Position
Product Quality
Customer Loyalty
Sales Distribution
Global Expansion
Advertising
E-Commerce
Customer Service
Price Competitiveness
Management Experience
Totals
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Weight
0.12
0.05
0.08
0.10
0.03
0.08
0.09
0.10
0.15
0.07
0.10
0.03
1.00
Rating
3
3
2
3
4
3
2
3
4
3
3
3
Score
0.36
0.15
0.16
0.30
0.12
0.24
0.18
0.30
0.60
0.21
0.30
0.09
3.01
© 2013, Tony Gauvin,UMFK
Redbox
Rating
2
4
1
2
2
2
1
2
2
4
4
2
Score
0.24
0.20
0.08
0.20
0.06
0.16
0.09
0.20
0.30
0.28
0.40
0.06
2.27
Time Warner
Rating
4
2
4
4
3
4
3
4
3
2
1
4
Score
0.48
0.10
0.32
0.40
0.09
0.32
0.27
0.40
0.45
0.14
0.10
0.12
3.19
18
EFE
Opportunities
147 million people in the United States watch online videos.
Digital distribution of media is growing at a rate of 30% a year.
International markets account for over 50% of spending in US
filmed entertainment.
4. US TV market accounts for less than 15% of the world's TV
households.
5. China's box office annual growth rate continues to grow over
10% a year.
6. Rivals such as Blockbuster are struggling with their business
models.
7. Consumers spent over $20 billion on home video purchases in
2010.
8. More people know English now than ever before.
9. High price of an outing at the movie theater.
10. Weak US Dollar makes global markets more attractive.
1.
2.
3.
1.
2.
3.
4.
5.
6.
7.
8.
9.
0.05
2
0.10
0.02
1
0.02
0.04
4
0.16
0.05
3
0.15
0.03
0.04
0.03
2
4
2
0.06
0.16
0.06
Weight Rating Weighted Score
Threats
Poor global economy has reduced personal spending.
0.04
2
0.08
YouTube owns over 75% of the multimedia web market share.
0.10
2
0.20
Time Warner Cable's movies on demand.
0.08
3
0.24
Hulu, and ad based streamer, provides TV shows and movies for
0.10
2
0.20
free.
DVRs are in 40% of US homes as of 2011.
0.03
2
0.06
Barriers to entry are low as startups can be launched for
0.05
3
0.15
relatively low costs.
By law, Netflix cannot release new DVDs until 28 days after retail
release.
Increase in US postal fees would reduce profit margins.
Infringements on Netflix patents, and other proprietary assets by
decrease Netflix brand value.
10. Netflix is the object of complaints regarding collusion with WalMart.
Totals
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Weight Rating Weighted Score
0.08
3
0.24
0.06
3
0.18
0.07
2
0.14
0.03
3
0.09
0.03
2
0.06
0.04
4
0.16
0.03
4
0.12
1.00
© 2013, Tony Gauvin,UMFK
2.63
19
Internal Audit
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Organizational Structure
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Financial Information (Income)
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Financial Information
Net Worth Analysis (in millions)
Stockholders' Equity
Net Income x 5
(Share Price/EPS) x Net Income
Number of Shares Outstanding x Share Price
Method Average
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$290
$805
$4,904
$6,240
$3,060
23
Ratio Analysis
Growth Rate Percent
Netflix
Industry
S&P 500
Sales (Qtr vs year ago qtr)
48.60
47.70
14.90
Net Income (YTD vs YTD)
-
-
-
Net Income (Qtr vs year ago qtr)
64.50
51.70
65.70
Sales (5-Year Annual Avg.)
25.95
25.47
8.28
Net Income (5-Year Annual Avg.)
30.79
30.32
8.77
Dividends (5-Year Annual Avg.)
-
-
5.67
Profit Margin Percent
Gross Margin
Pre-Tax Margin
Net Profit Margin
5Yr Gross Margin (5-Year Avg.)
36.6
12.9
8.1
35.7
36.5
12.7
8.0
35.7
39.5
18.0
13.1
39.4
Liquidity Ratios
Debt/Equity Ratio
Current Ratio
Quick Ratio
2.4
1.2
-
0.59
1.2
-
1.00
1.4
0.9
Profitability Ratios
Return On Equity
Return On Assets
Return On Capital
Return On Equity (5-Year Avg.)
Return On Assets (5-Year Avg.)
Return On Capital (5-Year Avg.)
82.0
17.4
32.8
28.8
14.6
22.1
80.8
17.1
32.3
28.2
14.3
21.7
28.1
8.8
11.7
23.8
8.0
10.8
109,175
2.1
107,624
1.4
0.0
2.1
118,037
15.2
12.3
0.8
Efficiency Ratios
Income/Employee
Receivable Turnover
Inventory Turnover
Asset Turnover
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Strengths
1.
2.
3.
4.
5.
6.
Revenues increased 29% from 2009 to 2010.
90% of surveyed subscribers would recommend Netflix to their friends.
Library of choices grew 30% in 2010.
Currently have over 100,000 DVDs available for customers.
Netflix expanded into Canada, Mexico and Latin America in 2011.
Netflix is the largest streaming movie company with over 25 million
subscribers as of Fall 2011.
7. Recent customer satisfaction ACSI score was 85 out of 100.
8. Unlimited access to internet movies and mail in DVDs for $7.99.
9. Net income doubled from $83B to $161B from 2008 to 2010.
10. Apple uses Netflix to stream movies to its Apple TV, iPhone, and iPad.
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Weaknesses
1.
2.
Reliance on the US Mail System for delivering of DVDs in US Markets.
Relies upon Amazon for a majority of its cloud computing services and
cannot easily switch to another cloud provider.
3. Only 2 of the top 8 executives are women.
4. Netflix has no publically available vision or mission statement.
5. Netflix deal with Disney and Sony expires in 2011.
6. In 2010, Netflix did not rank in the Top 10 among online video content
providers.
7. Netflix charges $95/year to Amazon's $79/year for unlimited streaming
without DVDs.
8. Netflix collects data from subscribers and some firms have received criticism
for this practice.
9. Netflix is the object of patent infringement regarding client-server
communications.
10. Stock price fell 60% between July 2011 and October 2011.
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IFE
1.
2.
3.
4.
5.
6.
Strengths
Revenues increased 29% from 2009 to 2010.
90% of surveyed subscribers would recommend Netflix to their
friends.
Library of choices grew 30% in 2010.
Currently have over 100,000 DVDs available for customers.
Netflix expanded into Canada, Mexico and Latin America in 2011.
Netflix is the largest streaming movie company with over 25
million subscribers as of Fall 2011.
Recent customer satisfaction ASCI score was 85 out of 100.
Unlimited access to internet movies and mail in DVDs for $7.99.
Net income doubled from $83B to $161B from 2008 to 2010.
7.
8.
9.
10. Apple uses Netflix to stream movies to its Apple TV, iPhone, and
iPad.
Weaknesses
Reliance on the US Mail System for delivering of DVDs in US
Markets.
2. Relies upon Amazon for a majority of its cloud computing
services and cannot easily switch to another cloud provider.
3. Only 2 of the top 8 executives are women.
4. Netflix has no publically available vision or mission statement.
5. Netflix deal with Disney and Sony expires in 2011.
6. In 2010, Netflix did not rank in the Top 10 among online video
content providers.
7. Netflix charges $95 to Amazon's $79 for unlimited streaming
without DVDs.
8. Netflix collects data from subscribers and some firms have
received criticism for this practice.
9. Netflix is the object of patent infringement regarding clientserver communications.
10. Stock price fell 60% between July 2011 and October 2011.
Totals
1.
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Weight Rating Weighted Score
0.06
4
0.24
0.06
4
0.24
0.04
0.04
4
4
0.16
0.16
0.07
4
0.28
0.07
3
0.21
0.04
0.08
0.05
4
4
4
0.16
0.32
0.20
0.04
3
0.12
Weight Rating Weighted Score
0.05
1
0.05
0.04
1
0.04
0.02
0.02
0.04
1
1
1
0.02
0.02
0.04
0.06
1
0.06
0.08
1
0.08
0.03
2
0.06
0.03
1
0.03
0.08
1.00
1
0.08
2.57
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Strategy Formulation
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SWOT MATRIX
SO Strategies
1.
2.
3.
4.
Increase advertising expenses by 15% in 2012 and 2013. (S1, S4, S5, O1, O2)
Offer first 3 months at reduced price to take advantage of at home movie customers (S8, O7).
Aggressively enter the Chinese market. (S9, O5, O8, O10).
Provide free month service to any customer who recommends 5 friends. (S2, O1, O2).
WO Strategies
1.
2.
Extend expansion into Canada, Mexico, Latin America and China by 15% per year (W6, W10, O3,
O4, O5, O8, O10).
Renew deals with Disney and Sony (W5, O2).
ST Strategies
1.
2.
Provide a free month of service for anyone who recommends 5 friends (S2, T1).
Increase R&D by 25% for marketing of online streaming movies (S6, S8, T6, T8).
WT Strategies
1.
2.
Form a partnership with UPS to deliver all DVDs (W1, T8).
Develop a clear mission (W4, T1, T6).
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Space Matrix
FP
Conservative
Aggressive
7
Possible Strategies
6
•Backwards, Forward, Horizontal Integration
•Market Penetration
•Market Development
•Product Development
•Diversification (related or unrelated)
5
4
3
2
1
CP
-7
-6
-5
-4
-3
-2
-1
1
2
3
4
5
6
-1
-2
-3
-4
-5
Internal Analysis:
Financial Position (FP)
Gross Margin
Debt to Equity
Current Ratio
ROE
ROA
Financial Position (FP) Average
Internal Analysis:
Competitive Position (CP)
Market Share
Product Quality
Customer Loyalty
Technological know-how
Control over Suppliers and Distributors
Competitive Position (CP) Average
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4
6
4
4
4
4.4
-2
-2
-1
-2
-5
-2.4
External Analysis:
Stability Position (SP)
Rate of Inflation
Technological Changes
Price Elasticity of Demand
Competitive Pressure
Barriers to Entry into Market
Stability Position (SP) Average
External Analysis:
Industry Position (IP)
Growth Potential
Financial Stability
Ease of Entry into Market
Resource Utilization
Profit Potential
Industry Position (IP) Average
-6
-2
-2
-2
-4
-6
-7
Defensive
SP
Competitive
-3.2
6
4
2
2
5
3.8
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30
7
IP
Grand Strategy Matrix
Rapid Market Growth
Possible Strategies
•Backwards, Forward, Horizontal
Integration
•Market Penetration
•Market Development
•Producti Development
•Diversification (related)
Quadrant II
Quadrant I
Netflix
Weak
Competitive
Position
Strong
Competitive
Position
Quadrant III
Quadrant IV
Slow Market Growth
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Divisional Analysis
• Netflix recognizes two segments
– United States
– International Markets
• Canada as of September, 2010
• Streaming only, no DVD’s
• “Substantially all of the Company’s revenues are generated in the United States”
(Netflix 2010 10-K)
• Additional expansion to come in 2011
– Mexcio, Latin America, Caribbean
• Possible Segmentation by Product
– DVD rental
– Streaming
– Since buying DVD subscription gives access to both DVD and Streaming Video ,
it is difficult to separate revenues and profits
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Matrix Analysis
Alternative Strategies
IE
SPACE
GRAND
BCG
COUNT
Forward Integration
x
x
2
Backward Integration
x
x
2
Horizontal Integration
x
x
2
Market Penetration
x
x
2
Market Development
x
x
2
Product Development
x
x
2
Related Diversification
x
x
2
Unrelated Diversification
x
1
Retrenchment
Divestiture
Liquidation
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Possible Strategies
• Integration Strategies not feasible
–
–
Short supply and delivery chain
Limited competition
• Market Penetration
–
–
–
•
Market Development
–
–
•
SO 1 Increase advertising expenses by 15% in 2011 and 2012. (S1, S4, S5, O1, O2)
SO 2 Offer first 3 months at reduced price to take advantage of at home movie customers (S8, O7).
SO 4 & ST 1 Provide free month service to any customer who recommends 5 friends. (S2, O1, O2).
SO 3 Aggressively enter the Chinese market. (S9, O5, O8, O10).
WO 1 Extend expansion into Canada, Mexico, Latin America and China by 15% per year (W6, W10,
O3, O4, O5, O8, O10).
Product Development
–
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ST 2 Increase R&D by 25% for marketing of online streaming movies (S6, S8, T6, T8).
© 2013, Tony Gauvin,UMFK
34
QSPM
Increase
advertising and
R&D budgets
by 15%
1.
2.
3.
4.
Opportunities
147 million people in the United States watch online videos.
Digital distribution of media is growing at a rate of 30% a year.
International markets account for over 50% of spending in US
filmed entertainment.
US TV market accounts for less than 15% of the world's TV
households.
5. China's box office annual growth rate continues to grow over
10% a year.
6. Rivals such as Blockbuster are struggling with their business
models.
7. Consumers spent over $20 billion on home video purchases in
2010.
8. More people know English now than ever before.
9. High price of an outing at the movie theater.
10. Weak US Dollar makes global markets more attractive.
Weight
0.08
0.06
AS
3
4
TAS
0.24
0.24
0.07
1
0.07
4
0.28
0.05
2
0.10
4
0.20
0.02
1
0.02
4
0.08
0.04
1
0.04
2
0.08
0.05
2
0.10
3
0.15
0.03
0.04
0.03
1
3
1
0.03
0.12
0.03
3
2
3
0.09
0.08
0.09
AS
2
0
3
TAS
0.08
0.00
0.24
AS
1
0
1
TAS
0.04
0.00
0.08
0
0.00
0
0.00
3
0.09
1
0.03
0
0.00
0
0.00
0
0.00
0
0.00
0
0.00
0
0.00
0
0.00
0
0.00
0
0.00
0
0.00
Weight
Threats
Poor global economy has reduced personal spending.
0.04
YouTube owns over 75% of the multimedia web market share.
0.10
Time Warner Cable's movies on demand.
0.08
Hulu, and ad based streamer, provides TV shows and movies for
0.10
free.
5. DVRs are in 40% of US homes as of 2011.
0.03
6. Barriers to entry are low as startups can be launched for
0.05
relatively low costs.
7. By law, Netflix cannot release new DVDs until 28 days after retail
0.03
release.
8. Increase in US postal fees would reduce profit margins.
0.03
9. Infringements on Netflix patents, and other proprietary assets by
0.04
decrease Netflix brand value.
10. Netflix is the object of complaints regarding collusion with Wal0.03
Mart.
1.
2.
3.
4.
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Expand by 15%
into Latin
America,
Mexico, and
China
AS
TAS
1
0.08
3
0.18
© 2013, Tony Gauvin,UMFK
35
QSPM
Increase
advertising and
R&D budgets
by 15%
Weight
Strengths
Revenues increased 29% from 2009 to 2010.
0.06
90% of surveyed subscribers would recommend Netflix to their
0.06
friends.
3. Library of choices grew 30% in 2010.
0.04
4. Currently have over 100,000 DVDs available for customers.
0.04
5. Netflix expanded into Canada, Mexico and Latin America in 2011.
0.07
6. Netflix is the largest streaming movie company with over 25
0.07
million subscribers as of Fall 2011.
7. Recent customer satisfaction ASCI score was 85 out of 100.
0.04
8. Unlimited access to internet movies and mail in DVDs for $7.99.
0.08
9. Net income doubled from $83B to $161B from 2008 to 2010.
0.05
10. Apple uses Netflix to stream movies to its Apple TV, iPhone, and
0.04
iPad.
AS
2
TAS
0.12
0
0.00
0
0.00
0
0
1
0.00
0.00
0.07
0
0
4
0.00
0.00
0.28
0
0.00
0
0.00
0
0
2
0.00
0.00
0.10
0
0
3
0.00
0.00
0.15
0
0.00
0
0.00
Weight
AS
TAS
AS
TAS
0.05
1
0.05
2
0.10
0.04
0
0.00
0
0.00
0.02
0.02
0.04
0
2
0
0.00
0.04
0.00
0
3
0
0.00
0.06
0.00
0.06
4
0.24
2
0.12
0.08
2
0.16
1
0.08
0.03
0
0.00
0
0.00
0.03
0
0.00
0
0.00
0.08
0
0.00
2.18
0
0.00
2.43
1.
2.
Weaknesses
Reliance on the US Mail System for delivering of DVDs in US
Markets.
2. Relies upon Amazon for a majority of its cloud computing
services and cannot easily switch to another cloud provider.
3. Only 2 of the top 8 executives are women.
4. Netflix has no publically available vision or mission statement.
5. Netflix deal with Disney and Sony expires in 2011.
6. In 2010, Netflix did not rank in the Top 10 among online video
content providers.
7. Netflix charges $95 to Amazon's $79 for unlimited streaming
without DVDs.
8. Netflix collects data from subscribers and some firms have
received criticism for this practice.
9. Netflix is the object of patent infringement regarding clientserver communications.
10. Stock price fell 60% between July 2011 and October 2011.
Totals
1.
3/25/2013
Expand by 15%
into Latin
America,
Mexico, and
China
AS
TAS
3
0.18
© 2013, Tony Gauvin,UMFK
36
Objective Get Big Fast
• Based on Thomas R. Eisemann’s (Harvard Business
School) book “Internet Business Models: Text and Cases.”
• “Winner-take-all” dynamics apply when
• Network effects (i.e., “viral”)
• Scale economies (i.e., “scalable”)
• Customer retention (i.e., “sticky”)
• Competitive risks are “reasonable”
• Lifetime value of customer exceeds acquisition
cost
• You can fund aggressive growth
3/25/2013
© 2013, Tony Gauvin,UMFK
37
Strategic Fit
•
Network effects
–
–
•
Scale economies
–
•
Competitors have smaller market shares
Lifetime value of customer exceeds acquisition cost
–
–
–
•
Subscription revenue model
Structural reliance
Switching costs high
Competitive risks are “reasonable”
–
•
Amortization of content library costs
Customer retention
–
–
–
•
Recommender system
Friend referrals
CAC is $ 18 (two months subscription)
Based on 3 year retention CLV is ~ $300 to $350
CAC/CLV = 5-6%
You can fund aggressive growth
–
–
–
3/25/2013
Current assets exceed current liabilities by $260 million
Dept/equity ratio is 0.6 (S&P is 1.0)
Market Capitalization of $6 billion is 20 times more than assets base (~$300 million)
© 2013, Tony Gauvin,UMFK
38
3 Year Goal and Annual Objectives
• In 3 years
– Own 70% of the video steaming market by
• Purchasing more and better content for distribution
• Increase marketing efforts
• Create embedded players for any electronic device that has a video
screen and a connection to the Internet
• Fuel global expansion
• Annual goals
–
–
–
–
3/25/2013
2011  35 million subscribers ( $3.5 billion in revenues)
2012  55 million subscribers ( $5.5 billion in revenues)
2013  80 million subscribers ( $8 billion in revenues)
There is 147 million potential customers in the US
© 2013, Tony Gauvin,UMFK
39
Strategy Selection with Year 1 Costs
• Increase advertising budgets by 15 percent.
– 15% of $293M = $44M
• Expand by 15 percent into Latin America, Mexico, and China.
– 15% of $2,162M = $324 New revenues * 92.5% (exp. ratio) = $300M of
added expenses + $500M marketing and development costs
• Increase R&D by 25% for marketing and delivery of online
streaming movies (S6, S8, T6, T8).
– 25% of 293M = $73.25M
• Total cost for all three
– Approx. $1,000 Million
3/25/2013
© 2013, Tony Gauvin,UMFK
40
Strategic Implementation
3/25/2013
© 2013, Tony Gauvin,UMFK
41
Technology Issues
• Reliance on a Public Internet
– Network Neutrality
• NetFlix is 20-30% of ALL Internet traffic
– Consumer Broadband Service
– Distributed Distribution
• Intellectual Property Protection
– International regulatory bodies
3/25/2013
© 2013, Tony Gauvin,UMFK
42
EPS/EBIT
Amount Needed: $1,000
Stock Price: $120
Shares Outstanding: 52 million
Interest Rate: 5%
Tax Rate: 36%
3/25/2013
EBIT
Interest
EBT
Taxes
EAT
# Shares
EPS
Common Stock Financing
Recession
Normal
Boom
$100
$200
$300
0
0
0
100
200
300
37
74
111
63
126
189
60
60
60
1.04
2.09
3.13
EBIT
Interest
EBT
Taxes
EAT
# Shares
EPS
Recession
$100
40
60
22
38
54
0.70
20 Percent Stock
Normal
$200
40
160
59
101
54
1.88
Boom
$300
40
260
96
164
54
3.05
© 2013, Tony Gauvin,UMFK
Recession
$100
50
50
19
32
52
0.61
Debt Financing
Normal
$200
50
150
56
95
52
1.82
Boom
$300
50
250
93
158
52
3.03
Recession
$100
10
90
33
57
59
0.97
80 Percent Stock
Normal
$200
10
190
70
120
59
2.04
Boom
$300
10
290
107
183
59
3.11
43
Projected Financials
• Assumptions
– Sell stock to raise $1,000 M
• 8.33 million new shares @ $120/share
• $1000M paid in capital
– 50% increase in revenues
• 15% from international
• 35% from domestic
–
–
–
–
3/25/2013
Marketing Budget increases by 15%
New R&D expense of $73.5M
Increase Content Inventory by 50%
No dividends
© 2013, Tony Gauvin,UMFK
44
Projected Income Statement
Netflix, Inc.
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
Projected
December 31,
December 31,
2010
2011
Revenues
Domestic
$
2,162,625 $
International
2,919,543.75 +35%
515,213.60 +15% of total revenues
Total
$ 2,162,625.00
$
3,434,757.35
Cost of revenues
$ 1,357,355.00
$
1,832,429.25 CGS method
Marketing
$
293,839.00 $
456,185.05 CGS method + additional 15%
Technology and development
$
163,329.00 $
236,829.00 additional $73.5M
General and administrative
$
64,461.00 $
Legal settlement
$
Operating income (loss)
Other income (expense):
$
283,641.00 $
307,078.10
Interest expense
$
(19,629.00) $
(19,629.00) Same
Interest and other income (expense)
87,022.35 CGS method
-
$
3,684.00 $
Income (loss) before income taxes
$
267,696.00 $
291,133.10
Provision (benefit) for income taxes
$
106,843.00 $
106,843.00 same
Net income (loss)
Earnings per share:
$
160,853 $
$
3.06 $
3.03
$
2.96 $
2.94
Basic
Diluted
Weighted-average common shares outstanding:
Basic
Diluted
3/25/2013
$
52,529
54,304
3,684.00 same
184,290.10 add to retained earings
60,862additional 8.33 million shares
62,637additional 8.33 million shares
© 2013, Tony Gauvin,UMFK
45
Projected Balance Sheet
Netflix, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands)
Projected
December 31,
2010
2011
December 31,
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Current content library, net
Prepaid content
Other current assets
Total current assets
Non-current content library, net
Property and equipment, net
Other non-current assets
Total assets
$
$
$
$
$
$
$
$
$
$
194,499
155,888
181,006
62,217
43,621
637,231
180,973
128,570
35,293
982,067
$
198,808
$
155,888
$
271,509
$
62,217
$
43,621
$
732,043
$
271,460
$
128,570
$
35,293
$ 1,167,365
fudge number
$
$
$
$
174,791
54,129
32,476
127,183
$
$
$
$
174,791
54,129
32,476
127,183
Same
"
"
"
$
$
$
$
$
$
388,579
48,179
200,000
55,145
691,903
$
$
$
$
$
$
388,579
48,179
200,000
55,145
691,903
"
"
"
$
$
$
51,622
750
237,739
$
$
$
52,622
750
422,029
$
290,164
$
475,462
$
982,067
$ 1,167,365
50% additional titles
50% additional titles
same
same
Liabilities and Stockholders' Equity
Current liabilities:
Current content liabilities
Accounts payable
Accrued expenses
Deferred revenue
Total current liabilities
Non-current content liabilities
Long-term debt
Long-term debt due to related party
Other non-current liabilities
Total liabilities
"
"
Stockholders' equity:
Common stock
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
53
Total stockholders' equity
Total liabilities and
stockholders' equity
3/25/2013
© 2013, Tony Gauvin,UMFK
61add new stock issue
add 1,000m paid in capital
same
Add projected Net Income
46
Projected Ratios
Growth Rate Percent
Netflix 2010
Netflix 2011
S&P 500
48.60
58.82%
14.90
-
14.57%
-
Profit Margin Percent
Gross Margin
Pre-Tax Margin
Net Profit Margin
36.6
12.
8.1
47%
9%
5%
39.5
18.0
13.1
Liquidity Ratios
Debt/Equity Ratio
2.4
1.46
1.00
Current Ratio
1.2
1.88
1.4
Quick Ratio
1.2
1.88
0.9
Profitability Ratios
Return On Equity
Return On Assets
82.0
17.4
39
16
28.1
8.8
Efficiency Ratios
Asset Turnover
2.1
2.9
0.8
Sales
( YTD to YTD)
Net Income (YTD vs YTD)
3/25/2013
© 2013, Tony Gauvin,UMFK
47
Strategic Evaluation
3/25/2013
© 2013, Tony Gauvin,UMFK
48
Balanced Score Card
Area of Objectives
Measure or Target
Time
Expectation
Primary Responsibility
Customers
1
Satisfaction
Customer Survey results
Yearly
Marketing Department
2
Brand Identity
Industry Reports
Yearly
Marketing Department
Employees
1
Quality and service training
On site and webinars
Yearly
COO
2
Employee Satisfaction
Survey
Yearly
Human resources
2011 +15 M, 2012 +20M, 2013 +25M
Yearly
COO
volume of recyclable materials
Quarterly
COO
# of ethics training sessions
Yearly
Human resources
Marketing
1. Number of Subscribers
Business Ethics/Natural
Environment
1
Waste reduction
2 Ethics Training
Financial
1
Revenues
50% increase each year
Quarterly
CFO
2
Ratio analysis
better than Industry Avg,
Yearly
CFO
3/25/2013
© 2013, Tony Gauvin,UMFK
49
Netflix Update
3/25/2013
© 2013, Tony Gauvin,UMFK
50
Update
3/25/2013
© 2013, Tony Gauvin,UMFK
51
Update
3/25/2013
© 2013, Tony Gauvin,UMFK
52
The Quickster Fiasco
• In September 2011, Hastings announces that
he will split off the DVD rental business into a
new company called Qwickster
• NetFlix loses 800,000 customers
• Stock prices falls from $295 to $108/share
• In October 2011, Hastings decides to NOT split
off the DVD business
3/25/2013
© 2013, Tony Gauvin,UMFK
53
Stock Performance
Source: MorningStar®
3/25/2013
© 2013, Tony Gauvin,UMFK
54
3/25/2013
© 2013, Tony Gauvin,UMFK
55
3/25/2013
© 2013, Tony Gauvin,UMFK
56
Questions
3/25/2013
© 2013, Tony Gauvin,UMFK
57
•
References
Uhle, Frank, and Stephen Meyer. "Netflix, Inc." International Directory of Company Histories. Ed. Derek Jacques and Paula Kepos. Vol. 115.
Detroit: St. James Press, 2010. 350-355. Business Insights: Essentials. Web. 22 Mar. 2013. Document URL
http://bi.galegroup.com/essentials/article/GALE|CX2335800079
•
•
•
•
•
•
•
•
•
•
•
"DVD Rental Market, 2009-2010." Market Share Reporter. Detroit: Gale, 2012. Business Insights: Essentials. Web. 22 Mar. 2013. Document URL
http://bi.galegroup.com/essentials/article/GALE|I2502040158?u=maine_fortkent
"Top Entertainment Web Sites, 2010." Market Share Reporter. Ed. Robert S. Lazich and Virgil L. Burton, III. 2012 ed. Detroit: Gale, 2012.
Business Insights: Essentials. Web. 22 Mar. 2013. Document URL
http://bi.galegroup.com/essentials/article/GALE|I2502036216?u=maine_fortkent
"DVD Rental Market, 2009-2010." Market Share Reporter. Detroit: Gale, 2012. Business Insights: Essentials. Web. 22 Mar. 2013. Document URL
http://bi.galegroup.com/essentials/article/GALE|I2502040158?u=maine_fortkent
"Digital Video Streaming Market, 2010." Market Share Reporter. Ed. Robert S. Lazich and Virgil L. Burton, III. 2012 ed. Detroit: Gale, 2012.
Business Insights: Essentials. Web. 22 Mar. 2013. Document URL
http://bi.galegroup.com/essentials/article/GALE|I2502038343?u=maine_fortkent
“The Network Neutrality and the Netflix Dispute: Upcoming Challenges for Content Providers in Europe and the United States. “ Intellectual
Property & Technology Law Journal; Mar2011, Vol. 23 Issue 3, p3-6, 4p Document URL
http://www.library.umaine.edu/auth/EZProxy/test/authej.asp?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=5862324
7&site=ehost-live
Chapter 18: FILMED ENTERTAINMENT. Miller, Richard K. and Washington, Kelli, Leisure Market Research Handbook; 2010, p156-159, $p, 2
Charts Document URL:
http://www.library.umaine.edu/auth/EZProxy/test/authej.asp?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4756508
6&site=ehost-live
Eisenmann, Thomas R., ed. Internet Business Models: Text and Cases. New York: McGraw-Hill/Irwin, 2001
Netflix, Inc. – 2011, Lori Radanovich, Bladwin-Wallace College, published in Strategic Management, Concepts and Cases 14th edition, Fred David
Netflix– 2011, case notes, Forest David
http://ir.netflix.com/
All images are from www.netflix.com and are the property of Netflix, Inc.
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© 2013, Tony Gauvin,UMFK
58