Netflix began as a DVD rental service and has transformed into an online streaming platform serving over 20 million subscribers globally, however rising content costs and increasing competition have led to declining revenues and subscriber losses, threatening Netflix's business model and requiring strategic changes around pricing, international expansion, and content partnerships to strengthen its competitive position.

1. Ashna Dhawan
Emira Ajeti
Neel Bhalaria
Ta r u n C h u g h

2. Reed
Hastings
Founder, Chairm
Management Team an
Neil David Wells
Hunt
Chief Financial
Chief Product Officer
Officer
Leslie Patty
Kilgore McCord
Chief Marketing Chief Talent
Officer Officer

3. Company Background
• Founded in 1997 by Reed Hasting
• Headquartered in Los Gatos, California
• Offers online flat rate DVD and Blu-ray disc rental-by-mail and video
streaming
• Serving more than 20 million subscribers
• Employees-2,180 full-time employees
• More than 100,000 titles of DVD
• Distribution centers-more than 50
• International Operations-Canada and Latin America
(Caribbean, Mexico, Central and South America
• Agreements and Partnerships with Nintendo WII, PS3, Xbox, Blu- ray disc
players etc

4. How Netflix works
DVDS by mail
•Select •Receive •Watch •Exchange

5. How Netflix works
PLUS, instantly over the Internet to your TV
•Select •Watch Instantly •Anytime

6. Strategic Direction
Mission-to be a great Internet movie service by satisfying its customers and providing
them with the most expansive selection of DVDs; an easy way to choose movies; and
fast, free delivery.
Vision-To be world’s best distribution platform
Objective-offer a superior customer experience by providing convenient and
affordable entertainment and to revolutionize the home entertainment experience
Strategic Philosophy- to continuously improve the customer experience by
expanding its streaming content, enhancing its user interfaces and extending its
streaming service to more Internet-connected devices while staying within the
parameters of their operating margin target.

7. Competition
Blockbuster Redbox Hulu/Hulu Plus Amazon Vudu
• Founded in 1985 • Founded in 2002 • Founded in 2007 • Founded in 2008 • Founded in 2004
• McKinney, Texas • Oakbrook • Los Angeles, • Provides users to • Santa Clara,
• North Terrace, Illinois, U California, United rent individual California, USA
America, South nited States States films or episodes of • To distribute full-
America, Europe, • specializes in the • Provide ad television shows, length movies over
Australia rental of supported which extends the Internet to
• Provider of home DVDs, Blu-ray subscription users' access to over television
video and video Discs, and video service to bring 90,000 film • Subsidiary of
games, DVD by games via current TV • Cost $79 per year Walmart
mail and streaming automated retail programs in HD to • Rent: $1.99-2.99 • Cost-$1-5.99 per
videos on demand kiosks PC’s and TV etc . • Buy:$15 video
and kiosks • Subsidiary of • Joint venture
• Subsidiary of Dish Coinstar (NBCUniversal,
Network • Cost-$1/ day Fox Entertainment
• Mail service Cost- Group,Disney-ABC
$11.99/ month Television Group)
• Rentals (1.99-3.99) • Cost-$ 7.99/month
•

8. Barriers to entry
• Timing
 Barnes and Nobles v/s Amazon
 Barnes and Nobles late by 17months.
 Amazon has 30times market capitalization and 8 times the profit mrgin
 Netflix v/s Blockbuster
 Right Timing
 Netflix profits increase by 7times and Blockbuster lost $1bn in revenue
• Investment/Capital for:
 Tie ups with production houses
 Supply Chain Management

9. Substitutes/Unique
Resources
• Substitutes
 Theatres, Concerts, TV
• Unique/Scarce Resources
 Patented software and content
 Bandwidth

10. Legal and Political
Macro Environment
Opportunities Threats
 Password Sharing
 Copyright Laws preventing
expansion
 State of Tennessee, July 2011
 Lawsuits
 Video Privacy Protection i. National Association
Act ($200,000 lobbying) of the Deaf
ii. Recommended
Algorithm
iii. Throttling
i. Unlimited rental
ii. One day delivery

11. Economic
Macro Environment
Opportunities Threats
 270 million internet users in  Low Entry Barriers
the US  Rising Content Costs
 Aggregate 2.2 billion users in i. Increased competition
the world ii. Excessive supplier power
 Expansion in the international  Low Pricing Power
markets with Canada, Latin
America& UK  Price Sensitive customers
 First Mover advantage in the
streaming business
 Great Recession has been a
boon

12. Social/Demographic
Macro Environment
Opportunities Threats
 17% of US users use the
 Price Elasticity is highest for
internet to stream videos 18-34 demographic
 Time spent online has
 Only 15% of the 18-25 age
increased by 6% group ready to pay extra for
Premium
 18-34 age group have the
highest affinity to Netflix  Company is ignoring the
baby boomers
 Multiple people households
income>50k

13. Technological
Macro Environment
Opportunities Threats
 93 million households High
 Fair usage issues
Speed net 2013  First sale doctrine
 Only 35% of the users use  Amazon, Hulu are strong
smart phones competitors
 Properitory software &  Piracy
Streaming protocols
 97% of the customers
receive DVDs in 1 business
day

14. Global
Macro Environment
Opportunities Threats
 43 countries in Latin
 Execution risks
America  Increased content costs due
 Q4 expects to have 2 million
to broadening of portfolio
subscribers  Negative contribution
 20 million households in
margin
the UK 60% pay for an  Per capita income levels
online movie offering  Tech infrastructure

15. Finance
Internal Environment
• Objectives
 Focus on increasing the subscribers to 26 million by 2011
 Maintain a healthy cash position to meet the growing content costs
obligations by issuance of new equity/debt
 Invest in innovative user interface and streaming technologies to create a
solid platform for the shift of subscribers from DVD business to streaming
 Ensure that the international businesses become contribution profit positive
within the next 2 years
 (Contribution profit= revenues-COGS-marketing expenses)

16. Finance
Internal Environment
 Over the last few 5 years 38.8 % growth rate in net income

17. Finance
Internal Environment
Profit/Operating Margin
40
35
30
25
20
15
10
5
0
2005 2006 2007 2008 2009 2010
Gross margin 31.7 37.1 34.8 33.6 35.4 37.2
Operating margin 1.6 6.3 6.4 8.9 11.2 12.8
Vincent Chung 1055-5

18. Finance
Internal Environment
Long term Debt to cash
500
400
300 cash (In
200 millions)
LTD(in
100
millions)
0
2005 2006 2007 2008 2009 2010

19. Finance
Internal Environment
Current Liabilities and Cash flow
500
400
Current Liabitlities (in
300 millions)
200 Free Cash Flow(in
millions)
100
0
2005 2006 2007 2008 2009 2010

20. Finance
Internal Environment
 Stock has given -63.06% return in the last one year
 Reached its life time high of $304.79 in July and its 52 week low in
November of $62.79

21. Finance
Internal Environment
 Netflix has given
a negative return
of -63.06% YTD
 S&P 500 has
given 1.15%

22. Finance
Internal Environment
 The future
estimates are in
the negative
 Wall Street
shoots first and
then thinks

23. Finance
Internal Environment
July 12, 2011 September October 24, 2011 November
SeS
19, 2011 22, 2011
• 800,000
• Announces a 60%
subscribers leave
increase in plans by • Announces • Announces
the company
separating DVD by separating DVD by issuance of equity
• Announces the first
mail and streaming mail and to raise 400 million
two quarters of
business streaming 2012 will be loss
business making
• Backtracks on the
decision

24. Finance
Internal Environment
Weaknesses
Strengths
 Weak Pricing power& price
 Mid 30% top line and bottom elasticity of customers
line growth for 5 years
 3% subscriber loss due to price
 Consistent Cash flow growth changes
 Low debt to equity ratio  $2.9 billion dollar in content
 Early mover advantage in obligations in next 5 years
streaming  International expansion to be
 Linear trend in OM has reached loss making for next 3 years
11.2% in 2010  Negative share holder return in
last 1 year due to lack of
strategic direction

25. FROM a company that sends out DVD-s in the mail
TO one of the world’s largest media distributors
Marketing
 It is easy to drop an idea or a campaign because it isn't "ready."
Many are still not satisfied with the content available through their
streaming video service. That hasn’t stopped Netflix to improve over time
 Re-branding strategy? A mistake?
Netflix lost over 1 million subscribers after its price increase
Well researched?
Well planned strategy with segmented strategies for all possible
scenarios?
 Netflix split its brand into 2 different categories:
2 separate websites, two sets of recommendations,
2 separate customer bases, 2 monthly payments. and
2 separate places to get affordability, instant access and usability

26. Marketing Analysis
• Strength
 1st mover advantage - venture into the online DVD rental retailing
 Large customer base over the years
 Strong relationship with major studios and independent film studios
(latest releases, low cost and niche market)
 It offers a proprietary recommendation system, quite accurate
 Recently sent out "refer-a-friend" cards for one free month of service.
• Weaknesses
 High cost for the replacement of content
 Netflix business model does not really work with low volume customers

27. Marketing Expense
 Customer acquisition is becoming both harder
and more expensive.
 Netflix seems to be spending much more on free
subscribers than ever before.
 Overall acquisition costs for subscribers showed a
large increase from 2010 to 2011.

28. Operations
Objectives
 Reduce R&D costs by possibly partnering with an expert
company
 Retract from further international expansion
Its previous strategies of investing in locating itself strategically
has now moved to the strategy of content improvement.
However, adapting to the content appealing to an international
audience needs further investment
 Enhance video content in the US, follow Disney example

29. PRAISE FOR ITS TALENT MANAGEMENT PROGRAMS
Human resource and ethical
concerns
 Salaries are at the 90th percentile of the market
 Employees who meet the membership criteria are rewarded with
premium base salary levels.
 Not differentiating rewards by individual performance, but by
considering all members who prove themselves to be top performers.
 Commitment to their style of performance management
- show mediocre employees the door
- Netflix has an annual “keep test” (double digit # people fail the test yearly
among the Netflix population of about 500 salaried employees)
 Critical competencies in recruiting
-in-house recruiting
 Careful avoidance of “incentives to stay”
-vest schedules for its stock options

30. Core Competencies and
Competitive advantages
 Netflix’s core product and its strength is
delivering a very smooth, seamless, enjoyable
customer experience.
 The Netflix model and software are
proprietary, making their unique features
difficult to imitate

31. Key weaknesses
• Internal
 Lack of Pricing Power
 Lack of strategic direction
 Brand dilution due to recent adhoc decisions
• External
 Lack on technological support in international markets
 Rising content cost

32. Central Problem
 Deviating from the success formulae of unlimited DVD rental
 Declining revenue/subscribers
 Increase content costs
 Low barriers to entry for new competitors

33. Strategic Recommendation
and Implementation
 Pricing Strategy: Tiered System-Mature Content, Pay per view
(Movies, Advertising with a low price)
 Focus on US markets. Losing money in expansion.
 Form partnership with other streaming companies so they are able
to improve their bargaining power for content