Kim Kruse

March 17, 2011

BUSN 460- Strategic Planning and Policy

Netflix

Background/Strategy

Netflix is the world’s largest online entertainment subscription service. Subscribers pay a
monthly fee based on what package they want. All packages include unlimited online streaming and
unlimited DVDs each month, but the price you pay will determine how many DVDs you can have at
home at any given time. Netflix has grown to provide one day delivery service to all its customers. The
library of movies has grown larger and larger each year to what can be watched instantly or through
mail. Wal-Mart and Netflix has entered into an agreement to which they would refer to each other for
online streaming and buying the actual DVD. Netflix has grown tremendously since 1999 when they first
launched the online service. Revenues and movie titles had both increased dramatically over the last 5
years.

Netflix’s strategy is providing customers with a wide range of movies, an easy way to choose the
movies, fast delivery of the selections, no due dates for the return, a convenient drop it in the mail
return procedure, all together with aggressive marketing to attract subscribers and build awareness of
the Netflix brand and services worldwide. Netflix wanted to avoid people having the hassle to go to the
store, pick out a movie at the store, and then having to return the movie by a certain date. In 2008,
Netflix has joined with LG Electronics, so subscribers could watch movies on their television screens.
Also in 2008, they combined with Starz Entertainment to provide a more movies that would be available
online to stream and was included in the subscription fee already without raising the prices. Netflix
based their market on the idea that DVDs and Blu-rays would be the main format for the coming years.
Management believes that internet streaming will surpass the mail delivery option in the future and the
mail option will only be a small fraction of Netflix’s main business.

Along with Netflix’s strategy, they have a wide choice of subscription plans that many people
and families can choose from to fit their needs. Netflix has also created a software device, within the
main database, to recommend movies to customers that they might like to see based upon what they
have already watched and rated, of which 50% of rentals and online streaming come from this service.
They also offer quick delivery capabilities to all customers using the mail option. Customers will receive
their DVD within one shipping day. The distribution centers are spread throughout the USA and try to
use the closest one to the customer if distribution center has the movie in stock. If that center doesn’t it
then moves to the next closest one to give the customer the movie they have selected they want next
from their list. Netflix has several licenses with many companies for all the movies. Half way in 2008,
Netflix had a net value of $126.9 million of content (DVDs). Netflix also uses several marketing channels
to attract customers. They have used online advertising (banner ads, paid search listings, text on
popular sites, and permission based emails), radio stations, television, direct mail, and print ads. They
also produced advertising featuring a certain movie in which Netflix would get some cash back for.
Netflix also provided free trials to attract more customers to try the service out.

Problems and Issues

 One problem that Netflix faces is other competitors. Netflix was the only company in the
market and faced competitive pressure coming from the threat of entry of new rivals, like Blockbuster.
Blockbuster is one company that has tried to compete in the same market. Blockbuster had a different
strategy on how they would compete in the home delivery and online movie market. Both companies
were offering similar services except for Blockbuster offered an actual store location that customers
could use too.

An issue that Netflix has is the availability to watch the movies on television. Netflix has DVDs
sent to home whenever the customer wants, but the customer also has the availability to watch several
movies online on their PC. The customers cannot watch the movies directly on their television unless
they have the DVD.

Vending machines

Illegal downloading

Financial

2004 2005 2006 2007

NETFLIX
Operating Operating 3.875% .440% 6.461% 7.567%
Profit Margin Income/Revenue
Return on Profits After 13.82% 18.56% 11.40% 16.18%
Stockholder’s Taxes/Total Equity
Equity
Current Ratio Current 1.974 .9678 .7037 .6437
Assets/Current
Liabilities
Working Current Assets- 92.4 148.8 235.0 203.9
Capital Current Liabilities
Price/Earnings Current Market 29.286 34.177 33.205 26.900
Ratio Price Per
Share/EPS

Netflix is doing well in all the financial areas. Their operating profit margin has increased every
year, except in 2005, but then made a great increase in 2006. Netflix’s return on stockholder’s equity
has floated around a little bit, but is normally at an above average level, which is 12-15%. The current
ratio of Netflix has been decreasing over the 4 years shown above. This number should be greater than
1.0 in order to pay off current liabilities, but it isn’t too bad for Netflix, because they do not have that
many assets, because a lot of their business is done online. This can also be helped with working capital.
Working capital for Netflix has grown, except in 2007 when the economy started to turn. These are
internal funds that they have available to pay off current liabilities and to not borrow as many funds in
the future. The price/earnings ratio of Netflix has varied for these years. It is well above what is rated
good for companies, 20, but they show a strong investor confidence in the firm’s outlook and earnings in
growth are good.
 Blockbuster

Background/Strategy

Blockbuster used to be the global leader in the movie rental industry. They had thousands of
stores in the USA and had some in 24 other countries. However when the market got more competitive,
Blockbuster fell hard having to close several hundred stores across the world and posted net losses. This
was partly because of the split between Blockbuster and Viacom, which when the split happened there
was an arrangement for all shareholders to receive a special divided on $5 causing a huge financial
burden. In 2007, Blockbuster appointed a new CEO to the company to try and get Blockbuster back on
top.

Blockbuster’s strategic vision in 2002 was to become the complete source for movies and video
games in the rental and retail area. They were the leader in the movie and game rental market already,
they wanted to further increase sales and in-store selection of movies and gaming equipment. To help
with this vision and strategy, Blockbuster purchased a video game retailer in England. This helped boost
them in the gaming industry with video games for rent and also equipment such as the gaming systems
themselves. They had experts in gaming work during peak hours so that customers could have help
available if they had any questions. Blockbuster also came up with a movie subscription service where
people could rent out as many movies as they could in one month and the price determining how many
they could have out at one time. They also expanded to online rentals in 2004. Blockbuster had 3 plans
for which customers could choose from depending on how many DVDs they wanted to have at one time,
all with unlimited rental limits. Online subscribers were sent two coupons each month for free in-store
rentals. The distribution centers across the USA sent out videos daily to the customers based upon the
movies they have in their queue. This move to be online was Blockbuster’s idea of being “anywhere,
anytime.” In 2004, they cut the price of the plans, opened more distribution centers, had two week free
trial periods for new customers, and they also integrated their online and in-store subscription program.
In 2005, Blockbuster discontinued the late fees for in-store rentals. This helped them in the beginning
but many stores across the nation lost revenue because the movies weren’t returning on time. Having
movies not returned on time, cost stores more money to stock additional copies of the popular films.

In 2007, Blockbuster moved to redo their strategy as they fulfilled their previous one. They
wanted to focus on growing its core movie rental business, broadening the product offerings at local
stores, and develop new channels for delivery of digital movies. One of the first things the new CEO did
was improved the availability of new releases in movies. They boosted inventory by 20% to 60% in one
year, which helped boost their sales back up. They also expanded their selection of independent films,
refurbished stores, placed vending machines in high-traffic areas, created several more options of plans,
and Blockbuster also purchased Movielink, an online movie downloading service, which these all help
boost their revenue. Blockbuster expanded their inventory of movies for rent, but also the selection
available to buy. They also included video game consoles for sale along with video games. Blockbuster
expanded their selection of video games as well. The acquisition of Movielink let Blockbuster customers
the availability to rent or own movies online.

Problems/Issues

Financial
 2004 2005 2006 2007
BLOCKBUSTER
Operating Operating -20.703% -6.692% 1.333% .706%
Profit Margin Income/Revenue
Return on Profits After -117.5% -92.45% 5.42% -12.43%
Stockholder’s Taxes/Total Equity
Equity
Current Ratio Current .8401 1.080 1.112 1.024
Assets/Current
Liabilities
Working Current Assets- -231.7 105.9 157 30.7
Capital Current Liabilities
Price/Earnings Current Market -.722 -.848 .040 -.115
Ratio Price Per
Share/EPS

Overall Blockbuster didn’t do too well over these 4 years, especially in 2004 the worst of the 4
years. Their operating profit margin in 2004 and 2005 were both negative. This shows the profitability
of current operations for the company. Blockbusters return on stockholder’s equity is well below the
average during these 4 years. The average return is from 12-15%, of which Blockbusters was negative
for 3 years and at 5% in 2006, which is still lower than the average. Blockbusters current ratio is alright
through these 4 years. This ratio should be larger than 1 and the higher the better to show that they can
pay off current liabilities and assets can be converted into cash easily. Working capital shows the
company’s internal funds available to pay its current liabilities on time and money available to not
borrow funds. Blockbuster has a negative amount in 2004, but the years after are positive showing that
the company has some money to work with but not much because the amounts are low. The
price/earnings ratio shows the company’s growth outlook to the future. Blockbuster has a negative
outlook for 3 years and a very small one in 2006. Any price/earnings ratio should be around 20 or if they
are at risk or plan to grow slowly at 12. Blockbuster is well below 12, showing no growth at all.