On-line DVD Rental

NETFLIX

Laurie Bouchard
Kikuyu Daniels
Stephen MacNeil
John McDonnell
Christine Palkoski
 DVD Rental Overview

• Primary “after theater” consumer distribution

methods:
• DVD rental and purchase
• On-line content service (pay-per view, streaming)

• Growth of DVD rental/purchase in 1990s

• Large movie studios recording in digital format
• DVD players more affordable

• Enter Netflix, DVD rental strong in U.S.

 Netflix Profile

• Founded in 1997 by Marc Randolph and current CEO

Reed Hastings

• Originally offered DVDs on a fee per use basis

• Introduced monthly subscription service in 1999

• 9.4 million subscribers as of Q4 2008

• 2009 forecast of 10.6 to 11.3 million subscribers

 Netflix Competitive Advantage
• First-mover advantage in on-line rental

• Patented method of web-based DVD selection

• Customer-centric, monthly subscription-based

service

“It probably looks easy to imitate Netflix, but it’s quite

difficult to get all the details right that matter to a
consumer. We’ve put four year’s effort into building our
service.” – Reed Hastings, co-founder in 2001
 Netflix Services
• Service Plan Options:
• Unlimited Plans
» $8.99 1 DVD at a time
» $13.99 2 DVDs at a time
» $16.99 3 DVDs at a time
» Less popular plans of 4-8 DVDs at a time available
*Unlimited online viewing on all unlimited plans
• 1 Limited Plan
» $4.99 1 DVD at a time (2 per month)
* 2 hours of online viewing
 Subscriber Growth
(000’s)

10,000 9,400

8,000 7,479

6,316
6,000
4,179
4,000
2,610

2,000 1,487
857
292 456
107
0
'99 '00 '01 '02 '03 '04 '05 '06 '07 '08
 Service Features
• No Due Dates

• No Late Fees

• No Cancellation Fees

• Free DVD Shipping – Both Ways

• Blu-ray Substitution, for a Fee

 Customer Loyalty
• Consistently maintain 84% - 86% of existing
customers quarter over quarter.

• Voted #1 online retailer 8 consecutive periods by

Foresee/FGI Research

• Achieved Through:
– Ease of Use
– Fast Delivery (97% in one day)
– Size of Selection (Over 100,000 DVD titles)
 Competition
• Movie Rental Stores
– Blockbuster, Hollywood Video, Movie Gallery

• Movie Rental Kiosks

– Red Box

• Downloadable Movies
– Apple, YouTube, Hulu
– “On Demand”

• Movie Theaters
– AMC, Showcase
 Main Competition
Netflix Blockbuster Redbox Industry Median
Annual Sales 1,364.7 5,542.4 22.4
($M)
Employees 1,644 59,643 750
Gross Profit 33.30% 51.90% - 36.00%
Marin
Net Profit 6.10% 0.50% - -11.50%
Margin
Return on 19.8% 1.8% - 2.9%
Invest. Cap.
12 mo. 13.2% 0.6% - 8.7%
Revenue
Growth
12 mo. Net 24.0% 0.0% - 15.2%
Income
Growth
Source: 2008 Data from Hoovers, SEC
 Financial Position
Twelve Months Ended Twelve Months Ended Twelve Months Ended
December 31, December 31, December 31,
2006 2007 2008

Revenues $ 996,660 $ 1,205,340 $ 1,364,661

Cost of revenues:
Subscription 532,621 664,407 761,133
Fulfillment expense* 94,364 121,761 149,101
Total cost of revenues 626,985 786,168 910,234
Gross profit 369,675 419,172 454,427
Operating expenses:
Technology and development* 47,831 70,979 89,873
Marketing* 225,436 218,212 199,713
General and administrative* 35,987 52,404 49,662
Gain on disposal of DVDs (4,797) (7,196) (6,327)
Gain on legal settlement - (7,000) -
Total operating expenses 304,457 327,399 332,921
Operating (loss) income 65,218 91,773 121,506
Other income (expense):
Interest expense on lease financing obligations (1,210) (1,188) (2,458)
Interest and other income (expense) 15,904 20,340 12,452
(Loss) income before income taxes 79,912 110,925 131,500
Provision (benefit) for income taxes 31,073 44,317 48,474
Net income $ 48,839 $ 66,608 $ 83,026

Net Income Margin 4.9% 5.5% 6.1%

 Financial Highlights

• Predictable Revenue Streams

• Not dependent on rental fees or late fees

• Low Overhead Costs Contribute to Profits

• No store rent, utilities, salaries

• Strong Growth
• Market entry timing, planned barrier to entry for competition,
customer centric
Video Streaming
Video Streaming
 Video Streaming
Opportunities for Netflix
• Lowers shipping costs
• More can be spent on content while achieving same profit
margins
• No more planning ahead to watch a movie
• May attract a new segment of movie watchers

• Partnerships for streaming

• LG & Samsung Blu-ray players
• Xbox360
• Roku digital video players
• Tivo HD boxes
Video Streaming
 Video Streaming
Threats for Netflix
• Exclusivity agreements with content providers may effect
availability of movies for streaming
• More competition from big name companies (Apple,
Microsoft, Amazon) and global competition from
companies operating locally overseas
• Limits on Bandwidth usage from internet providers
• Price adjustments to cover new expenses
Exclusivity Issues

Source: Netflix 2008 Investor Day Presentation

 SWOT
STRENGTHS WEAKNESSES

• First Mover Advantage • Monthly Fee Discourages Membership From

• Strong Brand Recognition Less Frequent Movie Watchers
• High Customer Satisfaction • Lack of Control Over DVD Return Time
• Large Movie Selection • Comparatively Small Movie Library Available to
• Low Overhead Costs Stream
• Predictable Monthly Revenue Streams • DVDs Can Arrive Scratched or Broken Due to
• Affordable Pricing Mailing Process

OPPORTUNITIES THREATS

• Product Line Expansion – Video Games • Staying power of DVDs

• Expand Downloadable Movie Offerings • Contractual restrictions on streaming content
• Print 3rd Party Advertisements of Red Envelopes • Bigger competition in the streaming video market
• Expand on Partnerships With Content Providers • DVD competition from Red Box, and Blockbuster
and Technology Providers.
 References
• “Twitter for Netflix” accessed on 23 March 2009. <http://addnetflix.moltbedesigns.com/>
• Luther, Shaila. “Netflix creeps into Facebook with Netflix Updates.” CrunchGear. 24 March 2009.
<http://www.crunchgear.com/2009/03/24/netflix-creeps-into-facebook-with-netflix-updates/>
• NetFlix Company Website accessed on 3 March 2009. <www.netflix.com>
• Wikipedia accessed on 14 March 2009. <http://en.wikipedia.org/wiki/Netflix>
• Hoovers Online accessed 23 March 2009. <http://premium.hoovers.com> (Premium subscription required)
• Cook, Jim and Taylor, Suzanne. “Five Lessons From the Netflix Startup Story.” MarketingProfs. 11 April 2006. <
http://www.marketingprofs.com/print.asp?source=/6/cooktaylor1.asp>
• Mullaney, Timothy. “Coming soon to a Netflix near you.” Business Week Online. 9 June 2006.<
http://www.businessweek.com/smallbiz/content/jun2006/sb20060609_292496.htm>
• Helft, Miguel. “Netflix to Deliver Movies to the PC.” New York Times. 16 January 2007. <
http://www.nytimes.com/2007/01/16/technology/16netflix.html>
• “Netflix offers subscribers the option of instantly watching movies on their PCs.” Netflix press release. 16 January 2007. <
http://www.netflix.com/MediaCenter?id=5384>
• Blockbuster Movies accessed 23 March 2009. <http://www.blockbuster.com/totalaccess>
• “Apple TV.” Apple.com. <http://www.apple.com/appletv/>
• Zeidler, Sue. “Netflix, consumer electronics partnerships near.” Reuters. Gary Hill. 2 April 2008. <
http://www.reuters.com/article/technologyNews/idUSN2133480820080422?feedType=RSS&feedName=technologyNews&sp=true
>
• Jacobs, Ian. “Internet-based businesses are (finally) changing the customer interaction paradigm.” Frost & Sullivan Market
Insight. 28 September 2007. <http://www.frost.com>
• Jacobs, Ian. “Universal agents – not a universally applicable idea.” Frost & Sullivan Market Insight. 30 June 2007. <
http://www.frost.com>
• “World Video Content Delivery Networks Market.” Frost & Sullivan Subscription Service. 15 December 2008. <
http://www.frost.com>
• “World Video Encoders and Transcoders Markets.” Frost & Sullivan Subscription Service. 13 December 2007. <
http://www.frost.com>
• “North American Residential Broadband Access Services Markets.” Frost & Sullivan Subscription Service. 28 March 2008.
http://www.frost.com
• SEC website accessed 7 April 2009 . <http://idea.sec.gov/Archives/edgar/data/1065280/000119312509037430/d10k.htm>