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Case 15
Netflix, Inc.
The 2011 RebRanding/PRice incRease debacle
Alan N. Hoffman
Bentley University

In 2011, Netflix was the world’s largest online movie rental service. Its subscribers paid
to have DVDs delivered to their homes through the U.S. mail, or to access and watch
unlimited TV shows and movies streamed over the Internet to their TVs, mobile
devices, or computers. The company was founded by Marc Randolph and Reed
Hastings in August, 1997 in Scotts Valley, California, after they had left Pure
Software. Hastings was inspired to start Netflix after being charged US$40 for an
overdue video.1 Initially, Netflix provided movies at US$6 per rental, but moved
to a monthly subscription rate in 1999, dropping the single-rental model soon after.
From then on, the company built its reputation on the business model of flat fee
unlimited rentals per month without any late fees, or shipping and handling fees.
In May 2002, Netflix went public with a successful IPO, selling 5.5 million shares of
common stock at the IPO price of US$15 per share to raise US$82.5 million. After incur-
ring substantial losses during its first few years of operations, Netflix turned a profit of
US$6.5 million during the fiscal year 2003.2 The company’s subscriber base grew strongly
and steadily from 1 million in the fourth quarter of 2002 to over 27 million in July 2012.3
By 2012, Netflix had over 100,000 titles distributed via more than 50 shipment
centers, insuring customers received their DVDs in one to two business days, which
made Netflix one of the most successful dotcom ventures in the past two decades.4 The
company employed almost 4100 people, 2200 of whom were part-time employees.5 In
­September 2010, Netflix began international operations by offering an unlimited stream-
ing plan without DVDs in Canada. In September 2011, Netflix expanded its international
operations to customers in the Caribbean, Mexico, and Central and South America.
Key to Netflix’s success was its no late fee policy. Netflix’s profits were directly
proportional to the number of days the customer kept a DVD. Most customers wanted
to view a new DVD release as soon as possible. If Netflix imposed a late fee, it would

The authors would like to thank Barbara Gottfried, Ashna Dhawan, Emira Ajeti, Neel Bhalaria, Tarun
Chugh, and Will Hoffman for their research and contributions to this case. Please address all correspon-
dence to: Dr. Alan N. Hoffman, Dept. of Management, Bentley University, 175 Forest Street, Waltham,
MA ­02452-4705, voice (781) 891-2287, ahoffman@ bentley.edu. Printed by permission of Alan N. Hoffman.

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have to have multiple copies of the new releases and find a way to remain profitable.
However, because of the no-late-fee rule, the demand for the newer movies was spread
over a period of time, ensuring an efficient circulation of movies.6
On September 18, 2011, Netflix CEO and co-founder Reed Hastings announced on
the Netflix blog that the company was splitting its DVD delivery service from its online
streaming service, rebranding its DVD delivery service Qwikster as a way to differenti-
ate it from its online streaming service, and creating a new website for it. Three weeks
later, in response to customer outrage and confusion, Hastings rescinded rebranding
the DVD delivery service Qwikster and reintegrating it into Netflix. Nevertheless, by
October 24, 2011, only five weeks after the initial split, Netflix acknowledged that it
had lost 800,000 U.S. subscribers and expected to lose yet more, thanks both to the
Qwikster debacle and the price hike the company had decided was necessary to cover
increasing content costs.7
Despite this setback, Netflix continued to believe that by providing the cheapest
and best subscription-paid, commercial-free streaming of movies and TV shows it could
still rapidly and profitably fulfill its envisioned goal to become the world’s best enter-
tainment distribution platform.

Online Streaming
By the end of 2011, Netflix had 24.4 million subscribers, making it the largest provider of
online streaming content in the world.8 Subscription numbers had grown exponentially,
increasing 250% from 9.3 million in 2008. At the same time, Netflix proactively recog-
nized that the demand for DVDs by mail had peaked, and the future growth would be
in online streaming. With 245 million Internet users in the United States, and 2.2 billion9
worldwide, Netflix saw the opportunity to expand its online streaming base both domes-
tically and internationally to become a dominant world player. In 2011, Netflix expanded
into Canada and Central America, and in 2012 into Ireland and the United Kingdom.10
The scarce resource for the online video industry was bandwidth, the amount of
data that can be carried from one point to another in a given time period.11 With the
introduction of Blu-ray discs, the demand for higher- and better-quality picture and
sound streaming increased, which in turn increased the demand for higher bandwidths.
At the same time, cheaper Internet connections and faster download speeds made it
easier and more affordable for customers to take advantage of the services Netflix and
its competitors offered. If the cost of Internet access was to increase, it would directly
affect sales in the industry’s streaming segment.
Netflix was a leader in developing streaming technologies, increasing its spending on
technology and development from US$114 million (2009) to US$258 million in 201112
(8% of its revenue),13 and initiating a US$1 million five-year prize in to improve the
existing algorithm of Netflix’s recommendation service by at least 10%. Because Netflix
had already developed proprietary streaming software and an extensive content library, it
had a head start in the online streaming market, and with continued investments in tech-
nological enhancements, hoped to maintain its lead.14 However, increased competition
in streaming, ISP fair-use charges, and piracy were some of the major challenges it faced.
In March 2011, Netflix made its services readily available to consumers through
Smart-phones, tablets and video game consoles when only 35% of the total U.S. market
were using Internet-enabled Smartphones.15 Thus, the expansion potential for Netflix in
this market was substantial. The Great Recession of 2008–2010 was a boon for Netflix
as people cut down on high-value discretionary spending, choosing “value for money”
Internet offerings instead.16 However, in its annual letter to shareholders, Netflix

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acknowledged that many of its customers were among the highest users of data on an
ISPs network and in the near future it expected that such users might be forced to pay
extra for their data usage, which could be a major deterrent for the growth of Netflix
because most of its customers are highly price sensitive.

Demographics
The number of Internet users in the United States had increased from about 205 million
in 2005 to 245 million in 2012.17 According to a research report by Mintel investment
research database, the percentage of people using the Internet to stream video has jumped
from 5% (2005) to 17% (2011), significantly growing the market for online streaming
services such as Netflix. At the same time, the recession of 2008–2010, with its high unem-
ployment and slow economic growth had a significant impact on the spending habits of
U.S. consumers. More and more people chose to forego an evening at the movie theatre
in favor of home movie rentals to save on costs.18 By 2011, the crucial 18- to 34-year-old
demographic saw the Internet as its prime source of access to entertainment. However,
this demographic, was particularly sensitive to price fluctuations. When Netflix changed
its pricing structure in the third quarter of 2011, subscriptions immediately dropped off
3%. Mintel Research reported that only 15% of the under 18–25 age bracket of its cus-
tomers were ready to pay US$16/month for premium content via Netflix. In addition, the
proliferation of free content over the Internet—Mega video, for example, with around
81 million unique visitors and a maximum exposure in the 18–33 demographic became a
strong competitor for Netflix, further limiting the pricing power Netflix could exercise.19
The Mintel report also found that American households with two or more children
and a household income of US$50,000 or more had a very favorable attitude toward
Netflix;20 Netflix fostered this trend by cutting a deal with Disney21 that gave it access
to content exclusively targeting young children.
At the same time that Netflix was increasing its customer base among the 18- to 34-year-
olds and households with young children, both of whom preferred streaming, it lost ground
with affluent Baby Boomers who still preferred to rent the DVDs over the Internet. Thus,
Netflix needed to fine-tune its strategy to include this older demographic since people over
60 had US$1 trillion in discretionary income per year, and fewer familial responsibilities,
making them a prime target demographic for expanding Netflix’s customer base.22
The availability of high-speed Internet at home and the shift to online TVs created
opportunities for Netflix. The company recognized that to fully leverage the current
world of technological convergence, it needed to compete on as many platforms as pos-
sible, and created applications for the Xbox, Wii, PS3, iPad, Apple TV, Windows phone,
and Android. The company also collaborated with TV manufacturers to integrate Netflix
directly into the latest televisions.23

Netflix’s Competitors
Netflix’s great operational advantage in the DVD rental market was its nationwide
distribution network, which prevented the entry of many of its potential competitors.
While only Netflix provided both mail delivery and online rentals, with the growth of
online streaming, Netflix’s advantage shrank and it faced increasing competition from
Blockbuster, Wal-Mart, Amazon, Hulu, and Redbox.
Netflix’s one-time strongest competitor, Blockbuster LLC, founded in 1985, and
headquartered in McKinney, Texas, provided in-home movie and game entertainment,
originally through over 5000 video rental stores throughout the Americas, Europe,

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Asia, and Australia, and later by adding DVD-by-mail, streaming video on demand,
and kiosks. Its business model emphasized providing convenient access to media enter-
tainment across multiple channels, recognizing that the same customer might choose
different ways to access media entertainment on different nights. Competition from
Netflix and other video rental companies forced Blockbuster to file for bankruptcy on
September 23, 2010, and on April 6, 2011, satellite television provider Dish Network
bought it at auction for US$233 million.24
Redbox Automated Retail, LLC, a wholly owned subsidiary of Coinstar Inc., spe-
cialized in DVD, Blu-ray, and rentals via automated retail kiosks. By June 2011, Redbox
had over 33,000 kiosks in over 27,800 locations worldwide,25 and was considering launch-
ing an online streaming service, perhaps for as cheaply as US$3.95 per month.
Vudu, Inc., formerly known as Marquee, Inc., founded in 2004, a content delivery
media technology company acquired by Wal-Mart in March 2010, worked by allowing
users to stream movies and TV shows to Sony PlayStation3, Blu-ray players, HDTVs,
computers, or home theaters. VUDU Box and VUDU XL provided access to movies
and television shows; users also needed a VUDU Wireless Kit to connect VUDU Box/
VUDU XL to the Internet. Based in Santa Clara, California, the company was the third
most popular online movie service, with a market share of 5.3%.26 Vudu had no monthly
subscription fee, instead users deposited funds to an online account which was reduced
depending on how many movies the user rented. In other words, you paid for only what
you watched.
In February 2011, Amazon.com, a multinational electronic commerce company,
announced the launch for Amazon Prime members of unlimited, commercial-free
instant streaming of all movies and TV shows to members’ computers or HDTVs. In
addition, Amazon Prime members were given access to the Kindle Owners’ Lending
Library, allowing them to borrow selected popular titles for free with no due date. For
non-Amazon Prime members, 48-hour on-demand rentals were available for US$3.99,
or the title could be bought outright.27
Hulu Plus was the first ad-supported subscription service for TV shows and films
that could be accessed by computers, television sets, mobile phone, or other digital
devices. Like Netflix, the streaming service cost US$8 per month, but unlike Netflix,
Hulu offered more recent TV episodes and seasons. However, subscribers had to put
up with ads, and Hulu’s movie selection was much more limited than Netflix’s selection.
Marc Schuh, an early financial backer of Netflix, observed that copying software
was relatively simple.28 Anyone could buy the best servers, processors, operating systems,
and databases—but timing was crucial.29 Barnes & Noble waited 17 months to enter the
fray against Amazon, so that by 2012, Amazon had eight times the profit and 30 times
the market capitalization of Barnes & Noble. Similarly, in the same year that Netflix’s
profits increased sevenfold, Blockbuster lost over 1 billion dollars.30 Technology with
correct timings can help a company gain competitive advantage over rivals. Other bar-
riers to entry include investments in infrastructure aiding supply chain and delays from
major production houses for gaining permission to stream their titles.

Rising Content Costs

In the DVD rental business, the rental company had the first sale doctrine, in which
the company was permitted to rent a single disc many times to recover the cost of the
content. But this doctrine did not apply to digital content, and the technological shift
away from the DVD rental business was in part responsible for the excessive increase
in content cost for Netflix.31

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In addition, Netflix’s dependence on outside content suppliers such as the six major
movie studios and the top television networks contributed significantly to rising costs for
the company. As an example, Liberty Media Corporation’s Starz LLC had been an early
Netflix supplier. In 2011, Starz demanded US$300 million to renew its deal with Netflix,
testament to the power of suppliers in relation to market demand from an increasing
number of competitors. On September 1, 2011, Netflix customers learned they would lose
access to newer films from the Walt Disney Company and the Sony Corporation after talks
to obtain those movies from Starz broke down. The loss created the impression of a major
setback, even though the films were making up a smaller share of viewing than previously.
However, Netflix did sign new deals with the CW Network, DreamWorks Anima-
tion, and Discovery Communications in 2011.

Global Expansion
Beginning in 2007, Netflix shifted its focus to its streaming business in response to their
customers’ move to streaming in preference to DVD rentals and the rising cost of mail-
ing DVDs. Conveniently, expanding its streaming business did not require expanding
its physical infrastructure. This strategy has proven to be a major differentiator as it
expands internationally in the Americas and Europe.
By the end of 2011, the company had started operations in Canada and 43 countries
in Latin America, and planned to start European operations in early 2012. At the end of
the third quarter of 2011, Netflix had 1.48 million international subscribers with predic-
tions of 2 million by the end of the year.32 The United Kingdom was considered a huge
potential market. Twenty million UK households had broadband Internet, and 60% of
those households subscribed to a paid movie service. In Latin America, four times that
number had Internet access,33 making international expansion there especially attractive
to subscriber-hungry Netflix.
However, international expansion was potentially risky, as Netflix faced rising con-
tent costs from higher studio charges. In addition, international expansion required both
broadening its content offerings and tailoring those offerings to meet the specific needs
of each of its international markets, which Netflix feared would further increase content
costs. It was clear that the correct content mix was crucial, yet a huge challenge for Netflix.
In addition, as Canada and the United Kingdom were already developed markets,
Netflix faced local competition from a proliferation of DVD rental/streaming services.
In the United Kingdom, for instance, Virgin and Sky already had strong brand recogni-
tion and balance sheets, and the Sky network had already contracted exclusive first-pay
window rights to movies from all six major American studios, tough competition that
could easily delay profitability from international operations.
Lower per capita income and slower Internet speeds, especially in Latin America,
were further potential problems for Netflix’s international expansion. In Canada, low
data usage limits per subscriber were a concern for a data hungry service such as Netflix.

Financial Results
In 2011, Netflix surpassed US$3.2 billion in sales, an annual revenue growth of 50%
over 2010 (US$2.1 billion, see Exhibits 1–3). Subscriber growth was the most important
metric for Netflix because its revenue growth was directly correlated to its subscriber
growth. Netflix grew from 12 million subscribers in 2009 to 20 million in 2010, and then
to 27 million in 2012. International operations were set to expand to become a major
source of sales growth for the company in the coming years.

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EXHIBIT 1
Netflix, Inc. Year ended December 31
­ onsolidated
C
Statements of 2011 2010 2009
Operations55 (in Revenues $3,204,577 $2,162,625 $1,670,269
thousands, except Cost of revenues:
per-share data)
Subscription 1,789,596 1,154,109 909,461
Fulfillment expenses 250,305 203,246 169,810
Total cost of revenues 2,039,901 1,357,355 1,079,271
Gross profit 1,164,676 805,270 590,998
Operating expenses:
Marketing 402,638 293,839 237,744
Technology and development 259,033 163,329 114,542
General and administrative 117,937 64,461 46,773
Legal settlement 9,000 — —
Total operating expenses 788,608 521,629 399,059
Operating income 376,068 283,641 191,939
Other income (expense):
Interest expense (20,025) (19,629) (6,475)
Interest and other income 3,479 3,684 6,728
Income before income taxes 359,522 267,696 192,192
Provision for income taxes 133,396 106,843 76,332
Net income $226,126 $160,853 $115,860
Net income per share:
Basic $4.28 $3.06 $2.05
Diluted $4.16 $2.96 $1.98
Weighted-average common
shares outstanding:
Basic 52,847 52,529 56,560
Diluted 54,369 54,304 58,416

EXHIBIT 2
Netflix, Inc.
As of December 31
­ onsolidated
C
­Balance Sheets55 (in 2011 2010
thousands, except Assets
share and per-share
Current assets:
data)
Cash and cash equivalents $508,053 $194,499
Short-term investments 289,758 155,888
Current content library, net 919,709 181,006
Prepaid content 56,007 62,217
Other current assets 57,330 43,621
Total current assets 1,830,857 637,231
Non-current content library, net 1,046,934 180,973
Property and equipment, net 136,353 128,570
Other non-current assets 55,052 35,293
Total assets $3,069,196 $982,067

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EXHIBIT 2
(Continued) As of December 31
2011 2010
Liabilities and stockholders’ equity
Current liabilities:
Content accounts payable $924,706 $168,695
Other accounts payable 87,860 54,129
Accrued expenses 63,693 38,572
Deferred revenue 148,796 127,183
Total current liabilities 1,225,055 388,579
Long-term debt 200,000 200,000
Long-term debt due to related party 200,000 —
Non-current content liabilities 739,628 48,179
Other non-current liabilities 61,703 55,145
Total liabilities 2,426,386 691,903
Commitments and contingencies (Note 5)
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000,000 shares — —
authorized at December 31, 2011 and 2010; no
shares issued and outstanding at December 31, 2011
and 2010
Common stock, $0.001 par value; 160,000,000 55 53
shares authorized at December 31, 2011 and 2010;
55,398,615 and 52,781,949 issued and outstanding at
December 31, 2011 and 2010, respectively
Additional paid-in capital 219,119 51,622
Accumulated other comprehensive income 706 750
Retained earnings 422,930 237,739
Total stockholders’ equity 642,810 290,164
Total liabilities and stockholders’ equity $3,069,196 $982,067

EXHIBIT 3
Netflix, Inc. Consolidated Statements of Cash Flows55 (in thousands)

Year Ended December 31

2011 2010 2009
Cash flows from operating activities:
Net income $226,126 $160,853 $115,860
Adjustments to reconcile net income to net cash provided by
operating activities:
Additions to streaming content library (2,320,732) (406,210) (64,217)
Change in streaming content liabilities 1,460,400 167,836 (4,014)
Amortization of streaming content library 699,128 158,100 48,192
Amortization of DVD content library 96,744 142,496 171,298
Depreciation and amortization of property, equipment, and
intangibles 43,747 38,099 38,044

SOURCE: http://files.shareholder.com/downloads/NFLX/2097321301x0x561754/3715da18-1753-4c34-8ba7-18dd28e50673/NFLX_10K.pdf
(continued)

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EXHIBIT 3
(Continued)

Year Ended December 31

2011 2010 2009
Stock-based compensation expense 61,582 27,996 12,618
Excess tax benefits from stock-based compensation (45,784) (62,214) (12,683)
Other non-cash items (4,050) (9,128) (7,161)
Deferred taxes (18,597) (962) 6,328
Gain on sale of business — — (1,783)
Changes in operating assets and liabilities:
Prepaid content 6,211 (35,476) (5,643)
Other current assets (4,775) (18,027) (5,358)
Other accounts payable 24,314 18,098 1,537
Accrued expenses 68,902 67,209 13,169
Deferred revenue 21,613 27,086 16,970
Other non-current assets and liabilities 2,883 645 1,906
Net cash provided by operating activities 317,712 276,401 325,063
Cash flows from investing activities:
Acquisition of DVD content library (85,154) (123,901) (193,044)
Purchases of short-term investments (223,750) (107,362) (228,000)
Proceeds from sale of short-term investments 50,993 120,857 166,706
Proceeds from maturities of short-term investments 38,105 15,818 35,673
Purchases of property and equipment (49,682) (33,837) (45,932)
Proceeds from sale of business — — 7,483
Other assets 3,674 12,344 11,035
Net cash used in investing activities (265,814) (116,081) (246,079)
Cash flows from financing activities:
Principal payments of lease financing obligations (2,083) (1,776) (1,158)
Proceeds from issuance of common stock upon exercise
of options 19,614 49,776 35,274
Proceeds from public offering of common stock, net of issuance 199,947 — —
costs
Excess tax benefits from stock-based compensation 45,784 62,214 12,683
Borrowings on line of credit, net of issuance costs — — 18,978
Payments on line of credit — — (20,000)
Proceeds from issuance of debt, net of issuance costs 198,060 — 193,917
Repurchases of common stock (199,666) (210,259) (324,335)
Net cash provided by (used in) financing activities 261,656 (100,045) (84,641)
Net increase (decrease) in cash and cash equivalents 313,554 60,275 (5,657)
Cash and cash equivalents, beginning of year 194,499 134,224 139,881
Cash and cash equivalents, end of year $508,053 $194,499 $134,224
Supplemental disclosure:
Income taxes paid $79,069 $56,218 $58,770
Interest paid 19,395 20,101 3,878

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However, by 2012, Netflix faced challenges from its pricing changes in the United
States and its expansion into international markets, even stating that it expected rev-
enue per subscriber to drop from its 2011 level of US$11.5634 as subscribers choose the
streaming only option of US$7.99 over the more expensive streaming and DVD delivery
option. For future revenue growth, Netflix needed to increase its subscribers numbers
both domestically and internationally.
In terms of net income, Netflix had steadily improved its bottom line in conjunction
with strong top line growth. The company had a net income of US$226 million in 2011
for a growth rate of 40% over the previous year’s US$160 million net income. Over the
five years from 2006–2011, the company saw an average net income growth of 31% per
year that, coupled with high revenue growth, was instrumental to Netflix’s high stock
valuation. However, recently, its operating margin slid from 15% in 2010 to 2.9% in 2012,
a drop directly attributable to the higher cost of content acquisition.
Until the end of 2007, Netflix had no long-term debt on its books, but it began to
acquire long-term debt in 2008 as a result of its decision to invest in building a strong
content library and expand overseas. At the end of 2011, Netflix had US$508 million in
cash and US$200 million in long-term debt.

Netflix’s Success
Netflix went from being a company that exclusively mailed DVDs to the largest media
delivery company in the world by making some smart strategic decisions. For instance,
Netflix jumped on the streaming bandwagon even though it was not really ready. At the
time, the online content available for streaming was extremely limited—less than 10%
of the content that was available from Netflix’s DVDs holdings.
At that time, Netflix’s mail-order DVD business was very popular, and customers
did not seem to mind waiting a day or two for their DVDs. Netflix then went ahead and
offered streaming content, a bold decision that anticipated an as yet unexpressed need
for the immediate gratification of streaming, and made Netflix the first entrant into the
market for streamed video. It was clear to Netflix that the use of DVDs would gradually
decline, and Netflix’s aggressive adoption of streaming videos was a sharp marketing
move, that gave it an edge in the global economy.
After its initial launch of online streaming, Netflix kept up to date with new trends
and customer preferences, especially the quickly changing preferences of Generation Y,
which were influenced by branding, social media, and media saturation. Netflix utilized
all the platforms that Generation Y would find appealing, from computers and TVs, to
Smartphones and tablets.
Continually bearing in mind that the two most important things for Netflix’s cus-
tomers were price per content, and quality of content, Netflix kept its priorities straight
and never stopped improving the quality of its content, or the platforms for delivering
that content.
Netflix also focused on increasing customer engagement. It allowed customers to
rate movies they viewed, thereby enhancing the customer experience and creating a
community of viewers. And, by tracking the movies a customer viewed, Netflix was able
to track customer preferences, and offer targeted recommendations for viewing. Netflix
also exploited customer loyalty to attract new customers, for instance, through its “refer-
a-friend” offer of one free month of service for both the new customer and the referrer
to attract new users who wanted to try the service risk-free.

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The 2011 Price Increase/Rebranding Debacle

Netflix continued to grow robustly by offering a combined DVD mail and unlimited
streaming service at a flat rate of US$9.99 a month, a rate that was key to Netflix’s ability
to offer a great value for money service. But with increased competition and expensive
new content deals, the company found it increasingly difficult to maintain its operating
margin levels. In the third quarter of 2011, Netflix implemented a 60% price increase,
from US$10 to US$16 a month for unlimited streaming and DVDs by mail, which imme-
diately resulted in the loss of 800,000 subscribers, pointing to the company’s very limited
latitude with regard to pricing.35
In response, Netflix took action that very shortly proved disastrous. In addition to
raising its prices and shifting its business model to focus on online streaming. Netflix
also attempted to restructure its operations by spinning off its DVD delivery ser-
vice and rebranding it Qwikster. Rebranding a well-known product or service such
as Netflix usually only works if a company was trying to simplify its brand, almost
never the other way around, which was, unfortunately what Netflix tried to do. Netflix
attempted to introduce a new entity, Qwikster, by splitting the old entity into two:
with two separate websites, two separate queues, two separate sets of recommenda-
tions, two separate customer bases, two separate billing avenues, and two new sets
of rules customer had to learn about. While Netflix had banked on the competitive
advantage of offering “affordability, instant access and usability,” the introduction of
a separate website undercut instant access and usability. Customers, critics, and Wall
Street responded harshly.
Apart from losing over 800,000 subscribers after its price increase, and losing half
of its market capitalization, Netflix’s rebranding strategy did not seem justifiable to its
customers.
Netflix botched the rebranding because it neglected due diligence prior to launch-
ing it and its price increases. Market research would surely have indicated customer
resistance to both. Heavily focused on increasing profits, Netflix did not effectively
strategize the rebranding/ repricing plan, nor did it anticipate resistance or prepare
strategy implementation scenarios. A new strategy should not only increase revenues
and profits, it should consider relationship and brand image gains and losses. In spring-
ing the rebranding on customers, Netflix undercut the quality of the experience it had
previously offered, and the negative reaction was not mitigated by the company’s public
apology or its rescinding of its decision to split its services. The botched rebranding led to
a dilution of Netflix’s brand, and loss of customer trust. Re-establishing its brand image
became a priority for Netflix, though it was not very easy to do. The company needed to
offer something genuinely useful to its customers at just the right cost, while increasing
the quality of the content offered and enhancing customer experience.
Finally, in order for Netflix to expand internationally, it needed to invest in the
technological infrastructure in the international markets that it lacked but which it des-
perately needs due to heavy competitions and other legal concerns that appear there.

Strategic Challenges Ahead for Netflix

Netflix’s top management needed to address many issues to maintain the company’s
leading position in the home video market. A strategic plan was needed to:
1. Repair the PR damage from the rebranding and price increases of 2011.
2. Focus on growing its subscriber base both at home and abroad.

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 www.downloadslide.net
3. Maintain a healthy cash position to meet the growing content cost obligations.
4. Invest in innovative user interface and streaming technologies to create a solid
platform for the shift from DVD delivery to streaming.
References
Blockbuster Wins 3-Month Restructuring Extension. Reuters. 20
Jan 2011. URL: http://t.co/iZPsUi5
Video On Demand, Wikipedia, Accessed: 31-Jan-2011, URL:
http://en.wikipedia.org/wiki/Video_on_demand
Netflix Annual SEC Report (2010) URL: http://files.shareholder
.com/downloads/NFLX/1159919179x0xS1193125
-10-36181/1065280/filing.pdf
http://www.fundinguniverse.com/company-histories/Netflix
-Inc-company-History.html
2 10-K Netflix Annual Report – 2010
Hoovers company profile—Netflix Inc.
Datamonitor. Netflix Inc. Company Profile. 23 Jun. 2010
http://money.cnn.com/2011/10/24/technology/netflix_earnings
/index.htm
Datamonitor. Blockbuster Inc. Company Profile. 30 Dec. 2010
http://www.redbox.com/release_20110811
http://www.theatlanticwire.com/business/2011/08/walmarts
-facebook-powered-future/41843/
http://www.csmonitor.com/Innovation/2011/0713
/Five-alternatives-to-Netflix/Amazon-Prime-instant-video
http://facstaff.uww.edu/mohanp/netflix.html
Information System: A Manager’s Guide to Harnessing – John
Gallaugher
FY 2008, and June 2009 market cap figures for both firms
http://www.barnesandnobleinc.com/newsroom/financial_only
.html
http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p
=irol-reportsOther
Movies to Go. The Economist. July 9, 2005
http://insight.kellogg.northwestern.edu/index.php/Kellogg
/article/a_surprising_secret_to_netflixs_runaway_success
http://searchenterprisewan.techtarget.com/definition/bandwidth
http://slatest.slate.com/posts/2011/06/02/nnessee_netflix_law_
new_measure_makes_it_illegal_to_share_login_.html
http://www.wired.com/threatlevel/2011/09/netflix-video-privacy/
http://www.reelseo.com/time-warner-netflix-sued-providing
-captions-video-streams/
http://news.cnet.com/8301-13578_3-20072619-38/netflix
-sued-by-deaf-group-over-lack-of-subtitles/
http://arxiv.org/PS_cache/cs/pdf/0610/0610105v2.pdf
http://www.nytimes.com/2010/03/13/technology/13netflix.html
http://news.cnet.com/8301-10784_3-9926311-7.html
notes
1.
http://www.fundinguniverse.com/company-histories
/Netflix-Inc-company-History.html.
2.
10-K Netflix Annual Report – 2010.
3.
Hoovers company profile – Netflix Inc.
4.
Datamonitor, Netflix Inc. Company Profile. 23 Jun. 2010.
5.
Datamonitor, Netflix Inc. Company Profile. 23 Jun. 2010.
Z15_WHEE5488_15_GE_CA15.indd 11
Ca se 15   Netflix, Inc. 15-11
S&P Net Advantage
IDC Technology Research Firm Source: S&P Industry Survey
10-Q Netflix Quarterly Fillings-Q3-2011
10-K Netflix Annual Report – 2010 http://www.cnn
.com/2011/08/31/tech/mobile/smartphone-market-share-
gahran/index.html
S&P Industry Survey
10-Q Netflix Quarterly Fillings-Q3-2011
Morningstar Analyst Report
Euromonitor Bentley Library Database
http://www.emarketer.com/blog/index.php/time-spent
-watching-tv-tops-internet/
Media Usage & Online Behavior—Mintel Report Oct 2011
http://www.reuters.com/article/2011/10/31/us-netflixdisney
-idUSTRE79U0O420111031
http://www.businessweek.com/magazine/content/05_43/
b3956201.htm
Mintel Investment Research
Annual Shareholder letter Netflix 2011
Consolidated Financial Statement 10k
Netflix 10k 2011
Netflix Factsheet
https://www.google.com/adplanner/planning/site_profile#siteDe
tails?identifier=megaupload.com Quarterly Letter to the
shareholders 3Q 2011
http://www.ibtimes.com/articles/256810/20111128/netflix
-estimates-revised-jefferies-guidance-capital-raise.htm
Company Fillings 8k 3Q
Blockbuster Creditors Should Call It Quits, Poll Says, TheStreet,
30 Jan 2011. URL: http://t.co/TcSPlun
Blockbuster Wins 3-month Restructuring Extension, Reuters, 20
Jan 2011. URL: http://t.co/iZPsUi5
Grossman, Robert J. Tough Love at Netflix. HR Magazine (Apr
2010): 36–41
Fuoco-Karasinski. Netflix Bucks Traditional Total Rewards,
WorldatWork workspan (8/07)
Goldfarb, Jeffrey, & Holding, Reynolds. Incentives Play Role in
Success of Netflix. The New York Times. (May 8, 2011).
http://files.shareholder.com/downloads/NFLX/2097321301x0x56
1754/3715da18-1753-4c34-8ba7-18dd28e50673/NFLX_10K
.pdf
http://ir.netflix.com/management.cfm
6.
http://insight.kellogg.northwestern.edu/index.php
/Kellogg/article/a_surprising_secret_to_netflixs_runaway_
success
7.
http://money.cnn.com/2011/10/24/technology/netflix_
earnings/index.htm
8.
S&P Advantage
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15-12 C as e 1 5   Netflix, Inc.
9. IDC Technology Research Firm Source: S&P Industry
Survey
10. 10-Q Netflix Quarterly Filings – Q3-2011
11. http://searchenterprisewan.techtarget.com/definition
/bandwidth
12. Consolidated Financial Statement 10-K
13. 10-K Netflix Annual Report – 2010
14. 10-K Netflix Annual Report – 2010
15. http://www.cnn.com/2011/08/31/tech/mobile/smartphone
-market- share-gahran/index.html
16. S&P Industry Survey
17. Euromonitor, Bentley University Library Database
18. S&P Industry Survey
19. https://www.google.com/adplanner/planning/site_profile#
siteDetails?identifier=megaupload.com
20. Media Usage & Online Behavior – Mintel Report Oct
. 2011
21. http://www.reuters.com/article/2011/10/31/us-netflixdisney
-idUSTRE79U0O420111031
Z15_WHEE5488_15_GE_CA15.indd 12
22. http://www.businessweek.com/magazine/content/05_43
/b3956201.htm
23. Annual Shareholder Letter – Netflix 2011
24. Datamonitor, Blockbuster Inc. Company Profile. 30 Dec
. 2010
25. http://www.redbox.com/release_20110811
26. http://www.theatlanticwire.com/business/2011/08
/walmarts-facebook-powered-future/41843/
27. http://www.csmonitor.com/Innovation/2011/0713
/Five-alternatives-to-Netflix/Amazon-Prime-instant-video
28. http://facstaff.uww.edu/mohanp/netflix.html
29. Information System: A manager’s guide to harnessing –
John Gallaugher
30. Movies to Go. The Economist. July 9, 2005
31. Morningstar Investment Report
32. Quarterly letter to the shareholders 3Q 2011
33. Quarterly letter to the shareholders 3Q 2011
34. Company Filings – 8K 3Q
35. 10-Q Netflix Quarterly Filings – Q3-2011
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