A CASE STUDY ON Netflix

Submitted to:
Mr. Siddiqur Rahman
Assistant Professor
Department of Business Administration,
Daffodil International University

Submitted by:
1. Swapnil Swadhinata
ID: 193-14-909
Mail: swapnil14-909@diu.edu.bd

2. Raghad Islam Bonna

ID: 193-14-910
Mail: raghad14-910@diu.edu.bd

3. Rahadul Islam
ID: 193-14-924
Mail: rahadul14-924@diu.edu.bd

4. Mariya Islam
ID: 193-14-912
Mail: mariya14-912@diu.edu.bd

1. Sharmin Akhter
ID: 201-14-935
Mail: sharmin14-935@diu.edu.bd

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Table of Contents
1. INTRODUCTION:........................................................................................................................................3
2. HISTORY OF BUSINESS............................................................................................................................3
Establishment:....................................................................................................................................................3
Membership fee, Blockbuster acquisition offer, growth start:......................................................................4
Introduction of video-on-demand & global expansion:..................................................................................4
Introduction of original content:......................................................................................................................4
3. INTERNATIONAL EXPANSION OF NETFLIX......................................................................................5
4. FINANCIAL ANALYSIS..............................................................................................................................6
Financial Statement Analysis:...........................................................................................................................6
5. SWOT ANALYSIS.........................................................................................................................................9
Netflix’s Strengths and Weaknesses (Internal Analysis)................................................................................9
Netflix’s Opportunities and Threats (External Analysis).............................................................................10
6. CORPORATE STRATEGY.......................................................................................................................12
Vertical Integration Strategy:.........................................................................................................................12
Horizontal Integration Strategy:....................................................................................................................12
Differentiation Strategy:..................................................................................................................................12
7. PRESENT BUSINESS MODEL.................................................................................................................13
8. FUTURE BUSINESS MODEL...................................................................................................................14
9. FUTURE BUSINESS STRATEGY:...........................................................................................................15
10. CONCLUSION.......................................................................................................................................15
11. REFERENCES........................................................................................................................................16

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 1. INTRODUCTION:

Netflix is such a brand that have a strong presence in our daily dose of entertainment. We are
a group of 5 members who teamed up to do a case study on Netflix. Netflix is the leading
online streaming service provider in the world who offers a library of TV Series & movies
with wide variety of genres and language, including original productions, to its subscribers.
Till July, 2020, Netflix gained 193 million subscribers in over 190 countries. [ CITATION
Net \l 1033 ]

In this case study we discussed how Netflix started its business and how they expanded
worldwide. After that, we will identify the strength, weakness, opportunity and threat of
Netflix through SWOT Analysis. We will also evaluate the corporate strategy and present
business model of Netflix to recommend some changes in the business model and future
strategies that will be beneficial for Netflix.

2. HISTORY OF BUSINESS

Establishment:

Netflix was founded on August 29, 1997 by Reed Hastings & Marc Randolph at California.
They co-founded Netflix to offer online movie rental service. They launched world’s first
DVD rental and sales website ‘netflix.com’ in US on 1998, with only 30 employees and 925
titles available. Users simply ordered movies on their website and received DVDs via post.
They used pay-per-rent model with due dates and rates similar to their competitor,
Blockbuster. (Kosiarz, 2018)

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Membership fee, Blockbuster acquisition offer, growth start:

In 1999, Netflix started the monthly subscription concept with the opportunity of unlimited
rentals without any due dates and late fees.

But at 2000, Netflix was losing money due to their high dependency on US postal service. So
they offered Blockbuster to acquire Netflix for $50 million. But the proposal was declined
later as Blockbuster proposed to change Netflix’s name and handle the online business
themselves.[ CITATION Mar13 \l 1033 ]

On 2002, Netflix initiated IPO (Initial Public Offering) by selling 5.5 million shares of
common stock at $15 per share.[ CITATION Net \l 1033 ]

Introduction of video-on-demand & global expansion:

In 2007, Netflix introduced video-on-demand via internet. Netflix’s streaming service

allowed subscribers to watch movies and TV shows instantly on their personal computers.
They understood that streaming is going to be the future of entertainment. This is how they
grew even after DVD became outdated.

By 2014, they gained subscribers in over 40 countries. Worldwide the customer base reached
197 million within 2018, confirming its rank as world’s largest online subscription video
service.[ CITATION Net \l 1033 ]

Introduction of original content:

To gain new subscribers Netflix started producing original contents from 2013. Netflix
debuted in their original content with the hour long political drama ‘House of Cards’ &
earned huge success. The variety of new original content is very important attempt of Netflix
to capture larger demographic audience. [ CITATION Pie16 \l 1033 ]

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 3. INTERNATIONAL EXPANSION OF NETFLIX

The international expansion strategy of Netflix is an exemplary case. At present, Netflix is

streaming in over 190 countries around the world. This expansion was not built in a day.
Their expansion strategy was careful and well calculated process. The expansion effort
started from 2010, after getting a huge popularity base in USA.[ CITATION Aar20 \l 1033 ]

 Netflix’s initial expansion strategy was ordinary. They aimed to enter adjacent market
that were culturally, geographically and linguistically close to their country of origin
US. So they targeted Canada and from September 2010, Netflix started offering
streaming service in Canada. Within a year, Netflix gained 1 million subscribers from
Canada.[ CITATION Int \l 1033 ]

 The biggest expansion of Netflix was in 2011 when they decide to launch streaming
service in Latin America. The announcement itself surged 8% of Netflix’s stock. In
September 2011, Netflix launched streaming service in 43 countries of South America
as well as the Caribbean, offering content in English, Portuguese & Spanish.
[ CITATION Int \l 1033 ]

 Netflix expanded its service to Europe in 2012, launching in UK & Ireland. Within a
year the expanded in 10 more countries of Europe (Denmark, Finland, Norway,
Sweden Austria, Belgium, Germany, Luxembourg, France and Switzerland). Now
Netflix is accessible in whole Europe.[ CITATION Int \l 1033 ]

 As competition intensified in home market, Netflix stepped out to expand in Asia.

Netflix first entered Asian market when they launched in Japan. In the same year, they
also started streaming in Australia & New Zealand. Later on 2016, to continue its
push across Asia, they expanded streaming service in India, Hong Kong, Singapore,
South Korea, and Taiwan. We can stream Netflix in Bangladesh from 2017. At
present, except China every other country of Asia can stream Netflix. [ CITATION
YIF20 \l 1033 ] [CITATION Net17 \l 1033 ]

Wherever Netflix expanded, they didn’t forget to localize the contents. That’s why they were
more successful to appeal audience in every nation.

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 4. FINANCIAL ANALYSIS

Financial Statement Analysis:

The financial statement of Netflix is analyzed based on the fiscal year of 2020. Netflix has
managed to grow both net income and sales at a faster pace in 2020 compared to the same
period a year ago.

Revenue & Profitability:

Every single data of Netflix income statement & profitability Ratio indicates that their
business is in rapidly growing stage because their sales increase 25 % from previous year,
where their net income increased 166 % in 2020.This is the example of great management of
operating & financial cost. Their ROA & ROE is almost twice that means their assets &
Equity growing almost 50-90% within a year

INCOME Q2 FY20 Q2 FY19 % increase

STATEMENT
Net Sales ($mil) 6148.29 4923.12 24.8860478
7
EBITDA ($mil) 1384.59 731.92 89.1723139
1
EBIT ($mil) 1357.93 706.42 92.2270037
7
Net Income ($mil) 720.2 270.65 166.100129
3
PROFITABILITY Q2 Q2
FY20 FY19 % increase
Gross Profit Margin 41.17 39.47 4.30706866
EBITDA Margin 22.51 14.86 51.4804845
2
Operating Margin 22.09 14.35 53.9372822
3
Sales Turnover 0.61 0.58 5.17241379
3
Return on Assets 7.21 3.81 89.2388451
4
Return on Equity 28.72 18.85 52.3607427 6
1
 Source: The street,2020

Balance Sheet Analysis:

BALANCE SHEET Q2 FY20 Q2 FY19 % increase

Cash & Equiv. ($mil) 7153.25 5004.25 42.9434980
3
Total Assets ($mil) 37175.28 30171.34 23.2138844
3
Total Debt ($mil) 17708.16 13678.12 29.4634057
9
Equity ($mil) 9334.75 6105.55 52.8895840
7

Source: The street,2020

From Balance sheet we can see that there is poor cash management because 43% cash balance
is increased in compare to previous year, this means there is huge amount of idle cash
remaining. If they make a proper plan of this cash for further investment it will be wise for
them.

Debt:

DEBT Q2 FY20 Q2 FY19 % increase

Current Ratio 1.12 0.85 31.76470588
Debt/Capital 0.65 0.69 -
5.797101449
Interest Expense 189.15 152.03 24.41623364
Interest Coverage 7.18 4.65 54.40860215

Source: The street,2020

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Current ratio is increase by 32 %, Debt /Capital is decreased, interest payment capabilities is
increased. Considering all of the ratio Netflix seems to be in a very good position because
their sales has increased & it shows proper cost management

Stock performance & valuation:

Netflix don’t pay dividend to their share holder while they have strong position, may be for
that their financial position is too much good. EPS is growing 0.6 to 1.59 which means
wealth maximization of their owner. They don’t pay any dividend from this position may
only be possible for them because of institutional investment. Average daily trading volume
is decreasing may be because shareholder have less interest on transferring their ownership
compared to previous year.

SHARE DATA Q2 FY20 Q2 FY19

Shares outstanding (mil) 441.02 437.84
Div / share 0.0 0.0
EPS 1.59 0.6
Book value / share 21.17 13.94
Institutional Own % n/a n/a
Avg Daily Volume 7426380.0 8735446.0

Source: The street,2020

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 5. SWOT ANALYSIS

In the SWOT analysis of Netflix, the strengths, weaknesses, opportunities & threats reflects
the internal situation and external environment of the movie streaming company. [ CITATION
Nam18 \l 1033 ]

Netflix’s Strengths and Weaknesses (Internal Analysis)

 Strengths

1. Global Customer Base – Netflix has a huge global customer base. There are over 151
million subscribers that gives the company solid bargaining power with studios to get
exclusive contents.[ CITATION ANT19 \l 1033 ]
2. Exponential Growth- Netflix has high brand equity and has become a dominant brand for
online streaming content across the world.
3. Originality- One of the major strength of Netflix is its original contents. Some of its
original contents like: House of cards, Orange is the new black etc. became so popular that
its subscriber kept on increasing over the year.[ CITATION ANT19 \l 1033 ]
4. User interface – Netflix has built a very user friendly interface for its customers. Viewers
like watching Netflix because it is tailored as per the user’s choice and is easy to use as
well as eye-catching.[ CITATION Abh19 \l 1033 ]

 Weaknesses:

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 1. Growing Operational Costs – Original contents gives Netflix a competitive
advantage by differentiating from competitors but the cost of supporting this contents
keeps on increasing and leading to lower profit despite higher revenue.[ CITATION
Abh19 \l 1033 ]
2. Not using green energy- Netflix still didn’t invest in renewable energy to promote
environmental sustainability like its prime competitor Amazon. Not taking initiative
for green energy utilization has a negative influence on the brand impact of Netflix.
[ CITATION Ric19 \l 1033 ]
3. Increasing Debt – According to report, Netflix is going under excessive debt by
spending too much on original contents which sometimes fails to win hearts and is a
huge loss

Netflix’s Opportunities and Threats (External Analysis)

 Opportunities:

1. Expand and grow: There are some countries where Netflix is still not available, for ex-
China. With such a huge customer base, now the company can penetrate to these countries
and expand its service and grow subscribers.[ CITATION Ric19 \l 1033 ]
2. Make alliances: Netflix can make some allies to be beneficial in the long run. For ex-
they can make partnership with different telecom providers of each countries and offer
various bundle packages.[ CITATION Bri19 \l 1033 ]
3. Region based content: At present, Netflix is available in 190 countries. They can make
a new breakthrough by creating region based contents. People will be more engaged when
they can relate themselves with the familiar contents. And thus Netflix will gain popularity
in that specific region. For example- Netflix’s original series ‘La Casa de Papel’ in Spain &
‘Sacred Games’ in India were massive hits. [ CITATION Bri19 \l 1033 ]

 Threats
1. Competitive Pressure: Netflix is not any more the only provider of online streaming
service around the world. Streaming platforms like Amazon Prime, HBO Max, Hulu,

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Disney plus are getting more agile day by day. Netflix is falling behind as the other
platforms are capturing market by buying shows and giving repeated access of it to its
customers.[ CITATION Bri19 \l 1033 ]
2. Local Government regulations: The strict govt. regulations regarding streaming service
provider in many countries is a big threat for Netflix. For ex- Netflix cannot expand in
China because of its government’s restriction on foreign content. [ CITATION Ric19 \l 1033 ]
3. Digital Piracy: Netflix’s video contents can be downloaded and leaked out. So, digital
piracy is at its peak. Thousands of people around the world find ways to view free
downloaded contents without paying the monthly subscription fee.

6. CORPORATE STRATEGY

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Corporate strategy allows a company to determine how to create the most by taking a
portfolio approach to strategic decision making.

The corporate level strategy followed by Netflix are discussed below:

Vertical Integration Strategy:

Netflix improved their margins by backward vertical integration and started production of
original exclusive contents, like- House of cards. Today Netflix follows forward vertical
integration and uses its distribution model to promote their original content besides licensed
contents.[CITATION Wilne \l 1033 ]

Horizontal Integration Strategy:

Netflix uses horizontal integration strategy by acquiring services and controlling the main
industries of video distribution. They dominate digital distribution and provide their service
in many markets and forms. Till now, Netflix has acquired two companies: Millarworld in
2017 & Storybots in 2019. [ CITATION Lis20 \l 1033 ]

Differentiation Strategy:
Differentiation is a strategy by which a company puts efforts in developing a single product
and then invests in incorporating unique attributes to that in order to meet customer needs.
Companies add value to a product to attract customers so that they are likely to buy the
product at a higher price. Netflix followed this strategy. Netflix targeted the market of renting
of video online. This strategy was successful as Netflix used newly developed and upcoming
internet marketing technology, which other companies didn’t incorporate in their business.
Netflix launched a website including search engine where customers could search and access
product according to one’s choice. So Netflix uses differentiation strategy to create
competition advantage in order to gain the market share.[ CITATION UKE18 \l 1033 ]

7. PRESENT BUSINESS MODEL

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Business model is a concept of how strategies should work together to enable the company in
achieving competitive advantage & profit. [CITATION Cha \l 1033 ]

Netflix is the pioneer in offering amusement through video streaming platform in return for a
monthly membership charge. The business model of Netflix is based on creating content and
then distributing this through its platform. What makes it so appealing is that it offers on-
demand viewing of content and also personalization by charging a subscription fee. [ CITATION
Gup20 \l 1033 ]

At present Netflix uses two business model:

1. Business model: Digital distribution

Netflix obtains licensed contents from third party and streams it online to subscribers.
2. Business model: Digital creation
Netflix creates original contents and releases it online for its subscribers.

8. FUTURE BUSINESS MODEL

Till now, Netflix’s business model is profitable but it is not sustainable in the long run.

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The current business model of Netflix is subscription-driven and its main source of revenue is
the subscription fee of the subscribers. To attract more and more subscribers, Netflix creates
original content of movies and series with no advertisement. But this content creation is a
very costly affair. To gain new subscribers Netflix is now offering subscription at a very
cheap or promotional rate, specially in the developing countries. In this case, Netflix will not
be able to increase the subscription fee in future as they are facing competitions from other
streaming sites now-a-days. Also, Netflix cannot stop creating contents at the current rate
otherwise they will lose subscribers who mainly joined to watch the Netflix originals.

So along with the current business model, Netflix needs to add the following:

 Netflix can make an advertisement-driven model. They can offer some contents for
free but with advertisement. This will attract a lot of subscribers. Also, Netflix will
earn money from the advertisers.

 Netflix can make partnership with third party content providers to experiment with
new forms of contents. But the prices must be controlled by Netflix. This will be very
helpful for Netflix’s efforts in content acquisition.

 Netflix can allow 3rd parties to sell products within the service but out of
subscription. This can add a revenue source to their business.

9. FUTURE BUSINESS STRATEGY:

To stay one step ahead from its competitors, Netflix can take on the following strategies:

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  Unrelated diversification: Netflix can diversity their service from the entertainment
industry and provide services in unrelated industry like gaming service to their
subscriber. In this way subscribers will be hooked up to Netflix as they get more
service from it than its competitors.

 Horizontal integration: Netflix should try to make partnership with Amazon &
merge their streaming business.

 Forward Integration: Netflix should consider the ownership of own movie theatres
to release their contents theatrically.

 Product Development: Netflix should put out all the same shows everywhere. For
ex- Indians residing in the USA cannot access Indian content on their Netflix even if
they want to. Because Indian shows are only available in Netflix India. If they put the
same thing everywhere, people will be watching the app more.

 Provide rating information: Netflix should attempt to connect with different internet
services like- IMDP, Rotten Tomatoes etc. to provide rating information of each
content to the user. This way customers will be more satisfied.

 Strengthen security: Netflix should strengthen their security to control digital piracy.
If people can access pirated copy of their content for free, why would they subscribe?
So, Netflix needs take strict measures to stop illegal accessing their content.

10. CONCLUSION

In conclusion this case study attempts to give a complete overview of Netflix’s present &
future situation. It is clear that Netflix is at its peak of maturity stage. So now it needs to
invest in different industries to grow its revenues and survive in the long run.

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