COMPANY ANALYSIS

Presented by:
Eric Kosub
Stephanie Thornton
Veronica Sullivan
Ryan Staph
Elizabeth Lessert
Entertainment Streaming Services Industry

• 2018 Industry Revenue $24.771 billion

• Annual growth rate (CAGR 2019-2023) of 12.3%
• CR3 = 98% (51%+33%+14%)

• Oligopoly with 3 primary companies in 2019

 Netflix (87% M.S.)

 Amazon Prime (53% M.S.)

 Hulu (41.5% M.S.)
Company Overview

• 2018 Revenue $15.79B

• 2018 Net Income $1.2B

• 7,100 employees

• 190 Countries
• NAICS 532282: Video Tape & Disc Rental
Company History
• Founded 1997 in Scotts Valley, California by Marc Randolph and Reed Hastings
• Partially inspired by the small book company Amazon

• Started as DVD rental and sales, though sales were stopped in 1998
• Adopted the monthly subscription service model in 1999

• Started its streaming service in 2007

• Separated streaming and DVD rental subscriptions in 2011
(The backlash was such that the idea was abandoned after stock prices fell
almost 60% with 800,000 subscribers, and the idea was abandoned.)
• DVD rental is still offered through DVD.com
Business Model
• Content producer, highly invested in original content
• Leverage current business relationship to produce additional original
content
• Accessibility
• Large amount of content (original & licensed)

Value Proposition:
Bring content directly to the consumer as easily as possible
 Porter Five Forces
Threat of new entrants
 High barriers to entry/exit
 Large investment
 Licensing costs
 Network capacity
 Website stability
 New entrants include media
giants Apple and Disney.
Bargaining power of suppliers
 High bargaining power due
to low number of content
producers
 Competition with
traditional media
distributors (TV, motion
pictures, etc.)
Competitive rivalry
 Intense competition within
industry
 Netflix is market share
leader
 Original content
differentiates competition.
 Buyers tend to have
multiple subscriptions.
Threat of substitutes
 High threat of substitutions
 Movie Theaters
 DVD Purchase/Rentals
 You Tube
 Other sources of
entertainment and leisure
time substitutes (sports,
outdoor activities, etc.)
Bargaining power of customers
 Buyer switching costs are
low
 New entrants in the
industry increase bargaining
power of customers
because more available
substitutes
Target Market
• Movie fans
• Cord cutters
• People too busy to go to movies
• People seeking value
• Age groups: 18-49
• All income levels
US Netflix users by age
US Netflix users by income
Competition
US Subscribers New Competition in 2019:
Netflix 61.1 million Apple TV+
Amazon Prime 26 million Disney+ 10 million + day 1
Hulu 25 million
Netflix Trend Analysis
• U.S. market share has decreased by 3% since 2014
• Annual revenue has grown from $1.21B in 2007 to $15.79B in 2018
• 2020 investment in new content creation is $15B compared to a
competitor combined investment of $15.5B
• 1-Year stock price has fallen 27%
Netflix 1 Year Stock Prices
Case Problem
• Market is evolving and new entrant are a threat
– Is there room in the market for all?
– Netflix needs to maintain market leader status
– Must innovate with original content/licensing
– Consumer choice: content vs cost of subscription
• Netflix has 47,000 TV episodes & 4,000 movie titles
• Hulu has 85,000 TV episodes & 2,500 movie titles
• Amazon Prime Video has about 12,000 titles
• Disney has 7,500 TV episodes & 500 movie titles
• One big advantage—main threats are not available in
as many countries
Major Issues

• Competitive differentiation
• Cost efficiency
• How do consumers choose
• Hot deals from net entrants
• Financial - Cash flow is a concern
Netflix’s Original Content Strategy Failing?
The 4 Ps
• Streaming media (intangible asset)
• Brand, ease of availability
• Brand leader
• Variety & original content

• Ease of access (TV, phone, tablets & computer)

• In 190 countries
• Not in 4 countries due to government regulation against U.S. or
content restrictions

• One month free trial

• Standard subscription offered free (Verizon TV/ T-Mobile)
• Partners with various companies to offer discounts
• International bundles with other services

• Offer 3 rates in U.S. (standard most common)

• Significantly lower than satellite or cable subscription
• Recent U.S. price increase caused significant revenue increase
• Starting to offer international mobile subscription at low price
SWOT Analysis

• Range/quality of content • Global penetration

• Global reach • International content
• Adaptive creation
• Technology • Bundle partnerships
• Niche content

• Copyrights/licenses for • Government regulations

original content • New entrants
• Growing operational • Piracy
costs • Consumer preferences
• Debt
Constraints

• Debt very high ($24.1 billion)

• Content not owned by Netflix (licensed)
• Lower paid subscriber adds projected for 2019
Alternative #1 – Original content production

Advantages:
1. Own content instead of licensing
2. Creative control over each title
3. More control over production costs
Disadvantages:
4. High acquisition costs
5. Increase to long-term debt load
6. If content isn’t quality, could lose customers
7. Diversification has only 5% chance of success
Alternative #2 – Procurement of “Hot” Licenses

Advantages:
1. Exclusivity
2. Attract fanatics
3. Adds more content/volume
Disadvantages:
4. High contract price
5. Competitive negotiations
6. Increase debt
7. Limited contract period
8. Consumer exhaustion
Recommendation: Original content production

Advantages:
1. Own content / no contract expirations
2. Creative control over each title
3. More control over production costs
4. Best potential long-term profitability
5. Attract new customers with unique content
Disadvantages:
6. Increase debt load by $250 million
7. Labor costs
8. Sunken costs on bad content
Tradeoffs
How advantages will overcome disadvantages
1. New customers acquired from original content
will offset debt
2. More control over costs can reduce labor costs
resulting in higher net margin percentages
3. Creative control will help lessen occurrences of
“flops” (bad content) & cost control will help
mitigate losses on “flops”
4. Increase in net margins can be used to invest in
“hot” licenses
Netflix growth rate (2016-2019)
Recommendation: Quantitative Implications
• Netflix Top 50 Market Data:
­ Weighted average revenue per paying member: $125.34
­ Netflix current customer base (Sept. 2019): 159.5 million
­ Average quarterly paid net adds (2016-2019): 5.23%
­ Average net margin (2017-2019): 7.4%
• Estimated costs to acquire a studio
- $250 million (based on Tyler Perry’s Atlanta studio)
- B/E on investment ≈ 2 million annual paid subscriptions
• 2020 profit estimate
– Projected 20% increase in membership: 191.4 million
– $1.78 billion (29.2% increase)
The 5 W’s
• Ted Sarandos, Chief Content Officer
• Cindy Holland, VP of Original Content
• Channing Dungey, VP of Original Content

• Acquire a small to mid-size production company or build a studio

• Approximate cost $250 million

• Anywhere close to major airport

• Availability of large land parcels

• Acquire in 2020
• If build, operational no later than 2022

• Creative control
• Control production costs
• Better compete with new entrants
• Long-term revenue