Netflix Case Study
Netflix Case Study
Netflix Case Study
B. STATE...............................................................................................................15
3 Mission.....................................................................................................................15
4 Vision.......................................................................................................................15
5 Values.......................................................................................................................15
6 Bibliography.............................................................................................................22
A. BACKGROUND
When the first home video systems became widely available during the 1970s
and early 1980s, movie fans clamored for the chance to watch their favorite films at
home without relying on a broadcast or TV cable. Movie studios also saw a way to
bring back films from previous generations to a new audience. The growing demand
and the new-found supply required an intermediary to facilitate the transaction -- a store
During the 1980s and 1990s, retail video rental stores boomed. In 1995, the
Blockbuster video rental chain had more than 4,500 stores. The company made $785
million in profits and $2.4 billion in revenues over 30 percent of margin profit. Much of
this profit came from "late fees" on overdue rentals, which did not require any
additional product sales and minimal additional labor, but became a major
While Blockbuster and other retail video rental outlets were operating under
their previous business models, a wave of technological innovation swept the world
during the mid-1990s. Increased access to the World Wide Web created new retail
opportunities. Companies such as Amazon and Netflix filled the niche that video stores
had just a few years earlier. Customers could now order their favorite movies online
The growth of broadband internet access in the early 2000s allowed media
providers to transition from selling physical objects to offering digital formats. Films
were now available for download directly to a computer without the need for bulky
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tapes or DVD boxes. Without the demand for physical inventory, the need for brick-
and-mortar video stores declined. In 2007, the annual revenue for Netflix reached over
$1.2 billion and just three years later Blockbuster floundered on the verge of
bankruptcy.
some purists still savor the experience of physical media. Redbox, a rental store
provider, offers DVDs, Blu-ray discs and video games at many large retail outlets.
Although the retail "big box" video rental store is all but extinct, movie fans will still
seek out ways to rent and watch films. From TV and desktops to tablets and
smartphones, movie buffs can now rent their favorite movies and watch them wherever
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2. Netflix gets into the DVD Rental Services
In 1997, Netflix1 entered an existing home video rental industry riddled with
mom- and-pop retail stores and dominated by Blockbuster. It tried to differentiate itself
in a number of ways, first and foremost with online rental experience. Customers would
search the website, choose a film, and within a few days the film would be delivered by
mail. Netflix began by renting DVDsthen a relatively new and promising, but as yet
unproven formatwhich are smaller, lighter, and cheaper to send via the Postal Service.
The basics of the website itselfa search engine and a queue has not changed
(although its sophistication and accuracy has certainly evolved), but the pricing
apparatus was initially modeled on traditional brick and mortar rental stores: a $4 rental
charge, plus a $2 shipping and handling charge, and a specific due date (with the
dreaded late fees as penalty for late return). However it used the traditional pay-per-
rental model.
Sales Subscription
1200000
1000000
Amount of subscribers
800000
600000
400000
200000
0
1 2 3 4 5 6 7 8 9
Sales Subscription Graphic
In the graphic above we can observe the highest pick taken by Netflix according
to their sales subscriptions during their first 9 years in the market. Several factors had an
important impact in the increase of Netflix subscribers; one of them is the availability of
approaching toward internet and the low cost it represents for customers rather than
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International and U.S suscribers
After several years, Netflix began its expansion toward Canada, Latin America
and Europe respectively. However, it was just in 2012 when strong numbers start to
double as it first started in the international market with almost 25% of international
Wall Street Journal, until 2013 Q4, Netflix reached 9.7 international paid streaming
subscribers and it has continuously increasing due to our empowerment and necessity of
using internet.
The graphic below shows the important market share that Netflix has obtained until
during the last few years. Netflix is now just below TV cable becoming the most
popular video streaming service to young adults... With a very affordable price strategy,
Netflix has now become more aggressive in this developing sector. We believe that
Netflix could easily obtain one or 2 more points in market share during year 2016
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Netflix vs Other DVD Streamings
150000
100000
50000
0
1 2 3 4 5 6 7 8 9
-50000
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As Netflix started to reach more market share by introducing themselves to a
new generation of people, it was in 2000 when the company start looking for good
results in their subscriptions. After the breaking point, it has been more than successful
years for the company in terms of important revenues due from their sales. The graphic
above presents an increase of more than a 200% in terms of money making it a strong
As we can observe in the graphic above, Netflix increasing tendency reach took
a high peak of 2.168 million of gross income in 2015, thanks to a big an increase with
worldwide subscriptions (over 12.8%) and a 3.8% more for American subscribers.
According to an interview done to Netflix CFO, their projections were accurate as they
expected this numbers to happen do to a strong demand and new development of other
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online-streaming services. These years were mainly focused on introducing Netflix
services outside the United States. For this year 2016 Netflix planned to expand their
market with a 100 000 000 investment in which they will develop an approximate of 30
exclusive movies, documentaries and series that can only be watch by Netflix
subscribers. Also this amount was invest toward approaching new ways of getting more
subscribers
one of the strongest companies in the market has a very volatile market share in Wall
Street. Even though their numbers looks negative (see graphic number ) we can still
say that Netflix keeps strongest in cash flow management. We will analyze two
scenarios; Netflix first steps toward the industry and their biggest jump through global
market in 2003.
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Netflix development through their first years became stronger after more people
company, Netflix didnt wait a lot to start seeing positive numbers and cash in their cash
flow. This new online rental movie was developing in such a faster speed that by 2006
Netflix as already obtain 12% more than their first year in 1998.
Until Q1 2012, Netflix develop profit and a good price/share at Wall Street.
Despite being the leaders in the market and having a big approach toward customers
Netflix started to obtain negative numbers and it becomes stronger in the following
years. By the end of 2015 they finish with a total of -273.3 million. The reason why
Netflix stock is crashing in the after hours session is mostly because of the company's
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guidance of its widely followed international expansion. We remarked in a few
paragraph before, that Netflix pretended to expand more internationally, producing more
series and movies exclusively for Netflix costumers but it wasnt working out as
expected. Another factor can be the aggressive expansion on Amazon View into the
Watch Netflix further projections and answers regarding their failure toward this
If you think about your last 30 days, and analyze the evenings you did not
watch Netflix, you can understand how broad our competition really is. Whether you
played video games, surfed the web, watched a DVD, TVOD, or linear TV, wandered
through YouTube, read a book, streamed Hulu or Amazon, or pirated content (hopefully
not), you can see the market for relaxation time and disposable income is huge, and we
are but a little boat in a vast sea. For example, while weve grown from zero to 47
million members in the USA, HBO has also grown, which shows how large the
entertainment market is. We earn a tiny fraction of consumers time and money, and
have lots of opportunity ahead to win more of your evenings away from all those other
The increase in ARPU will allow us to invest more in content next year, and we
are taking up our expected spend from about $5B in 2016 to over $6B on a P&L basis in
2017.
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Which brings us to our favorite topic: cash burn? Here is NFLX's explanation:
At the end of Q1, we had cash and equivalents totaling $2.1 billion. In Q1, free
cash flow was $261 million, compared with $276 million in Q4 15. As we have written
more cash intensive upfront, resulting in a timing-driven gap between net income and
free cash flow. We currently have $2.4 billion of long term debt. With our low debt to
enterprise value of 5%, our plan is to raise additional capital through the high yield
As Netflix will continue to invest this is an expectation in long turn for sure that
will keep them strong on the market. Even though, they are still much unpredicted,
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4. From DVD Movie Rental to VOD
Hastings, Netflixs CEO and founder, and others realized that, given the longer delivery
times (compared to the traditional rental experience of going to the store), Netflixs
value was in its ability to allow customers to have DVDs in their homes at all times, and
they quickly switched to a pre-paid subscription service, minus late fees. Netflixs next
trick was to offer the unlimited option, thereby adding a high-volume customer base for
whom the cost of individual rentals (and of course the late fees) far exceeded the value
Netflix bought DVDs wholesale from very few distributors for minimal
discountsbut also because these up-front costs forced a restrictive selectivity when
actually choosing which movies to buy. Netflix once again switched its business
strategy, recognizing that the rental business (as a part of the film industry) was heavily
made with, for example, the studios themselves. Enter Ted Sarandos, who left Video
City (a U.S. video rental chain) in May 2000 to become Netflixs new chief content
officer. Sarandos brought his contacts and relationships with him, and within a year,
Netflix had negotiated direct revenue-sharing agreements with nearly all the major
studios, which meant a reduction in up-front costs for Netflix in return for a fee paid to
the studios on the number of rentals of a given studios films within a given period of
time.
In 2005, 35,000 different film titles where available, and Netflix shipped 1
million DVDs out every day. In 2007, Netflix expanded its business with the
introduction of streaming media, while retaining the DVD and Blu-ray rental service.
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Netflix has achieved astounding levels of growth. It has jumped from 700,000
subscribers in May 2002 (when it announced its IPO) to 20 million at the time of its
10K filing in February 2011. In 2010 alone, approximately 7.7 million people signed up
for its service, more than doubling the 2.9 million subscribers gained in 2009. The
According to the statement released by the company on April 15th 2015, several
Latest forecast from IHS Technology reveals that by 2019, Western Europe
subscribers will make up 23% of total Netflix subscribers. Netflix already spends more
According to the report, by 2019 Netflix will have over 21 million subscribers, up from
The company has not stopped innovating since its inception. It transitioned from
being an on-line video rental subscription based provider to being the leader in
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B. STATE
5. Mission
As there is no specific Mission established the CEO and founder once interviewed said:
and globally. We are continuously improving the customer experience, with a focus on
expanding our streaming content, enhancing our user interface and extending our
streaming service to even more Internet-connected devices, while staying within the
parameters of our consolidated net income and operating segment contribution profit
targets."
6. Vision
In October, 2011, co-founder and CEO Reed Hastings expressed a clear vision
7. Values
Netflix published its company values, which demonstrate the standards with
which it wants its employees to function in their daily decisions and activities:
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C. STRATEGIC PLANNING
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Demography Population Smarts cities New markets O
growth Buildings (Rurals and customers
VS Urbans)
Ecology Energy from Introduced CO2 Need to change T
fossil to atm. to chain energy
Fuels
OPPORTUNITIES THREATS
- International law agreements (WTO) - Local law could restrict access to
allow free trade and companies could internet.
be in the global business. - Energy from fossils fuels.
- Movie makers in a dynamic industry - Middle class and Asian cultures
(HIGH TECH). / M&M , Foy with strict regulations of the
- Internet allows a better communication government and facing fierce
and DATA TRANSFER competition from domestic
+MAIL SYSTEM streaming services.
BAND WITDH - Hackers.
- U.S dollar is a world currency. - Blockbuster
- Service cost is low MKT with specific - Other VOD competitors including
customer. 1. Vongo
- Western culture uses to watch movies in 2. CinemaNow
3. MovieBEAM
Hollywood.
4. Movielink
- Population Smart
5. Traditional cable/satellite
Smart Buildings
- R&D Movie maker + Internet providers
- International expansion. - VOD content prices and
- Original content availability
- New product lines such as video games Limited VOD content due to
or educational materials studios concerned about pirating
- Offer alternative subscription to appeal and affecting DVD sales.
to less frequent movie renters.
- Lowers Shipping cost: More can be
spent on content while achieving same
profit margins
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2. Strengths & Weaknesses Matrix
Weakness:
Strengths:
Cost of Content: Thecostofmasslicensing
Brand Recognition:TheNetflixbrandisverywell packagesandthein-houseoriginalcontent
knownandhasbecomeaverbamongmany productionhasthecompanyundertakingalarge
internetusers. amountofdebt.
Accessibility:TheNetflixApphasenabledtheir DVD Subscribers: DVDandBlu-raysubscribershave
subscriberstheabilitytostreammediaonnearly dramaticallydeclinedin2013.
allinternetenableddevices. Raising Subscription Prices: Netflixhasadifficult
Original Content:Awardwinningoriginal timeraisingsubscriptionprices.Thelastattemptto
raisemonthlysubscriptionpricesleftcurrently
contentforseriesHouseofCardsandHemlock
subscribersupsetandNetflixstocktumbling.
Groveandothercriticallyacclaimedtitles.
SWOT
THREATS:
OPPORTUNITIES:
ISPs:Netflixaccountsforabout30%ofdailyinternet
InternationalExpansion:Theabilitytocreate
traffic.Withnetneutralitylawsstruckdown,Netflix
originalcontentwillenhanceinternationalgrowth.
mayhavetoassumemoredebtorcutcontent.
OriginalIn-HouseProgramming:Withmanyhouse-
Competition (Amazon Prime, YouTube):Both,Amazon
holdentertainmentdevicesconnectedtothe
PrimeandYouTubehasannouncedtheirownoriginal
internet,thereisanopeningforinternettvand
contentproductionsandaimtobeadirectcompetitor
Netflixsexclusivein-housecontentpoisesthe
toNetflix.
companyforthatdemand.
Content Price: Thepriceoflicensingandrenewing
Word-of-MouthCampaigns:Marketingexpenses
thoselicenseagreementsremaintobethelargest
havesteadilydecreasedduetoword-of-mouth
threattothecompanysabilitytooperateataprofit.
campaignsbasedonoriginalcontent.
4. Strategic Objectives
Invest more in series and original content for the most popular international
markets
Invest in the development of customer relationship management (CRM) as a
Netflix is definitely the biggest video streaming innovation of all times. It has
played well in the field and now competes with very far away competitors that are
trying to get into their speed. We all can see that technology and internet is a constant
changing world and if companies from that specific niche are not aware, years will pass
by and they will become obsoletes. Netflix good intention in introducing to their own
network some movies , documentaries and even series of their authority has make them
catch another point. It has just passed a year since Netflix decided to invest more than
100 million dollars and they already are nominated in films awards. Imagine how far
Netflix can go when these complete transitions have been done They will definitely
surprise us!
Netflix is definitely the perfect example of a company that uses the internet to
reinvent the market. It has a huge competitive advantage that is a true understanding of
E. Recommendation
The company should be more careful with cash flow. The investment made
by Netflix is higher risky than conservative, exposing sometimes too much their
price increase that would supplement some of these costs by implementing limited
campaign and proving that the company can be an award winning content producer.
F. Bibliography
http://www.zerohedge.com/news/2016-04-18/netflix-crashes-after-slashing-
international-sub-forecast-burns-1-billion-last-12-mo
http://www.nscreenmedia.com/international-markets-hold-netflix-attention-
drive-growth/
http://smallbusiness.chron.com/movie-rental-industry-life-cycles-63860.html
2016, de http://www.arabiangazette.com/video-streaming-boom-western-europe-
infographic-20150609/
Willy Shih, S. K. (2007). Netflix Case Study. Hardvard Business School, Boston.