Netflix Case Study

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)

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 Source: 2008 Data from Hoovers, SEC Netflix Blockbuster Redbox Industry Median Annual Sales ($M) 1,364.7 5,542.4 22.4 Employees 1,644 59,643 750 Gross Profit Marin 33.30% 51.90% - 36.00% Net Profit Margin 6.10% 0.50% - -11.50% Return on Invest. Cap. 19.8% 1.8% - 2.9% 12 mo. Revenue Growth 13.2% 0.6% - 8.7% 12 mo. Net Income Growth 24.0% 0.0% - 15.2%

Financial Position

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

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

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

First Mover Advantage

Strong Brand Recognition

High Customer Satisfaction

Large Movie Selection

Low Overhead Costs

Predictable Monthly Revenue Streams

Affordable Pricing

WEAKNESSES

Monthly Fee Discourages Membership From

Less Frequent Movie Watchers

Lack of Control Over DVD Return Time

Comparatively Small Movie Library Available to

Stream

DVDs Can Arrive Scratched or Broken Due to

Mailing Process

OPPORTUNITIES

Product Line Expansion – Video Games

Expand Downloadable Movie Offerings

Print 3 rd Party Advertisements of Red Envelopes

Expand on Partnerships With Content Providers

and Technology Providers.

THREATS

Staying power of DVDs

Contractual restrictions on streaming content

Bigger competition in the streaming video market

DVD competition from Red Box, and Blockbuster

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 >