Netflix has seen declining stock prices and consumer confidence following changes to its pricing and structure. To recover, it must reestablish itself as the dominant internet streaming company. A SWOT analysis finds Netflix has strengths like brand identity and content library but also weaknesses like high churn rate. It faces threats from competitors but also opportunities in growing markets. An analysis of alternatives recommends diversifying into music streaming to leverage Netflix's strengths and gain new customers.

1. Seminar In Business Policy
Thomas Vogelsang
1

2. Strategic Issue:
Netflix stock prices have plummeted. After changing pricing and corporate structure,
Netflix has seen a continuing decline in consumer confidence - and its concerning
shareholders. How can Netflix reestablish itself as the dominant internet streaming,
DVD-mailing company and recover from its strategic misstep? And, more importantly,
how can Netflix reaffirm company stability to its consumers and shareholders?
Limitations:
• Internet Service Quality
• Government Regulations
• Infrastructure: Internet and TV services (As contrasted between developed and
developing countries)
• Content Library
S.W.O.T. Analysis:
Strengths:
• Large Company
• Historically High Growth Rates
• First Mover Advantage
• Economies of Scale
• Brand Identity
• Strong Delivery System
• Wide and Varied Video Content
• Low-Cost Service
• Progressive Services/Company Capabilities
• Movie Selection Software
• Personalized Services
• Service Speed
• Marketing (Free One-Month Trials)
Weaknesses:
• Internet Service Dependency
• Managerial Strategic Missteps
• Consumer Confidence (Qwikster Backlash)
• High Churn Rate
Opportunities:
• Increased Popularity in Streaming Services
• Internet Development (Particularly in Latin America)
• Foreign Market Development
• Consumer Acceptance of delivery of TV Shows and Movies via Internet
• Fast-Growing Market
• Technological Advancements
2

3. Threats:
• Competitors: Hulu Plus, Starz, Redbox, Amazon Instant Video, etc.
• Competitor Partnerships
• Rapid Technological Changes
• Change In Buyer Preferences
• Low Entry Barriers For Competitors
• Decline in DVD Market
• Price Increase of Licensing Fees
• Internet Service
• Weak or Nonexistent
• Increase in Price
S.W.O.T. Conclusion:
Although Netflix has taken a large misstep, the company outlook is hopeful and strong.
Netflix market share is large and expanding into foreign markets. Netflix has many
strengths and opportunities: ranging from economies of scale to first mover advantage,
foreign market development to personalization, to marketing and established brand
identity. This, as well as updates in internet service capabilities, development, and
speed, puts Netflix in a good position to move forward.
P.E.S.T.E.L. Analysis:
Political:
Netflix has to compete with a free service - illegal online streaming. The control of
online piracy is limited and rather ineffective, and is always changing as the
development and creation of internet capabilities change. This is a legitimate threat.
Although, not crippling (yet).
Economic:
The U.S. economy is displaying signs of rebirth and growth since the 2008 economic
meltdown. This puts Netflix in a good position as consumers begin to emerge from a
saver-oriented cultural downswing to a consumer-oriented upswing.
Social:
Netflix is in a prime social positioning for two reasons: their service is extremely
convenient and user-friendly, and the entertainment industry demands have shown
large growth and encourage Netflix growth as an entertainment facet. The social
environment - one geared toward entertainment - looks promising.
Technological:
Technology changes rapidly, and is unforgiving to those who fall behind. Fortunately,
Netflix is a fast-moving company that invites the changes in technology: especially in
streaming capabilities and access. However, this creates a strong reliance on high
speed internet - one that should raise more than a few eyebrows. But, if internet
development stays strong, access to Netflix services will increase. Overall, the
development of new and improved technology will create a wave for Netflix: one they
3

4. will either ride and enjoy large profits from, or, one that will move faster than they
can, and result in them being swept under.
Environmental:
The largest environmental threat to Netflix is the dependency of strong internet
service. If internet services go down due to lighting storms, tornadoes, ice storms, etc.,
Netflix subscribers will suffer first hand - and not be pleased. The Netflix-consumer
relationships depends on strong, dependable internet service.
Legal:
There is a relatively low amount of government regulation on Netflix. The primary
concern in the legal environment is the development/change in licensing, patents, and
copyrights. If these fees were to increase, Netflix consumers and owners might bear
the increased costs.
Weighted Competitive Strength Analysis:
Ratings: (very weak) 1 - 10 (very strong)
Key Success
Factors
Weights Netflix Amazon
Instant
Video
Redbox
Price: 30% 8 2.4 9 2.7 7 2.1
Convenience: 25% 9 2.3 9 2.3 6 1.5
Video Content: 20% 9 1.8 7 1.4 4 0.8
Brand Identity: 10% 8 0.8 6 0.6 8 0.8
Service Speed/Quality: 15% 9 1.4 9 1.4 6 0.9
Weighted Total: 100% 8.7 8.4 6.1
In this analysis, Netflix is competitively compared to Amazon Instant Video (a growing
and strong competitor for DVD rental and video streaming) and Redbox (a competitive
DVD rental provider). Redbox is the weakest competitor: paying particular attention to
convenience, video content, and service speed/quality. Netflix and Amazon, services
with video streaming, far outcompete Redbox due mostly to streaming abilities and
conveniences. Video streaming is extremely convenient for consumers and allows a
significantly higher video content range - giving both companies a significant
competitive advantage. Although Amazon Instant Video is a little cheaper of a service
than Netflix, one can see Netflix makes up for this with a stronger brand identity and a
larger video content. Netflix offers thousands of more movies and shows than either
Amazon or Redbox, and has a stronger brand identity (although Amazon is an
extremely identifiable company, the Instant Video service is not nearly as
known/recognized by consumers).
4

5. Five Forces Analysis:
5 Competitive Forces Pressure
Substitute Products: Strong
Buyer Power: Strong
Supplier Power: Weak
Potential New Entrants: Moderate
Rivalry: Strong
Overall: Moderately Strong
•Substitute Products: Strong
Netflix is in competition with Hulu Plus, Amazon Instant Video, Walmart, Redbox,
and many other companies, all offering (relatively) the same product. Although
video quality and company services between providers are arguable points,
consumers have many options (even illegal ones - i.e. internet streaming) to watch
movies and TV shows. This places substitute products as a high pressure.
• Buyer Power: Strong
Consumers can easily and readily switch between service providers, and do. Netflix
has a high churn rate, meaning, anywhere from 30-70% of subscribers cancel their
service with Netflix annually1
. This puts Netflix in a tough position and increases its
need to strive to outcompete rivals.
• Supplier Power: Weak
Netflix is in a weak position in regards to supplier power for a couple reasons: buyer
switching costs are low, substitutes are available, buyers are price sensitive, and
product differentiation is relatively low. Although, Netflix’s.....
• Potential New Entrants: Weak
To enter into the video streaming/DVD rental service would be difficult because of
the economy of scale. Netflix is a multi-billion dollar company and has constructed a
large and intricate network for mailing and internet based service(s). Along with
these justifications is the fact that competition between Netflix and rivals is stiff and
only growing - making entry even more difficult.
• Rivalry: Strong
There are many companies that offer the same (although quality is arguable)
products and services as Netflix. There are many sizable competitors, brand loyalty
is low, and products are relatively undifferentiated. The competitive environment
between rivals is strong: Hulu Plus, Amazon Instant Video, Starz, Walmart, Redbox,
and many others are all striving to outcompete Netflix and gain a larger market
share.
1 Netflix Case Study p. C-145
5

6. Overall Competitive Environment: Strong
Netflix is engaged in intense competition. Renting and streaming DVD’s, TV shows,
and movies is easy and convenient for consumers. Substitute products are readily
available with a variety of companies offering similar products and services. Due to
competitive pressures from Hulu, Amazon, and Redbox, and the ever-pressing threat
of illegal streaming, the competitive environment is strong and only growing as
Amazon Instant Video, Hulu Plus, and others continue to strive for greater market
shares.
Five Generic Strategies: Broad Differentiation
Netflix’s generic strategy is one that works to provide a low cost and differentiated
service to its customers. Netflix is looking to serve anyone with internet: its service is
cheap and appeals to anyone - especially as internet streaming services are better
developed and more readily available. Their marketing strategy does not specifically
target any niche, but rather appeals through differentiated service: whether that be
better speed, increased convenience, larger video content (in which they’re
unparalleled!), or the personalization of the service. They also differentiate themselves
by providing extensive movie information, no late fees or DVD rental due dates, and
no additional pay-per-view charges.2
Financial Ratio Analysis and Benchmarking:
Financial Ratios (With Benchmark)
2009 2010 2011 DIRECTV
(2012)
Liquidity Ratios:
Current Ratio 1.84 1.64 1.49 1.00
Quick Ratio 1.19 0.71 -0.11 0.93
Efficiency Ratios:
Asset Turnover Ratio 2.46 2.20 1.04 1.45
Operating Profit Margin 11% 13% 12% 17%
Profitability Ratios:
Net Return on Assets
(ROA)
17.1% 16.4% 7.4% 14.5%
Return On Equity (ROE) 58.2% 55.4% 35.2% 54.8%
2 Netflix Case Study p. C-141
6

7. Financial Ratios (With Benchmark)
Net Profit Margin 6.94% 7.44% 7.10% 10.0%
Debt Ratios:
Debt-to-Equity Ratio 2.41 2.38 3.77 2.78
Debt Ratio 0.71 0.70 0.79 0.74
Financial Ratio/Benchmarking Overview:
The table above shows an industry comparison between DIRECTV and Netflix,
as well as a comparison between years 2009, 2010, and 2011. Netflix’s “strategic
misstep” is shown in its financial reports: from 2009 - 2011 the current, quick, asset
turnover, ROA, and ROE ratios have all shown diminishing signs. This puts Netflix,
heading into 2012-2013, into a tough financial situation. Investors are going to notice
the smaller ROE and ROA coming in to the new financial year. However, investors
should also notice the increase in foreign investment and the financial predictions of
increased revenues by 2013. The debt was occurred during expansion in foreign
countries: Canada, Latin America, United Kingdom and Ireland. And, “Netflix
executives were fully aware that international expansion would temporarily depress
overall company profitability” and project these costs to be covered within 2 years.
Alternatives:
Alternative 1: Diversification: Music Streaming
Advantages:
• Large Music Streaming Market Growth
• Lucrative Industry
• Low Risk
• Competitive Advantage
• First-Mover
Disadvantages:
• Supporting Systems
• Competitive Industries
Alternative 2: Focused Partnerships Strategy: Obtaining Content First
Advantages:
• Competitive Advantage
• Enhance Offerings
• Established Relationships
• Increased Market Exposure
7

8. Disadvantages:
• Increased Costs
• Higher Cost of Service or Lower Profit Margins
• Lower Profitability Potential
• Technological Challenges
• Storage
Alternative 3: Expansion Into European Countries
Advantages:
• Large Growth Potential
• New Markets
• Large Population
• Established Internet Services
Disadvantages:
• Limited Internet Service(s)
• Expensive Startup Costs
• Differing Government Regulations
Weighted Analysis of Alternatives:
Key Success
Factors
Weights Alternative 1 Alternative 2 Alternative 3
Profitability: 28% 8 2.24 6 1.68 8 2.24
Brand Image: 12% 7 0.84 6 0.72 9 1.08
Risk: (lower = more risk) 13% 6 0.78 9 1.17 4 0.52
Growth Potential: 22% 9 1.98 6 1.32 9 1.98
Comp. Adv.: 10% 8 0.80 7 0.70 5 0.50
First Mover: 15% 9 1.35 6 0.90 7 1.05
Weighted Total: 100% 7.99 6.49 7.37
Solution and Justification:
8

9. Reed Hastings, CEO of Netflix, is a first mover type of leader - one that seeks to
pioneer and use industry changes to his advantage. The introduction of music
streaming services provides Netflix with a previously unheard offer and advantage
over competitors. The proposed strategy - Alternative 1 - holds potential in many
venues: profitability, first mover status, competitive advantage, increased brand
identity, low risk, and large growth, to boot.
The basic idea would be to introduce music streaming paired with the movie
streaming services already offered. Music and movies go hand-in-hand and would be a
relatively easy and cost-effective way to attract and keep customers - no other
competitor is offering this service. Because Netflix is an industry giant, preparing the
relationships between the music and movie industry will be easy and of a much lower
cost than furthering expansion into European markets. The movie streaming
development could also partner with movie soundtrack providers to offer instant
knowledge and access to movie soundtracks - offering yet another extension of services
not offered by competitors. Netflix should also be able to use this strategy as a
marketing technique: “Netflix now offers music streaming services with access to
thousands of songs from thousands of artists” or something to that effect.
Lastly, Alternative 1 allows Netflix to continue expansion in Latin American
countries (as it is currently doing) and continue to target Netflix’s “three types of
customers.”3
The start up costs associated with Alternative 1 are minimal and allow
market expansion and development without project interference. Netflix can continue
with its dedication to providing customers with a cheap, convenient, personalized and
innovative service, and now, a more comprehensive service - one that will satisfy movie
and music lover needs alike.
Implementation:
Alternative 1 proposes development to couple music and movies together.
Implementation will focus on merging the music and movie streaming industries into
one convenient bundle for the consumer. This will require a slow and steady increase in
employment from a current employee base of 2,0004
to 2,250, to satisfactorily compete
with large music streaming providers, like Pandora5
. This will be broken down into a
separate, but similar entity. It will require an expansion of office space and a bulking up
of internet streaming capacities, as well. An additional 250 employees to manage and
create the music streaming system will be heavy in cost, but will be added in through
phases. Each year following year 1, and the hiring of 75 new employees, an additional
25 will be hired. This will effectively take place over an 8 year period, reaching 250 new
employees after year 8.
The two biggest costs accompanying this plan are licensing fees and marketing
expenses. There will also need to be a large-scale marketing campaign to market this
additional service - which will be offered for an additional fee of $1 a month (raising the
3 Netflix Case Study, p. 138
4 Fastenberg, Dan. AOL jobs.
5 “Pandora Number of Employees P NYSE.” Macroaxis. 2014. Accessed Oct. 30, 2014.
9

10. monthly subscription to $8.99). The service will be offered as a choice for the first 2 years
after introduction. This will allow Netflix consumers to try the music streaming service
without requiring the change. After the 2 year period, it will become a mandatory
additional cost, effectively raising the price of “Unlimited Streaming (no DVD’s)” from
$7.99, to “Unlimited Streaming: Movies and Music (no DVD’s)” to $8.99. The price
increase will be similar, as in an additional $1 monthly, to each subscription choice.
Management:
Because streaming technologies are similar, the additional employee support is
simple and can be primarily focused on recruiting new engineers and analysts, with
minimal additional managerial support needed. Netflix managers and engineers are
competent in movie streaming software and requirements, and can easily transition
work to include music streaming necessities as well. With an additional 250 employees,
there will need to be an additional 20 managers and 10 senior manager positions to
oversee the project. Of the remaining 220 new employees, most will be different
analysts and engineers: Software, Research, Network, Hardware, and User Interface
engineers, with 20 senior and managerial network and software engineers as well, and
the rest working for marketing and PR, finance, facilities, product innovation, and
customer service.6
Marketing:
Marketing this transition is key. First, Netflix will advertise the addition of music
streaming as an added bonus to the 1-month free trial. For new subscribers, Netflix will
offer the same deal as before - a free 1-month trial - and absorb the additional costs of
music streaming in their marketing budget (just like before). For previous subscribers,
Netflix will allow a decision time of 2 years to allow users to try and explore the music
streaming capability. Netflix will then offer a separate payment plan option - one, for
$8.99 a month, that can enjoy unlimited music and movie streaming. Marketing for the
new service will begin in year 0 and extend until the end of year 2. Netflix can expect
minimal subscriptions for the first 2 years. After year 2, all subscription options will
include the additional music streaming services and all pricing will increase by $1.
The introduction of music streaming as a new addition to Netflix should be
marketed as innovative and trendy, and will be a personalized service - just as the movie
selection software functions (the creation of music selection software will be part of research
and development costs). Marketing will begin with a budget of 25 million for the first 2
years of operations and then proceed to increase by 5 million a year: FY 3: 30 million to
FY 10: 65 million. The large marketing budget aligns with Netflix’s previous marketing
strategy and can continue to allow a 1-month free trial.
Economics:
6 “Netflix Jobs.” Netflix. 2014. Accessed October 28, 2014.
10

11. Economic analysis brings hope to the Netflix company. Netflix is at the forefront
of streaming services: with unparalleled personalization and the largest movie library
of any service provider, successfully dwarfing competition in terms of revenue and
market share. Consumer confidence in Netflix will grow as increased foreign market
development continues as planned, and, once again, bring a profitable company
outlook. Alternative 1 will result in additional revenues over $100 million by year 10
and should be used as marketing leverage when comparing Netflix with competitors.
Finance:
Start up costs are minimal: requiring only $8 million for purchasing property (for
additional employees), the beginning development of software and services, and the
original content library. By year 3, all subscription options will have absorbed the music
streaming service and an additional $1 will be added to every new subscription.
Netflix will incur losses for the first 5 years since project launch. Year 6 is
predicted to incur a net income of $6.8 million and consecutive years are predicted to
continue to rise to $113.276 million by year 10. The largest expense is the ongoing
marketing costs - which can be justified with the absorption of one-month free trials as
marketing costs. Second to that expense is licensing fees - which are 15% of total
revenues7
. Otherwise, labor costs are rather minor, with an average salary of $45,000 for
newly hired employees, as well as relatively minor costs associated with administrative
work, research and development, and additions to the content library.
Accounting:
The Accounting sheet is the final attached page. The start up costs are $8 million
and hold a NPV of $12.67 million, with a WACC of 11% and an IRR of 12.9%. The
proposed alternative projections extend over a 10 year project timeline - in which by
year 6 it will be a profitable venture. Most of the ongoing expenses are suggested to
maintain competitive advantage over rival firms. Continually growing marketing,
content library, and research and development costs are designed to keep the firm
competitive and at the technological forefront.
7 Licensing Royalty Rates. Invention Licensing. 2014.
11

12. 12
Accounting Analysis (in thousands)
Year 0 Year
1
Year
2
Year
3
Year
4
Year 5 Year
6
Year 7 Year 8 Year 9 Year 10
Projected Revenues:
Subscription Revenues $0 $2,00
0
$4,00
0
$41,0
00
$54,0
00
$69,0
00
$88,0
00
$107,0
00
$128,00
0
$151,
000
$176,00
0
Operating Income $0 $0 $0 $0 $0 $0 $0 $33,20
0
$85,105 $160,
821
$267,34
4
Other Revenues $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Revenues: $0 2,000 4,000 41,00
0
54,00
0
69,00
0
88,00
0
140,20
0
213,105 311,8
21
443,344
Projected Expenses:
Start-up Expenses:
Real Property $2,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Development $1,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Content Library $5,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Start-Up
Expenses:
$8,000
Running Expenses:
Labor $0 $3,37
5
4,500 5,625 6,750 7,875 9,000 10,125 11,250 $11,2
50
$11,250
Marketing $0 $25,0
00
$25,0
00
$30,0
00
$35,0
00
$40,0
00
$45,0
00
$50,00
0
$55,000 $60,0
00
$65,000
Licensing Fee (15%
Royalty)
$0 -300 -600 -
6,150
-
8,100
-
10,35
0
-
13,20
0
-
21,030
-31,966 -
46,77
3
-66,502
Administrative $0 $2,00
0
$2,00
0
$3,00
0
$3,00
0
$4,00
0
$4,00
0
$5,000 $5,000 $6,00
0
$6,000
Research and
Development
$0 $5,00
0
$2,00
0
$2,00
0
$3,00
0
$3,00
0
$4,00
0
$4,000 $5,000 $5,00
0
$6,000
Additions to Content
Library
$0 $1,00
0
$2,00
0
$3,00
0
$4,00
0
$5,00
0
$6,00
0
$7,000 $8,000 $9,00
0
$10,000
Additional Real
Property
$0 $0 $0 $0 $2,00
0
$0 $0 $0 $0 $0 $0
Total Expenses: 8,000 36,07
5
34,90
0
37,47
5
45,65
0
49,52
5
54,80
0
55,095 52,284 44,47
7
31,748
Net Income: -8,000 -
34,07
5
-
30,90
0
3,525 8,350 19,47
5
33,20
0
85,105 160,821 267,3
44
411,596
11,250 $1,12
5.00

13. Conclusion:
In conclusion, Netflix sits in a good position. Being a first-mover company has
provided and will provide success for Netflix. The coupling of the new music streaming
service with the market expansion into the UK, Ireland, Canada, and Latin America
holds a promising outlook. By year 3 of introduction of Alternative 1, subscriptions
should begin a strong increase due to new music streaming capabilities as well as more
developed international markets. This, coupled with streaming growth potential, the
introduction and development of new technologies, and growing entertainment
demands, all elude to a bright future for Netflix.
13
Net Present Value Calculations (In Thousands)
Present
Day
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Cash Flows -$8,000 -
$34,675
-$32,100 -$8,775 -
$7,850
-
$1,22
5
$6,800 $20,6
05
$42,0
64
$72,85
5
$113,276
NPV $12,667
WAAC 11.0%
IRR 12.9%
PV of Expected
Cash Flows
$20,667

14. Bibliography:
• "DIRECTV Annual Report." February 24, 2014. Accessed October 30, 2014.
• Fastenberg, Dan. "Are Netflix's 2,000 Employees In Jeopardy?" AOL Jobs. October 27, 2011. Accessed
October 30, 2014.
• Inkpen, Casey. "Netflix Case Analysis." YouTube. June 23, 2013. Accessed October 30, 2014.
• "Licensing Royalty Rates | Average Royalty Rates for Invention Licensing." Licensing Royalty Rates |
Average Royalty Rates for Invention Licensing. Accessed October 30, 2014.
• Netflix Case Study.
• "Netflix Jobs." Netflix. January 1, 2014. Accessed October 28, 2014.
• "Pandora Number of Employees P NYSE." Macroaxis. January 1, 2014. Accessed October 30, 2014.
• Rayburn, Dan. "Amazon's Prime Streaming Will DEFINITELY Disrupt Netflix: Here's How." Business
Insider. February 23, 2011. Accessed October 30, 2014.
• Szalai, Georg. "Hulu Reports 2011 Revenue of $420 Million, Hulu Plus Reaches 1.5 Million Subs -
Hollywood Reporter." The Hollywood Reporter. January 12, 2012. Accessed October 30, 2014.
• Trefis, Team. "What Justifies A $445 Price Estimate For Netflix?" Forbes. September 23, 2014. Accessed
October 30, 2014.
14