Netflix stock analysis

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  • It has revolutionized the way people enjoy entertainment
  • To incre catalogue numb…to maintain good relationship with entertainment providers
  • Netflix lost half of its market value since July. Did it have enough reason to tweak its business model, and launch its rebranding marketing strategy.Qwikster, not to be confused with Quickster, a sports network, Quixtar, an internet division of Amway, or Kwik Star, a chain of convenience stores. Qwikster is the new brand for Netflix DVD-mail rentals, and a whole new set of rules that customers must learn about.From a brand marketing perspective, Netflix has dropped the ball. Rebranding should be part of an overall brand strategy that includes a prolonged adherence to increasing brand equity, cultivating relationships with brand advocates, and ultimately increasing profits. Instead, Netflix made numerous changes without warning, and then made a public apology for those changes.Netflix’s core product and its strength is delivering a very smooth, seamless, enjoyable customer experience. Thereby, Netflix should have been able to anticipate that by splitting the above in two they would be affecting the quality of the experience. If changes one makes in any aspect of their business threaten or affect that core product, one ought to be trying to study the possible implications of that and developing some ways to mitigate that risk.Though Netflix idea or rebranding was a very forward thinking and even visionary approach, it was not received so by the costumers. Netflix was in other words trying to say that for those who were Netflix customers in the past, Netflix will serve their needs as best as it can in the future. What it delivers will be the thing that they would probably want to see in the future, streaming video. Netflix will remain Netflix for them in the sense of being able to deliver that quality solution to them. Netflix simply wanted to separate out from the product that may not be relevant in tomorrow’s world.
  • Strength:Being the first company that venture into the online DVDs rental retailing, Netflix gain a first mover advantage. Netflix has gained alarge base of customers over the years. Beside having a good and strong relationship with several major studios which enable them to acquire latest releases at a faster time and lower cost, Netflix also successfully gain resources from independent film studios whereby creating a niche in the market. Therefore, customers can get a whole wide range of movies (including those lower-profile and independent films as well as earlier released movies) from Netflix as compared to other competitors.Netflix also offers a web portal with powerful features such as a proprietary recommendation system that was very accurate in recommendations, due to exploiting the knowledge of the choices made by the masses in its web portal as well as having the largest collection of movie ratings. Customers are recommended to movies based on their preferences as well as the availability of the movies. Netflix offers prepaid subscription service whereby customers only need to sign up and pay a fixed subscription fee a month for unlimited rentals. Customers will now have no more worry of returning their movies late, as Netflix has cancelled the late-fee system. This model enables Netflix to justify its slower delivery time in comparison to Blockbuster brick-and-mortar model. Instead of making it difficult for customers to unsubscribe its service, Netflix made the unsubscription process relatively easy and adopting the strategy of reclaiming churn customers rather than forcing dissatisfied customers to stay.
  • Netflix stock analysis

    1. 1. Ashna Dhawan Emira AjetiNeel Bhalaria Ta r u n C h u g h
    2. 2. Reed Hastings Founder, ChairmManagement Team an Neil David Wells Hunt Chief Financial Chief Product Officer Officer Leslie Patty Kilgore McCord Chief Marketing Chief Talent Officer Officer
    3. 3. Company Background• Founded in 1997 by Reed Hasting• Headquartered in Los Gatos, California• Offers online flat rate DVD and Blu-ray disc rental-by-mail and videostreaming• Serving more than 20 million subscribers• Employees-2,180 full-time employees• More than 100,000 titles of DVD• Distribution centers-more than 50• International Operations-Canada and Latin America(Caribbean, Mexico, Central and South America• Agreements and Partnerships with Nintendo WII, PS3, Xbox, Blu- ray discplayers etc
    4. 4. How Netflix worksDVDS by mail •Select •Receive •Watch •Exchange
    5. 5. How Netflix worksPLUS, instantly over the Internet to your TV •Select •Watch Instantly •Anytime
    6. 6. Strategic DirectionMission-to be a great Internet movie service by satisfying its customers and providingthem with the most expansive selection of DVDs; an easy way to choose movies; andfast, free delivery.Vision-To be world’s best distribution platformObjective-offer a superior customer experience by providing convenient andaffordable entertainment and to revolutionize the home entertainment experienceStrategic Philosophy- to continuously improve the customer experience byexpanding its streaming content, enhancing its user interfaces and extending itsstreaming service to more Internet-connected devices while staying within theparameters of their operating margin target.
    7. 7. Competition Blockbuster Redbox Hulu/Hulu Plus Amazon Vudu• Founded in 1985 • Founded in 2002 • Founded in 2007 • Founded in 2008 • Founded in 2004• McKinney, Texas • Oakbrook • Los Angeles, • Provides users to • Santa Clara,• North Terrace, Illinois, U California, United rent individual California, USA America, South nited States States films or episodes of • To distribute full- America, Europe, • specializes in the • Provide ad television shows, length movies over Australia rental of supported which extends the Internet to• Provider of home DVDs, Blu-ray subscription users access to over television video and video Discs, and video service to bring 90,000 film • Subsidiary of games, DVD by games via current TV • Cost $79 per year Walmart mail and streaming automated retail programs in HD to • Rent: $1.99-2.99 • Cost-$1-5.99 per videos on demand kiosks PC’s and TV etc . • Buy:$15 video and kiosks • Subsidiary of • Joint venture• Subsidiary of Dish Coinstar (NBCUniversal, Network • Cost-$1/ day Fox Entertainment• Mail service Cost- Group,Disney-ABC $11.99/ month Television Group)• Rentals (1.99-3.99) • Cost-$ 7.99/month •
    8. 8. Barriers to entry• Timing  Barnes and Nobles v/s Amazon  Barnes and Nobles late by 17months.  Amazon has 30times market capitalization and 8 times the profit mrgin  Netflix v/s Blockbuster  Right Timing  Netflix profits increase by 7times and Blockbuster lost $1bn in revenue• Investment/Capital for:  Tie ups with production houses  Supply Chain Management
    9. 9. Substitutes/Unique Resources• Substitutes  Theatres, Concerts, TV• Unique/Scarce Resources  Patented software and content  Bandwidth
    10. 10. Legal and Political Macro EnvironmentOpportunities Threats  Password Sharing  Copyright Laws preventing expansion  State of Tennessee, July 2011  Lawsuits  Video Privacy Protection i. National Association Act ($200,000 lobbying) of the Deaf ii. Recommended Algorithm iii. Throttling i. Unlimited rental ii. One day delivery
    11. 11. Economic Macro EnvironmentOpportunities Threats  270 million internet users in  Low Entry Barriers the US  Rising Content Costs  Aggregate 2.2 billion users in i. Increased competition the world ii. Excessive supplier power  Expansion in the international  Low Pricing Power markets with Canada, Latin America& UK  Price Sensitive customers  First Mover advantage in the streaming business  Great Recession has been a boon
    12. 12. Social/Demographic Macro EnvironmentOpportunities Threats  17% of US users use the  Price Elasticity is highest for internet to stream videos 18-34 demographic  Time spent online has  Only 15% of the 18-25 age increased by 6% group ready to pay extra for Premium  18-34 age group have the highest affinity to Netflix  Company is ignoring the baby boomers  Multiple people households income>50k
    13. 13. Technological Macro EnvironmentOpportunities Threats  93 million households High  Fair usage issues Speed net 2013  First sale doctrine  Only 35% of the users use  Amazon, Hulu are strong smart phones competitors  Properitory software &  Piracy Streaming protocols  97% of the customers receive DVDs in 1 business day
    14. 14. Global Macro EnvironmentOpportunities Threats  43 countries in Latin  Execution risks America  Increased content costs due  Q4 expects to have 2 million to broadening of portfolio subscribers  Negative contribution  20 million households in margin the UK 60% pay for an  Per capita income levels online movie offering  Tech infrastructure
    15. 15. Finance Internal Environment • Objectives Focus on increasing the subscribers to 26 million by 2011 Maintain a healthy cash position to meet the growing content costs obligations by issuance of new equity/debt Invest in innovative user interface and streaming technologies to create a solid platform for the shift of subscribers from DVD business to streaming Ensure that the international businesses become contribution profit positive within the next 2 years (Contribution profit= revenues-COGS-marketing expenses)
    16. 16. Finance Internal Environment Over the last few 5 years 38.8 % growth rate in net income
    17. 17. Finance Internal Environment Profit/Operating Margin 40 35 30 25 20 15 10 5 0 2005 2006 2007 2008 2009 2010 Gross margin 31.7 37.1 34.8 33.6 35.4 37.2 Operating margin 1.6 6.3 6.4 8.9 11.2 12.8Vincent Chung 1055-5
    18. 18. Finance Internal EnvironmentLong term Debt to cash500400300 cash (In200 millions) LTD(in 100 millions) 0 2005 2006 2007 2008 2009 2010
    19. 19. Finance Internal EnvironmentCurrent Liabilities and Cash flow 500 400 Current Liabitlities (in 300 millions) 200 Free Cash Flow(in millions) 100 0 2005 2006 2007 2008 2009 2010
    20. 20. Finance Internal Environment Stock has given -63.06% return in the last one year Reached its life time high of $304.79 in July and its 52 week low in November of $62.79
    21. 21. Finance Internal Environment Netflix has given a negative return of -63.06% YTD S&P 500 has given 1.15%
    22. 22. Finance Internal Environment The future estimates are in the negative Wall Street shoots first and then thinks
    23. 23. Finance Internal EnvironmentJuly 12, 2011 September October 24, 2011 NovemberSeS 19, 2011 22, 2011 • 800,000• Announces a 60% subscribers leave increase in plans by • Announces • Announces the company separating DVD by separating DVD by issuance of equity • Announces the first mail and streaming mail and to raise 400 million two quarters of business streaming 2012 will be loss business making • Backtracks on the decision
    24. 24. Finance Internal Environment Weaknesses Strengths  Weak Pricing power& price Mid 30% top line and bottom elasticity of customers line growth for 5 years  3% subscriber loss due to price Consistent Cash flow growth changes Low debt to equity ratio  $2.9 billion dollar in content Early mover advantage in obligations in next 5 years streaming  International expansion to be Linear trend in OM has reached loss making for next 3 years 11.2% in 2010  Negative share holder return in last 1 year due to lack of strategic direction
    25. 25. FROM a company that sends out DVD-s in the mail TO one of the world’s largest media distributors Marketing It is easy to drop an idea or a campaign because it isnt "ready."Many are still not satisfied with the content available through theirstreaming video service. That hasn’t stopped Netflix to improve over time Re-branding strategy? A mistake? Netflix lost over 1 million subscribers after its price increase Well researched? Well planned strategy with segmented strategies for all possible scenarios? Netflix split its brand into 2 different categories: 2 separate websites, two sets of recommendations, 2 separate customer bases, 2 monthly payments. and 2 separate places to get affordability, instant access and usability
    26. 26. Marketing Analysis• Strength  1st mover advantage - venture into the online DVD rental retailing  Large customer base over the years  Strong relationship with major studios and independent film studios (latest releases, low cost and niche market)  It offers a proprietary recommendation system, quite accurate  Recently sent out "refer-a-friend" cards for one free month of service.• Weaknesses  High cost for the replacement of content  Netflix business model does not really work with low volume customers
    27. 27. Marketing Expense Customer acquisition is becoming both harder and more expensive. Netflix seems to be spending much more on free subscribers than ever before. Overall acquisition costs for subscribers showed a large increase from 2010 to 2011.
    28. 28. OperationsObjectives  Reduce R&D costs by possibly partnering with an expert company  Retract from further international expansion Its previous strategies of investing in locating itself strategically has now moved to the strategy of content improvement. However, adapting to the content appealing to an international audience needs further investment  Enhance video content in the US, follow Disney example
    29. 29. PRAISE FOR ITS TALENT MANAGEMENT PROGRAMS Human resource and ethical concerns Salaries are at the 90th percentile of the market Employees who meet the membership criteria are rewarded with premium base salary levels. Not differentiating rewards by individual performance, but by considering all members who prove themselves to be top performers. Commitment to their style of performance management- show mediocre employees the door- Netflix has an annual “keep test” (double digit # people fail the test yearly among the Netflix population of about 500 salaried employees) Critical competencies in recruiting-in-house recruiting Careful avoidance of “incentives to stay”-vest schedules for its stock options
    30. 30. Core Competencies and Competitive advantages Netflix’s core product and its strength is delivering a very smooth, seamless, enjoyable customer experience. The Netflix model and software are proprietary, making their unique features difficult to imitate
    31. 31. Key weaknesses• Internal  Lack of Pricing Power  Lack of strategic direction  Brand dilution due to recent adhoc decisions• External  Lack on technological support in international markets  Rising content cost
    32. 32. Central Problem Deviating from the success formulae of unlimited DVD rental Declining revenue/subscribers Increase content costs Low barriers to entry for new competitors
    33. 33. Strategic Recommendation and Implementation Pricing Strategy: Tiered System-Mature Content, Pay per view (Movies, Advertising with a low price) Focus on US markets. Losing money in expansion. Form partnership with other streaming companies so they are able to improve their bargaining power for content

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