Final_NetFlix 0.3 - Copy

Agenda

History Background Corporate Management Business Environment Strategic Analysis – External Context Strategic Analysis – Internal Context Recommendations Q & A

1997: Netflix.com, Inc was established and incorporated in Delaware and is headquartered in Los Gatos, California by founder Reed Hastings1998: Netflix website launched with an online version of a more

traditional pay-per-rental model1999: Netflix introduced the monthly subscription concept 2000: Dropped the single-rental model and introduced flat-fee unlimited rentals without due dates, late fees, shipping or handling fees, or per-title rental fees 2002: Company Went Public In May, 20022006: Subscribers increased to 5.6 million at the end of the third

quarter2008: Introduced Internet video streaming and announced a partnership with Starz Entertainment. Blu-ray Discs support2010: Introduced video streaming in Canada2011: Partnership with CBS

History

Background - How Netflix Works

Instantly watch online on your PC or Mac. Instantly watch right on your TV via devices streaming from

Netflix. Choose from a growing library of movies & TV episodes

Background - Features

Queue

Instant Queue

Browse

Suggestions

Background - Facts

Ratings

Movie choosing

Recommendations

Customer Satisfaction

Background – Services offered

Company Started As An Internet Subscriber Renter Of DVD Movies

Patented Business Model Where Customers Rented DVD Movies Online and Received Them In The Mail1

Company Started Out Doing Business Only In The USA And Canada With The Intent Of Expanding Globally

Note Late or Cancellation Fee1

Free DVD shipping both ways1

Blue-ray subscription, for a min fee Flat-fee service with various plans1

Sells gift subscriptions Instant Viewing Sells used DVDs to its subscribers

Background - Pricing model

Corporate Management

C- Level Strategic Leadership Corporate Governance Company Vision Opportunities & Threats Risks and Vulnerability Value Creation

C- Level Strategic Leadership Reed Hastings – Founder, CEO, President And Chairman Of The Board Since 1997

Neil Hunt – Chief Product Officer Since 1999 Leads Website Development Team

Leslie Kilgore – Chief Marketing Officer Since 2000

Andrew Rendich – Chief Service And Operations Officer Since 2000

David Wells – Chief Financial Officer Since 2010

David Hyman – General Council Since 2002

Ted Sarander – Chief Content Officer Since 2000 Oversees Company’s Content Acquisition Through Relationships With Studios, Networks, Film Makers And Producers

Patty McCord – Chief Talent Officer Since 1998

Board Of Directors

Chair/Head Of The Board Reed Hastings

Audit Committee (All Independent directors) Charles H Giancarlo (Member Of Board) Timothy Haley (Member Of Board) Ann Mather (Chair Of Audit Committee)

Compensation Committee (All Independent directors) A. George Battle (Independent Director) Timothy Haley (Chair Of Compensation Committee) Jay Hoag (Member Of Board)

Nomination And Governance Committee (All Independent) Richard Barton (Member Of Board)– Jay Hoag (Chair Of Committee)

Vision Statement

As Stated By CEO Reed Hastings:

“Our Vision Is To Change The Way People Access And View The Movies

They Love”

Corporate Governance•Board Of Directors & Senior Managers Create Company Vision And High Level Strategies

• Senior Level/Business Unit Managers Create Detailed Business Strategies To Fulfill Vision

• BU Managers Verifies That Strategies Are Implemented To Carry Out Vision

– Gives Regular Implementation Feedback To The Board

• Share Holders Can Communicate Directly With Board Of Directors Via Email Link On Company’s Website2

– General Council Monitors Emails Before Sending Them To Board Members

• Board Issues Code Of Ethics & Insider Trading Rules That All Employees Must Follow2

– Helps To Shape The Culture Of The Company

• Pay High Performing Employees At The Top Of Market. Get Rid Of Marginal Performers.

– Also Helps To Shape The Culture Of The Company

• Company Promotes Culture Of Freedom And Responsibility3

– Stresses 9 Behaviors And Skills That They Want Employees To Adapt•Judgment, Communication, Impactful Actions, Curiosity, Innovation, Courage, Passion, Honesty and Selflessness

Netflix Strategic Plan/Goals

• Maintain The leadership Role As the Market Leader Of Digitally Down loadable Movies4

– Continue to Improve The Skill set Of R&D Group With Expertise In Video Compression And High Volume File Transfer

• Achieve Exponential Growth In Both Subscribers And Revenue4

– Strive For Growth in the US And Globally

• Achieve Continuous Improvement Of Customer Experience By Also Achieving Growth In the Number Of Netflix Enabled Devices Such As: Wii, Xbox 360 And Play-Station, TV(s) And Phillip Blue-ray Player5

Opportunities• Netflix Sees One Of Its Biggest Future Business Opportunity In Personal Accounts For Handheld Electronic Devices6

– Company Started With A Business Model Of Targeting House Holds With Computers, DVD Players And TV Sets As Their Main Market

– Now Company Wants To Shift Its Model From Targeting Households To Targeting Individuals With Smart Phones, Tablets And Laptops

– Company Also Working Hard To Incorporate Netflix On Facebook Which Fits With Their Goal Of Gaining Personal Accounts.

– This Shift In Business Model Aligns With The Company’s Current Technology Shift From DVD Rentals To Streaming Video Over The Internet, Which Is A More Personal Technology

– Company Expects The Shift From Households To Individual Accounts To Take A Few Years

• Streaming Movies For Television Networks– Feb 2011, Signed 2yr Deal With CBS To Stream Old & New CBS Movies7

Risks/Challenges•Possibility That Shift In Business Model From Targeting Household Accounts To Targeting Individual Accounts May Not Generate Enough Customers

• International Expansion Plans May Not Be As Successful As Planned9

• Threat Of Main Competitor Of Streaming Video (Hulu Plus) Gaining Market Share By Changing Its Business Model8

• Possibility That Talks Of HBO And Amazon Partnering To Start Doing Streaming Of HBO Movies Over The Internet Could Become A Reality

• Threat Of Piracy On Websites Could Affect Company’s Revenue

• Better Offerings From MVPDs (HBO, Showtime, DTV) Could Make Netflix Less Desirable8

• Threat Of Content Cost To Netflix Rising Quickly And Slowing The Company’s Growth9

• If Internet Service Providers Do Not Maintain The Internet, Company Will Lose Customers

Value Creation

• User Friendly Internet Website Allow Customers To Easily Find Movies They Want To Watch

– CineMatch Technology Also Give Customers Movie Recommendations

• Streaming Video Gives Customers Instant Gratification Of Watching Movies Without The Delay Of Waiting For It In Mail

• Customers Can Keep DVD Movies As Long as They Want Without Paying Late Fees Or Shipping Charges

• Customer Service Center That Operates 7 Days A Week

• Strategically Placed Distribution Centers For Providing The Best Supply Of DVDs To Customers

Business Environment

Market Spaces Social dimension Economic dimension Technological dimension Political dimension Ethical dimension

Business Environment – Market Spaces

• Netflix Competes In The DVD Movie Rental Market Space Of The Overall Movie Entertainment Industry

– Company Stands Out By Using Internet Technology To Spark Service Innovation For Customers

• Netflix Initially Created A Unique Business Advantage Over Competitors By Using Internet Technology To Allow Customers To Rent DVD Movies Online By Subscription Memberships

– Customers Receive Rented DVDs By Mail (Don’t Have To Leave Home)– Competitors Such As Blockbuster & Wal-mart Originally Relied On Their Outlet Stores To Rent DVD Movies But Have Recently Started An Online Subscription Service

• Company Has Also Created A Business Advantage In Market For Movie Rental By Streaming Movies Over The Internet To Not Just Computers But Also Other Internet Ready Electronic Devices

– Competition Such As Amazon Or Oovoo Stream Movies To Computers Only– Competition Charges Per Movie. No Low Cost Subscription Plan

• Company Has Mainly Been Serving Customers In The USA And Canada

– Slowly Penetrating Market in UK

Business Environment – Social Dimension

• Netflix’s Customer Base Is Composed Of Younger Middle Class Individuals Who Have Computers And DVD Players And Can Afford To Pay For Internet Access

• Company Is Now Trying To Expand Its Customer Base With Even Younger Individuals Who Own Mobile Internet Ready Devices Such As Smart Phones, Tablet Computers And Laptops

• Company Has Mainly Been Catering To Customers In The US And Canada Who Have Similar Cultures And Spending Habits

Business Environment – Economic Dimension

• Netflix Caters To Younger Middle Class To Upper Income Earners– Internet Cost Forms Barrier To Lower Income Earners– Most People Today Have Smart Internet Ready Phones

• It Is Highly Recommended That Netflix Come Up With A Brilliant Way Of Subsidizing The Cost Paying For Internet Access

– Such An Investment Would Grow Their Customer Base Rapidly– This Is An Investment That Would pay For Itself Many Times Over

•Netflix Has A Business/Market leadership Edge On Its Competitors But It Has Competitors With Deep Pockets Like Amazon, Who Will Be Trying To Catch Up

• Many Studies Have Shown That Hard Economic Times Do Not Affect The Movie Rental Portion Of The Entertainment Industry10

– Families Still Want to Be Entertained At A Fair Price– Families May Decide Not To take An Expensive Vacation Or Go To An Expensive Ball Game But They Will Still Rent Movies Or Go To A Movie Theater

Business Environment – Technological Dimension

• To Remain A Sustainable Entity It Is Highly Recommended That Netflix Starts Working On Other Technologies That Can Replace Or Improve Their Streaming Video Technology

– Just In Case Another Technology Comes Along That Causes Them To Lose Their Edge– Other Online Streaming Video Companies Like Hulu Plus Or Amazon May Decide To Start Offering A Monthly Low Cost Subscription Plan

Business Environment – Political Dimension

• From A Political Standpoint Netflix Does Not Have Any Serious Issues Operating In The US And Canada

– These Are Political Landscapes That The Company Is Familiar With And Understand Being Neighboring Countries

• The Real Challenges Will Come When Netflix Starts Expanding More Internationally In Countries With Political Systems And Cultures They Do Not Understand

• It Would Be Wise For Netflix To Do Their Home Work On The Political And Cultural Tendencies Of Each International Nation They Plan To Do Business In, Before Starting A Business There

Business Environment – Ethical Dimension

• Netflix Faces A Major Ethical Issue of Piracy On Websites– The Computer Hackers Who Steal Movies And Sell Them

• There Are Some Local Internet Service Providers (ISP) Of Customers Who Charge Netflix Extra For Delivering Movie Content To Customers, Even Though Customers Already Pay Them Monthly For Content Delivery11

– Netflix Sees This As An Ethical Issue Since They Are Double Charged.

• Netflix Managers Will Also Face Ethical Challenges When Trying To Navigate The Political System In International Markets

– Will Managers Try To Make Shady Deals To Get Their Business Established Quickly Internationally?

Internal Context - Competencies Assessment

Netflix’s core competencies:

Convenience - DVD rental thru mail order

“Netflix offers a familiar core benefit – move rentals – through a delivery system that combines the Internet and regular mail. Its customers don’t have to race back to the store at 10:59 p.m. to return their rentals and avoid late fees”

Innovation – Streaming Video

Netflix gives its customers the options of downloading their products using: Xbox 360 Wii consoles Playstation 3 systems

Internal Context – Competencies Assessment


Netflix’s core competence of providing its customers the

ability to rent movies thru the mail currently allows it to be the industry leader in DVD rental and has positioned Netflix for sustainable growth

Netflix has enhanced its leadership position by implementing streaming video technology, for example in 2010 Netflix paid $406M to acquire more streaming content for its library



Netflix has expanded their movie title selection for customer rental purposes

Netflix can exploit its core competencies gaining a competitive advantage by offering:

Special promotions like having a membership drive to offer discounts in an attempt to attract new members, returning members, even dissatisfied customers from the Outer Market Space of the business environment

Seasonal marketing campaigns in an effort to increase sales



Netflix is continuing its exploitation of the Internet and mail order service offerings maintaining its strong market position in traditional DVD rental

Netflix’s management team have the mindset to be the industry leaders, for example they are providing strategic direction in the area of technological innovation by tapping into streaming video and pursuing opportunities internationally in markets like Canada and the United Kingdom

Internal Context - Capabilities Assessment

Understanding current situation:

Netflix has the knowledge and capabilities that are necessary to fulfill the company’s mission

Netflix’s vision and mission statements are clearly understood. Its core values are shared by all the stakeholders including customers alike

With the advent of streaming video and its use across a wide-range of mobile devices, this will allow Netflix to become the “go-to” company and premier provider for anyone looking to stream movies.


Determining future requirements:

Netflix’s core capabilities strengths include having the technology, finances, including intellectual capital needed to support its future growth plans

Netflix’s Balance Sheet (excerpt):

Balance Sheet(in US $)

As of Dec. 31, 2010 As of Dec. 31, 2009

Total assets $ 982,067,000 $ 679,734,000

Total liabilities $ 691,903,000 $ 480,591,000

Total stockholder’s equity $ 290,164,000 $199,143,000



Netflix’s Income Statement (excerpt)

Income Statement (in US $)

As of Dec. 31, 2010

As of Dec. 31, 2009

Revenues $ 2,162,625,000 $ 1,670,269,000

Total Cost of Revenues $ 1,357,355,000 $ 1,079,271,000

Gross Profit $ 805,270,000 $ 590,998,000



Netflix’s Cash Flow Statement (excerpt)

Cash Flow Statement (in US $)

As of Dec. 31, 2010

As of Dec. 31, 2009

Net Income $ 160,853,000 $ 115,860,000

Net cash provided by operating activities

$ 276,401,000 $ 325,063,000

Net cash used in investing activities $ (116,081,000) $ (246,079,000)

Cash at end of year $ 194,499,000 $ 134,224,000



Bridging the digital divide in the US, Canada, and the UK will provide Netflix with even more opportunity to increase its sales revenue and profit margins

Internal Context - Cont. Capabilities Assessment


Netflix is continuing its enhancement to its streaming technology by investing more cash to acquire more streaming content for its library

For example, in 2010 Netflix invested $342M more than the previous year in acquisition of streaming content

Internal Context - Cont. Capabilities Assessment


Netflix has already enhanced its existing capabilities and developed the capabilities to meet the requirements to streaming video technology

Internal Context – Cont. Capabilities Assessment

Leadership:

Netflix leaders create sustainable solutions in the movie rental business and are executing and implementing their strategic plans expanding access points where their customers can acquire their products which increase sales and profits

Netflix’s international expansion will broaden its operations increasing the demand for its product offerings which also makes the company a more sustainable entity

Internal Context – Cont. Capabilities Assessment

Leadership (cont’d):

Netflix’s management team exhibit a mindset that fosters the necessary change required to lead the company now and into the unforeseeable future

Netflix’s current leaders have the ability to develop the appropriate enterprise-wide business strategies that are necessary to make the company successful and sustainable

Netflix has the “best-of-breed” in both leadership and management programs surpassing industry standards which enables the company to meet its future needs

Internal Context - Resource Assessment (Tangible)


Netflix’s most important assets are the thousands of movie titles it has available for rental

Netflix has sufficient financial resources to take advantage of the opportunities that are available with streaming video technology

Netflix’s advantage of convenience and innovation makes it an attractive business entity

Customers have the ability to access its products from almost anywhere.

Internal Context - Resource Assessment (Intangible)


Patents are the most important intellectual property

Currently streaming video technology

provides Netflix with its most technological competitive business advantage

Strategic Analysis – External Context

Business Environment Assessment Market Space Assessment Supply Network Assessment Competition Assessment Stakeholders Assessment

Introduction Growth Maturity Decline

TIME

The Industry

External Context –Industry Life Cycle

External Context – Industry Key Success factors

Overall low costs Market coverage Large collection of movies and TV shows Updated catalog Ability to provide fast convenient service Customer centered approach Innovative and technology enhancements Partnership

External Context- Industry Growth

Cont. External Context – Market Space

Internet Users in the world

External Context- Market Space World Internet Penetration

Rates

External Context – Market Space Assessment

Pay-for-performance banner Search-engine Third party download ads and logos Best-buy to include flyers Free trials Shared revenue or flat fee with studios and TV channels Segment is consumer paid streaming subscription of movies and shows

External Context – Technology

Keep up with new devices Easy to use website and better customer

experience Ability to support OS and hardware

versions Infrastructure Support (cloud computing) Security (encryption, hackers etc) Performance and Reliability Operating Expenses on Technology &

Development (7.6% of revenue)

External Context – Customers

Four Types Convenience of free home delivery Access to the widest selection The bargain hunters Streaming on wide variety of hardware devices

Growth

External Context – Customers

External Context – Supply/Partner Network

Assessment

External Context – Cont. Supply/Partner Network

Assessment Paramount Pictures, MGM, Lions Gate Entertainment

(through an output deal with Epix) Films from Sony Pictures, Walt Disney Motion Pictures

Group, Overture Films, Anchor Bay Entertainment (through an output deal with Starz)

Other studios providing first-run films include First Look Pictures, Relativity Media and other smaller and independent distributors

Netflix holds rights to back-catalog titles to films from Time Warner, Universal Pictures, Sony Pictures, Paramount Pictures, MGM, Lions Gate Entertainment, 20th Century Fox and other distributors

Netflix provides current and back-catalog TV programs distributed by NBC Universal, 20th Century Fox, Sony Pictures, Disney-ABC Domestic Television, with select shows from Warner Bros. as well

Netflix also previously showed movies from the Criterion Collection

Partnership with USPS as a shipping carrier

External Context - Competitor comparison on DVD Rental services

External Context – Cont. Competitor comparison on DVD Rental

Services

External Context - Competitor comparison on Subscription Service

External Context – Competitive Advantage

External Context - Competitive Strategy

Customer-centric, monthly subscription-based service in various price plans

Outstanding value A robust and growing selection of content that

our subscribers want to watch High levels of customer satisfaction, a

personalized and adaptive user interface Large and growing subscriber base which gives us

tremendous operating efficiencies

External Context – Porter’s Five Forces

External Context - Global Strategy

Started streaming in Canada Pure streaming Rapidly growing content selection Expect to be over 1 m subs and profitable in Q3

one year from lunch

Financial Highlights Predictable Revenue Streams

Not dependent on rental fees or late fees Low Overhead Costs Contribute to Profits

No store rent, utilities etc Strong Growth

Market entry timing, planned barrier to entry for competition, customer centric

2 billion in revenue, 12 billion dollar market cap

External Context - Opportunities

Opportunities

Growing video stream market Growing internet usage throughout the world Expand Partnerships with Content providers and

Technology providers Product Line Expansion – Video Games Expand streaming Movie and TV shows

Offerings Print 3rd Party Advertisements of Red Envelopes Target from households customers to individuals

with Smart Phones, Tablets etc Branding Partnership with customer centric companies in

the market like Facebook Expand the Global market

External Context – Threats Threats

DVD competition from Red BoxHighly competitive environmentSlowing growth on dvd rentalsTechnology rapid changesPiracy of movies and TV shows Increase cost on video contentContractual restrictions on streaming content International market copyright rulesDisruptive Innovation from other companies Website Security ISP ThreatsVery cheap PPV or Ad support free TV shows and

movies

Recommendations

Start researching a new technology that can significantly improve or replace their method of streaming video over the internet

Increase the number of digital movies and TV shows Expand marketing campaign to raise awareness “streaming “

using various devices Create annual membership campaigns for loyal customers Develop referral programs using various incentives Expanding Internationally beyond Canada and UK Build stronger Strategic Alliances with supply chain network

becoming the “go-to” provider for movies and TV shows

Cont. Recommendations Established different channels to obtain potential

customers (from 300 million) Lookout companies with disruptive innovation in video

streaming, Sports etc. Continuous technology innovation Stay focus and run faster

Documents

Final_NetFlix 0.3 - Copy