TEAM FERRARI

NetFlix’s VOD offer

The Situation

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How should NetFlix respond to the threat of a viable VOD technology?

1. Enter VOD Market?1. Yes2. No

2. What VOD service should NetFlix offer?1. Licensing agreement2. Integration3. Stand Alone Product

Road Map

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Enter VOD market? Integration

Outsourcing

Stand-alone Product

Do not enter

Enter

Executive Summary

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Enter VOD market High potential as a profitable market Only viable option in order for NetFlix to stay competitive

Offer VOD as a Stand Alone Product Most valuable alternative – will increases aggregated

gross profits by 1 859 million dollars in 6 years. Investment today: 50 million dollars Competitive advantage – unique DVD and VOD offer

In the long run – initiate harvest strategy and plan to exit the DVD rental service The DVD rental service is now in it’s growth stage but will

reach maturity in 2009 and decline in 2011.

Where Are We Now?

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STRENGTHS• Market

leader and growing

• Strong Brand• Online

recommendation system

• Customer satisfaction

WEAKNESSES• Unsustainabl

e business model due to changes in technology

OPPORTUNITIES• Leverage

brand strength when entering VOD market

• Grow existing core business and harvest

THREATS• The

emergence of a successful competing VOD service

Competition in the VOD Market

Establish competitive

advantage through unique DVD & VOD

offer

High bargaining power of content

suppliers

High entry barriers due to licensing costs.

Low exit barrierHigh potential

profitability

Low threat of LEGAL substitute

products.Medium bargaining power of customers. Price sensitive but

high switching costs due to recom. system

TEAM FERRARI

NetFlix Should Enter the VOD Market!

TEAM FERRARI

Enter VOD market? Integration

Outsourcing

Stand-alone Product

Do not enter

Enter

Key Issues In NetFlix Future

DVD-rental service will reach decline in 2011

Potential to increase future revenuesIssue with online content acquisitionCustomer retentionPotential market share

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Evaluation Of Alternative Strategies

Outsourcing Integration Stand-alone

Very important

factors

Potential to increase future revenues

+ ++ +++

Online content acquisition +++ + +Customer retention + ++ +++

Potential market share

+ +++ ++

Leveraging brand strength + +++ ++

Size of financial investment needed

+++ ++ ++

Less important

factors

Potential to increase short-term revenues

+++ ++ ++

TEAM FERRARI

Evaluation Of Alternative Strategies

Outsourcing Integration Stand-alone

Very important

factors

Potential to increase future revenues

+ ++ +++

Online content acquisition +++ + +Customer retention + ++ +++

Potential market share

+ +++ ++

Leveraging brand strength + +++ ++

Size of financial investment needed

+++ ++ ++

Less important

factors

Potential to increase short-term revenues

+++ ++ ++

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Revenue Forecast

Number of subscribers

Average sales per subscriber

Revenues

Two major variables to predict when forecasting revenues

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Do Nothing And NetFlix Faces Decline

S0: Do Nothing

Number of subscribers:• The growth of DVD-

rental subscribers will continue to slow down and become negative.

Price level:• Unchanged

2006 2007 2008 2009 2010 2011 20120

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

Reve

nues

(Dol

lars

in th

ousa

nds)

Enter VOD Market To Avoid Decline

S2: Integrated

Number of subscribers:• The annual growth of

DVD-rental subscribers will be 10 percentage points higher than S0.

Price level:• Unchanged

2006 2007 2008 2009 2010 2011 20120

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

Reve

nues

(Dol

lars

in th

ousa

nds)

Stand Alone Product Is More Profitable

S3: Stand Alone Product

Number of subscribers:• The annual growth of

total subscribers will be 10 percentage points higher than S0.

• 10 % of DVD-rental subscribers per year will be converted to VOD subscribers.

Price level:• DVD-rental

subscribers: Unchanged

• VOD subscribers: +50 %

2006 2007 2008 2009 2010 2011 20120

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

Reve

nues

(Dol

lars

in th

ousa

nds)

Return On Investment

Conclusion

Aggregated surplus of gross profit compared to S0:

1 859 million dollars

Investment:50 million dollars

= Great return on investment

2006 2007 2008 2009 2010 2011 20120

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

Reve

nues

(Dol

lars

in th

ousa

nds)

Time Frame

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ACTION 2007 2008 2009 2010 2011 2012

R&D VOD            

Launch VOD            

Harvest DVD            Plan DVD Exit

Strategy            

PLC STAGE 2007 2008 2009 2010 2011 2012

VOD Introduction

VOD Growth            

DVD Growth            

DVD Mature            

DVD Decline            

Recommendations

TEAM FERRARI

Enter VOD market High potential as a profitable market Only viable option in order for NetFlix to stay competitive

Offer VOD as a Stand Alone Product Most valuable alternative – will increases gross profits by

1 859 million dollars in 6 years. Investment today: 50 million dollars Competitive advantage – unique DVD and VOD offer

In the long run – initiate harvest strategy and plan to exit the DVD rental service The DVD rental service is now in it’s growth stage but will

reach maturity in 2009 and decline in 2011.

Appendix

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APPENDIX BEGINS HERE (not part of presentation)

Appendix - PLC

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Appendix – Subscribers

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2003 2004 2005 2006 2007 2008 2009 2010 20110%

10%

20%

30%

40%

50%

60%

70%

80%

Change Subscribers in Percent

Appendix – Data Revenue Forecast

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          Prognosis           2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total revenues 

(Dollar in thousands)Assumptions

1 2 3 4 5 6 7 8 9 10 11

Alt 0:   Subscribers 857 1487 2610 4179 6316 9122,702867 12423,72 14651,47 16069,44 16298,39 15185,44

The growth of subscribers will continue to slow down and at a increasing pace in 2009. Unchanged price level.

Change Subscribers 74% 76% 60% 51% 44% 36% 18% 10% 1% -7% Sales/Subscribers 158 Revenues 150818 270410 500611 682213 996660 1439555,579 1960454 2311990 2535746 2571874 2396252 13 215 871

Alt 2:    Subscribers 857 1487 2610 4179 6316 9122,702867 13335,99 17060,92 20418,17 22750,9 23472,43

The annual growth of subscribers will be 10 percentage points higher than alt.1. Unchanged price level.

Change Subscribers 74% 76% 60% 51% 44% 46% 28% 20% 11% 3% Sales/Subscribers 158 Revenues 150818 270410 500611 682213 996660 1439555,579 2104410 2692200 3221972 3590075 3703931 16 752 143 Alt 3: A subscribers Subscribers 857 1487 2610 4179 6316 9122,702867 11511,45 12424,47 12384,47 11322,47 9417,059 The annual growth of A subscribers will

be 10 percentage points less than alt.1. Unchanged price level. 10 % of A subscribers will be converted to B subscribers each year. The same number of customer will join externally. B subscribers pay 50 % more than A subscribers

Change Subscribers 74% 76% 60% 51% 44% 26% 8% 0% -9% -17% Sales/Subscribers 158 Revenues 150818 270410 500611 682213 996660 1439555,579 1816498 1960572 1954260 1786677 1486005 10 443 567 B subscribers Subscribers 0 0 0 0 0 0 1824,541 4126,831 6611,725 9088,618 11353,11 Change Subscribers Sales/Subscribers 237 Revenues 0 431866,7 976816,2 1564988 2151266 2687269 7 812 205 18 255 772 A&B Subscribers Revenues 150818 270410 500611 682213 996660 1439555,579 2248365 2937388 3519247 3937942 4173273  

Evaluation Of Alternative Strategies – Weighting System

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Outsourcing Integration New Product Weighting (per plus)

Very important

factor

Potential to increase

future revenues

+ (6) ++ (12) +++ (18) 6

Licensing costs

+++ (15) + (5) + (5) 5

Potential market share

+ (4) ++ (8) +++ (12) 4

Leveraging brand name

+ (3) +++ (9) ++ (6) 3

Size of financial

investment needed

+++ (6) ++ (4) ++ (4) 2

Less important

factors

Potential to increase

short-term revenues

+++ (3) ++ (2) + (1) 1

37 40 46