A.

BACKGROUND

1. History of Home Video Rental

When the first home video systems became widely available during the 1970s

and early 1980s, movie fans clamored for the chance to watch their favorite films at

home without relying on a broadcast or TV cable. Movie studios also saw a way to

bring back films from previous generations to a new audience. The growing demand

and the new-found supply required an intermediary to facilitate the transaction -- a store

that could bring the movies to the waiting customers.

During the 1980s and 1990s, retail video rental stores boomed. In 1995, the

Blockbuster video rental chain had more than 4,500 stores. The company made $785

million in profits and $2.4 billion in revenues over 30 percent of margin profit. Much of

this profit came from "late fees" on overdue rentals, which did not require any

additional product sales and minimal additional labor, but became a major

inconvenience for customers.

While Blockbuster and other retail video rental outlets were operating under

their previous business models, a wave of technological innovation swept the world

during the mid-1990s. Increased access to the World Wide Web created new retail

opportunities. Companies such as Amazon and Netflix filled the niche that video stores

had just a few years earlier. Customers could now order their favorite movies online

receive them via e-mail and return them at their convenience.

The growth of broadband internet access in the early 2000´s allowed media

providers to transition from selling physical objects to offering digital formats. Films

were now available for download directly to a computer without the need for bulky

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tapes or DVD boxes. Without the demand for physical inventory, the need for brick-

and-mortar video stores declined. In 2007, the annual revenue for Netflix reached over

$1.2 billion and just three years later Blockbuster floundered on the verge of

bankruptcy.

While millions of viewers enjoy the convenience of watching digital movies,

some purists still savor the experience of physical media. Redbox, a rental store

provider, offers DVDs, Blu-ray discs and video games at many large retail outlets.

Although the retail "big box" video rental store is all but extinct, movie fans will still

seek out ways to rent and watch films. From TV and desktops to tablets and

smartphones, movie buffs can now rent their favorite movies and watch them wherever

and whenever they want.

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2. Netflix gets into the DVD Rental Services

In 1997, Netflix1 entered an existing home video rental industry riddled with

mom- and-pop retail stores and dominated by Blockbuster. It tried to differentiate itself

in a number of ways, first and foremost with online rental experience. Customers would

search the website, choose a film, and within a few days the film would be delivered by

mail. Netflix began by renting DVDs—then a relatively new and promising, but as yet

unproven format—which are smaller, lighter, and cheaper to send via the Postal

Service.

The basics of the website itself—a search engine and a queue— has not changed

(although its sophistication and accuracy has certainly evolved), but the pricing

apparatus was initially modeled on traditional brick and mortar rental stores: a $4 rental

charge, plus a $2 shipping and handling charge, and a specific due date (with the

dreaded late fees as penalty for late return). However it used the traditional pay-per-

rental model.

1 Netflix's DVD Rental Services

1 Netflix is American multinational entertainment company founded on August 29, 1997,

in Scotts Valley, California, by Reed Hastings and Marc Randolph. The company is currently
headquartered in Los Gatos, California.
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3. Netflix Financial Statements

(a) Sales subscriptions and subscribers important growth

Sales Subscription
1200000
Amount of subscribers

1000000

800000

600000

400000

200000

0
1 2 3 4 5 6 7 8 9
Amount 585 4854 35894 7455 150818 270410 500611 682213 996660
Years 1998 1999 2000 2001 2002 2003 2004 2005 2006

Sales Subscription Graphic

In the graphic above we can observe the highest pick taken by Netflix according

to their sales subscriptions during their first 9 years in the market. Several factors had an

important impact in the increase of Netflix subscribers; one of them is the availability of

approaching toward internet and the low cost it represents for customers rather than

renting movies physically. An important strength is the opportunity they bring to

promoting a wide option of movies, TV series, documentaries, etc.

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 After several years, Netflix began its expansion toward Canada, Latin America

and Europe respectively. However, it was just in 2012 when strong numbers start to

show up towards international subscribers. By 2013, Netflix was reaching almost

double as it first started in the international market with almost 25% of international

members. (Estimates, 2013) According to Netflix statistics provided by the Wall Street

Journal, until 2013 Q4, Netflix reached 9.7 international paid streaming subscribers and

it has continuously increasing due to our empowerment and necessity of using internet.

The graphic below

International and U.S suscribers

shows the

important market share that Netflix has obtained until during the last few years. Netflix

is now just below TV cable becoming the most popular video streaming service to

young adults... With a very affordable price strategy, Netflix has now become more

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aggressive in this developing sector. We believe that Netflix could easily obtain one or

2 more points in market share during year 2016 among U.S subscribers.

Netflix vs Other DVD Streaming’s

(b) Gross Profit analysis

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 Gross Profit ( 1998 -2006)
400000
350000
300000
250000
200000
$

150000
100000
50000
0
-50000
1 2 3 4 5 6 7 8 9
Gross Profit Per Year (713. (1,80 786.0 11,71 54,40 91,40 170,6 217,6 370,6
Years 1998 1999 2000 2001 2002 2003 2004 2005 2006

Gross Profit Analysis

As Netflix started to reach more market share by introducing themselves to a

new generation of people, it was in 2000 when the company start looking for good

results in their subscriptions. After the breaking point, it has been more than successful

years for the company in terms of important revenues due from their sales. The graphic

above presents an increase of more than a 200% in terms of money making it a strong

company and a pioneer in the market.

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 Netflix Gross Income Analysis

As we can observe in the graphic above, Netflix increasing tendency reach took

a high peak of 2.168 million of gross income in 2015, thanks to a big an increase with

worldwide subscriptions (over 12.8%) and a 3.8% more for American subscribers.

According to an interview done to Netflix CFO, their projections were accurate as they

expected this numbers to happen do to a strong demand and new development of other

online-streaming services. These years were mainly focused on introducing Netflix

services outside the United States. For this year 2016 Netflix planned to expand their

market with a 100 000 000 investment in which they will develop an approximate of 30

exclusive movies, documentaries and series that can only be watch by Netflix

subscribers. Also this amount was invest toward approaching new ways of getting more

subscribers

(c) Free Cash Flow Analysis

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 As we all know, technology sector is a constant changing world and Netflix as

one of the strongest companies in the market has a very volatile market share in Wall

Street. Even though their numbers looks negative (see graphic number …) we can still

say that Netflix keeps strongest in cash flow management. We will analyze two

scenarios; Netflix first steps toward the industry and their biggest jump through global

market in 2003.

Netflix Free Cash Flow

1998-2006

80000
60000
40000
20000
0
-20000 1 2 3 4 5 6 7 8 9
-40000
-60000

Years Free cash flow

Netflix Frees Cash Flow Analysis

Netflix development through their first years became stronger after more people

were getting subscripted on Netflix services. As an innovative video-streaming

company, Netflix didn’t wait a lot to start seeing positive numbers and cash in their cash

flow. This new online rental movie was developing in such a faster speed that by 2006

Netflix as already obtain 12% more than their first year in 1998.

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 Free Class Anaysis 2011-2016

Until Q1 2012, Netflix develop profit and a good price/share at Wall Street.

Despite being the leaders in the market and having a big approach toward customers

Netflix started to obtain negative numbers and it becomes stronger in the following

years. By the end of 2015 they finish with a total of -273.3 million. The reason why

Netflix stock is crashing in the after hour’s session is mostly because of the company's

guidance of its widely followed international expansion. We remarked in a few

paragraph before, that Netflix pretended to expand more internationally, producing

more series and movies exclusively for Netflix costumers but it wasn’t working out as

expected. Another factor can be the aggressive expansion on Amazon View into the

streaming video space.

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 Watch Netflix further projections and answers regarding their failure toward this

two years strategy: (Durden, 2016)

The company also discussed the increasingly sensitive topic of competition:

“If you think about your last 30 days, and analyze the evenings you did not

watch Netflix, you can understand how broad our competition really is. Whether you

played video games, surfed the web, watched a DVD, TVOD, or linear TV, wandered

through YouTube, read a book, streamed Hulu or Amazon, or pirated content (hopefully

not), you can see the market for relaxation time and disposable income is huge, and we

are but a little boat in a vast sea. For example, while we’ve grown from zero to 47

million members in the USA, HBO has also grown, which shows how large the

entertainment market is. We earn a tiny fraction of consumers’ time and money, and

have lots of opportunity ahead to win more of your evenings away from all those other

activities if we can keep improving.”

NFLX also expects more spending:

“The increase in ARPU will allow us to invest more in content next year, and we

are taking up our expected spend from about $5B in 2016 to over $6B on a P&L basis

in 2017”.

Which brings us to our favorite topic: cash burn? Here is NFLX's explanation:
“At the end of Q1, we had cash and equivalents totaling $2.1 billion. In Q1, free

cash flow was $261 million, compared with $276 million in Q4 ‘15. As we have written

in the past, our investment in original programming (particularly owned content) is

more cash intensive upfront, resulting in a timing-driven gap between net income and

free cash flow. We currently have $2.4 billion of long term debt. With our low debt to

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enterprise value of 5%, our plan is to raise additional capital through the high yield

market later in 2016 or in early 2017.”

As Netflix will continue to invest this is an expectation in long turn for sure that

will keep them strong on the market. Even though, they are still much unpredicted,

several investors continue to pursue their share with the company.

4. From DVD Movie Rental to VOD

The traditional pay-per-rental model lasted for a brief period of time, as

Hastings, Netflix’s CEO and founder, and others realized that, given the longer delivery

times (compared to the traditional rental experience of going to the store), Netflix’s

value was in its ability to allow customers to have DVDs in their homes at all times, and

they quickly switched to a pre-paid subscription service, minus late fees. Netflix‘s next

trick was to offer the unlimited option, thereby adding a high-volume customer base for

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whom the cost of individual rentals (and of course the late fees) far exceeded the value

of the immediacy of the traditional stores.

Netflix bought DVDs wholesale from very few distributors for minimal

discounts—but also because these up-front costs forced a restrictive selectivity when

actually choosing which movies to buy. Netflix once again switched its business

strategy, recognizing that the rental business (as a part of the film industry) was heavily

based on personal relationships through which more favorable arrangements could be

made with, for example, the studios themselves. Enter Ted Sarandos, who left Video

City (a U.S. video rental chain) in May 2000 to become Netflix’s new chief content

officer. Sarandos brought his contacts and relationships with him, and within a year,

Netflix had negotiated direct revenue-sharing agreements with nearly all the major

studios, which meant a reduction in up-front costs for Netflix in return for a fee paid to

the studios on the number of rentals of a given studio’s films within a given period of

time.

In 2005, 35,000 different film titles where available, and Netflix shipped 1

million DVDs out every day. In 2007, Netflix expanded its business with the

introduction of streaming media, while retaining the DVD and Blu-ray rental service.

Netflix has achieved astounding levels of growth. It has jumped from 700,000

subscribers in May 2002 (when it announced its IPO) to 20 million at the time of its

10K filing in February 2011. In 2010 alone, approximately 7.7 million people signed up

for its service, more than doubling the 2.9 million subscribers gained in 2009. The

company expanded internationally with streaming made available to Canada in 2010.

By January 2016, Netflix was available in over 190 countries.

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 According to the statement released by the company on April 15th 2015, several

major milestones were achieved in Q1: subscribers in the US surpassed 40 million; 20

million internationally; and 60 million in total.

Latest forecast from IHS Technology reveals that by 2019, Western Europe

subscribers will make up 23% of total Netflix subscribers. Netflix already spends more

on content than BBC, HBO and the Discovery Channel.

According to the report, by 2019 Netflix will have over 21 million subscribers, up from

3 million in 2013. In October 2016, Netflix reported over 86 million subscribers

worldwide, including more than 47 million in the United States.

The company has not stopped innovating since its inception. It transitioned from

being an on-line video rental subscription based provider to being the leader in

supplying video and entertainment on-demand throughout the world.

B. STATE

5. Mission

As there is no specific Mission established the CEO and founder once interviewed said:

"Our core strategy is to grow our streaming subscription business domestically

and globally. We are continuously improving the customer experience, with a focus on

expanding our streaming content, enhancing our user interface and extending our

streaming service to even more Internet-connected devices, while staying within the

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parameters of our consolidated net income and operating segment contribution profit

targets."

6. Vision

In October, 2011, co-founder and CEO Reed Hastings expressed a clear vision

for the future of Netflix:

• Becoming the best global entertainment distribution service

• Licensing entertainment content around the world

• Creating markets that are accessible to film makers

• Helping content creators around the world to find a global audience

7. Values

Netflix published its company values, which demonstrate the standards with

which it wants its employees to function in their daily decisions and activities:

• Judgment • Intelligence • Selflessness

• Productivity • Honesty • Reliability

• Creativity • Communication • Passion

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 C. STRATEGIC PLANNING

1. Opportunities & Threats Matrix

Factors Facts Analysis Synthesis O/T

Political/Legal Who allows Netflix can Any country is a O
free trade of provide the market target
services movies
(Entertainment) international
services beyond
U.S borders
Local law Licensing Specific for each Netflix should T
requirements country obey local law
Currency U.S Dollars to U.S Dollar is an Most countries O
change for international and make business
movies worldwide in US dollars
services currency
Cost of Low Monthly No need for Open O
Service changes loans accessibility
-Families
-Schools
- Universities/
colleges
R&D Movies with New way of Movie expand to O
specials effects entertainment new markets and
movies made customers
by computers.
Netflix new
stories
Technologies Movie makers Industry has Client O
suppliers dynamics many actions for satisfaction
industries quality services increases
Demography Population Smarts cities New markets O
growth Buildings (Rurals and customers
VS Urbans)
Ecology Energy from Introduced CO2 Need to change T
fossil to atm. to chain energy
Fuels

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 OPPORTUNITIES THREATS
- International law agreements (WTO) - Local law could restrict access to
allow free trade and companies could be internet.
in the global business. - Energy from fossils fuels.
- Movie makers in a dynamic industry - Middle class and Asian cultures
(HIGH TECH). / M&M , Foy with strict regulations of the
- Internet allows a better communication government and facing fierce
and DATA TRANSFER competition from domestic
+MAIL SYSTEM streaming services.
BAND WITDH - Hackers.
- U.S dollar is a world currency. - Blockbuster
- Service cost is low MKT with specific - Other VOD competitors including
customer. 1. Vongo
- Western culture uses to watch movies in 2. CinemaNow
Hollywood. 3. MovieBEAM
- Population Smart 4. Movielink
Smart Buildings 5. Traditional cable/satellite
- R&D – Movie maker + Internet providers
- International expansion. - VOD content prices and
- Original content availability
- New product lines such as video games Limited VOD content due to
or educational materials studios concerned about pirating
- Offer alternative subscription to appeal and affecting DVD sales.
to less frequent movie renters.
- Lowers Shipping cost: More can be
spent on content while achieving same
profit margins

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 2. Strengths & Weaknesses Matrix

Factors Facts Analysis Synthesis S/W

-It A.G Works under
-Headquarters
the US Law -Netflix it’s a
Los Gatos,
-Own culture&values company with
California,
Assets -Alliance with: strong relations with S
Silicon Valley
US postal service producers to be #1
- 4 distribution
Movie makers in the market
centers
Internet suppliers
-DVD customers are
decreasing Netflix is gaining
2006 – 6M -Rural areas costumers
Customers S
2016 – 366M -life town areas using worldwide thanks to
streaming the internet
-overseas customers
Diversification Customer satisfaction It will increase
Movies&Series S
matrix customers
Low prices mean low
revenues to the
-low price It will increase
Economy company S
-low rentability market
Rising prices should be
a future option
Netflix depends on
MGM
producers which is
Warner Bros Relationship with
Alliances wrong they should W
Walt Disney producers
have more original
Universal
content

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 STRENGTHS WEAKNESSES

- Amount of content not only in - High dependence on the

numbers but also in genres with availability of fast internet
many categories. connection to works well.
- Cheaper than one night at the - Having an elastic demand in
movies, paying for all you can which a raise in their prices will
watch. end up in loses of subscribers.
- Offers original series with - Low profit margin as Hollywood
exclusive content. producers raises their prices for
- Technology that facilitates online movies.
streaming instantaneously. - Loses in DVD subscribers,
- Diversification of delivery decreasing Netflix revenues as
methods through different they don’t always switch to the
platforms (cross-platform streaming service.
combability) - The terms of content distribution.
- Strong brand image, well known, Is not exclusive, allowing
with a good reputation for the competitor’s access to the same
service they offer. movies and television shows,
- Personalized recommendations leaving the way open for
system that suggests users what to competition?
watch next.(Large movie - Monthly fees discourages
selection) membership from less frequent
- Possibility to create different movie watchers
profiles per account.
- High Customer satisfaction
- Strong Brand Recognition
- Low overhead cost

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 3. SWOT Matrix

Strengths:
Weakness:
Brand Recognition: The Netflix brand is very well Cost of Content: The cost of mass licensing packages
known and has become a verb among many and the in-house original content production has the
internet users. company undertaking a large amount of debt.
Accessibility: The Netflix App has enabled their DVD Subscribers: DVD and Blu-ray subscribers have
subscribers the ability to stream media on nearly dramatically declined in 2013.
all internet enabled devices. Raising Subscription Prices: Netflix has a difficult time
Original Content: Award winning original raising subscription prices. The last attempt to raise
monthly subscription prices left currently subscribers
content for series House of Cards and Hemlock
upset and Netflix stock tumbling.
Grove and other critically acclaimed titles.

SWOT
OPPORTUNITIES: THREATS:
International Expansion: The ability to create original ISPs: Netflix accounts for about 30% of daily internet
content will enhance international growth. traffic. With net neutrality laws struck down, Netflix
Original In-House Programming: With many house- may have to assume more debt or cut content.
hold entertainment devices connected to the internet, Competition (Amazon Prime, YouTube): Both,
there is an opening for internet tv and Netflix’s Amazon Prime and YouTube has announced their own
exclusive in-house content poises the company for that original content productions and aim to be a direct
demand. competitor to Netflix.
Word-of-Mouth Campaigns: Marketing expenses have Content Price: The price of licensing and renewing
steadily decreased due to word-of-mouth campaigns those license agreements remain to be the largest
based on original content. threat to the company’s ability to operate at a profit.

4. Strategic Objectives

• Invest more in series and original content for the most popular international

markets

• Invest in the development of customer relationship management (CRM) as a

differentiating element from the competition.

• Continue to negotiate agreements with the major producers in this way they can

diversify the content offered.

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 • Continue to build its catalog of original content accumulating millions of loyal

users so in the coming years ir can be possible to rise prices.

D. Conclusion

Netflix is definitely the biggest video streaming innovation of all times. It has

played well in the field and now competes with very far away competitors that are

trying to get into their speed. We all can see that technology and internet is a constant

changing world and if companies from that specific niche are not aware, years will pass

by and they will become obsoletes. Netflix good intention in introducing to their own

network some movies , documentaries and even series of their authority has make them

catch another point. It has just passed a year since Netflix decided to invest more than

100 million dollars and they already are nominated in films awards. Imagine how far

Netflix can go when these complete transitions have been done… They will definitely

surprise us!

Netflix is definitely the perfect example of a company that uses the internet to

reinvent the market. It has a huge competitive advantage that is a true understanding of

the customers’ needs and behaviors.

E. Recommendation

The company should be more careful with cash flow. The investment made

by Netflix is higher risky than conservative, exposing sometimes too much their

cash flow. They must keep it monitored.

Financing and licensing is the immediate threat to the company’s ability to

operate on the short-term. Management may consider introducing a conditional

price increase that would supplement some of these costs by implementing limited

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 advertising between programming. The in-house original content is a noteworthy

investment that has benefited the company by generating a word-of-mouth

campaign and proving that the company can be an award winning content producer.

F. Bibliography

Durden, T. (18 de 04 de 2016). Zero Hedge. Obtenido de

http://www.zerohedge.com/news/2016-04-18/netflix-crashes-after-slashing-

international-sub-forecast-burns-1-billion-last-12-mo

Estimates, S. M. (23 de 10 de 2013). Screen Media . Obtenido de

http://www.nscreenmedia.com/international-markets-hold-netflix-attention-

drive-growth/

Hanks, G. (2015). Smalbusiness.com. Recuperado el 6 de November de 2016, de

http://smallbusiness.chron.com/movie-rental-industry-life-cycles-63860.html

Murphy, I. (2011). Netflix and Emerging Economies of Media Distribution. 12,13.

Reporter, A. (9 de June de 2015). Arabiangazette.com. Recuperado el 6 de November

de 2016, de http://www.arabiangazette.com/video-streaming-boom-western-

europe-infographic-20150609/

Willy Shih, S. K. (2007). Netflix Case Study. Hardvard Business School, Boston.

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