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EXECUTIVE SUMMARY

Netflix is an internet subscription company that allows users to access movies and
television shows through DVD-by-mail and/or instantly through the use of a streaming device.
Content is obtained through streaming license agreements made with studios, DVD direct
purchases, and through DVD revenue sharing agreements. Netflix markets their services
through online advertising, television and radio, and partnerships
The founder and CEO of Netflix, Inc. Reed Hastings, incorporated in 1997 and starting
movie rental services in 1999. Netflix employed then and continues to employ a subscriptionbased business model. The company was originally only a DVD--by--mail service in which the
customer paid for a certain level of membership that determined how many DVDs could be
rented at one time. DVDs were mailed to the customer and then returned by the customer
when they had completed viewing.
After a couple years in business, the company began including streaming services
along with the DVD--by--mail option. The goal here was to reduce costs by trying to get the
subscribers to switch to streaming, which would reduce the costs incurred for postage and
shipping with the mailed DVDs. The streaming option began in 2007, with 2,000 titles available
for instantwatching via streaming and around 20,000 titles in 2010. Until this time,
subscribers could receive the streaming option along with the DVD--by--mail subscription in
amounts based upon their subscription level.
Netflix was known, especially in 2010, prior to some business model changes, to be
the largest and most wellknown internet subscription streaming service. With market trends
in home viewing of movies consistently growing, Netflix had a solid entrenchment within in the
market and holding a majority of the subscribers.
In 2010, Netflix began offering its streaming services to residents in Canada and in
2011, initiated services in 43 countries worldwide. The mail services only continued in North
America as it did originally.

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In2011,Netflixannouncedthat this wouldnolongerbeanoptionandtherewouldnot be a


subscription plan that offered both the option for streaming and DVDs--bymail service.
Instead, the services would be offered in two separate packages. There was a negative
response from the current customers and Hastings decided to only continue the streaming
services offered through the name Netflix, Inc. and all mail services would be accessed through
the website Qwikster.com. This caused uproar from customers and the stock price of the
company dropped considerable in a short time. This idea was abandoned from more
negativities and a continued drop in stock price.
In that same year, Netflix announced that they had raised $400 million dollars in new
capital by selling stocks to mutual funds and T. Rowe Price Associates and by selling $200
million Convertible Senior notes due in 2018. After this announcement the stock dropped again
considerably.

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BACKGROUND
Netflix was created in 1997 in Scotts Valley, California by Marc Randolph and Reed
Hastings. The two had previously worked together at a company called Pure Software.
Randolph was co-founder of MicroWarehouse, a computer mail order company, and later
worked as vice president of marketing at Borland International.
Hastings founded Pure Software, which he had recently sold for $700 million, and he
invested $2.5 million in Netflix for start-up cash. Hastings thought of the idea for Netflix when
he forgot to return a movie by its due date and ended up having to pay $40 in late fees. The
website launched on April 14, 1998 with a more traditional pay-per-rental method. Netflix
introduced the monthly subscription method in September 1998. Since then, Netflix has built
its reputation for flat-fee unlimited rentals without complications such as due dates, late fees, or
shipping and handling fees.
By 2005, Netflix had 35,000 different film titles available, and shipped out 1 million
DVDs per day. In February 2007, the company delivered its one billionth DVD, but still began
to move away from its original core business model of mailing DVDs and introduced video-ondemand via the Internet, live streaming. Netflix has even licensed and distributed independent
films through a division called Red Envelope Entertainment. By 2011, the total digital revenue
for Netflix reached at least $1.5 billion.
Vision
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

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Mission
"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 parameters of our consolidated
net income and operating segment contribution profit targets."
Values
Netflix has published its company values, which provide further clarification about the
principles which guided its employees in their daily decisions and activities. The Netflix
Company Values were published as:
Judgment
Productivity
Creativity
Intelligence
Honesty
Communication
Selflessness
Reliability
Passion
Our Customer
Netflixs target market should be US customers because these customers have the
technological capabilities and earn the income needed to purchase Netflixs service. The age
bracket average parenting ages of 17 60 with monthly allowance or income of $ 30,000 and
up which represents a potential market share increase due to its high percentage in the US
population.

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ORGANIZATIONAL CHART
Reed Hastings
Co-Founder and CEO

Neil Hunt
Chief Product
Officer

David
Hyman

Leslie
Kilgore

General
Counsel and

Chief Marketing
Officer

Patty McCord
Chief Talent
Officer

Andrew Rendich
Chief Service and
DVD operations
officer

Ted
Sarandos
Chief Content

Officer

Netflix has a functional organizational structure, which is segmented by the aims of its
functions themselves, rather than by customer segments or regions. The structure is
centralized, as CEO Reed Hastings has direct control over the seven departments, each with
individual managers. The organizational flow beyond this point is not as structured.

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David Wells
Chief
Financial
Officer

I.

TIME CONTEXT

The problem arises in the Mid July 2011

II.

VIEWPOINT

REED HASTINGS, Co-founder and Chief Executive Officer

III.

STATEMENT OF THE PROBLEM

A. Major Problem
What strategy should Netflix choose to sustain its market leadership in Internet
television network globally
B. Minor Problem
Recovering from its strategic mistakes in terms of splitting the prices of DVDs by
mail business from the internet streaming business.
Customers cancelled their subscriptions that caused deterioration of brand image.
Suppliers had broken off talks with Netflix regarding renewal of contract.
The basis for the new pricing was not properly communicated to the consumer.

IV.

STATEMENT OF OBJECTIVE

A. To increase profits for the corporation from 47-50% through international expansion
within five years.
A1.

To drive additional acquisition of new subscribers from 25 to 30% for them to

have sufficient revenues to cover all associated costs within four to six months.
A2.

To conduct voice of the customer or customer feedback research in a non-

biased environment within three to five months.


A3.

To build positive brand awareness and goodwill especially in new international

markets within nine to twelve months.

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B. To improve the customer experience, with a focus on expanding our streaming content,
enhancing our user interface within four years
B1.

To acquire local and international extensive movie selection in every

geographic market Netflix is serving within three to nine months.


B2.

To be a partner of a Multichannel Television provider to offer its streaming

content within three to five months.


B3.

To influence mobile technology to create additional value for customers by

offering easy to use applications and interfaces to access Netflix across multiple
mobile platforms within six to nine months.

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V.

AREAS OF CONSIDERATION

A. SWOT Analysis
SWOT analysis is an analytical method which is used to identify and categorize
significant internal (Strength and Weaknesses) and external (Opportunities and Threats)
factors. It provides information that is helpful in matching the firms resources and
capabilities to the competitive environment in which it operates and is therefore an
important contribution to the strategic planning process.
A1. Strengths
The DVD-by-mail Option
Netflix had aggressively added more distribution centers and shipping points in order to
provide members with 1-business-day delivery on DVD Orders. Subscribers could keep a DVD
for as long as they wished, with no due dates, no late fees, no shipping fees, and no pay-perview fees.
The Streaming Option
Netflix launched its Internet streaming service in January 2007, with instant-watching
capability for 2,000 titles on personal computers. Very quickly, Netflix invested aggressively to
enable its software to instantly stream content to a growing number of Netflix-ready Devices,
including Sonys PlayStation 3 console, Microsoft Xbox 360, Nintendos Wii, Internet connected
Blu-ray players and TVs, TiVo DVRs, and special Netflix players made by Roku and several
other electronic manufacturers. At the same time, it began licensing increasing amounts of
digital content that could be instantly streamed to subscribers.
A comprehensive library of movies and TV Episodes
Netflix provides their subscribers with a large and diverse selection of DVD titles. It had
aggressive in seeking out attractive new titles to add to its offerings. Its library of offerings had
grown for some 55,000 titles in 2005 to about 120,000 titles by 2011. The line-up included
everything from the latest available Hollywood releases to releases several decades old to

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movie classics to independent films to hard-to-locate documentaries to TV shows and how-to


videos, as well as a growing collection of cartoons and movies for children 12 and under.
New Content Acquisition
Over the years, Netflix had spent considerable time and energy establishing strong ties
with various entertainment video providers and leveraging these ties to both expand its content
library and gain success to new releases as early as possible - the time frame that Netflix
gained access to films after their theatrical release was an important negotiation for Netflix.
Also in 2011, Netflix had successfully negotiated exclusive rights to show a number of titles
produced by several studios.
First Mover Advantage
Netflix has set themselves apart as an industry leader in streaming entertainment services.
By being the first significantly competitive company to provide streaming movie services, they
have significantly leveraged their first mover advantage in this market segment
A2. Weaknesses
Management Missteps
Poor public relations and communications with consumers concerning price and company
restructuring has carried a negative sentiment with consumers. Not only did Netflix loose
customers from this situation but they also experience a sharp decline in stock values
demonstrating a lack of faith in the management decisions that led to a loss in the customer
base (Stelter, 2011).
Raising Subscription Prices
Netflix has a difficult time raising subscription prices. Trying to raise prices didnt sit
well with consumers and caused Netflix stock to stumble. The affect of this going forward will
be to make management a little gun shy at raising prices any time soon, which, if explained
well to consumers given their new content, they could likely get away with.
Slower to Update Inventory
Netflix has earned the reputation as a limited inventory provider. It is widely known that
Netflix will be slow to pick up recently released movies and television shows. Alternate

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streaming services and dvd rentals provide newer releases at a much faster pace than Netflix
which will lead to Netflix possibly being eclipsed as the leader in this industry (Daily Finance).
A3. Opportunities
Opportunity for International Growth
While the United States is the primary geographic market segment for Netflix, the U.S.
ranks 35th in broadband speed according to Ookla. With high-speed Internet access readily
available in many countries, international expansion is an attractive strategy for streaming
content providers such as Netflix.
Growth of Independent Studios
With the growth of independent film studios, streaming content providers such as Netfix
can deal directly with the smaller studio to make exclusive content. By avoiding the major
motion picture company streaming content providers have better negotiating power, decreasing
the bargaining power of supplier and reducing overhead
Increasing Popularity of Streaming Content
When Netflix first launched its streaming option in 2007, it barely even caused a blip on the
radar, but now Netflix subscribers with the streaming option outrank dvd only subscribers by 11
million. They also make up one quarter of all internet traffic in North America (Luckerson). That
popularity only seems to be climbing, as everything shifts to online and the ability to stream
online only gets easier.
Expansion Into Gaming Market
It has a significant impact, so an analyst should put more weight into it. This statements will
have a short-term positive impact on this entity, which adds to its value. This statement will lead
to an increase in profits for this entity. "Expansion Into Gaming Market" is a difficult qualitative
factor to defend, so competing institutions will have an easy time overcoming it.

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A4. Threats

Increasing Competition
Increasing competition is the most formidable threat the company faces. The market for
online entertainment services remains subject to rapid technological change, and fewer barriers
to entry in the streaming business means greater competition from rivals. A large number of
consumers use multiple entertainment providers, and can easily shift their spending depending
on a variety of factors. Amazon.com (AMZN) is one such competitor. Its service Amazon
Prime is an annual membership program that, in addition to offering free shipping on millions of
physical items for purchase, also allows customers access to its instant streaming platform,
with thousands of movies and television episodes. Cable channel HBO has announced its
HBOGO will be made available without a television subscription in 2015. Its large catalogue of
original titles ought to be tough competition for Netflixs own streaming offerings. CBS network
has also announced a subscription streaming service. We expect competition will continue to
increase in the coming years.
Increase in internet free-content download
We believe the black market around the world in the form of downloading is also a potential
threat for Netflix. Increasingly high numbers of young people between the ages of 20 and 30
download content for free. These customers dont need a subscription service at all, and most
content is available to them for free.
Shipping Costs
With the price of postage and shipping going up, a huge threat to Netflix will be shipping
and postage cost. Business Insider reported that Netflix spent around 600 million in postage
and shipping in 2011. Those charges, in addition to overhead costs, salaries, benefits, and
other costs will only go up as popularity increases.

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B. SWOT MATRIX
Strengths:
Internal Factors

External Factors
Opportunities:

The DVD-by-mail Option


Management Missteps
The Streaming Option
Raising Subscription
Prices
A comprehensive library of
Slower to Update
movies and TV Episodes
Inventory
New Content Acquisition
First-Mover Advantage
SO Strategies
WO Strategies

SO1. Widen Customer scale of DVD-by- WO1. Expand internationally to


mail and streaming by expanding recover from managemen
internationally. (S1,S2,O1)
missteps due to the heave o
subscription
prices
SO2. Expand market efforts by (W1,W2,O1)
acquiring additional new content with WO2. Develop partnerships
the help of independent studios. with content and technology
(S4,O2,O3)
providers internationally to
Expansion into gaming SO3. Make a first move in producing
reduce technical errors o
market
and expanding the line into the gaming slower to update inventory. (W3
market. (S5,O5)
O1)
Opportunity
for
International Growth
Growth of Independent
Studios
Increasing Popularity of
Streaming Content

Threats:

Weaknesses:

ST Strategies

ST1. Strong brand recognition through


DVD-by-mail and streaming will
Increase in internet free surmount the continuing growth of
competition. (S1, S2, T1)
content download
ST2. Acquisition of new content will
prevail over the increasing internet free
Shipping Costs
content downloads. (S4, T2)
ST3. Construct a first move to prevail
over the costs being produced by
shipping. (S5, T3)
Increasing Competition

WT Strategies

WT1. Enhance the system to


compete with the competitors
and recover from managemen
missteps. (W1, T1)

WT2. Develop new products to


improve slower to update
inventory and get through the
empowerment of free conten
download. (W1, W3, T2)

WT3. Reduce subscription


prices and improve negative
media to contend with rivals
(W2, T1)

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C. Porters Five Forces Analysis


Porters Five Forces Model is a business strategy tool that helps in analyzing the
attractiveness in an industry structure. It let you access current strength of you competitive
position and the strength of the position that you are planning to attain. Itwill be used to analyze
the long run profitability of the movie rental industry.
C1. Rivalry of Competitors: High
The rivalry among established companies is intense. The movie rental industry is very
competitive as there are a large number of firms in this industry. There are also many methods
for consumers to obtain a movie which also increases rivalry. Consumers have four options to
choose from such as in store rental, online selection and mail delivery, Kiosk rental, or Video on
Demand. Comparable products can be found at many different locations. There are low
switching costs which also lead to fierce competition. Netflix key competitors have large levels
of capital and have achieved economies of scale. Low levels of product differentiation also
increase rivalry.
C2. Bargaining Power of new Buyers: High
The bargaining power of buyers is high. Highly price sensitive customers have a lot of
power. There are little to no switching costs and customers have an extremely large amount of
options on which products to choose. Although buyers are fragmented and no singular buyer
has the ability to influence a product or price, their diminishing brand loyalty give them a
reasonable amount of power. Price points in this industry have to be uniform across similar
products.
C3. Threats of new entrants:Moderately Low
The threat of new potential entrants is moderately low. This is largely due to very high
cost or capital requirements resulting from stocking the product needed. The branding and
image of the largest firms in the industry also causes some difficulty of entering the market. Key
players in the industry include Red Box, Hulu+ and Amazon Instant Video. A new entrant would
have to spend a lot of money on marketing and advertising to become competitive.

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C4. Bargaining Power of Suppliers: Moderately High


The bargaining power of suppliers is moderately high. Normally suppliers are able to
impose a price increase on their products or reduce the quality of products supplied which may
decrease a companys overall profitability. This proves to be true in the movie rental industry as
their suppliers are the studios who make the movies.
C5. Threat of Substitute Products: High
The threat of substitute products is high in this industry and costs must be kept low in order
to be competitive. Substitute products to the movie rental industry are wide in number and
include physically attending a movie, watching television, surfing the web or even playing a
video game. Technology has tremendously aided to increase the threat of substitute products.
More consumers are using the web to research prices, find sales and read reviews

D. STEEPLE (PESTEL) Framework


PESTEL analysis is in effect an audit of an organizations environmental influences with the
purpose of using this information to guide strategic decision-making. The assumption is that if
the organization is able to audit its current environment and assess potential changes, it will be
better placed than its competitors to respond to changes.
D1. SOCIAL
In terms of social landscape, demographic changes and changes of the way that
people consume to traditional media versus digital media are challenging factors for
Netflix to adjust the content for all ages. Furthermore, increased access to electronic
devices is affecting Netflixs access to each market while privacy is a significant issue
that affects Netflixs ability to leverage member data. Indeed, disclosure of member
data could have negative impact on its business and reputation. Finally, the
increasingly large amount of consumers resorting to online piracy represents a strong
threat to Netflix.

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D2. TECHNOLOGICAL
Netflixs ability to stay relevant in the online streaming market is highly affected by
developments in technology. In particular, Netflix must developed and maintain apps
for the plenty of new devices used by consumers to view media- such as smartphones,
tablets and smart TVs. Importantly, growth of internet- connected devices, including
TVs, computers and mobile devices has increased consumers acceptance of internet
delivery of entertainment video.
D3. ECONOMICAL
The consumers income is crucial factor for the industry that Netflix operates aim.
Revenue is highly sensitive to economic conditions as consumers may consider online
streaming a luxury item. Therefore, the improvement in economic conditions since the
financial crisis could increase future revenue. Importantly, the ability of Netflix to
sustainably offer of Netflix at a low monthly cost gives Netflix a competitive advantage.
Finally, Netflixs revenue is affected by foreign exchange volatility. Due to, the need of
repatriate earnings.
D4. ENVIRONMENTAL
The environmental factor is not a significant one for Netflix as most of its production
facilities happen online. It is furthermore a good sign for Netflix that the transition of
Netflix from physical DVDs to online streaming is less wasteful for the environment.
D5. POLITICAL & LEGAL
In terms political and legal landscape, Netflix is affected by any change in copyright
laws. Such changes can make distribution of movies and TV Shows to member
problematic. Moreover, problems can arise current tax differentials between online
service and brick-and-mortar DVD sales as new regulations seek to reduce this gap.
A recent issue that represents a significant threat to the Subscription Video On
Demand SVOD industry is that of net neutrality. Net neutrality refers to laws that
require internet service provider (ISPs) to treat all data on the internet equally. In the
absence of such a law, ISPs can intentionally slow down communication for website

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such as Netflix. In the US domestic market, Netflix has been forced to pay Comcast
significant fees so as to avoid Comcast intentionally slowing down the traffic of Netflix.
The potential for additional ISPs to impose such levies on Netflix therefore represents
a significant risk factor. Finally, changes in laws regarding personal data usage could
affect Netflixs ability to leverage member data.
D6. ETHICAL
There are also several ways to cheat the system via streaming and online media.
One of the easier ways is by sharing subscriptions. Netflix and Hulu offer customers
subscriptions that can stream on multiple devices at a time. Although the intent was to
make it easier to go from one room to the next and continue watching a show (like a
traditional cable set-up), customers have taken advantage of the multiple device
option. They share login information with friends and family at different locations,
essentially cutting their per capita subscription cost in half or more. These actions,
though not technically illegal in most state, can have consequences. A recent
Tennessee law criminalizes sharing Netflix and other entertainment subscription
services in the same category as stealing cable TV. Netflix's own Terms of Use
acknowledges that users will share their passwords. However, all liability for shared
use is back to the account owner. If Netflix does decide that a borrower violates the
Terms of Use, the owner will be the one paying (Hamburger, 2011).
A larger issue to arise is the increase in video piracy as a way to circumvent cable
costs. This is perhaps exacerbated by the increase in home internet speeds. Most
television shows and films are available for illegal download within hours of
airing/viewing on peer-to-peer sites. Illegal streaming of live pay-per-view and out-ofmarket events are available with an internet search. The value of illegally downloaded
copies of one film can equal 10s of millions of dollars. The Hobbit and Django
Unchained were each illegally downloaded from piracy sites more than 8 million times
in 2013. Fast & Furious 6 was a close third, with 7.9 million downloads (Busis,
2014). These movies are rented for $1-3 and sold for $10.00 or more in theatre and
DVD stores. Video piracy potentially costs billions of dollars every year. Punishment of
copyright infringement varies from case to case and country to country, but a
conviction could include jail time and severe fines for each separate instance of
copyright infringement. Here in the United States, fins for copyright infringement can

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carry a fine up to $150,000 per instance, according to the U.S. Copyright Office
website.

E. Competitive Profile Matrix


Competitive profile matrix is an essential strategic management tool to compare the firm
with the major players of the industry. It shows the clear picture to the firm about their strong
points and weak points relative to their competitors. The CPM score is measured on basis of
critical success factors, each factor is measured in same scale mean the weight remain same
for every firm only rating varies. Rating in CPM represents the response of the firm toward the
critical success factors.
Each critical success factor should be assigned a weight ranging from 0.0 (low importance)
to 1.0 (high importance). The numbers indicate how important the factor is succeeding in the
industry. If there were no weights assigned all factors would be equally reported, which is an
impossible scenario in the real world. The sum of all the weights must equal 1.0. Separate
factors should not be gives too much emphasize (assigning a weight of 0.3 or more) because
the success in an industry is rarely determined by one or few factors.
The ratings in CPM refer to how well companies are doing in each area. They range from 4
to 1 where:
4 Major strength
3 Minor strength
2 Minor weakness
1 Major Weakness
DVD by Mail

Critical

Success Weigh

Factors
Market Share
Inventory System
Financial Position
Product Quality
Customer Loyalty

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t
0.12
0.05
0.08
0.10
0.03

Netflix
Ratin

Weighte

Redbox
Blockbuster
Rating Weighted Rating Weighted

g
3
3
2
3
4

d Score
0.36
0.15
0.16
0.30
0.12

2
4
1
2
2

Score
0.24
0.20
0.08
0.20
0.06

2
3
1
3
2

Score
0.24
0.18
0.08
0.30
0.06

Sales Distribution
Global Expansion
Advertising
E-Commerce
Customer Service
Price

0.08
0.09
0.10
0.15
0.07
0.10

3
2
3
4
3
3

0.24
0.18
0.30
0.60
0.21
0.30

2
1
2
2
4
4

0.16
0.09
0.20
0.30
0.28
0.40

3
3
2
2
4
4

0.24
0.27
0.20
0.30
0.28
0.40

Competitiveness
Management

0.03

0.09

0.06

0.03

Experience
Total

1.0

36

3.01

28

2.27

30

2.58

Subscription based on Internet Streaming


Critical

Success Weigh

Factors
Market Share
Inventory System
Financial Position
Product Quality
Customer Loyalty
Sales Distribution
Global Expansion
Advertising
E-Commerce
Customer Service
Price

t
0.12
0.05
0.08
0.10
0.03
0.08
0.09
0.10
0.15
0.07
0.10

Competitiveness
Management

0.03

Experience
Total

1.0

Netflix
Ratin

Scor

Hulu
Rating

Score

Amazon
Rating

Scor

Vudu
Ratin

Scor

F. FINANCIAL ANALYSIS
Financial ratios are useful indicators of firms performance and financial situation. These
financial ratios can be used to analyze trends and compare the firms financials to those of
other firms. Financial ratios are categorized according to the financial aspect of the business
which the ratio measures the following:
Current Ratio = Current Asset/ Current Liabilities

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The current ratio went lower slightly. This means that Netflix has more current liabilities
in 2010 and 2011. The company would be unable to pay off its obligation if they came due at
that point of 1.49

Current
Ratio

Current Asset
Current Liabilities

2009
416,500,000
226,400,000

1.84

2010
637,200,000
388,600,000

1.64

2011
1,830,900,000
1,225,100,000

1.49

Acid Test Ratio = Cash + Short term Investment + Account Receivables -Inventories
Current Liabilities
The acid test ratio is a strong indicator of whether a firm has sufficient short term
assets to cover its immediate liabilities. The quick ratio of Netflix came down on 2010 to 2011,
which may apparently seem to have deteriorated.
2009
134,200,000

Acid

Cash +

Test

Short

Ratio

Investment
Current Liabilities

Term

2010
194,500,000

2011
508,100,000

186,000,000
226,400,000

1.41

155,900,000
388,600,000

+
0.90

290,000,000
1,225,100,000

Debt to Equity Ratio = Total Liabilities / Total Owners Equity


The ratio stayed about the same in 2009 and 2010. The creditors have more say than
investors do in the company. It shows the extent to which shareholders' equity can fulfill a
company's obligations to creditors in the event of liquidation.Then in the year 2010 and 2011
the ratio went up from 2.38 to 3.77 because Netflix may not be able to generate enoughcash to
satisfy its debt obligations. For every dollar of Netflix owned by the shareholders, Netflix owes
$3.77 to creditors.
Debtto

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2009

2010

2011

0.65

Equity

Total Liabilities

480,600,00

Ratio

691,900,000
2.41

Total Owners Equity

2,426,400,000
2.38

290,200,000

3.77
642,800,000

199,100,00
0
Gross Profit Margin = Gross Profit / Sales
Gross profit margin serves as the source for paying additional expenses and future
savings. The gross profit margin of Netflix in 2010 is 37.24% and it went down in 2011 and
became 36.33. It means that Netflix cannot maintain its gross profit margin.
Gross
Profit
Margin

Gross Profit
Sales

2009
591,000,000
1,670,300,000

35.38

2010
805,300,000
2,162,600,000

37.24

2011
1,164,700,000
3,205,600,000

36.33

Net Profit Margin = Net Income / Revenue


Sales dollars contributed to net income increased a small amount from 2009 to 2010.
And the net income decreased from 2010 to 2011 that indicates the inefficient management of
the affairs of Netflix.
Net
Profit

Net Income

Margin

Revenue

2009
115,900,000
1,670,300,000

2010
160,800,000
6.94

2,162,600,000

2011
226,100,000
7.44

3,205,500,000

G. INDUSTRY ANALYSIS
What are the products and services does it serve?
Netflix maintains a large library of movies and television shows that are made available to
their members through DVD or unlimited online streaming with use of a computer or streaming
device. Users can rate their viewed movies and television shows in order to receive precise
recommendations for future viewing

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7.05

a. What function does it serve?


Netflix serves the best quality of movies and television series that the members can play
pause and resume watching.
b. What are the channels of distribution?
Online Streaming
Entertainment
Video Provider

Amazon AWS Cloud


Computing Services

Internet Connected
Devices

Consumer

DVD by mail
Log On to Netflix
Website

Choose movies

Returned viewed movies and


the Netflix will send mor

DVD Delivery with no


fees

Watch yor movie of


your leisure

What is the industry size in units or in dollars?


In year 2011, internet television industry reported
a. How fast is it growing?
From January 1, 2010 through June 30, 2011, the number of Netflix subscribers in the US
alone doubled from 12.3 million to 24.6 million, quarterly revenues climbed from $445 million to

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$770 million, and quarterly operating income climbed from $53 million to $125 million. Netflix
swift growth in the US and its promising potential for expanding internationally pushed the
companys stock price to an all-time high of $304.79 on July 13, 2011, up from close of $55.19
on December 31, 2009.
b. Are products differentiated?
There is almost no product differentiation in the industry. The channel through which a
product is delivered to the consumer differentiates it by restricting it to specific viewing
mediums (computers vs. TVs) as well its degree of sophistication (i.e. resolution, sound quality
and encoding, special features). Competitors may also differentiate themselves by deepening
their title selection. Product differentiation is minimal and exists only across segments, or
between consumer groups.
c. Are there high exit barriers?
Yes. Exit barriers are moderately high, keeping competitors in the industry. Long-term
assets and inventories make up just over 50% of assets for both Blockbuster and Netflix. Netflix
maintains a $3 salvage value in the depreciation of its DVDs with a life-term of only 1-3 years
depending on its release date.
d. Are there high fixed costs?
No. Capacity in the home video entertainment industry is added in small increments,
leading to a lower fixed cost dependency and more stable average costs, all having the effect
of weakening rivalry in the industry. Addition of capacity refers to an increase in title selection or
inventory size. Online distribution on the other hand is much more reliant on revenue-sharing
models, which means that industry members in that segment have virtually no costs to increase
selection.
e. Are there some forces that determine the strength of competition among existing
competitors?
Yes. Competition in the entertainment video industry is most strongly affected by its great
diversity of competitors. There is a great variety of corporate and business-level strategy
amongst competitors.
3. Who are the major competitors?
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The major competitors of Netflix in DVD and rental are Redbox, Blockbuster, and others.
And the major competitors in internet streaming are Hulu Plus, AmazonPrime, Vudu and
others.

a. What are the market shares?


DVD by Mail

US DVD Market Share 2010


17%

Netflix

36%

Redbox

Blockbuster

22%

25%

Subscription based on Internet Streaming

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Others

US Online Movie Market Share 2011

26%

Netflix

Vudu

Amazon

44%

Hulu

Others

8%
18%

4%

b. Is the industry consolidated or fragmented?


Netflix is a consolidated industry because its market has relatively high barriers to entry,
differentiated products, well established brands and high profit margin.
4. What are the major customers of the industry?
Netflixs target market should be US customers because these customers have the
technological capabilities and earn the income needed to purchase Netflixs service. The age
bracket average parenting ages of 17 60 with monthly allowance or income of $ 30,000 and
up which represents a potential market share increase due to its high percentage in the US
population
a. Are they powerful?
Yes, they are powerful
b. What gives them power?
Their diminishing brand loyalty gives them a reasonable amount of power.
5. Who are the major suppliers of the industry?

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The major suppliers of the industry are the cable providers (such as time warner, comcast,
cox, and charter), direct broadcast satellite providers (such as directTV and DISH network),
fiber-optics providers (like AT&T and Verizon), and movie-only channels (such as HBO,
Showtime, and Starz).
6. Do significant entry barriers exist?
Yes, significant entry barriers exist.
a. What are they?
The major impediment to becoming an online video streaming service is acquiring, creating
and licensing content. Large capital requirement are needed because of acquiring the network
capacity to hold a significant amount of video content as well as support substantial website
visits without crashing. Another entry barrier is the exclusive agreement with key distributors or
retailers can make it difficult for other to enter the market.

b. Are they effective in protecting existing competitors, thus enhancing profits?


Yes, they are effective in protecting existing competitors by copyright of the product.
7. Are there any close substitutes for the industry products or services?
Yes, there are close substitutes for the Netflix services or products. These are Redbox,
Blockbuster in DVD and rental. And Hulu Plus, Amazon Prime, and Vudu in internet streaming.
a. Do they provide pressure on price change in the industry?
Yes, they provide pressure on price change in the industry because they offer the
service lower than the price of the Netflix subscription.
8. What are the basic strategies of competitors?
Blockbuster offered lower pricing and less wait time for new releases. Pay TV
companies like DirecTV and Comcast Xfinity ran ads to appeal to people interested in early
release dates. Redbox gained customers with low prices and free movie rentals through
Facebook and Twitter. Hulu Plus offered access to Gamefly. Amazon Instant Video and WalMart entered the market. Dish offered access to media through the Blockbuster Movie Pass
and Verizon and Redbox partnered to offer streaming services.
25 | P a g e

a. How successful are they?


Despite these aggressive competitors, Netflix holds the lead with over 30% market
shares compared to other competitors.
9. To what extent is the industry global?
The industry goes global by expansion of Netflix in Canada, Latin America and the
Caribbean.
a. Are they any apparent advantages to being involved in more than one
country?
Yes, expanding Netflix globally will capture wide range of customers
10. Is the industry regulated?
Yes, the industry is regulated.
a. What influence do regulations have on industry competitiveness?
For environmental regulation, companies or Netflix should comply with the laws and
regulations standard in order to avoid some misconduct.

VI.

ALTERNATIVE COURSES OF ACTION

ACA #1: Market development by expanding Netflix internationally.


International expansion would allow Netflix to gain a wide range of new potential
customers that will help Netflix to promote their brand globally.
ADVANTAGES:
This will increase the brand popularity and marketability of Netflix due to introduction to
new geographic market and it will expand the consumer exposure.
Netflix can widen business opportunities by developing partnerships with content and
technology providers
Netflix can increase market share by creating an expectation of exciting ideas among
customers.

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DISADVANTAGES:
The external resources are much more difficult to control and a supplier that sends you
incorrect network resources can put your entire product and market development plans
behind schedule and over budget.
It typically requires capital investment in expansion, either to build new locations or to
expand marketing efforts to new territories.

ACA #2: Market Penetration by inducing a new pricing strategy.


By inducing a new pricing strategy, Netflix will attract a lot of potential customers and
will raise the market share of the company.
ADVANTAGES:
Netflix can drive competitors out of the marketplace so the company can eventually
increase prices with little fear of price competition from the few remaining competitors.

It can also obtain so much market share that the seller can take down its
manufacturing costs due to very large production and / or purchasing volumes.

Netflix can create customer base quickly due to low price of product .

DISADVANTAGES:
Unmet production costs
Marketplace become saturated.
ACA #3: Unrelated diversification by expanding into gaming industry.
Netflix should convert from concentrated portfolio to diversified business
specifically into gaming industry to to add value for customers or gain competitive advantage
by broadening present business to include complementary products
ADVANTAGES:
Risk reduction. Netflix could spread the risks across several industries and cash flow is
more stable over time.

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Netflix can build shareholder value by doing a superior job of choosing businesses to
diversify into and of managing the whole collection of businesses in the companys
portfolio.

Stability of profits -- Hard times in one industry may be offset by good times in another
industry

DISADVANTAGES:

Netflix might have difficulties of competently managing many diverse


businesses

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The implementation of unrelated diversification strategy requires allocation of


significant financial and human resources and there is always the risk of harming
the main company business.

VII.

DECISION MATRIX

Criterion

Weigh

ACA 1:

Development
Ratin Weighte

Penetration
Ratin Weighte

Diversification
Ratin Weighted

g
2

d Score
.20

g
2

d Score
.20

g
1

Score
.10

.20

.60

.60

.40

Impact
Cost Effective .20
Research and .10

2
3

.40
.30

2
1

.40
.10

1
1

.20
.10

Development
Risk
Competitors
Total:

3
2
15

.60
.40
2.5

2
2
12

.40
.40
2.1

2
3
10

.40
.60
1.8

Ease

of .10

Market ACA

2: Market ACA 3: Unrelated

Implementatio
n
Customers

.20
.20
1.0

Weight Cost
1-

Not 1-High

Impact
1-Low

Important

Impact

2-

2-Medium

Slightly 2-Medium

Important

3Important

Ease
1-Difficult
2- Average

Impact

Very 3-Low

29 | P a g e

3-High
Impact

3-Easy

VIII.

RECOMMENDATION
We therefore recommend that the best alternative course of action is the ACA
#1, which is market development by expanding Netflix internationally since it can
widen the business opportunity. It can also increase Netflix's brand popularity and
marketability by introducing it to new geographic market. Market development will
increase potential customers that can dramatically improve sales, resulting in
increase of profitability because they will enter a larger market. First entrant can
gain control of resources that followers may not be able to match. This market
development should be done in order to increase market share internationally and
they could also maintain a strategic competitive focus on global positioning.

IX.

CONCLUSION
We therefore conclude that

H. DETAILED ACTION PLAN


Time Frame

Activities

Person/ Department

Budget

responsible
One Week

Evaluate the major strengths and

Chief Executive Officer

Not Applicable

Executive Vice President

Not Applicable

weaknesses of the functional areas


Five Days

Establish objectives and devise


strategies
Gather relevant information and

Two Weeks

30 | P a g e

evaluate it.

$1 million
Research and

Development
Customer Analysis
One Week

$500 thousands
Marketing Department

Five Days

Product and Service Planning

Marketing Department

Not Applicable

One Week

Cost and Benefit Analysis

Accounting Department

Not Applicable

One Month

Introduce present and new product

Advertising Agency

$150 million

One Month

Improve and modify present

Production and

$30 million

products or services

Marketing Development

Elevator pitch

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Convenience, portability, immediate access and


transferability of the product, and are more than
willing to watch video on their computers. And
also people who want to get the most value for
their money.

Are too busy to go out and shop for movies,


people who are frequent movie renters and
movie buff.

Males and Females between the ages 1760 and average income earner
households

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CURRICULUM VITAE
BIBLIOGRAPHY

and WANT
WHO
Netflix is for

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