Netflix

1
Netflix

• Noam Schwartz
• Lev Gelfand
• Pujish Amin

2
Company Description

• Internet Retail Industry
• Worlds largest subscription service company
• Streaming movies and TV episodes
• Sending DVDs by mail (20 mil subscribers as of
  12/31/10)
• Domestic Streaming content and DVD delivery in
  US
• International unlimited streaming plan w/o DVD
  in Canada
• Eventually to Central and South America, UK,
  Ireland
• Streaming to TVs, cell-phones, computers, mobile
  devices
• Marketing through online advertising, TV, radio,
  strategic partnerships

3
NETFLIX, Inc., (NASDAQ NFLX)
4
NETFLIX, Inc., (NASDAQ NFLX)
Price 66.37 52 Week Range 62.37 304.79
Volume 5.66 M Market Cap 3.48 B
Beta 0.46 Yield 0
SP 500 1244.28
2010A 2011E 2012E
ESP 2.96 4.47 0.36
P/E Ratio 59.5 15.6 208
SP EPS 78 85 94
SP P/E Ratio 14.9 11.9 10.9
Relative P/E 400 131 1908
5
SWOT Analysis Strengths

• User Experience
• Unlimited movies/TV episodes streamed directly to
  user
• DVDs delivered quickly to home
• Streaming Capability
• Technology ? Downloading of content to newer
  devices
• Streaming service available on laptops,
  cell-phones, tablets, game consoles and
  internet-enabled TVs
• Large Subscriber Base
• 23.8 Million Subscribers, even after major recent
  losses

6
SWOT Analysis Weaknesses
Netflix has clearly shot itself in the foot a
couple of times in the past few months Whitney
Tilson

• Poor Management
• JULY Raised the price of its basic subscriber
  plan by 60
• Massive Subscriber Defections
• SEPT Launches Qwikster to rebrand, spin off DVD
  business
• Idea subsequently reversed due to public outrage
• NOV Raised 400 Million, convertible notes of
  85.80
• Earlier this year, Netflix had bought back its
  own shares at 200
• Damaged Reputation
• Loss of 800,000 subscribers in 3Q (3 decline)
• Loss of credibility public confidence
• Increased subscriber churn and dissatisfaction in
  the near term

7
SWOT Analysis Weaknesses

• Content Acquisition
• Netflix doesnt own the content it provides
• Must invest a large amount of capital to acquire
  it
• Highest-quality content isnt available
• Will stay in the pay TV business, where it
  generates more value for content owners
• Netflix pays for scraps
• Dated, second-tier content that has no value in
  any other window

8
SWOT Analysis Opportunities

• International Expansion
• Canada
• Launched last year, almost 1 million Canadian
  subscribers
• Latin America Caribbean
• Launched in Brazil in Sept 2011
• Plans for the rest of Central South America
• U.K. Ireland
• Scheduled launch in early 2012

9
SWOT Analysis Threats

• Major Industry shift ? Content Streaming
• Netflix no longer enjoys competitive advantage
• Previously thrived off first-mover advantage and
  efficient distribution
• Now, Netflix streaming Any other companys
  streaming
• Low barrier of entry, all it takes is the to
  acquire content
• Rising cost of content
• More competitors More Bids for Content Higher
  Prices
• Bandwidth Limitations
• Netflix relies on unlimited bandwidth for its
  streaming offering
• 20 of all internet traffic
• Broadband providers could move to a pay-for-use
  model

10
Porters Five Forces Model
Threat of New Entrants

• Barriers to Entry
• Capital Requirements, content costs money
• Economic moat around streaming business for new
  entrants
• Relatively low barrier for existing competitors
  with enough
• Brand Identity No longer the best
• Loyalty is weak, many unsubscribed

11
Porters Five Forces Model

• The Bargaining Power of Suppliers (HIGH)
• Content is a Key Input in Netflix Business
• Suppliers Content Owners (Time Warner, CBS)
• Limited of Suppliers have High Quality Content
• There is no substitute for High Quality Content
• At the mercy of their licensing deals

Bargaining Power of Suppliers
12
Porters Five Forces Model

• Bargaining Power of Buyers (HIGH)
• Netflix Revenue is majority customer sales based
• Customers not as loyal as before
• Better and cheaper ways to watch movies and TV

Bargaining Power of Buyers
13
Porters Five Forces Model

• Many Competitors from all sides of business
• Apple TV, Amazon on Demand, Hulu, Blockbuster on
  Demand, Cablevision, Verizon, DirecTV
• Comcast and Dish Network are overlooked
  substitutes
• Work closer with content owners to offer better
  Video On Demand experience for customers

Threat of Substitute Products
14
Porters Five Forces Model
Rivalry Among Competing Firms in Industry

• Competition is split into 2 buckets
• Existing Pay-TV distributors
• Cash Rich Tech Companies
• For Example Apples Cash Balance is 20x
  Netflixs Projected 2011 Sales
• - Good First Mover Advantage, but TV distributors
  and Tech companies have a better position to
  license quality content over a longer horizon

15
Recommendation SELL

• Netflix is a prime example of a BROKEN company
• Business model is flawed, there was an overall
  shift in the Internet retail industry, they lost
  their competitive advantage
• Continued customer defections
• International expansion is expensive, risky,
  uncertain
• Rising costs of content will drain profitability
• No dividends or yield