Netflix Netflix Consultant Report November 30, 2011 Stephen Allen Graham Haynes Zachary Konings Alexis Mallett Rachel Mitchell

The Firm Provides users throughout North America with low cost movie rentals Focuses on two major revenue streams: mail order rentals and online streaming Under corporate direction from Co-founder Reed Hastings Netflix – An Overview Resources Employee base of 2300 ranging from employment in distribution centers to corporate positions, Little long term debt, corporation is heavily solvent 9 U.S patents pertaining to its mail-order business model Suppliers includes retail wholesalers with no copyright fees Corporate Functionality Reduction in COGS by 2% in 2010, important driver in Net income’s increase of 5 million to 160.9million Unusually simple marketing strategy, uses ads and some mail out techniques Laissez faire human resource strategy;

Netflix – Current Situation  With over 70% of Netflix’s stock value originating from U.S subscribers Netflix roughly doubled it’s price, resulting in 800,000 cancellations and a stock devaluation from $300/share to $80/share  Unfavourable consumer perceptions forced Netflix to cancel plans for its’ subsidiary named Quickster  Netflix has expansionary plans for Europe in 2012 and hopes to earn additional revenue to offset losses expected in US market  Recently Netflix’s Research and Development operations have optimised Android applications and are expecting Kindle Fire’s partnership with Netflix to jumpstart revenue streams

Industry & Marketplace Growth Trends:  The demand for Netflix’s streaming services has increased twelvefold since 2008 (Reference figure 1.1)  Mail out orders have been marginally declining since 2009 (Reference figure 1.1)  Annual sales in the traditional rental market have declined by 10-15% since 2011  If Netflix were to keep its original bundled $7.99 pricing it is likely that subscriptions by the end of 2012 could reach nearly 30 million

Industry & Marketplace Demand Schedule: Prior to Price Change Announcement September 30,2011 Conservative Predictions for December 31,2011

Major Competitors A subsidiary of Dish Network “Total access” service, jumps into streaming market Lower cost membership with more timely releases 500,000 new subscribers in the first month Membership programs provides free shipping Introduced free online streaming in 2011 Kindle fire is also expected to increase subscriber base

The Broader Environment Demographics:  Increased access to pirated media, putting substantial strains on sales  Perception that Netflix’s operations are inherently “Green” by its natural digital strategy  Products appeal to tech savvy age groups Technology:  Introduction of blu-ray players threatens Netflix because it lacks HD capabilities  Netflix lags behind technology of modern LED televisions, especially in 3-D capability  Compatibility of Netflix to many devices like consoles and Roku and Apple TV

The Broader Environment Economy:  Netflix is a low cost alternative to traditional movie rentals  Some lack the confidence to spend on unneeded luxuries  Fuel costs translate into high overhead expenditures for Netflix’s rental by mail services Political & Legal:  Increased concerns about privacy and digital rights, Netflix kept history of users’ activities  The application of The First Sales Doctrine to strictly digital media in the United States

SWOT Analysis Strengths Constantly updating inventory Price increase has reduced overhead costs substantially – reinvestment Employee loyalty unparalleled in the industry Industry Patents Popular culture brand recognition Progressive and innovative management Weaknesses Repetitive and annoying Marketing Scheme High cost Fixed Assets that may prove inefficient with business plan change Dependency on business partners and agreements

SWOT Continued Opportunities Gaming is an untapped market with huge demand and possibility Recessionary consumer behavior Bill HR2471 could eliminate a great deal of piracy Purchase of television stations archives – small price to pay International Expansion to tech- savvy markets - Europe Threats Pressure to pay more for video rights First Sales Doctrine Missing Blu-ray and HD content is a sticking point Ease of piracy - streaming and torrenting Investor Confidence - Stock prices from ~$ suggests market instability Supplementary Services interfere

Future Steps “And posted in your guidance, are you saying that Netflix will be unprofitable on a global basis over all of 2012? In response, they think yes.” - VP Netflix Inc.  Dwindling US subscriptions and the possibility of a hugely capital intensive FDI in Europe will quickly corrode and reduce Netflix’s current financial position  Instead Netflix is advised to diversify it’s online product offerings by adding Cloud Video Games and additional premium television series to achieve economies of scope  If such is done then a more stable domestic customer base can be established. Once domestic relations are stabilised and emphasis on capital intensive mail out rentals is reduces Netflix may begin International expansion. Economies of Scope Increased Domestic Profits International Expansion