NetflixNetflix

Noam SchwartzNoam Schwartz

Lev GelfandLev Gelfand

Pujish AminPujish Amin

Company DescriptionCompany Description

• Internet Retail Industry

• World’s 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

NETFLIX, Inc., (NASDAQ: NFLX)NETFLIX, Inc., (NASDAQ: NFLX)

NETFLIX, Inc., (NASDAQ: NFLX)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

S&P 500: 1244.28

2010A 2011E 2012E

ESP $2.96 $4.47 $0.36

P/E Ratio 59.5 15.6 208

S&P EPS $78 $85 $94

S&P P/E Ratio 14.9 11.9 10.9

Relative P/E 400% 131% 1908%

SSWOT Analysis: WOT Analysis: StrengthsStrengths

• 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

SSWWOT Analysis: OT Analysis: WeaknessesWeaknesses

• PPoor 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

“Netflix has clearly shot itself in the foot a couple of times in the past few months” – Whitney Tilson“Netflix has clearly shot itself in the foot a couple of times in the past few months” – Whitney Tilson

SSWWOT Analysis: OT Analysis: WeaknessesWeaknesses

• Content Acquisition• Netflix doesn’t own the content it provides• Must invest a large amount of capital to acquire it• Highest-quality content isn’t 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

SWSWOOT Analysis: T Analysis: OpportunitiesOpportunities

• 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

SWOSWOTT Analysis: Analysis: ThreatsThreats

• 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 company’s 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

Porter’s Five Forces ModelPorter’s Five Forces Model

• 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

Threat of New Entrants

Porter’s Five Forces ModelPorter’s 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

Porter’s Five Forces ModelPorter’s 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

Porter’s Five Forces ModelPorter’s 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

Porter’s Five Forces ModelPorter’s Five Forces Model

• Competition is split into 2 buckets1. Existing Pay-TV distributors

2. Cash Rich Tech Companies

For Example – Apple’s Cash Balance is 20x Netflix’s 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

Rivalry Among Competing Firms

in Industry

Recommendation: Recommendation: SELLSELL

• 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