Running Head: NETFLIX ANALYSIS

Final Project: Netflix Analysis

Herzing College Online
MBA 691: Graduate Capstone Project
December 13, 2014
Dr. Jeffrey Snider

NETFLIX ANALYSIS

2
Table of Contents

Executive Summary3
Introduction.4
Organizational Analysis..................................................................................................4
Netflix Overview.....4
Organizational Structure..6
Competitors..6
Corporate Management6
Leadership and Diversification. ..8
Locations..8
Mission and Vision..9
Cultural Environment...9
Strategy .10
Goals. 10
Marketing Analysis10
Product Mix...11
Product Strategies..12
Market Segment.12
Competition12
Sales Method..13
Marketing Plan...13
Environmental Analysis.14
Internal Analysis14
External Analysis...15
Financial Analysis..16
Balance Sheet.16
Income Statement...17
Statement of Cash Flows...18
Statement of Stockholder Equity...18
Stocks.19
Financial Ratios.20

NETFLIX ANALYSIS

Netflix Financial Issues..21

The Problem in 2011..21
Operations Management21
Social Responsibility.22
Code of Ethics22
Ethical Issues.23
Privacy Laws..23
Consumer Trust..23
Human Resource Needs.23
Cultural Training24
Unique Policies..24
Technology Needs.25
Competitive Technology25
Recommendations..26
Conclusion.26
References..27
Appendix A: Balance Sheet...31
Appendix B: Income Statement.32
Appendix C: Statement of Cash Flows..33
Appendix D: Stockholder Equity...34
Appendix E: Financial Ratios35
Appendix F: Code of Ethics...36

NETFLIX ANALYSIS

4
Executive Summary

This report analyses the mission, vision, management, leadership, market structure,
internal and external environments, products, financial performance, social responsibility, ethical
issues, as well as human resource and technology needs of Netflix Incorporated. As the worlds
leading Internet television network, the company suffered losses due to strategic errors but were
able to reorganize and experienced remarkable revenue growth. The recommendation is for
Netflix to continue their efforts to expand their streaming operations globally and concentrate on
increasing their technological advancements. The development of new apps and customerfriendly software will allow Netflix to maintain its competitive advantage, funding their
expansion efforts. As Netflix continues with their unique human resource policies, marketing
efforts, plans for expansion, and excellent customer service, investing in the company appears to
be a rewarding endeavor.

NETFLIX ANALYSIS

5
Netflix Analysis

Potential investors and even subscribers of Netflix require knowledge to make quality
decisions regarding their continued or future support. A comprehensive analysis provides the
information about how the company performs their business operations, handles finances,
markets their product and services, their leadership style, and customer service skills (Thompson,
Peteraf, Gamble, & Strickland lll, 2014). The following examines Netflix operations
management, organizational structure, strategy, marketing environment, and financial
performance.
Organizational Analysis
Potential investors and business partners of Netflix realize the importance of researching
the core organizational structure and strategy as laid out by management. Evaluating a
companys strategic mission helps to define their purpose, while the organizations vision
outlines their long-term direction (Thompson et al., 2014). The following examines the
organizational structure of Netflix, their mission, and vision, as well as how receptive they are to
change.
Netflix Overview
Netflix Inc., established in 1997, is a global organization described as a pioneer in the
Internet delivery of TV shows and movies (Netflix, Inc., 2014, p. 1). As a leader of the Internet
television industry, Netflix membership now tops 50 million in almost 50 countries (Investor
Relations Overview, 2014). Netflix provides their members with unlimited, commercial free
television shows, movies, and original programming for one low monthly price, as well as no
late fees on their DVDs and free delivery (Netflix Long Term View, 2014). The increase in
streaming subscribers results from the wide variety of mobile devices capable of streaming

NETFLIX ANALYSIS

movies and television shows (Businessweek, 2014). The 2013 annual report describes a
harmonious internal environment with a total of 2,327 employees and benefits that include a
401k plan and an employee stock purchase program (ESPP) (Netflix, Inc., 2014).
Organizational Structure
According to the year-end 2013 annual report, Netflix core business operating segments
include domestic DVDs, domestic streaming, and international streaming (Netflix, Inc., 2014). In
2012, Netflix began acquiring and producing exclusive and original programming as part of their
non-core business structure, as well as developing their data centers with cloud technology
(Netflix, Inc., 2014). The organizational structure started out as a simple structure and grew into
a functional structure with departmental managers reporting to the CEO and corporate staff
(Thompson et al., 2014).
Competitors
While Netflix considers HBO as their biggest long-term competitor-for-content (Netflix Long
Term View, 2014, p. 4), they also compete with linear television networks, pay-per-view
providers, DVD vendors, video games, and other Internet networks. Most of their competitors,
like Amazon Prime, Blockbuster, and HBO have a more decentralized structure known as a
multidivisional structure (Thompson et al., 2014). The multidivisional structure could become
problematic when attempting to implement change, unlike the simpler functional structure that
Netflix employs (Thompson et al., 2014). The Netflix organization is receptive to change as
witnessed by their failed strategy to split Netflix into two separate companies Netflix and
Qwickster (Bosker, 2011).
Corporate Management
Starting in 1997 Reed Hastings co-founded Netflix after founding Pure Software in 1991

NETFLIX ANALYSIS

(Netflix Management Team, 2014). Hastings hired a talented group of corporate management
leaders that came from companies such as the Walt Disney Company, Warner Bros, Bausch &
Lomb, and Deloitte Consulting (Netflix Management Team, 2014). The rest of the corporate
management team is as follows:
1. Kelly Bennett became Netflix Chief Marketing Officer in 2012 after nearly a decade at
Warner Bros.
2. Tawni Cranz became Chief Talent Officer in October 2012. Prior to Netflix, she was HR
director at Bausch & Lomb.
3.

Jonathan Friedland joined Netflix in February 2011 as the Chief Communications

Officer from The Walt Disney Company.

4. Neil Hunt has been at Netflix since 1999 and serves as Chief Product Officer.
5. David Hyman has served as Netflix General Counsel since 2002. He also serves as the
Companys Secretary.
6. Gregory K. Peters is Chief Streaming and Partnerships Officer for Netflix since joining
Netflix in 2008.
7. David Wells has served as the Company's Chief Financial Officer since December 2010.
8. Ted Sarandos has led content acquisition for Netflix since 2000.
(Netflix Management Team, 2014, p. 1)
Together, this team provided Netflix with a competitive advantage as one of the top
leaders in the Internet television industry (Netflix Management Team, 2014). According to the
2013 annual report, the year ended with Netflix at 2,022 full-time employees and 305 part-time
and temporary employees (Netflix, Inc., 2014). Netflix does not have an organizational chart, but
allows employees freedom to work professionally under the guidance of the corporate staff listed

NETFLIX ANALYSIS

above (Netflix, Inc., 2014).

Leadership and Diversification. While the initial appearance of Netflix does not appear
to be very diverse, the reverse is true. Thanks to the leadership of Reed Hastings and Tawni
Cranz, Netflix is a very diverse organization company-wide (Netflix Management Team, 2014).
All of the Netflix corporate officers and directors promote an interdependent culture, reminding
employees that success involves group participation, and therefore are excellent leaders and
managers (Harris, 2010).
Locations
Netflix corporate headquarters, located at 100 Winchester Circle, Los Gatos, CA 95032
and according to the annual report, Netflix leases six properties on the west coast with expiration
dates ranging from April 2016 to March 2019 (Netflix, Inc., 2014). Netflix also operate a
nationwide network of distribution centers for our Domestic DVD segment that serve major
metropolitan areas throughout the U.S. (Netflix, Inc., 2014, p. 13), and plan to expand the
number of locations to include states other than California, Oregon, and Ohio. The table below
lists the six properties and their primary uses:
Figure 1: Locations

(Netflix, Inc., 2014, p. 13)

NETFLIX ANALYSIS
Mission and Vision
Netflix mission or focus is the offering of unlimited viewing of commercial-free
entertainment for a flat fee (Netflix Long Term View, 2014). While Netflix has no official
published mission or vision statement, CEO Reed Hastings has declared a vision of Netflix
(Farfan, 2014). This vision includes:
1. Becoming the best global entertainment distribution service
2. Licensing entertainment content around the world
3. Creating markets that are accessible to film makers
4. Helping content creators around the world to find a global audience
(Farfan, 2014, p. 1)
Cultural Environment. Hastings calls the companys culture the reason for their
success, which he describes as emphasizing performance, freedom, and responsibility
(Blodget, 2011, p. 1). Hastings also describes the seven aspects of this culture as:
1. Values are what we Value
2. High Performance
3. Freedom and Responsibility
4. Context not Control
5. Highly Aligned, Loosely Coupled
6. Pay Top of Market
7. Promotions and Development
(Blodget, 2011, p. 5)
While Hastings neglected the publishing of an official mission statement, it becomes clear that
Netflix overcame many obstacles thanks to the vision of values now known.

NETFLIX ANALYSIS

10

Strategy
According to the 2013 annual report, the core strategy for Netflix is a growth-oriented
strategy that includes domestic and International streaming subscriptions (Netflix, Inc., 2014).
The goal of Netflix is to improve customer satisfaction continually, increase content, add more
original programming, and improve the user interface on more types of mobile devices (Netflix,
Inc., 2014). Netflix maintains a strategic advantage because of their understanding of the video
on demand culture, the digital advancements in the development of film, the wide net they cast in
their approach to Internet television (Ware, 2014). Current and future strategies for Netflix lies
in the realm of networked-streaming film and television, a form of digital delivery of
entertainment content that is part of the titular concept of Chuck Tryon's On-Demand Culture
(Ware, 2014, p. 238).
Goals. Netflix developed many goals including High Definition streaming video on
mobile devices, partnerships with cable networks, partnerships with mobile device and electronic
manufacturers, increase global expansion, and staying aware of advances in technology (Netflix,
Inc., 2014).
Marketing Analysis
As a competitive organization, Netflix uses market and environmental analysis to
examine their marketing environment, objectives, strategies, and activities (Kotler & Keller,
2012, p. 643). The audits or analysis assists with determining any areas of opportunity to
capitalize on or problem areas that may require adjustment (Kotler & Keller, 2012). This analysis
examines marketing and environmental issues for Netflix, such as the main products, marketing
strategy, product mix, and sales methods for revenue creation.
Netflix performs their marketing from two California offices, the Los Gatos and Beverly

NETFLIX ANALYSIS

11

Hills locations (Netflix, Inc., 2014). According to the annual report for 2013, Netflix reports their
marketing expenses consist mainly of advertising costs, expensed as they occur, as well as
payments made to the Companys affiliates and consumer electronics partners (Netflix, Inc.,
2014, p. 50). The report also indicates a consistent increase in advertising costs of $78.1 million
between 2011 and 2012, and an increase of $60.7 million between 2012 and 2013 (Netflix, Inc.,
2014). While Netflix considers the marketing costs for the Domestic DVD segment as
immaterial, the Domestic and International streaming segments incur the majority of the
marketing costs (Netflix, Inc., 2014).
Product Mix
The products and services sold by Netflix include domestic DVD rentals, domestic and
international streaming of movies, television shows, and original programming (Netflix, Inc.,
2014). Thanks to advancements in communication technology, the streaming market for Netflix
extends to anyone with internet access or mobile devices (Netflix, 2014). Table 1 below shows
the pricing structure for these products.
Table 1: Product Plans and Rates
Netflix Product Plans
Unlimited Streaming Monthly Rates
All plans offer unlimited TV shows and movies, on as many devices as you want.
Watch on 1 screen at a time in Standard Definition.
Watch on 2 screens at a time. HD available.
Watch on 4 screens at a time. HD and Ultra HD available.

Discs out at a time

DVDs
Blu-Ray

Product Strategies

DVD Rates
1
2
$7.99
$11.99
$9.99
$14.99

$7.99
$8.99
$11.99

3
$15.99
$19.99
(Netflix, 2014)

NETFLIX ANALYSIS

12

According to the 2013 Annual Report, the core strategy for Netflix is growing their
domestic and international streaming subscription business (Netflix, Inc., 2014). This strategy
requires Netflix to improve the member experience, expand the mix of content, enhancing the
user interface, and extending our streaming service to even more Internet-connected devices
(Netflix, Inc., 2014, p. 1). With more content available for streaming, Netflix expects to see a
decline in DVD memberships as the streaming subscriber base increases (Netflix, Inc., 2014).
Based on the core strategy, Netflix is adding recent movies, increasing their customer service,
using cloud technology, and expanding in additional countries (Netflix, Inc., 2014). The latest
announcement from Netflix on November 18, 2014, reveals their intent to launch in Australia
and New Zealand in March 2015 (Netflix, 2014).
Market Segment
Netflix claims to market to every age group that enjoys relaxing, while they watch their
favorite commercial-free movies, television shows, and original programming, in the comfort of
their homes, or wherever they are with mobile devices (Netflix, 2014). The Netflix DVD market
is throughout the United States, and the streaming market extends internationally (Netflix, 2014).
Competition
Netflix views competition in two categories, competitors for time, and competitors for
content (Netflix, Inc., 2014). Netflix considers their main long-term competitor for content to be
HBO, but also considers pay per view and piracy as content competition as well (Netflix, Inc.,
2014). Competitors for time also include HBO, but also Amazon Prime Instant Video, Hulu,
Now TV, Viaplay, Clarovideo, and many other cable and broadcast networks in various
territories (Netflix, Inc., 2014, p. 4). As economic times toughen, consumers seek out
inexpensive sources for home entertainment and while Netflix competitors reduced the market

NETFLIX ANALYSIS

13

share over the last couple of years, Netflix still maintains a competitive advantage (Netflix, Inc.,
2014).
Sales Method
Netflix enrolls subscribers by directing them to the Netflix website by way of mostly low
cost advertising campaigns. By offering subscribers a free month trial membership of DVDs,
streaming, or both, Netflix allows the consumer the freedom to try the service without a longterm commitment. Netflix utilizes online banner advertising, partnerships, Internet service
providers (ISP), content providers, game systems, and electronics manufacturers to promote their
service (Netflix, Inc., 2014). Netflix also promotes with a broad mix of marketing and public
relations programs, including social media sites such as Facebook and Twitter, to promote our
service to potential new members (Netflix, Inc., 2014, p. 4). The company also makes use of a
referral program to enroll friends and family of existing members as well as increasing their
subscriber base from those who rejoin after canceling their service (Netflix, Inc., 2014). All of
these inexpensive methods for promoting Netflix assist with increasing the subscriber base,
which in turn generates increasing revenues for the company.
Marketing Plan
Netflix has a simple marketing plan consisting of continued investment in international
expansion, developing new partnerships, develop new content, enhance user interface, and
increase customer satisfaction. With Australia and New Zealand opening up in 2015, the Netflix
brand name, revenues, and subscriber base increases (Netflix, 2014). Netflix continues to offer
free month trial membership, maintain low prices, expand its database with newer movies,
television shows, and original content, while adding new features to the Netflix apps and website
(Netflix, Inc., 2014). Increasing and maintain the number of partners that offer the Netflix instant

NETFLIX ANALYSIS

14

streaming content through Internet-connected devices is a key feature of the marketing plan
(Netflix, Inc., 2014).
Environmental Analysis
Performing a SWOT analysis of Netflix allows for the examination of the internal
environment, strengths and weaknesses, and their external environment, opportunities and threats
(Thompson, Peteraf, Gamble, & Strickland lll, 2014).
Internal Analysis
The numerous strengths exhibited by Netflix as reflected in their annual report include:
1. Low price
2. No late fees
3. Low overhead and fixed costs
4. Fast DVD delivery
5. User-friendly website
6. Future movie preferences
7. Positive customer satisfaction survey
8. High market share
9. Strong management
10. Dedicated employees
11. Streaming technology upgrades
12. Loyal customers
(Netflix, Inc., 2014)
Each of these strengths assisted Netflix in becoming the worlds leading Internet television
network, in nearly 50 countries and exceeding 50 million members (Netflix, 2014).
The weaknesses within Netflix include:
1.
2.
3.
4.
5.
6.

Limited access to movie content

Ever-increasing database size
Bandwidth limitations
Increasing DVD costs
No games
Lag time for new content
(Netflix, Inc., 2014)

NETFLIX ANALYSIS

15

The majority of these weaknesses reveal areas that Netflix must monitor and prepare to make
adjustments for to maintain a high level of customer satisfaction and maintain a competitive
advantage (Kotler & Armstrong, 2012).
External Analysis
The opportunities available for Netflix include:
1.
2.
3.
4.
5.
6.

New international market expansion

Original content expansion
Video gaming market
Internet ready televisions
Cable subscription price increases
New mobile devices and apps
(Netflix, Inc., 2014)

These opportunities present Netflix with the ability to gain market share, increase their
competitive advantage, and generate additional revenues (Kotler & Keller, 2012).
The threats that Netflix faces include:
1.
2.
3.
4.
5.
6.

Increased delivery costs

Existing and new competitors
Content price increases
Technology price increases
Online security
Government interference through regulation and interest rate hikes.

Each of these threats presents Netflix with considerable risks that if not monitored could
decrease market share, reduce their competitive advantage, and destabilize their financial
standing (Netflix, Inc., 2014).
Financial Analysis
Analyzing the financial performance of Netflix provides managers, investors, and
consumers with the companys ability to manage their resources (Heintz & Parry, 2011).
Financial statements provide the data required to analyze the finances and profitability of Netflix

NETFLIX ANALYSIS

16

(Heintz & Parry, 2011). The following examines financial issues that affected Netflix, their
financial performance, financial ratios, and a comparison with the competition.
The financial statements required to evaluate the performance of Netflix include the
balance sheet, income statement, statement of cash flows, and a statement of stockholder equity
with retained earnings (Heintz & Parry, 2011). These statements reflect the data reported n the
2013 Annual Report for Netflix and the Security Exchange Commission.
Balance Sheet
By examining the consolidated balance sheet (located in Appendix A), it becomes
apparent that there is a steady increase in cash, cash equivalents and short-term investments, as
well as total assets, and stockholders equity (SEC.gov, 2014), see Table 1.
Table 2: Balance Sheet Figures
Consolidated Balance Sheets:
2013
Cash, cash equivalents and
short-term investments
Total content library, net
Working capital
Total assets
Long-term debt
Long-term debt due to related party
Non-current content liabilities
Total stockholders' equity

$ 1,200,405
3,797,492
904,560
5,412,563
500,000
1,345,590
1,333,561

As of December 31,
2012
2011
(in thousands)

$ 748,078
$
797,811
2,874,170
1,966,643
564,865
605,802
3,967,890
3,069,196
200,000
200,000
200,000
200,000
1,076,622
739,628
744,673
642,810
(SEC.gov, 2014)

Two interesting figures that may need explanation are the 2012 working capital and the
cash, cash equivalents and short-term investments because of the decreases from the previous
year.
Income Statement
By examining the consolidated income statement (located in Appendix B) for Netflix,

NETFLIX ANALYSIS

17

there is a steady Increase in revenues, with a decrease in net income from 2011 to 2012 and an
increase from 2012 to 2013, as revealed in Table 2 (SEC.gov, 2014).
Table 3: Income Statement Figures
Year ended December
31,
2013
(in thousands, except per share
data)
Revenues

$ 4,374,562

Cost of revenues
Operating income
Net income
Earnings per share:

3,083,256
228,347
112,403

Basic

1.93

Diluted

1.85

Weighted-average common shares

outstanding:
Basic
Diluted

58,198
60,761

2012

2011

$
3,609,282
2,625,866
49,992
17,152

$
3,204,577
2,039,901
376,068
226,126

$
0.31
$
0.29

$
4.28
$
4.16

55,521
58,904

52,847
54,369
(SEC.gov, 2014)

For the year 2012, Netflix experienced a drastic drop in two areas, operating income and net
income; this corresponds with the decreases seen in the 2012 balance sheet.
Statement of Cash Flows
For the three years in the consolidated statements of cash flows ending December 31,
2013, there is a steady decrease in free cash flow, a reduction in net cash from 2011 to 2012, and
an increase from 2012 to 2013 (SEC.gov, 2014). Appendix C contains the complete statement of
cash flows. After analyzing the data in Table 3, the year 2012 also has significant decreases
compared to 2011 for each of the activities, operating, investing, and financing (Heintz & Parry,
2011). The most significant decreases appear to be the net cash provided by operating activities
and the net cash provided by financing activities; the drop in cash and cash equivalents at the end

NETFLIX ANALYSIS

18

of the period could also be cause for concern (Heintz & Parry, 2011).
Table 4: Cash Flow Figures
Consolidated Statements of Cash Flows:
Year Ended December 31,
(in thousands)
2013
Net cash provided by (used in) operating
317,712
activities
Net cash used in investing activities
(265,814)
Net cash provided by (used in) financing
261,656
activities
Cash and cash equivalents, end of period
$
508,053

2012

2011

21,586

97,831

(244,740)

(255,968)

5,589

476,264

290,291 $ 604,965
(SEC.gov, 2014)

Statement of Stockholder Equity

Through credits and debits of net income or losses to the retained earnings account,
Netflix reports the accumulated earnings not paid to stockholders of the corporation (Heintz &
Parry, 2011). Appendix D contains the complete Statement of Stockholder Equity. Analyzing
Table 4 reveals four years of steady increases in Shares, amount, capital, and retained earnings,
with a slight drop in income from 2010 to 2011. The drop in income for 2011 and the other
decreases seen from the other financial statements indicate that Netflix experienced an event in
2011 that required a change in strategy.
Table 5: Retained Earnings Figures
Consolidated statements of stockholder' equity
(in thousands, except share data)
Balances as of
Amoun
Incom Retained
December 31
Shares
t
Capital
e
Earnings
52,781,94
2010
9
$53 $51,622
$750 $237,739
55,398,61
$219,11
2011
5
$55
9
$706 $422,930
55,587,16
$301,61
2012
7
$56
6 $2,919 $440,082
59,607,00
$777,44
2013
1
$60
1 $3,575 $552,485
(Netflix, Inc., 2014)

NETFLIX ANALYSIS

19

Stocks. Netflix appears on the NASDAQ as NFLX and as of 4 PM on November 28,

2014, and the stock price reached $346.59. The table below reveals the most recent stock data as
of 4 PM on November 28, 2014, indicating a 52-week high of 489.29 and the 52-week low of
299.5.
Table 6: Stock Price
Last Price
346.59

Change
4.57
(1.301%)
Volume
957,500

Open
353.59

Previous Close
351.16

Day
High
354

52-Week
High
489.29

Day
52-Week
Low
Low
345.99
299.5
(Netflix, Inc., 2014)

According to the SEC financial data for Netflix, displayed in Table 6, the stocks showed a
steady quarterly decline in stock price for 2012 but a steady quarterly increase for 2013
(SEC.gov, 2014). The fall in stock prices indicate that Netflix experienced issues affecting them
financially.

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Table 7: Stock Activity

2013
2012
High
Low
High
$ 197.62
$ 90.69
$ 133.43
248.85
159.00
114.80
320.39
212.00
86.85
389.16
282.80
7.80
(SEC.gov, 2014)

Low
$ 70.13
60.70
52.81
54.34

Financial Ratios
Financial ratios assist with analyzing the financial health of Netflix, as compared to
other similar companies (NASDAQ.com, 2014). Appendix E contains a full list of financial
ratios comparing Netflix with Amazon.com and the cable television industry covering financial
strength, profitability ratios, management effectiveness, and efficiency. Table 7 clearly shows

NETFLIX ANALYSIS

20

that Netflix leading Amazon and the cable industry in each of the six categories including current
ratio, quick ratio, gross margin, net profit margin, return on investment, and pre-tax margin
(DailyFinance.com, 2014). The impressive figure for Netflix is the gross margin of 82.1%, which
is 48.4 points ahead of Amazon, and 25.1 points greater the cable industry (DailyFinance.com,
2014).
Table 8: Competitive Ratios
Netflix Amazon Industry
Current Ratio
1.5
0.9
1
Quick Ratio
0.7
0.5
0.8
Gross Margin
82.1
33.7
57
Net Profit Margin
4.5
-0.3
6.58
Return on
Investment
8.8
-1.6
4.7
Pre-Tax Margin
7.3
-0.1
10.8
(DailyFinance.com, 2014)
Netflix Financial Issues
After a thorough analysis of the Netflix financial data, it is clear that something occurred
in 2011 to reduce several key financial indicators in 2012. The consolidated balance sheets
revealed a drop between 2011 and 2012 in cash, cash equivalents, and short-term investments, as
well as in working capital (Netflix, Inc., 2014). The income statement showed major declines in
operating income, earnings per share, and net income for 2012 (Netflix, Inc., 2014). Decreases
reflected in the consolidated statements of cash flows include net cash provided by or used in
operating activities, financing activities, and investing activities (Netflix, Inc., 2014). An analysis
of the company stock also showed a decline in the price of Netflix stock for all four quarters of
2012 (SEC.gov, 2014).
The Problem in 2011
The big mistake made by Netflix in 2011 was an attempt to split off the DVD rental

NETFLIX ANALYSIS

21

operations into a new company and website called Qwikster (BrandChannel.com, 2011). The
company also announced price increases that created a reduction in the Netflix customer base
and caused stock prices to fall (BrandChannel.com, 2011). Clearly, this misstep in 2011 caused
Netflix to rethink their strategy, and the 2012 financial reports revealed just how big a mistake
the company made.
Operations Management
Netflix maintains a competitive advantage because of the emphasis placed on quality
improvement, and satisfying the customers needs (Pride, Hughes, & Kapoor, 2010). Operations
managers understand the importance of following a code of ethics, motivating employees,
improving productivity, and staying current with technological advancements (Pride et al., 2010).
The following examines social responsibility and ethical issues facing Netflix, as well as any
human resource and technology needs.
Social Responsibility
Netflix is a global organization that maintains a competitive advantage by meeting the
needs of their customers and improving the quality of the products and services they provide
(Pride et al., 2010). Netflix also understands the importance of motivating their employees by
providing them with a code of ethics, being socially responsible, and creating a positive cultural
environment. Social responsibility involves moral reasoning and ethical principles, which govern
fairness, justice, equality, duty, obligation, responsibility, and various kinds of rights (Winston
& Edelbach, 2012, p. 17). Netflix believes part of being socially responsible is in providing
wholesome family programming and developing parental controls (Netflix, Inc., 2014).
Code of Ethics
The definition of a code of ethics is, a guide to acceptable and ethical behavior as

NETFLIX ANALYSIS

22

defined by the organization (Pride et al., 2010, p. 40). The Board of Directors of Netflix adopted
a code of ethics with the purpose to prevent wrongdoing and promoting conduct that is honest
and ethical (Netflix, 2014). The code describes this honest and ethical conduct as:
1. The expectation is that Netflix employees act and perform their duties ethically and
honestly and with the utmost integrity.
2. Honest conduct is conduct that is free from fraud or deception.
3. Ethical conduct is conduct conforming to accepted professional standards of conduct.
4. Ethical conduct includes the ethical handling of actual or apparent conflicts of interest
between personal and professional relationships as discussed in below.
(Netflix, 2014, p. 1)
Included in the Netflix Code of Ethics, are definitions of compliance, disclosure, and
conflicts of interest, waivers and amendments of the code, accountability, and internal
reporting (Netflix, 2014). The entire code of ethics is n Appendix F.
Ethical Issues
Even though Netflix has a written code of ethics, the organization faces challenges that
test their concepts of social responsibility and moral reasoning. Ethics studies right and wrong
and the morality of the decisions made by individuals, while business ethics relate to applying
moral standards to business decisions; Recent court cases involving unethical behavior have
helped to make business ethics a matter of public concern (Pride et al., 2010, p. 35). Two issues
facing the decisions Netflix makes are privacy laws and consumer trust.
Privacy Laws. In 2011, Netflix needed to challenge the Video Privacy Protection Act
because they were slapped with a massive class-action lawsuit over their retaining records of
people's viewing habits even after accounts have been closed and deleted (Christophor, 2011, p.
1). Netflix decided to challenge the fines levied upon them of $2,500 per violation, which they
claimed stripped them of due process for record retention (Christophor, 2011). The moral and

NETFLIX ANALYSIS

23

legal question here is the consumers rights violated by Netflix by storing the data produced
when a consumer used their services.
Consumer Trust. Because Netflix rarely has face-to-face interaction with consumers,
building trust becomes a unique challenge (Busch, 2012). Netflix depends on its employees to
understand the strategy, marketplace, suppliers, and most importantly, the subscribers (Busch,
2012). Creating a healthy relationship with their customers requires Netflix to have a healthy
internal culture (Busch, 2012). The decision by Netflix to invest in their internal culture is onereason Netflix customers trust the organization (Busch, 2012).
Human Resource Needs
The unique human resource policies of Netflix are the result of Reed Hastings unique
vision, which motivated performance and shaped the internal corporate culture of the
organization (McCord, 2014). According to Hernandez and OConnor (2009), corporate culture
is the characteristic day-to-day internal environment that is experienced and shared by those
working within the organization (p. 10). Each of the seven aspects of the Netflix corporate
culture as outlined by Reed Hastings helped to redefine the human resource policies of Netflix
(Blodget, 2011). The informal custom and rules of Netflixs human resource policies create
quality relationships, enhances performance, and creates a high level of customer satisfaction
(Hernandez & OConnor, 2009).
Cultural Training
Because of the uniqueness of the Netflix cultural policies, the organization requires
leaders who possess the ability to train employees in this unconventional way of treating
employees (McCord, 2014). Netflix shaped their approach to hiring talent with five tenets:
1. Crafting a Culture of Excellence
2. Hire, Reward, and Tolerate Only Fully Formed Adults

NETFLIX ANALYSIS

24

3. Tell the Truth About Performance

4. Managers Own the Job of Creating Great Teams
5. Leaders Own the Job of Creating the Company Culture
(McCord, 2014)
Netflix believes that good talent managers must think like business people and innovators first,
and like hr people last (McCord, 2014, p. 10).
Unique Policies
Netflix eliminated the practice of annual performance reviews and no expense policy
except that they expect employees to act in Netflixs best interest (McCord, 2014, p. 6). Netflix
also allows salaried employees to choose how their compensation package is structured, enabling
them to decide the percentage of stock and salary (Busch, 2012). The vacation policy of Netflix
simply states, Take as much as youd like, just make sure your work is done (Busch, 2012, p.
2). Netflix does provide some guidance, but believes that most human resource policies waste
time and resources by focusing on the three percent of employees that cause problems, ignoring
the 97% of employees who do the right thing (McCord, 2014).
Technology Needs
Because Netflix uses the Internet for the majority of their business operations, it is
essential for an organization to stay up to date with technological advances. As previously
mentioned, Netflix must also understand all of the laws and regulations surrounding the Internet
and consumer rights as they pertain to privacy (Winston & Edelbach, 2012). As a leader in the
Internet television industry, Netflix understands that new ethical issues appear that need
consideration when making decisions, such as globalization, economics, consumer protection,
technology and personal identity, censorship, privacy, and surveillance (Winston & Edelbach,
2012).

NETFLIX ANALYSIS

25

Competitive Technology
As the Internet continues to evolve, the competitors of Netflix increase their ability to
threaten Netflixs competitive advantage (Netflix, Inc., 2014). Netflix must continually work on
improving the user friendliness of their mobile apps and other software because Existing linear
networks that offer compelling apps will get more viewing and be more valuable (Netflix, Inc.,
2014, p. 1). Multi-channel video program distributors (MVPD) such as Xfinity, Sky Go, and
Horizon stream videos and work to improve their apps and Those that fail to develop first-class
apps will lose viewing and revenue (Netflix, Inc., 2014, p. 1). Netflix must increase their
bandwidth and continue to improve their cloud technology because of Ultra HD 4k video, Smart
TVs, and the increase of streaming videos to tablets and smartphones (Netflix, Inc., 2014).
Recommendations
Based on this analysis, it is the recommendation for the investors that Netflix is an
excellent investment. The advice to invest is a result of the companys ability to attract new
subscribers, manage their finances, expanding internationally, and ability to recover from their
wrong decision in 2011 (Netflix, Inc., 2014). The investor needs to monitor the pricing strategy
and look out for the company to attempt to raise their streaming prices; this would be a good
time to sell the shares. Should Netflix decide to lower their streaming prices, it is the
recommendation to purchase additional shares. The company has an active position for further
growth, and provided they maintain their efforts to collaborate with cable companies, television
networks, and electronic manufacturers, the investment risks are minimal (Netflix, Inc., 2014).
Because of the stock performance in 2013 and recent stock activity, Netflix proved they have the
potential to be a great long-term investment (Netflix, Inc., 2014).
Conclusion

NETFLIX ANALYSIS

26

As a final note regarding the analysis of Netflixs operations management, organizational

structure, strategy, marketing environment, and financial performance, the analysis reveals how
the company rebounded after their mistake in 2011. The vision and leadership of Netflix created
a positive, ethical, and exceptional organizational culture, which explains why the company
remains a leader in the Internet television industry. Netflix is a good investment because of their
low streaming and DVD prices, which continues to attract new subscribers. Netflix continues to
grow because of their professional financial management skills and their efforts for global
expansion. Netflix learned from their mistakes and their professional team ensures their
continued success.
References
Blodget, H. (2011, April 04). NETFLIX MANAGEMENT SECRETS: CEO Reed Hasting's
Presentation On A Culture Of Freedom And Responsibility - Business Insider:. Retrieved
October 15, 2014, from businessinsider.com: http://www.businessinsider.com/netflixmanagement-presentation-2011?op=1
Bosker, B. (2011, October 10). Qwikster Is Dead: Netflix Kills DVD-Only Service Weeks After
Unveiling It. Retrieved November 12, 2014, from huffingtonpost.com:
http://www.huffingtonpost.com/2011/10/10/qwikster-dead-netflix-kills_n_1003098.html
BrandChannel.com. (2011, October 14). Netflix Quashes Qwikster and Gets On With It.
Retrieved November 28, 2014, from brandchannel.com:
http://www.brandchannel.com/home/post/2011/10/14/Netflix-Quashes-Qwikster-andGets-On-With-It.aspx
Busch, K. (2012, February 06). Trust Begins at HomeNetflixs Approach to Building Customer
Relationships. Retrieved December 04, 2014, from corporate-ethics.org:

NETFLIX ANALYSIS

27

http://www.corporate-ethics.org/trust-begins-at-home-netflixs-approach-to-buildingcustomer-relationships-2/
Businessweek. (2014). Netflix, Inc.: Private Company Information. Retrieved November 13,
2014, from investing.businessweek.com:
http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=32012
Christophor, R. (2011, October 21). Netflix To Attack Privacy Law As Unconstitutional, Raises
Further Privacy Issues. Retrieved December 04, 2014, from reelseo.com:
http://www.reelseo.com/netflix-privacy-law/
DailyFinance.com. (2014). Netflix Financial Ratios NFLX. Retrieved November 28, 2014, from
dailyfinance.com: http://www.dailyfinance.com/quote/nasdaq/netflix/nflx/financial-ratios
Farfan, B. (2014). Netflix Mission Statement - Mission, Values, Global Vision, Founders Facts,
and Trivia About Netflix Movie Rental Website. Retrieved November 10, 2014, from
retailindustry.about.com:
http://retailindustry.about.com/od/retailbestpractices/ig/Company-MissionStatements/Netflix-Movies-Mission-Statement.htm
Harris, E. K. (2010). Customer Service: A Practical Approach for Herzing College [VitalSource
Bookshelf version] (5th ed.). Upper Saddle River, New Jersey: Pearson Learning
Solutions.
Heintz, J. A., & Parry, R. W. (2011). College Accounting, Chapters 1-27, [VitalSource Bookshelf
version] (20th ed.). Mason, OH: South-Western Educational Publishing.
Hernandez, S. R., & OConnor, S. J. (2009). Strategic Human Resources Management in Health
Services Organizations, [VitalSource Bookshelf version] (3rd ed.). Clifton Park, NY:
Delmar Thomson Learning.

NETFLIX ANALYSIS

28

Kotler, P., & Armstrong, G. (2012). Principles of Marketing 14th Edition. New Jersey: Prentice
Hall.
Kotler, P., & Keller, K. L. (2012). Marketing Management [VitalSource Bookshelf version] (14th
ed.). Upper Saddle River: Prentice Hall.
McCord, P. (2014, January). How Netflix Reinvented HR. Retrieved December 04, 2014, from
hbr.org: https://hbr.org/2014/01/how-netflix-reinvented-hr
NASDAQ.com. (2014). Company Financials - Income Statement, Balance Sheet, Cash Flow NASDAQ.com. Retrieved November 28, 2014, from nasdaq.com:
http://www.nasdaq.com/quotes/company-financials.aspx
Netflix. (2014). Code of Ethics. Retrieved December 01, 2014, from ir.netflix.com:
http://ir.netflix.com/documentdisplay.cfm?DocumentID=73
Netflix. (2014). Company Overview. Retrieved August 21, 2014, from pr.netflix.com:
https://pr.netflix.com/WebClient/loginPageSalesNetWorksAction.do?
contentGroupId=10476&contentGroup=Company+Facts
Netflix. (2014). Netflix - Watch TV Shows Online, Watch Movies Online. Retrieved November
21, 2014, from netflix.com: https://www.netflix.com/confirm
Netflix. (2014). Netflix Management Team. Retrieved November 13, 2014, from pr.netflix.com:
https://pr.netflix.com/WebClient/loginPageSalesNetWorksAction.do?
contentGroupId=10478&contentGroup=Management+Team
Netflix. (2014). Netflix Media Center. Retrieved November 21, 2014, from netflix.com:
http://www.netflix.com/MediaCenter
Netflix, Inc. (2014). Investor Relations Overview. Retrieved November 12, 2014, from
ir.netflix.com: http://ir.netflix.com/index.cfm

NETFLIX ANALYSIS

29

Netflix, Inc. (2014, November 28). Netflix : Stock Quote & Chart. Retrieved November 28,
2014, from ir.netflix.com: http://ir.netflix.com/stockquote.cfm
Netflix, Inc. (2014). Netflix Long Term View. Retrieved November 12, 2014, from ir.netflix.com:
http://ir.netflix.com/long-term-view.cfm
Netflix, Inc. (2014). Netflix, Inc. - Annual Report. Retrieved November 12, 2014, from
ir.netflix.com: http://ir.netflix.com/secfiling.cfm?filingID=1065280-14-6&CIK=1065280
Pride, W. M., Hughes, R. J., & Kapoor, J. R. (2010). Foundations of Business [VitalSource
Bookshelf version] (2nd ed.). Mason, OH: South-Western, a part of Cengage Learning.
SEC.gov. (2014). View Filing Data. Retrieved November 26, 2014, from sec.gov:
http://www.sec.gov/cgi-bin/viewer?
action=view&cik=1065280&accession_number=0001065280-14-000006&xbrl_type=v#
Thompson, A. A., Peteraf, M. A., Gamble, J. E., & Strickland lll, A. J. (2014). Crafting &
Executing Strategy, The Quest for Competitive Advantage [VitalSource Bookshelf
version] (19th ed.). New York, NY: McGraw-Hill Irwin.
Ware, N. (2014). On-demand culture: Digital delivery and the future of movies. The Journal of
American Culture, 37(2), 238-239. Retrieved from
http://search.proquest.com/docview/1560769223?accountid=159007
Winston, M. E., & Edelbach, R. D. (2012). Society, Ethics, and Technology [VitalSource
Bookshelf version] (Updated 4th ed.). Wadsworth Publishing.

NETFLIX ANALYSIS

30

Appendix A: Balance Sheet

NETFLIX ANALYSIS

31

(Netflix, Inc., 2014, p. 46)

Appendix B: Income Statement

NETFLIX ANALYSIS

32

(Netflix, Inc., 2014, p. 43)

Appendix C: Statement of Cash Flows

NETFLIX ANALYSIS

33

(Netflix, Inc., 2014, p. 45)

Appendix D: Statement of Stockholder Equity

NETFLIX ANALYSIS

34

(Netflix, Inc., 2014, p. 47)

Appendix E: Financial Ratios

NETFLIX ANALYSIS

35

(DailyFinance.com, 2014)
Appendix F: Netflix Code of Ethics

NETFLIX ANALYSIS

36
Netflix Code of Ethics

The Board of Directors of Netflix, Inc. (the "Company") has adopted this Code of Ethics (this
"Code") for its directors, officers and other employees (individually, "Netflix Party" and
collectively, "Netflix Parties"). As used herein, the principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing similar functions are
sometimes also referred to as the "Senior Financial Officers".
This Code has been reasonably designed to deter wrongdoing and to promote:

l Honest and ethical conduct, including the ethical handling of actual or apparent conflicts
of interest between personal and professional relationships;

Full, fair, accurate, timely, and understandable disclosure in reports and documents that a
registrant files with, or submits to, the Securities and Exchange Commission and in other
public communications made by the Company;

Compliance with applicable governmental laws, rules and regulations;

The prompt internal reporting to an appropriate person or persons identified in this Code
of violations of this Code; and

Accountability for adherence to this Code.

I. Honest and Ethical Conduct

Netflix Parties are expected to act and perform their duties ethically and honestly and with the
utmost integrity. Honest conduct is considered to be conduct that is free from fraud or deception.
Ethical conduct is considered to be conduct conforming to accepted professional standards of
conduct. Ethical conduct includes the ethical handling of actual or apparent conflicts of interest
between personal and professional relationships as discussed in below.
II. Conflicts of Interest

NETFLIX ANALYSIS

37

A conflict of interest exists where the interests or benefits of one person or entity conflict or
appear to conflict with the interests or benefits of the Company. While it is not possible to
describe every situation in which a conflict of interest may arise, Netflix Parties must never use
or attempt to use their position with the Company to obtain improper personal benefits. Any
Netflix Party who is aware of a conflict of interest, or is concerned that a conflict might develop,
is required to discuss the matter with a higher level of management or the General Counsel
promptly. Senior Financial Officers may, in addition to speaking with the General Counsel, also
discuss the matter with the Audit Committee.
III. Disclosure
Senior Financial Officers are responsible for ensuring that the disclosure in the Company's
periodic reports is full, fair, accurate, timely and understandable. In doing so, Senior Financial
Officers shall take such action as is reasonably appropriate to (i) establish and comply with
disclosure controls and procedures and accounting and financial controls that are designed to
ensure that material information relating to the Company is made known to them; (ii) confirm
that the Company's periodic reports comply with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and (iii) ensure that information contained in the
Company's periodic reports fairly presents in all material respects the financial condition and
results of operations of the Company. Senior Financial Officers will not knowingly (i) make, or
permit or direct another to make, materially false or misleading entries in the Company's, or any
of its subsidiary's, financial statements or records; (ii) fail to correct materially false and
misleading financial statements or records; (iii) sign, or permit another to sign, a document
containing materially false and misleading information; or (iv) falsely respond, or fail to respond,
to specific inquiries of the Company's independent auditor or outside legal counsel.

NETFLIX ANALYSIS

38
IV. Compliance

It is the Company's policy to comply with all applicable laws, rules and regulations. It is the
personal responsibility of each Netflix Party to adhere to the standards and restrictions imposed
by those laws, rules and regulations, and in particular, those relating to accounting and auditing
matters. Any Netflix Party who is unsure whether a situation violates any applicable law, rule,
regulation or Company policy should discuss the situation with the General Counsel.
V. Internal Reporting
Netflix Parties shall take all appropriate action to stop any known misconduct by fellow Netflix
Parties that violate this Code. To this end, Netflix Parties shall report any known or suspected
misconduct to the General Counsel or, in the case of misconduct by a Senior Financial Officer,
also to the Chair of the Company's Audit Committee. In addition, Netflix Parties are encouraged
to use the Company's confidential internal reporting system to report breaches of this Code.
Information concerning the Company's confidential internal reporting system can be located on
the Company's Intranet. The Company will not retaliate or allow retaliation for reports made in
good faith.
VI. Accountability
Any violation of this Code may result in disciplinary action, including termination, and if
warranted, legal proceedings. This Code is a statement of certain fundamental principles, policies
and procedures that govern the Netflix Parties in the conduct of the Company's business. It is not
intended to and does not create any rights in any employee, customer, supplier, competitor,
shareholder or any other person or entity. The General Counsel and/or the Audit Committee will
investigate violations and appropriate action will be taken in the event of any violation of this
Code.

NETFLIX ANALYSIS

39
VII. Waivers and Amendments of the Code

The Company is committed to continuously reviewing and updating our policies and procedures.
Therefore, this Code is subject to modification. Any amendment or waiver of any provision of
this Code must be approved in writing by the Company's Board of Directors and promptly
disclosed pursuant to applicable laws and regulations. Any waiver or modification of the Code
by a Senior Financial Officer will be promptly disclosed to stockholders if and as required by
law or the rules of the stock exchange or over the counter trading system on which Netflix's
stock is traded or quoted.
(Netflix, 2014, pp. 1-2)