On-line DVD Rental NETFLIX

Laurie Bouchard Kikuyu Daniels Stephen MacNeil John McDonnell Christine Palkoski

DVD Rental Overview

Primary after theater consumer distribution methods:
DVD rental and purchase On-line content service (pay-per view, streaming)

Growth of DVD rental/purchase in 1990s

Large movie studios recording in digital format DVD players more affordable

Enter Netflix, DVD rental strong in U.S.

Netflix Profile
Founded in 1997 by Marc Randolph and current CEO Reed Hastings
Originally offered DVDs on a fee per use basis Introduced monthly subscription service in 1999 9.4 million subscribers as of Q4 2008 2009 forecast of 10.6 to 11.3 million subscribers

Netflix Competitive Advantage

First-mover advantage in on-line rental Patented method of web-based DVD selection Customer-centric, monthly subscription-based service
It probably looks easy to imitate Netflix, but its quite difficult to get all the details right that matter to a consumer. Weve put four years effort into building our service. Reed Hastings, co-founder in 2001

Netflix Services
Service Plan Options:
Unlimited Plans
$8.99 1 DVD at a time $13.99 2 DVDs at a time $16.99 3 DVDs at a time Less popular plans of 4-8 DVDs at a time available *Unlimited online viewing on all unlimited plans

1 Limited Plan
$4.99 1 DVD at a time (2 per month) * 2 hours of online viewing

Subscriber Growth
(000s)

10,000 8,000
6,316 7,479

9,400

6,000
4,179

4,000
2,610

2,000 0
107 292 456 857

1,487

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

Service Features
No Due Dates
No Late Fees

No Cancellation Fees
Free DVD Shipping Both Ways Blu-ray Substitution, for a Fee

Customer Loyalty
Consistently maintain 84% - 86% of existing customers quarter over quarter. Voted #1 online retailer 8 consecutive periods by Foresee/FGI Research Achieved Through:
Ease of Use Fast Delivery (97% in one day) Size of Selection (Over 100,000 DVD titles)

Competition
Movie Rental Stores
Blockbuster, Hollywood Video, Movie Gallery

Movie Rental Kiosks

Red Box

Downloadable Movies
Apple, YouTube, Hulu On Demand

Movie Theaters
AMC, Showcase

Main Competition
Netflix Annual Sales ($M) Employees Gross Profit Marin Net Profit Margin Return on Invest. Cap. 12 mo. Revenue Growth 12 mo. Net Income Growth 1,364.7 1,644 33.30% 6.10% 19.8% 13.2% Blockbuster 5,542.4 59,643 51.90% 0.50% 1.8% 0.6% Redbox 22.4 750 36.00% -11.50% 2.9% 8.7% Industry Median

24.0%

0.0%

15.2%

Source: 2008 Data from Hoovers, SEC

Financial Position
Twelve Months Ended December 31, 2006 Revenues Cost of revenues: Subscription Fulfillment expense* Total cost of revenues Gross profit Operating expenses: Technology and development* Marketing* General and administrative* Gain on disposal of DVDs Gain on legal settlement Total operating expenses Operating (loss) income Other income (expense): Interest expense on lease financing obligations Interest and other income (expense) (Loss) income before income taxes Provision (benefit) for income taxes Net income Net Income Margin $ 996,660 532,621 94,364 626,985 369,675 47,831 225,436 35,987 (4,797) 304,457 65,218 (1,210) 15,904 79,912 31,073 48,839 4.9% Twelve Months Ended December 31, 2007 $ 1,205,340 664,407 121,761 786,168 419,172 70,979 218,212 52,404 (7,196) (7,000) 327,399 91,773 (1,188) 20,340 110,925 44,317 66,608 5.5% Twelve Months Ended December 31, 2008 $ 1,364,661 761,133 149,101 910,234 454,427 89,873 199,713 49,662 (6,327) 332,921 121,506 (2,458) 12,452 131,500 48,474 83,026 6.1%

Financial Highlights
Predictable Revenue Streams
Not dependent on rental fees or late fees

Low Overhead Costs Contribute to Profits

No store rent, utilities, salaries

Strong Growth
Market entry timing, planned barrier to entry for competition, customer centric

Video Streaming

Video Streaming

Video Streaming
Opportunities for Netflix Lowers shipping costs
More can be spent on content while achieving same profit margins

No more planning ahead to watch a movie

May attract a new segment of movie watchers

Partnerships for streaming

LG & Samsung Blu-ray players Xbox360 Roku digital video players Tivo HD boxes

Video Streaming

Video Streaming
Threats for Netflix
Exclusivity agreements with content providers may effect availability of movies for streaming
More competition from big name companies (Apple, Microsoft, Amazon) and global competition from companies operating locally overseas Limits on Bandwidth usage from internet providers

Price adjustments to cover new expenses

Exclusivity Issues

Source: Netflix 2008 Investor Day Presentation

SWOT
STRENGTHS First Mover Advantage WEAKNESSES

Strong Brand Recognition High Customer Satisfaction Large Movie Selection Low Overhead Costs Predictable Monthly Revenue Streams Affordable Pricing
OPPORTUNITIES Product Line Expansion Video Games

Monthly Fee Discourages Membership From Less Frequent Movie Watchers Lack of Control Over DVD Return Time Comparatively Small Movie Library Available to Stream DVDs Can Arrive Scratched or Broken Due to Mailing Process
THREATS Staying power of DVDs Contractual restrictions on streaming content

Expand Downloadable Movie Offerings Print 3rd Party Advertisements of Red Envelopes Expand on Partnerships With Content Providers and Technology Providers.

Bigger competition in the streaming video market DVD competition from Red Box, and Blockbuster

References
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