Agenda

History Background Corporate Management Business Environment Strategic Analysis External Context Strategic Analysis Internal Context Recommendations Q&A

History
1997: 1998:
Netflix.com, Inc was established and incorporated in Delaware and is headquartered in Los Gatos, California by founder Reed Hastings

Netflix website launched with an online version of a more traditional pay-per-rental model 1999: Netflix introduced the monthly subscription concept 2000: Dropped the single-rental model and introduced flat-fee unlimited rentals without due dates, late fees, shipping or handling fees, or per-title rental fees 2002: Company Went Public In May, 2002 2006: Subscribers increased to 5.6 million at the end of the third quarter 2008: Introduced Internet video streaming and announced a partnership with Starz Entertainment. Blu-ray Discs support 2010: Introduced video streaming in Canada 2011: Partnership with CBS

Background - How Netflix Works

Instantly watch online on your PC or Mac. Instantly watch right on your TV via devices streaming from Netflix. Choose from a growing library of movies & TV episodes

Background - Features
Queue

Instant Queue

Suggestions

Browse

Background - Facts
Ratings Movie choosing Recommendations Customer Satisfaction

Background Services offered

Company Started As An Internet Subscriber Renter Of DVD Movies Patented Business Model Where Customers Rented DVD Movies Online and Received Them In The Mail1 Company Started Out Doing Business Only In The USA And Canada With The Intent Of Expanding Globally Note Late or Cancellation Fee1 Free DVD shipping both ways1 Blue-ray subscription, for a min fee Flat-fee service with various plans1 Sells gift subscriptions Instant Viewing Sells used DVDs to its subscribers

Background - Pricing model

Unlimited Plan
Streaming Unlimited Plan

Limited Plan

Corporate Management
C- Level Strategic Leadership Corporate Governance Company Vision Opportunities & Threats Risks and Vulnerability Value Creation

C- Level Strategic Leadership

Reed Hastings Founder, CEO, President And Chairman Of The Board Since 1997 Neil Hunt Chief Product Officer Since 1999
Leads Website Development Team

Leslie Kilgore Chief Marketing Officer Since 2000 Andrew Rendich Chief Service And Operations Officer Since 2000 David Wells Chief Financial Officer Since 2010 David Hyman General Council Since 2002 Ted Sarander Chief Content Officer Since 2000
Oversees Companys Content Acquisition Through Relationships With Studios, Networks, Film Makers And Producers

Patty McCord Chief Talent Officer Since 1998

Board Of Directors
Chair/Head Of The Board
Reed Hastings

Audit Committee (All Independent directors)

Charles H Giancarlo (Member Of Board) Timothy Haley (Member Of Board) Ann Mather (Chair Of Audit Committee)

Compensation Committee (All Independent directors)

A. George Battle (Independent Director) Timothy Haley (Chair Of Compensation Committee) Jay Hoag (Member Of Board)

Nomination And Governance Committee (All Independent)

Richard Barton (Member Of Board) Jay Hoag (Chair Of Committee)

Vision Statement
As Stated By CEO Reed Hastings:
Our Vision Is To Change The Way People Access And View The Movies They Love

Board Of Directors & Senior Managers Create Company Vision And High Level Strategies

Corporate Governance

Senior Level/Business Unit Managers Create Detailed Business Strategies To Fulfill Vision BU Managers Verifies That Strategies Are Implemented To Carry Out Vision
Gives

Regular Implementation Feedback To The Board

Share Holders Can Communicate Directly With Board Of Directors Via Email Link On Companys Website2
General

Council Monitors Emails Before Sending Them To Board Members

Board Issues Code Of Ethics & Insider Trading Rules That All Employees Must Follow2
Helps

To Shape The Culture Of The Company

Pay High Performing Employees At The Top Of Market. Get Rid Of Marginal Performers.
Also

Helps To Shape The Culture Of The Company

Company Promotes Culture Of Freedom And Responsibility3

Stresses

9 Behaviors And Skills That They Want Employees To Adapt

Judgment, Communication, Impactful Actions, Curiosity, Innovation, Courage, Passion, Honesty and Selflessness

Netflix Strategic Plan/Goals

Maintain

The leadership Role As the Market Leader Of Digitally Down loadable Movies4
Continue to Improve The Skill set Of R&D Group With Expertise In

Video Compression And High Volume File Transfer

Achieve

Exponential Growth In Both Subscribers And

Revenue4
Strive For Growth in the US And Globally Achieve

Continuous Improvement Of Customer Experience By Also Achieving Growth In the Number Of Netflix Enabled Devices Such As: Wii, Xbox 360 And Play-Station, TV(s) And Phillip Blue-ray Player5

Opportunities

Netflix Sees One Of Its Biggest Future Business Opportunity In Personal Accounts For Handheld Electronic Devices6
Company

Started With A Business Model Of Targeting House Holds With Computers, DVD Players And TV Sets As Their Main Market

Now

Company Wants To Shift Its Model From Targeting Households To Targeting Individuals With Smart Phones, Tablets And Laptops Also Working Hard To Incorporate Netflix On Facebook Which Fits With Their Goal Of Gaining Personal Accounts.

Company

This

Shift In Business Model Aligns With The Companys Current Technology Shift From DVD Rentals To Streaming Video Over The Internet, Which Is A More Personal Technology

Company

Expects The Shift From Households To Individual Accounts To Take A Few Years

Streaming Movies For Television Networks

Feb

2011, Signed 2yr Deal With CBS To Stream Old & New CBS Movies7

Risks/Challenges
Possibility That Shift In Business Model From Targeting Household Accounts To Targeting Individual Accounts May Not Generate Enough Customers

International Expansion Plans May Not Be As Successful As Planned9 Threat Of Main Competitor Of Streaming Video (Hulu Plus) Gaining Market Share By Changing Its Business Model8 Possibility That Talks Of HBO And Amazon Partnering To Start Doing Streaming Of HBO Movies Over The Internet Could Become A Reality Threat Of Piracy On Websites Could Affect Companys Revenue Better Offerings From MVPDs (HBO, Showtime, DTV) Could Make Netflix Less Desirable8 Threat Of Content Cost To Netflix Rising Quickly And Slowing The Companys Growth9 If Internet Service Providers Do Not Maintain The Internet, Company Will Lose Customers

Value Creation
User

Friendly Internet Website Allow Customers To Easily Find Movies They Want To Watch
CineMatch

Technology Also Give Customers Movie Recommendations

Streaming Video Gives Customers Instant Gratification Of Watching Movies Without The Delay Of Waiting For It In Mail Customers Can Keep DVD Movies As Long as They Want Without Paying Late Fees Or Shipping Charges Customer Service Center That Operates 7 Days A Week Strategically Placed Distribution Centers For Providing The Best Supply Of DVDs To Customers

Business Environment
Market Spaces Social dimension Economic dimension Technological dimension Political dimension Ethical dimension

Business Environment Market Spaces

Netflix

Competes In The DVD Movie Rental Market Space Of The Overall Movie Entertainment Industry
Company

Stands Out By Using Internet Technology To Spark Service Innovation For Customers

Netflix Initially Created A Unique Business Advantage Over Competitors By Using Internet Technology To Allow Customers To Rent DVD Movies Online By Subscription Memberships
Customers Receive Rented DVDs By Mail (Dont Have To Leave Home) Competitors Such As Blockbuster & Wal-mart Originally Relied On Their Outlet Stores To Rent DVD Movies But Have Recently Started An Online Subscription Service

Company Has Also Created A Business Advantage In Market For Movie Rental By Streaming Movies Over The Internet To Not Just Computers But Also Other Internet Ready Electronic Devices
Competition Such As Amazon Or Oovoo Stream Movies To Computers Only Competition Charges Per Movie. No Low Cost Subscription Plan

Company Has Mainly Been Serving Customers In The USA And Canada
Slowly Penetrating Market in UK

Business Environment Social Dimension

Netflixs Customer Base Is Composed Of Younger Middle Class Individuals Who Have Computers And DVD Players And Can Afford To Pay For Internet Access Company Is Now Trying To Expand Its Customer Base With Even Younger Individuals Who Own Mobile Internet Ready Devices Such As Smart Phones, Tablet Computers And Laptops Company Has Mainly Been Catering To Customers In The US And Canada Who Have Similar Cultures And Spending Habits

Business Environment Economic Dimension

Netflix Caters To Younger Middle Class To Upper Income Earners

Internet

Cost Forms Barrier To Lower Income Earners Most People Today Have Smart Internet Ready Phones

It Is Highly Recommended That Netflix Come Up With A Brilliant Way Of Subsidizing The Cost Paying For Internet Access
An Investment Would Grow Their Customer Base Rapidly This Is An Investment That Would pay For Itself Many Times Over
Such

Netflix Has A Business/Market leadership Edge On Its Competitors But It Has Competitors With Deep Pockets Like Amazon, Who Will Be Trying To Catch Up

Many Studies Have Shown That Hard Economic Times Do Not Affect The Movie Rental Portion Of The Entertainment Industry10
Still Want to Be Entertained At A Fair Price Families May Decide Not To take An Expensive Vacation Or Go To An Expensive Ball Game But They Will Still Rent Movies Or Go To A Movie Theater
Families

Business Environment Technological Dimension

To Remain A Sustainable Entity It Is Highly Recommended That Netflix Starts Working On Other Technologies That Can Replace Or Improve Their Streaming Video Technology
Just

In Case Another Technology Comes Along That Causes Them To Lose Their Edge Other Online Streaming Video Companies Like Hulu Plus Or Amazon May Decide To Start Offering A Monthly Low Cost Subscription Plan

Business Environment Political Dimension

From A Political Standpoint Netflix Does Not Have Any Serious Issues Operating In The US And Canada
These

Are Political Landscapes That The Company Is Familiar With And Understand Being Neighboring Countries

The Real Challenges Will Come When Netflix Starts Expanding More Internationally In Countries With Political Systems And Cultures They Do Not Understand It Would Be Wise For Netflix To Do Their Home Work On The Political And Cultural Tendencies Of Each International Nation They Plan To Do Business In, Before Starting A Business There

Business Environment Ethical Dimension

Netflix Faces A Major Ethical Issue of Piracy On Websites

The

Computer Hackers Who Steal Movies And Sell Them

There Are Some Local Internet Service Providers (ISP) Of Customers Who Charge Netflix Extra For Delivering Movie Content To Customers, Even Though Customers Already Pay Them Monthly For Content Delivery11
Netflix

Sees This As An Ethical Issue Since They Are Double Charged.

Netflix Managers Will Also Face Ethical Challenges When Trying To Navigate The Political System In International Markets
Will

Managers Try To Make Shady Deals To Get Their Business Established Quickly Internationally?

Internal Context - Competencies Assessment

Netflixs core competencies:
Convenience - DVD rental thru mail order
Netflix offers a familiar core benefit move rentals through a delivery system that combines the Internet and regular mail. Its customers dont have to race back to the store at 10:59 p.m. to return their rentals and avoid late fees

Innovation Streaming Video

Netflix gives its customers the options of downloading their products using:
   Xbox 360 Wii consoles Playstation 3 systems

Internal Context Competencies Assessment

Netflixs core competencies:
Netflixs core competence of providing its customers the ability to rent movies thru the mail currently allows it to be the industry leader in DVD rental and has positioned Netflix for sustainable growth Netflix has enhanced its leadership position by implementing streaming video technology, for example in 2010 Netflix paid $406M to acquire more streaming content for its library

Internal Context Competencies Assessment

Netflixs core competencies: Netflix has expanded their movie title selection for customer rental purposes

Netflix can exploit its core competencies gaining a competitive advantage by offering: Special promotions like having a membership drive to offer discounts in an attempt to attract new members, returning members, even dissatisfied customers from the Outer Market Space of the business environment Seasonal marketing campaigns in an effort to increase sales

Internal Context Competencies Assessment

Netflixs core competencies: Netflix is continuing its exploitation of the Internet and mail order service offerings maintaining its strong market position in traditional DVD rental Netflixs management team have the mindset to be the industry leaders, for example they are providing strategic direction in the area of technological innovation by tapping into streaming video and pursuing opportunities internationally in markets like Canada and the United Kingdom

Internal Context - Capabilities Assessment

nderstanding current situation: Netflix has the knowledge and capabilities that are necessary to fulfill the companys mission Netflixs vision and mission statements are clearly understood. Its core values are shared by all the stakeholders including customers alike With the advent of streaming video and its use across a wide-range of mobile devices, this will allow Netflix to become the go-to company and premier provider for anyone looking to stream movies.

Internal Context - Capabilities Assessment

Determining future requirements:
Netflixs core capabilities strengths include having the technology, finances, including intellectual capital needed to support its future growth plans
Netflixs Balance Sheet (excerpt): Balance Sheet (in US $) Total assets Total liabilities Total stockholders equity As of Dec. 31, 2010 $ 982,067,000 $ 691,903,000 $ 290,164,000 As of Dec. 31, 2009 $ 679,734,000 $ 480,591,000 $199,143,000

Internal Context - Capabilities Assessment

Determining future requirements: Netflixs Income Statement (excerpt)
Income Statement (in US $) Revenues Total Cost of Revenues Gross Profit As of Dec. 31, 2010 $ 2,162,625,000 $ 1,357,355,000 $ 805,270,000 As of Dec. 31, 2009 $ 1,670,269,000 $ 1,079,271,000 $ 590,998,000

Internal Context - Capabilities Assessment

Determining future requirements: Netflixs Cash Flow Statement (excerpt)
Cash Flow Statement As of Dec. 31, 2010 (in US $) Net Income Net cash provided by operating activities Net cash used in investing activities Cash at end of year $ 160,853,000 $ 276,401,000 $ (116,081,000) $ 194,499,000 As of Dec. 31, 2009 $ 115,860,000 $ 325,063,000 $ (246,079,000) $ 134,224,000

Internal Context - Capabilities Assessment

Determining future requirements: Bridging the digital divide in the US, Canada, and the UK will provide Netflix with even more opportunity to increase its sales revenue and profit margins

Internal Context - Cont. Capabilities Assessment

Determining future requirements: Netflix is continuing its enhancement to its streaming technology by investing more cash to acquire more streaming content for its library For example, in 2010 Netflix invested $342M more than the previous year in acquisition of streaming content

Internal Context - Cont. Capabilities Assessment

Determining future requirements: Netflix has already enhanced its existing capabilities and developed the capabilities to meet the requirements to streaming video technology

Internal Context Cont. Capabilities Assessment

Leadership: Netflix leaders create sustainable solutions in the movie rental business and are executing and implementing their strategic plans expanding access points where their customers can acquire their products which increase sales and profits Netflixs international expansion will broaden its operations increasing the demand for its product offerings which also makes the company a more sustainable entity

Internal Context Cont. Capabilities Assessment

Leadership (contd): Netflixs management team exhibit a mindset that fosters the necessary change required to lead the company now and into the unforeseeable future Netflixs current leaders have the ability to develop the appropriate enterprise-wide business strategies that are necessary to make the company successful and sustainable Netflix has the best-of-breed in both leadership and management programs surpassing industry standards which enables the company to meet its future needs

Internal Context - Resource Assessment (Tangible)

Understanding current situation: Netflixs most important assets are the thousands of movie titles it has available for rental Netflix has sufficient financial resources to take advantage of the opportunities that are available with streaming video technology Netflixs advantage of convenience and innovation makes it an attractive business entity Customers have the ability to access its products from almost anywhere.

Internal Context - Resource Assessment (Intangible)

Understanding current situation: Patents are the most important intellectual property Currently streaming video technology provides Netflix with its most technological competitive business advantage

Strategic Analysis External Context

Business Environment Assessment Market Space Assessment Supply Network Assessment Competition Assessment Stakeholders Assessment

External Context Industry Life Cycle

The Industry

Introduction

Growth

Maturity

Decline

TIME

External Context Industry Key Success factors

Overall low costs Market coverage Large collection of movies and TV shows Updated catalog Ability to provide fast convenient service Customer centered approach Innovative and technology enhancements Partnership

External Context- Industry Growth

Cont. External Context Market Space Internet Users in the world

External Context- Market Space World Internet Penetration Rates

External Context Market Space Assessment

Pay-for-performance banner Search-engine Third party download ads and logos Best-buy to include flyers Free trials Shared revenue or flat fee with studios and TV channels Segment is consumer paid streaming subscription of movies and shows

External Context Technology

Keep up with new devices Easy to use website and better customer experience Ability to support OS and hardware versions Infrastructure Support (cloud computing) Security (encryption, hackers etc) Performance and Reliability Operating Expenses on Technology & Development (7.6% of revenue)

External Context Customers

Four Types
    Convenience of free home delivery Access to the widest selection The bargain hunters Streaming on wide variety of hardware devices

Growth

External Context Customers

External Context Supply/Partner Network Assessment

External Context Cont. Supply/Partner Network Assessment

Paramount Pictures, MGM, Lions Gate Entertainment (through an output deal with Epix) Films from Sony Pictures, Walt Disney Motion Pictures Group, Overture Films, Anchor Bay Entertainment (through an output deal with Starz) Other studios providing first-run films include First Look Pictures, Relativity Media and other smaller and independent distributors Netflix holds rights to back-catalog titles to films from Time Warner, Universal Pictures, Sony Pictures, Paramount Pictures, MGM, Lions Gate Entertainment, 20th Century Fox and other distributors Netflix provides current and back-catalog TV programs distributed by NBC Universal, 20th Century Fox, Sony Pictures, Disney-ABC Domestic Television, with select shows from Warner Bros. as well Netflix also previously showed movies from the Criterion Collection

Partnership with USPS as a shipping carrier

External Context -

Competitor comparison on DVD Rental services

External Context Cont. Competitor

comparison on DVD Rental Services

External Context -

Competitor comparison on Subscription Service

External Context Competitive Advantage

External Context - Competitive Strategy

Customer-centric, monthly subscription-based service in various price plans Outstanding value A robust and growing selection of content that our subscribers want to watch High levels of customer satisfaction, a personalized and adaptive user interface Large and growing subscriber base which gives us tremendous operating efficiencies

External Context Porters Five Forces

External Context - Global Strategy

Started streaming in Canada Pure streaming Rapidly growing content selection Expect to be over 1 m subs and profitable in Q3 one year from lunch

Financial Highlights
Predictable Revenue Streams  Not dependent on rental fees or late fees Low Overhead Costs Contribute to Profits  No store rent, utilities etc Strong Growth  Market entry timing, planned barrier to entry for competition, customer centric 2 billion in revenue, 12 billion dollar market cap

External Context - Opportunities

Opportunities
 Growing video stream market  Growing internet usage throughout the world  Expand Partnerships with Content providers and Technology providers  Product Line Expansion Video Games  Expand streaming Movie and TV shows Offerings  Print 3rd Party Advertisements of Red Envelopes  Target from households customers to individuals with Smart Phones, Tablets etc  Branding  Partnership with customer centric companies in the market like Facebook  Expand the Global market

External Context Threats

 Threats
DVD competition from Red Box Highly competitive environment Slowing growth on dvd rentals Technology rapid changes Piracy of movies and TV shows Increase cost on video content Contractual restrictions on streaming content International market copyright rules Disruptive Innovation from other companies Website Security ISP Threats Very cheap PPV or Ad support free TV shows and movies

Recommendations
Start researching a new technology that can significantly improve or replace their method of streaming video over the internet Increase the number of digital movies and TV shows Expand marketing campaign to raise awareness streaming using various devices Create annual membership campaigns for loyal customers Develop referral programs using various incentives Expanding Internationally beyond Canada and UK Build stronger Strategic Alliances with supply chain network becoming the go-to provider for movies and TV shows

Cont. Recommendations
Established different channels to obtain potential customers (from 300 million) Lookout companies with disruptive innovation in video streaming, Sports etc. Continuous technology innovation Stay focus and run faster