Noam Schwartz Lev Gelfand Pujish Amin

Netflix

Company 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)

Price: Volume: Beta: S&P 500:

66.37

5.66 M 0.46

1244.28

ESP P/E Ratio S&P EPS S&P P/E Ratio Relative P/E 2010A

$2.96

59.5

$78 14.9

400%

52 Week Range: Market Cap: Yield:

62.37 – 304.79

3.48 B 0

2011E

$4.47

15.6

$85 11.9

131%

2012E

$0.36

208 $94 10.9

1908%

S WOT Analysis: Strengths

• • •

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

S W OT Analysis: Weaknesses

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

P oor 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

S W OT Analysis: Weaknesses

• • • • •

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

SW O T Analysis: Opportunities

• • • •

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

SWO T Analysis: Threats

• •

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 Model

Threat of New Entrants • • • • 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

Porter’s Five Forces Model

Bargaining Power of Suppliers

• • • • • • 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

Porter’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 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 Model

Rivalry Among Competing Firms in Industry

• Competition is split into 2 buckets 1.

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

Recommendation:

SELL • • 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