1

Limitations:
Internet Service Quality
Government Regulations
Infrastructure: Internet and TV services (As contrasted between developed and developing
countries)
Content Library

S.W.O.T. Analysis:
Strengths:
Wide and Varied Video Content
Low-Cost Service
Progressive Services/Company Capabilities
Movie Selection Software
Personalized Services
Service Speed
Marketing (Free One-Month Trials)

Weaknesses:

Consumer Confidence (Qwikster Backlash)

High Churn Rate

Opportunities:
Consumer Acceptance of delivery of TV Shows and Movies via Internet
Fast-Growing Market

Technological Advancements

Threats:
Decline in DVD Market
Price Increase of Licensing Fees
Internet Service
Weak or Nonexistent
Increase in Price

P.E.S.T.E.L. Analysis:
Political:
Netflix has to compete with a free service - illegal online streaming. The control of
online piracy is limited and rather ineffective, and is always changing as the

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 development and creation of internet capabilities change. This is a legitimate threat.
Although, not crippling (yet).
Economic:
The U.S. economy is displaying signs of rebirth and growth since the 2008 economic
meltdown. This puts Netflix in a good position as consumers begin to emerge from a
saver-oriented cultural downswing to a consumer-oriented upswing.
Social:
Netflix is in a prime social positioning for two reasons: their service is extremely
convenient and user-friendly, and the entertainment industry demands have shown
large growth and encourage Netflix growth as an entertainment facet. The social
environment - one geared toward entertainment - looks promising.
Technological:
Technology changes rapidly, and is unforgiving to those who fall behind. Fortunately,
Netflix is a fast-moving company that invites the changes in technology: especially in
streaming capabilities and access. However, this creates a strong reliance on high
speed internet - one that should raise more than a few eyebrows. But, if internet
development stays strong, access to Netflix services will increase. Overall, the
development of new and improved technology will create a wave for Netflix: one they
will either ride and enjoy large profits from, or, one that will move faster than they
can, and result in them being swept under.
Environmental:
The largest environmental threat to Netflix is the dependency of strong internet
service. If internet services go down due to lighting storms, tornadoes, ice storms, etc.,
Netflix subscribers will suffer first hand - and not be pleased. The Netflix-consumer
relationships depends on strong, dependable internet service.
Legal:
There is a relatively low amount of government regulation on Netflix. The primary
concern in the legal environment is the development/change in licensing, patents, and
copyrights. If these fees were to increase, Netflix consumers and owners might bear
the increased costs.

Weighted Competitive Strength Analysis:

Ratings: (very weak) 1 - 10 (very strong)

Key Success Weights Netflix Amazon Instant Redbox

Factors Video

Price: 30% 8 2.4 9 2.7 7 2.1

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 Key Success Weights Netflix Amazon Instant Redbox
Factors Video

Convenience: 25% 9 2.3 9 2.3 6 1.5

Video Content: 20% 9 1.8 7 1.4 4 0.8

Brand Identity: 10% 8 0.8 6 0.6 8 0.8

Service Speed/Quality: 15% 9 1.4 9 1.4 6 0.9

Weighted Total: 100% 8.7 8.4 6.1

In this analysis, Netflix is competitively compared to Amazon Instant Video (a growing

and strong competitor for DVD rental and video streaming) and Redbox (a competitive
DVD rental provider). Redbox is the weakest competitor: paying particular attention to
convenience, video content, and service speed/quality. Netflix and Amazon, services
with video streaming, far outcompete Redbox due mostly to streaming abilities and
conveniences. Video streaming is extremely convenient for consumers and allows a
significantly higher video content range - giving both companies a significant
competitive advantage. Although Amazon Instant Video is a little cheaper of a service
than Netflix, one can see Netflix makes up for this with a stronger brand identity and a
larger video content. Netflix offers thousands of more movies and shows than either
Amazon or Redbox, and has a stronger brand identity (although Amazon is an
extremely identifiable company, the Instant Video service is not nearly as
known/recognized by consumers).

Five Forces Analysis:

5 Competitive Forces Pressure

Substitute Products: Strong

Buyer Power: Strong

Supplier Power: Weak

Potential New Entrants: Moderate

Rivalry: Strong

Overall: Moderately Strong

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Substitute Products: Strong
Netflix is in competition with Hulu Plus, Amazon Instant Video, Walmart, Redbox,
and many other companies, all offering (relatively) the same product. Although
video quality and company services between providers are arguable points,
consumers have many options (even illegal ones - i.e. internet streaming) to watch
movies and TV shows. This places substitute products as a high pressure.
Buyer Power: Strong
Consumers can easily and readily switch between service providers, and do. Netflix
has a high churn rate, meaning, anywhere from 30-70% of subscribers cancel their
service with Netflix annually1. This puts Netflix in a tough position and increases its
need to strive to outcompete rivals.
Supplier Power: Weak
Netflix is in a weak position in regards to supplier power for a couple reasons: buyer
switching costs are low, substitutes are available, buyers are price sensitive, and
product differentiation is relatively low. Although, Netflixs.....
Potential New Entrants: Weak
To enter into the video streaming/DVD rental service would be difficult because of
the economy of scale. Netflix is a multi-billion dollar company and has constructed a
large and intricate network for mailing and internet based service(s). Along with
these justifications is the fact that competition between Netflix and rivals is stiff and
only growing - making entry even more difficult.
Rivalry: Strong
There are many companies that offer the same (although quality is arguable)
products and services as Netflix. There are many sizable competitors, brand loyalty
is low, and products are relatively undifferentiated. The competitive environment
between rivals is strong: Hulu Plus, Amazon Instant Video, Starz, Walmart, Redbox,
and many others are all striving to outcompete Netflix and gain a larger market
share.
Overall Competitive Environment: Strong
Netflix is engaged in intense competition. Renting and streaming DVDs, TV shows,
and movies is easy and convenient for consumers. Substitute products are readily
available with a variety of companies offering similar products and services. Due to
competitive pressures from Hulu, Amazon, and Redbox, and the ever-pressing threat
of illegal streaming, the competitive environment is strong and only growing as

1 Netflix Case Study p. C-145

5
 Amazon Instant Video, Hulu Plus, and others continue to strive for greater market
shares.

Five Generic Strategies: Broad Differentiation

Netflixs generic strategy is one that works to provide a low cost and differentiated
service to its customers. Netflix is looking to serve anyone with internet: its service is
cheap and appeals to anyone - especially as internet streaming services are better
developed and more readily available. Their marketing strategy does not specifically
target any niche, but rather appeals through differentiated service: whether that be
better speed, increased convenience, larger video content (in which theyre
unparalleled!), or the personalization of the service. They also differentiate themselves
by providing extensive movie information, no late fees or DVD rental due dates, and
no additional pay-per-view charges. 2

Financial Ratio Analysis and Benchmarking:

Financial Ratios (With Benchmark)

2009 2010 2011 DIRECTV (2012)

Liquidity Ratios:

Current Ratio 1.84 1.64 1.49 1.00

Quick Ratio 1.19 0.71 -0.11 0.93

Efficiency Ratios:

Asset Turnover Ratio 2.46 2.20 1.04 1.45

Operating Profit Margin 11% 13% 12% 17%

Profitability Ratios:

Net Return on Assets 17.1% 16.4% 7.4% 14.5%

(ROA)

Return On Equity (ROE) 58.2% 55.4% 35.2% 54.8%

2 Netflix Case Study p. C-141

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 Financial Ratios (With Benchmark)

Net Profit Margin 6.94% 7.44% 7.10% 10.0%

Debt Ratios:

Debt-to-Equity Ratio 2.41 2.38 3.77 2.78

Debt Ratio 0.71 0.70 0.79 0.74

Accounting Analysis (in thousands)

Year 0 Year Year Year Year Year Year Year 7 Year 8 Year Year 1
1 2 3 4 5 6 9
Projected
Revenues:
Subscription $0 $2,0 $4,0 $41, $54, $69,0 $88, $107, $128,0 $151, $176
Revenues 00 00 000 000 00 000 000 00 000 00
Operating Income $0 $0 $0 $0 $0 $0 $0 $33,2 $85,10 $160, $267
00 5 821 44
Other Revenues $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Revenues: $0 2,00 4,00 41,0 54,0 69,00 88,0 140,2 213,10 311,8 443,3
0 0 00 00 0 00 00 5 21 4
Projected
Expenses:
Start-up
Expenses:
Real Property $2,00 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
0
Development $1,00 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
0
Content Library $5,00 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
0
Total Start-Up $8,00
Expenses: 0
Running
Expenses:

7
 Net Present Value Calculations (In Thousands)
Present Year 1 Year 2 Year 3 Year 4 Year Year 6 Year Year Year 9 Year 10
Day
Accounting Analysis
5
(in thousands)
7 8

Cash Flows -$8,000 - - - - - $6,80 $20,6 $42,0 $72,8 $113,27

Labor $0
$34,67 $3,3
$32,10 4,50
$8,775 5,62
$7,85 6,75
$1,22 0 7,87505 9,00
64 10,12
55 11,250
6 $11,2 $11,2
5 0
75 0 0
5 50 0 5 50 0
NPV $12,667
Marketing $0 $25, $25, $30, $35, $40,0 $45, $50,0 $55,00 $60,0 $65,0
WAAC 11.0%
000 000 000 000 00 000 00 0 00 0
Licensing Fee (15% $0 -300 -600 - - - - - - - -
IRR Royalty)
12.9% 6,15 8,10 10,35 13,2 21,03 31,966 46,77 66,50
0 0 0 00 0 3
PV of Expected $20,667
Administrative
Cash Flows $0 $2,0 $2,0 $3,0 $3,0 $4,00 $4,0 $5,00 $5,000 $6,00 $6,00
00 00 00 00 0 00 0 0
Research and $0 $5,0 $2,0 $2,0 $3,0 $3,00 $4,0 $4,00 $5,000 $5,00 $6,00
Development 00 00 00 00 0 00 0 0
Additions to Content $0 $1,0 $2,0 $3,0 $4,0 $5,00 $6,0 $7,00 $8,000 $9,00 $10,0
Library 00 00 00 00 0 00 0 0 0
Additional Real $0 $0 $0 $0 $2,0 $0 $0 $0 $0 $0 $0
Property 00
Total Expenses: 8,000 36,0 34,9 37,4 45,6 49,52 54,8 55,09 52,284 44,47 31,74
75 00 75 50 5 00 5 7
Net Income: - - - 3,52 8,35 19,4 33,2 85,10 160,8 267, 411,5
8,00 34,0 30,9 5 0 75 00 5 21 344 96
0 75 00
11,25 $1,1
0 25.0
0

Conclusion:
In conclusion, Netflix sits in a good position. Being a first-mover company has
provided and will provide success for Netflix. The coupling of the new music streaming
service with the market expansion into the UK, Ireland, Canada, and Latin America
holds a promising outlook.

8
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