Index
1.
History of Home Video Rental...................................................................................3
2.
Netflix gets into the DVD Rental Services................................................................5
1
Netflix Financial Statements......................................................................................6
2
From DVD Movie Rental to VOD...........................................................................13 B.
STATE...............................................................................................................15
3
Mission.....................................................................................................................15
4
Vision.......................................................................................................................15
5
Values.......................................................................................................................15
6
Bibliography.............................................................................................................22
A. BACKGROUND
1. History of Home Video Rental When the first home video systems became widely available during the 1970s and early 1980s, movie fans clamored for the chance to watch their favorite films at home without relying on a broadcast or TV cable. Movie studios also saw a way to bring back films from previous generations to a new audience. The growing demand and the new-found supply required an intermediary to facilitate the transaction -- a store that could bring the movies to the waiting customers. During the 1980s and 1990s, retail video rental stores boomed. In 1995, the Blockbuster video rental chain had more than 4,500 stores. The company made $785 million in profits and $2.4 billion in revenues over 30 percent of margin profit. Much of this profit came from "late fees" on overdue rentals, which did not require any additional product sales and minimal additional labor, but became a major inconvenience for customers. While Blockbuster and other retail video rental outlets were operating under their previous business models, a wave of technological innovation swept the world during the mid-1990s. Increased access to the World Wide Web created new retail opportunities. Companies such as Amazon and Netflix filled the niche that video stores had just a few years earlier. Customers could now order their favorite movies online receive them via e-mail and return them at their convenience. The growth of broadband internet access in the early 2000´s allowed media providers to transition from selling physical objects to offering digital formats. Films were now available for download directly to a computer without the need for bulky
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tapes or DVD boxes. Without the demand for physical inventory, the need for brickand-mortar video stores declined. In 2007, the annual revenue for Netflix reached over $1.2 billion and just three years later Blockbuster floundered on the verge of bankruptcy. While millions of viewers enjoy the convenience of watching digital movies, some purists still savor the experience of physical media. Redbox, a rental store provider, offers DVDs, Blu-ray discs and video games at many large retail outlets. Although the retail "big box" video rental store is all but extinct, movie fans will still seek out ways to rent and watch films. From TV and desktops to tablets and smartphones, movie buffs can now rent their favorite movies and watch them wherever and whenever they want.
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2. Netflix gets into the DVD Rental Services In 1997, Netflix1 entered an existing home video rental industry riddled with mom- and-pop retail stores and dominated by Blockbuster. It tried to differentiate itself in a number of ways, first and foremost with online rental experience. Customers would search the website, choose a film, and within a few days the film would be delivered by mail. Netflix began by renting DVDs—then a relatively new and promising, but as yet unproven format—which are smaller, lighter, and cheaper to send via the Postal Service. The basics of the website itself—a search engine and a queue— has not changed (although its sophistication and accuracy has certainly evolved), but the pricing apparatus was initially modeled on traditional brick and mortar rental stores: a $4 rental charge, plus a $2 shipping and handling charge, and a specific due date (with the dreaded late fees as penalty for late return). However it used the traditional pay-perrental model.
1 Netflix's DVD Rental Services
1 Netflix is American multinational entertainment company founded on August 29, 1997, in Scotts Valley, California, by Reed Hastings and Marc Randolph. The company is currently headquartered in Los Gatos, California.
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3. Netflix Financial Statements (a) Sales subscriptions and subscribers important growth
In the graphic above we can observe the highest pick taken by Netflix according to their sales subscriptions during their first 9 years in the market. Several factors had an important impact in the increase of Netflix subscribers; one of them is the availability of approaching toward internet and the low cost it represents for customers rather than renting movies physically. An important strength is the opportunity they bring to promoting a wide option of movies, TV series, documentaries, etc.
Sales Subscription Graphic
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International and U.S suscribers
After several years, Netflix began its expansion toward Canada, Latin America and Europe respectively. However, it was just in 2012 when strong numbers start to show up towards international subscribers. By 2013, Netflix was reaching almost double as it first started in the international market with almost 25% of international members. (Estimates, 2013) According to Netflix statistics provided by the Wall Street Journal, until 2013 Q4, Netflix reached 9.7 international paid streaming subscribers and it has continuously increasing due to our empowerment and necessity of using internet. The graphic below shows the important market share that Netflix has obtained until during the last few years. Netflix is now just below TV cable becoming the most popular video streaming service to young adults... With a very affordable price strategy, Netflix has now become more aggressive in this developing sector. We believe that Netflix could easily obtain one or 2 more points in market share during year 2016 among U.S subscribers.
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Netflix vs Other DVD Streaming’s
(b) Gross Profit analysis
Gross Profit ( 1998 -2006) 400000 350000 300000 250000 $
200000 150000 100000 50000 0 -50000
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6
7
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Gross Profit Analysis
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As Netflix started to reach more market share by introducing themselves to a new generation of people, it was in 2000 when the company start looking for good results in their subscriptions. After the breaking point, it has been more than successful years for the company in terms of important revenues due from their sales. The graphic above presents an increase of more than a 200% in terms of money making it a strong company and a pioneer in the market.
Netflix Gross Income Analysis
As we can observe in the graphic above, Netflix increasing tendency reach took a high peak of 2.168 million of gross income in 2015, thanks to a big an increase with worldwide subscriptions (over 12.8%) and a 3.8% more for American subscribers. According to an interview done to Netflix CFO, their projections were accurate as they expected this numbers to happen do to a strong demand and new development of other 7
online-streaming services. These years were mainly focused on introducing Netflix services outside the United States. For this year 2016 Netflix planned to expand their market with a 100 000 000 investment in which they will develop an approximate of 30 exclusive movies, documentaries and series that can only be watch by Netflix subscribers. Also this amount was invest toward approaching new ways of getting more subscribers (c) Free Cash Flow Analysis As we all know, technology sector is a constant changing world and Netflix as one of the strongest companies in the market has a very volatile market share in Wall Street. Even though their numbers looks negative (see graphic number …) we can still say that Netflix keeps strongest in cash flow management. We will analyze two scenarios; Netflix first steps toward the industry and their biggest jump through global market in 2003.
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Netflix Free Cash Flow 1998-2006 80000
60000
40000
20000
0
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2
3
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-20000
-40000
-60000 Years
Free cash flow
Netflix Frees Cash Flow Analysis
Netflix development through their first years became stronger after more people were getting subscripted on Netflix services. As an innovative video-streaming company, Netflix didn’t wait a lot to start seeing positive numbers and cash in their cash flow. This new online rental movie was developing in such a faster speed that by 2006 Netflix as already obtain 12% more than their first year in 1998.
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Free Class Anaysis 2011-2016
Until Q1 2012, Netflix develop profit and a good price/share at Wall Street. Despite being the leaders in the market and having a big approach toward customers Netflix started to obtain negative numbers and it becomes stronger in the following years. By the end of 2015 they finish with a total of -273.3 million. The reason why Netflix stock is crashing in the after hour’s session is mostly because of the company's guidance of its widely followed international expansion. We remarked in a few paragraph before, that Netflix pretended to expand more internationally, producing more series and movies exclusively for Netflix costumers but it wasn’t working out as expected. Another factor can be the aggressive expansion on Amazon View into the streaming video space.
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Watch Netflix further projections and answers regarding their failure toward this two years strategy: (Durden, 2016) The company also discussed the increasingly sensitive topic of competition: “If you think about your last 30 days, and analyze the evenings you did not watch Netflix, you can understand how broad our competition really is. Whether you played video games, surfed the web, watched a DVD, TVOD, or linear TV, wandered through YouTube, read a book, streamed Hulu or Amazon, or pirated content (hopefully not), you can see the market for relaxation time and disposable income is huge, and we are but a little boat in a vast sea. For example, while we’ve grown from zero to 47 million members in the USA, HBO has also grown, which shows how large the entertainment market is. We earn a tiny fraction of consumers’ time and money, and have lots of opportunity ahead to win more of your evenings away from all those other activities if we can keep improving.”
NFLX also expects more spending: “The increase in ARPU will allow us to invest more in content next year, and we are taking up our expected spend from about $5B in 2016 to over $6B on a P&L basis in 2017”.
Which brings us to our favorite topic: cash burn? Here is NFLX's explanation: “At the end
of Q1, we had cash and equivalents totaling $2.1 billion. In Q1, free
cash flow was $261 million, compared with $276 million in Q4 ‘15. As we have written in the past, our investment in original programming (particularly owned content) is
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more cash intensive upfront, resulting in a timing-driven gap between net income and free cash flow. We currently have $2.4 billion of long term debt. With our low debt to enterprise value of 5%, our plan is to raise additional capital through the high yield market later in 2016 or in early 2017.”
As Netflix will continue to invest this is an expectation in long turn for sure that will keep them strong on the market. Even though, they are still much unpredicted, several investors continue to pursue their share with the company.
4. From DVD Movie Rental to VOD The traditional pay-per-rental model lasted for a brief period of time, as Hastings, Netflix’s CEO and founder, and others realized that, given the longer delivery times (compared to the traditional rental experience of going to the store), Netflix’s 12
value was in its ability to allow customers to have DVDs in their homes at all times, and they quickly switched to a pre-paid subscription service, minus late fees. Netflix‘s next trick was to offer the unlimited option, thereby adding a high-volume customer base for whom the cost of individual rentals (and of course the late fees) far exceeded the value of the immediacy of the traditional stores. Netflix bought DVDs wholesale from very few distributors for minimal discounts—but also because these up-front costs forced a restrictive selectivity when actually choosing which movies to buy. Netflix once again switched its business strategy, recognizing that the rental business (as a part of the film industry) was heavily based on personal relationships through which more favorable arrangements could be made with, for example, the studios themselves. Enter Ted Sarandos, who left Video City (a U.S. video rental chain) in May 2000 to become Netflix’s new chief content officer. Sarandos brought his contacts and relationships with him, and within a year, Netflix had negotiated direct revenue-sharing agreements with nearly all the major studios, which meant a reduction in up-front costs for Netflix in return for a fee paid to the studios on the number of rentals of a given studio’s films within a given period of time. In 2005, 35,000 different film titles where available, and Netflix shipped 1 million DVDs out every day. In 2007, Netflix expanded its business with the introduction of streaming media, while retaining the DVD and Blu-ray rental service. Netflix has achieved astounding levels of growth. It has jumped from 700,000 subscribers in May 2002 (when it announced its IPO) to 20 million at the time of its 10K filing in February 2011. In 2010 alone, approximately 7.7 million people signed up for its service, more than doubling the 2.9 million subscribers gained in 2009. The 13
company expanded internationally with streaming made available to Canada in 2010. By January 2016, Netflix was available in over 190 countries. According to the statement released by the company on April 15th 2015, several major milestones were achieved in Q1: subscribers in the US surpassed 40 million; 20 million internationally; and 60 million in total. Latest forecast from IHS Technology reveals that by 2019, Western Europe subscribers will make up 23% of total Netflix subscribers. Netflix already spends more on content than BBC, HBO and the Discovery Channel. According to the report, by 2019 Netflix will have over 21 million subscribers, up from 3 million in 2013. In October 2016, Netflix reported over 86 million subscribers worldwide, including more than 47 million in the United States. The company has not stopped innovating since its inception. It transitioned from being an on-line video rental subscription based provider to being the leader in supplying video and entertainment on-demand throughout the world.
B. STATE
5. Mission As there is no specific Mission established the CEO and founder once interviewed said: "Our core strategy is to grow our streaming subscription business domestically and globally. We are continuously improving the customer experience, with a focus on 14
expanding our streaming content, enhancing our user interface and extending our streaming service to even more Internet-connected devices, while staying within the parameters of our consolidated net income and operating segment contribution profit targets."
6. Vision In October, 2011, co-founder and CEO Reed Hastings expressed a clear vision for the future of Netflix:
Becoming the best global entertainment distribution service Licensing entertainment content around the world Creating markets that are accessible to film makers Helping content creators around the world to find a global audience
7. Values Netflix published its company values, which demonstrate the standards with which it wants its employees to function in their daily decisions and activities:
Judgment Productivity Creativity
Intelligence Honesty Communication
Selflessness Reliability Passion
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C. STRATEGIC PLANNING
1. Opportunities & Threats Matrix
Factor s Politic al/Leg al
Local law
Curre ncy
Cost of Service
R&D
Facts
Who allows free trade of services (Enterta inment)
Licensi ng require ments U.S Dollars to change for movies services
Low Monthl y changes
Movies with specials
Analysis
Synthesi s Any country is a market target
Netflix should obey local law Most countries make business in US dollars
T
O
O
O
Netflix can provide the movies internatio nal services beyond U.S borders Specific for each country
U.S Dollar is an internatio nal and worldwid e currency No need for loans
New way of entertain
Open accessibi lity Families -Schools Universit ies/ colleges Movie expand to new
O/ T O
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Techno logies supplie rs
Demog raphy
Ecolog y
effects movies made by comput ers. Netflix new stories Movie makers dynami cs industri es Populat ion growth
Energy from fossil Fuels
ment
Industry has many actions for quality services Smarts cities Buildings (Rurals VS Urbans) Introduce d CO2 to atm.
markets and customer s
Client satisfacti on increases
O
New markets and customer s
O
Need to change to chain energy
T
OPPORTUNITIES
THREATS
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-
-
-
International law agreements (WTO) allow free trade and companies could be in the global business. Movie makers in a dynamic industry (HIGH TECH). / M&M , Foy Internet allows a better communication and DATA TRANSFER +MAIL SYSTEM BAND WITDH U.S dollar is a world currency. Service cost is low MKT with specific customer. Western culture uses to watch movies in Hollywood. Population Smart Smart Buildings R&D – Movie maker + Internet International expansion. Original content New product lines such as video games or educational materials Offer alternative subscription to appeal to less frequent movie renters. Lowers Shipping cost: More can be spent on content while achieving same profit margins
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Local law could restrict access to internet. Energy from fossils fuels. Middle class and Asian cultures with strict regulations of the government and facing fierce competition from domestic streaming services. Hackers. Blockbuster Other VOD competitors including 1. Vongo 2. CinemaNow 3. MovieBEAM 4. Movielink 5. Traditional cable/satellite providers VOD content prices and availability Limited VOD content due to studios concerned about pirating and affecting DVD sales.
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2. Strengths & Weaknesses Matrix
Factors
Headquar ters Los Gatos, Californi a, Silicon Valley -4 distributi on centers
Assets
Custom ers
Movies &Series
2006 – 6M 2016 – 366M
Diversifi cation matrix
Econo my
Allianc es
Facts
-low price -low rentabilit y MGM Warner Bros Walt Disney Universal
Analysis
Synthesis
S/
-It A.G Works under the US Law -Own culture&values -Alliance with: US postal service Movie makers Internet suppliers -DVD customers are decreasing -Rural areas -life town areas using streaming -overseas customers Customer satisfaction Low prices mean low revenues to the company Rising prices should be a future option Relationship with producers
-Netflix it’s a company with strong relations with producers to be #1 in the market
S
Netflix is gaining costumers worldwide thanks to the internet
S
It will increase customers
S
It will increase market
S
Netflix depends on producers which is wrong they should have more
W
original content
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-
-
STRENGTHS Amount of content not only in numbers but also in genres with many categories. Cheaper than one night at the movies, paying for all you can watch. Offers original series with exclusive content. Technology that facilitates online streaming instantaneously. Diversification of delivery methods through different platforms (cross-platform combability) Strong brand image, well known, with a good reputation for the service they offer. Personalized recommendations system that suggests users what to watch next.(Large movie selection) Possibility to create different profiles per account. High Customer satisfaction
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-
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WEAKNESSES High dependence on the availability of fast internet connection to works well. Having an elastic demand in which a raise in their prices will end up in loses of subscribers. Low profit margin as Hollywood producers raises their prices for movies. Loses in DVD subscribers, decreasing Netflix revenues as they don’t always switch to the streaming service. The terms of content distribution. Is not exclusive, allowing competitor’s access to the same movies and television shows, leaving the way open for competition? Monthly fees discourages membership from less frequent movie watchers
Strong Brand Recognition Low overhead cost
3. SWOT Matrix
4. Strategic Objectives Invest more in series and original content for the most popular international
markets Invest in the development of customer relationship management (CRM) as a
differentiating element from the competition. Continue to negotiate agreements with the major producers in this way they can
diversify the content offered. Continue to build its catalog of original content accumulating millions of loyal users so in the coming years ir can be possible to rise prices.
D. Conclusion
Netflix is definitely the biggest video streaming innovation of all times. It
has played well in the field and now competes with very far away competitors that are trying to get into their speed. We all can see that technology and internet is a constant changing world and if companies from that specific niche are not aware, years will pass by and they will become obsoletes. Netflix good intention in introducing to their own network some movies , documentaries and even series of their authority has make them
Weakness: Cost of Content: The cost of mass catch another point. It has just passed a year since Netflix decided to invest more than licensing packages and the in-house original content production has the company undertaking a large amount of 100 million dollars and they already are nominated in films awards.debt. Imagine how far DVD Subscribers: DVD and Blu-ray subscribers have dramatically declined in Netflix can go when these complete transitions have been done… They will definitely 2013. Raising Subscription Prices: Netfix has a difficult time raising subscription surprise us! prices. The last attempt to raise monthly subscription prices left currently subscribers upset and Netfix stock tumbling. Netflix is definitely the perfect example of a company that uses the
Strengths: Brand Recognition: The Netfix brand is very well known and has become a verb among many internet users. Accessibility: The Netfix App has enabled their subscribers the ability to stream media on nearly all internet enabled devices. Original Content: Award winning original content for series House of Cards and Hemlock Grove and other critically acclaimed titles.
SWOT
internet to reinvent the market. It has a huge competitive advantage that is a true ISPs: Netfix accounts for about 30% of daily internet traffic. With net neutrality laws struck down, Netfix may have to assume more debt or cut content. Competition (Amazon Prime, YouTube): Both, Amazon Prime and YouTube has announced their own original content productions and aim to be a direct competitor to Netfix. Content Price: The price of licensing and renewing those license agreements remain to be the largest threat to the company’s ability to operate at a proft.
understanding of the customers’ needs and behaviors. OPPORTUNITIES:
International Expansion: The ability to create original content will enhance international growth. E. Recommendation Original In-House Programming: With many house-hold entertainment devices connected to the internet, there is an opening for internet tv and Netfix’s exclusive in-house content poises the company for that demand. Word-of-Mouth Campaigns: Marketing expenses have steadily decreased due to
The company should be more careful with cash flow. The investment made by Netflix is higher risky than conservative, exposing sometimes too much their cash flow. They must keep it monitored. Financing and licensing is the immediate threat to the company’s ability to operate on the short-term. Management may consider introducing a conditional price increase that would supplement some of these costs by implementing limited advertising between programming. The in-house original content is a noteworthy investment that has benefited the company by generating a word-of-mouth campaign and proving that the company can be an award winning content producer.
F. Bibliography
Durden, T. (18 de 04 de 2016). Zero Hedge. Obtenido de http://www.zerohedge.com/news/2016-04-18/netflix-crashes-after-slashinginternational-sub-forecast-burns-1-billion-last-12-mo
Estimates, S. M. (23 de 10 de 2013). Screen Media . Obtenido de http://www.nscreenmedia.com/international-markets-hold-netflix-attentiondrive-growth/
Hanks, G. (2015). Smalbusiness.com. Recuperado el 6 de November de 2016, de http://smallbusiness.chron.com/movie-rental-industry-life-cycles-63860.html
Murphy, I. (2011). Netflix and Emerging Economies of Media Distribution. 12,13.
Reporter, A. (9 de June de 2015). Arabiangazette.com. Recuperado el 6 de November de 2016, de http://www.arabiangazette.com/video-streaming-boomwestern-europe-infographic-20150609/
Willy Shih, S. K. (2007). Netflix Case Study. Hardvard Business School, Boston.