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STRATEGIC ANALYSIS

Presented by: Kevin Andrews Ebube Anizor Nasir Gondal Mohammad Shafiei-Monfared John Selvakumar Schulich School of Business July 19, 2010
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Netflix will forever change the way you watch your TV & Movies.

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Company Overview
DVDs via mail, electronic delivery via the Internet -> great consumer value 14 million+ members in USA, projected to be 16 to 17 million by the end of 2010 (>10% of US household subscribe to Netflix) 2009 Revenue: US$1.67B 2010 forecasted: US$2.05B to US$2.11B Several subscription plan choices:
3 DVDs at-a-time/Unlimited Streaming - $17/month 2 DVDs at-a-time/Unlimited Streaming - $14/month 1 DVDs at-a-time/Unlimited Streaming - $9/month 2 DVDs /2 hours streaming - $5/month

Netflix corporate headquarters Los Gatos, California

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11 Years of Strong Growth

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Financial Highlights
Average Monthly Revenue per Subscriber: $13.30
Gross Profit: $4.71 Net Profit: $0.92

Profit (Gross/Net): 35.4% / 6.9% Cost Distribution:

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Service Overview

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DVD-by-Mail Service
58 distribution locations nationwide Netflix ships 2+ million DVDs each day 97% of subscribers receive discs in one day

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Instant Streaming Service

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Netflix-ready Devices in 2009


Blu-Ray & HTiB
Samsung LG Insignia (Best Buy) Sony NFLX check list in 10 LG Sony Vizio NFLX check list in 10 Xbox Sony PS3 Roku Tivo Sony BIVL

DTV

Gaming

STB

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Netflix-ready Devices in 2010


Blu-Ray & HTiB Gaming DTV VIZIO Samsung LG Sony Insignia Sharp Toshiba Panasonic Philips Sanyo

VIZIO Samsung LG Sony Insignia Sharp Toshiba Panasonic Philips

STB Roku Tivo Western Digital Seagate On-the-Go PC/Mac WMC HP TouchSmart Apple iPad & iPhone Xbox Sony PS3 Nintendo Wii

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Netflix-ready Device UI

Instant Queue

Title Details

Streaming Playback

Optimized FF/RW

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Business Strategy
Core Business Objective:
Grow a large subscription business consisting of streaming and DVD-by-mail content

Customer Intimacy Strategy


Subscribers are offered a choice of delivery method and platform that is most convenient for them, all at one low price Focus on customer service and user experience

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Technology Strategy
Bowling alley approach Shift to the next S-curve
Offer Streaming
Relationship

Digitize

Whole Product

Build subscriber base

DVD by Mail

Customer Reference

Leader in technologies to enhance the subscriber experience and operate efficiently

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Technology Strategy
Create
Digitize customer relationship All you can use content

Deliver

Personalized Experience Hybrid DVD/ streaming system

Capture
Strong installed base Multiple platforms Monthly subscription fee

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Innovation Strategy
Disruptive innovation has been the hallmark of the companys success
One of the first companies to introduce DVD by mail over the web

Innovation focus has been shifting to online streaming Internal and open innovation
$1 million competition to improve recommendation engine by 10%

Investment Priorities
Web based STAs Processing and distribution of DVDs and streaming content
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Intellectual Property
Netflix uses a combination of patent, trademark, copyright and trade secrets
Patent for Online DVD Rental process (2006)
Netflix successfully sued Blockbuster for infringement

Patented in-house video streaming technology Patented recommendation engine

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Complementary Assets 14 million customers and counting Strong customer service


24/7 call center in US High level of interaction with customers

Relationship with content providers and leveraging it to acquire licenses for online streaming content. Netflix-ready Devices

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Competition
Shifting from an industry with a few players to one with several strong players!

Traditional
DVD Rental Stores Blockbuster
Now near bankruptcy (delisted from NYSE) struggling to compete in digital and mail service space

Internet delivered video (video-on-demand, ad supported, and subscription)


Cable / Satellite Providers / TV Stations Downloading Services (e.g. iTunes) Streaming Services (e.g. Amazon on Demand) Content Providers (e.g. Hulu+)

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Competitors

Source: Netflix 2.0

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Competitive Factors Factor 1: Access to Content / Release Window

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Competitive Factors Factor 2: Pricing / Service Model


$4-5 PPV Hot new releases PPV: 24 hrs to view

Unlimited subscription Newer TV shows, some new movies, older movies 17,000 titles and growing DVD rental

Ad-supported video TV show centric Older movie titles Free for Hulu bas and YouTube PPV Model for Hulu+

Factor 3: Existing Business / Customer Base

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Competitive Strengths

Brand Personalized Service Growing Scale (efficiencies, negotiations) Convenience, Selection and Fast Delivery

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Competitive Position - Summary

Netflix augments the standard video package. Its success is based on clearly defining where and how it competes:
Segment. Consumer-paid streaming subscription Content. Library and relatively new content. Other content types not in scope. Revenue Model. Single, simple subscription based revenue model.

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Competitive Position - Summary

Netflix compares itself to a motorcycle


Positioned to augment rather than replace Standard video package is a car, Netflix is a motorcycle Few people with a motorcycle, vast majority have a car Need to offer a great experience to get car owners to buy spend on Netflix

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New Entrants

Independent offerings from content providers Potential for M&A amongst players Alliances with content providers (a la Hulu)

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Outlook Whats Growing? Declining?

Source: Netflix 2.0

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Outlook

Studios need to protect high margin DVD sales and value chain
Avoid iTunes-like domination by Netflix

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Outlook

Studios goal is to manage online availability (what and when) Net Neutrality

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Recommendations Focus on negotiating favourable long term content agreements Deploy to as many devices as possible Geographic expansion Expand complementary assets Leverage DVD / Streaming hybrid model Long Term: apply model to books, video games

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Are You In?


In the 5 years heading into 2010 subscribers tripled, revenue up 20% annually, profit 23% and a market cap of US$6.2 billion.

Poised for growth:


Currently services the only the US (today, announced expansion to Canada) Growth in smartphone and tablets Performance of broadband and mobile network improving IP connected devices on the incline Established Gorilla in Video Streaming market

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In Canada Streaming only no discs English at launch, French later Public announcement July 19th Target of less than $10/month unlimited streaming

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Are You In?

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Our Bet

Medium investment Ideal investment distribution:

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Market Trends & Threats (to Cable)

Source: Rogers

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The Impact of On-Line

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Video Driving Growth in Network Traffic

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Choice, Convenience and Control

Source: Rogers

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Content Acquisition
Netflix focuses on getting Netflix members the highest total viewing value in our library Not striving for a specific quantity Offer the best overall library Content obtained through direct purchases, revenue sharing agreements and license agreements with studios, distributors and other suppliers.
DVD content is typically obtained through direct purchases or revenue sharing agreements. Streaming content is generally licensed for a fixed fee for the term of the license agreement.

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Continued Investment in Content

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