NetFlix’s VOD offer

Team FERRARI
 The Situation

How should NetFlix respond to the threat of a viable



VOD technology?
1. Enter VOD Market?
1. Yes
2. No
2.What VOD service should NetFlix offer?
1. Licensing agreement
2. Integration
3. Stand Alone Product
4.
5.

TEAM FERRARI
 Road Map

Stand-alone
Product

Enter

Enter VOD
market? Integration

Do not enter

Outsourcing

TEAM FERRARI
 Executive Summary

Enter VOD market

 High potential as a profitable market
 Only viable option in order for NetFlix to stay competitive

Offer VOD as a Stand Alone Product

 Most valuable alternative – will increases aggregated gross
profits by 1 859 million dollars in 6 years.
 Investment today: 50 million dollars
 Competitive advantage – unique DVD and VOD offer

In the long run – initiate harvest strategy and plan to

exit the DVD rental service
 The DVD rental service is now in it’s growth stage but will
reach maturity in 2009 and decline in 2011.

TEAM FERRARI
 Where Are We Now?

TEAM FERRARI
 Competition in the VOD Market

TEAM FERRARI
 NetFlix Should Enter the VOD Market!

Stand-alone
Product

Enter

Enter VOD
market? Integration

Do not enter

Outsourcing

TEAM FERRARI
 Key Issues In NetFlix Future

DVD-rental service will reach decline in 2011

Potential to increase future revenues
Issue with online content acquisition
Customer retention
Potential market share

TEAM FERRARI
 Evaluation Of Alternative Strategies

Outsourcing Integration Stand-alone

Very important Potential to

factors increase future
+ ++ +++
revenues
Online content
acquisition
+++ + +
Customer
retention
+ ++ +++
Potential market + +++ ++
share

Leveraging brand
strength
+ +++ ++
Size of financial
investment needed
+++ ++ ++
Less important Potential to
factors increase short-
+++ ++ ++
term revenues

TEAM FERRARI
 Evaluation Of Alternative Strategies

Outsourcing Integration Stand-alone

Very important Potential to

factors increase future
+ ++ +++
revenues
Online content
acquisition
+++ + +
Customer
retention
+ ++ +++
Potential market + +++ ++
share

Leveraging brand
strength
+ +++ ++
Size of financial
investment needed
+++ ++ ++
Less important Potential to
factors increase short-
+++ ++ ++
term revenues

TEAM FERRARI
 Revenue Forecast

Number of subscribers Average sales per subscriber Revenues

Two major variables to

predict when forecasting
revenues

TEAM FERRARI
Do Nothing And NetFlix Faces Decline

S 0 : Do Nothing
Number of subscribers :
The growth of DVD-rental subscribers will continue to

Price level :
Unchanged
Enter VOD Market To Avoid Decline

S 2 : Integrated
Number of subscribers :
The annual growth of DVD-rental subscribers will be 10 p

Price level :
Unchanged
Stand Alone Product Is More Profitable

S 3 : Stand Alone Product

Number of subscribers :
The annual growth of total subscribers will be 10 perc


10 % of DVD-rental subscribers per year will be conv



Price level :
DVD-rental subscribers: Unchanged


VOD subscribers: +50 %

Return On Investment

Conclusion
Aggregated surplus of gross profit


1 859 million dollars


Investment :
50 million dollars



= Great return on investment

 Time Frame

ACTION 2007 2008 2009 2010 2011 2012

R&D VOD
Launch VOD
Harvest DVD
Plan DVD Exit Strategy
             

PLC STAGE 2007 2008 2009 2010 2011 2012

VOD Introduction            

VOD Growth
DVD Growth
DVD Mature
DVD Decline

TEAM FERRARI
 Recommendations

Enter VOD market

 High potential as a profitable market
 Only viable option in order for NetFlix to stay competitive

Offer VOD as a Stand Alone Product

 Most valuable alternative – will increases gross profits by 1
859 million dollars in 6 years.
 Investment today: 50 million dollars
 Competitive advantage – unique DVD and VOD offer

In the long run – initiate harvest strategy and plan to

exit the DVD rental service
 The DVD rental service is now in it’s growth stage but will
reach maturity in 2009 and decline in 2011.

TEAM FERRARI
 Appendix

APPENDIX BEGINS HERE (not part of presentation)

TEAM FERRARI
 Appendix - PLC

TEAM FERRARI
 Appendix – Subscribers

TEAM FERRARI
 Appendix – Data Revenue Forecast

                Prognosis              
      2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total Assumptions
      1 2 3 4 5 6 7 8 9 10 11 revenues  
(Dollar in
                            thousands)  
Alt   Subscribers 857 1487 2610 4179 6316 9122,702867 12423,72 14651,47 16069,44 16298,39 15185,44   The growth of subscribers will
0: continue to slow down and at a
increasing pace in 2009. Unchanged
    Change Subscribers   74% 76% 60% 51% 44% 36% 18% 10% 1% -7%   price level.
    Sales/Subscribers         158              
    Revenues 150818 270410 500611 682213 996660 1439555,579 1960454 2311990 2535746 2571874 2396252 13 215 871
                             
                               
Alt   Subscribers 857 1487 2610 4179 6316 9122,702867 13335,99 17060,92 20418,17 22750,9 23472,43   The annual growth of subscribers
2: will be 10 percentage points
higher than alt.1. Unchanged price
    Change Subscribers   74% 76% 60% 51% 44% 46% 28% 20% 11% 3%   level.
    Sales/Subscribers         158              
    Revenues 150818 270410 500611 682213 996660 1439555,579 2104410 2692200 3221972 3590075 3703931 16 752 143
                               
                               
Alt A subscribers Subscribers 857 1487 2610 4179 6316 9122,702867 11511,45 12424,47 12384,47 11322,47 9417,059   The annual growth of A
3  :   Change Subscribers   74% 76% 60% 51% 44% 26% 8% 0% -9% -17%   subscribers will be 10 percentage
points less than alt.1. Unchanged
    Sales/Subscribers         158               price level. 10 % of A
    Revenues 150818 270410 500611 682213 996660 1439555,579 1816498 1960572 1954260 1786677 1486005 10 443 567 subscribers will be converted to
                              B subscribers each year. The same
number of customer will join
  B subscribers Subscribers 0 0 0 0 0 0 1824,541 4126,831 6611,725 9088,618 11353,11   externally. B subscribers pay 50
                              % more than A subscribers
    Change Subscribers                        
    Sales/Subscribers         237              
    Revenues           0 431866,7 976816,2 1564988 2151266 2687269 7 812 205
                            18 255 772  
  A&B Revenues 150818 270410 500611 682213 996660 1439555,579 2248365 2937388 3519247 3937942 4173273    
Subscribers

TEAM FERRARI
 Evaluation Of Alternative Strategies – Weighting System

Outsourcing Integration New Product Weighting

(per plus)
Very Potential to
increase future
+ (6) ++ (12) +++ (18) 6
important
revenues
factor
Licensing costs
+++ (15) + (5) + (5) 5
Potential market
share
+ (4) ++ (8) +++ (12) 4
Leveraging brand
name
+ (3) +++ (9) ++ (6) 3
Size of financial
investment
+++ (6) ++ (4) ++ (4) 2
needed
Less Potential to
increase short-
+++ (3) ++ (2) + (1) 1
important
term revenues
factors
37 40 46

TEAM FERRARI