Why split up Netflix?

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Transcription:

Netflix Group 4

Why split up Netflix? DVD by mail is slowly dying, but Netflix will do everything it can to keep it alive Netflix has diverged into two different business lines, with two very different cost structures, they contain different benefits that need to be marketed differently, which allow each to grow and operate independently DVD by Mail = Qwikster, because it refers to quick delivery. Netflix = Streaming Streaming was much cheaper to Netflix. DVD warehouses were expensive to maintain, in addition to the postal fees for shipping and returning DVDs Separate websites make things easier for their customers. Might cause some confusion since they aren t integrated. Credit Cards/Movie Ratings

Qwikster Operations Customers interested in DVDs go to Qwikster.com instead of Netflix.com. Video Game and Blu-Ray options will also be offered through the website Qwikster will continue to run the best DVD by mail service ever, throughout the United States. Netflix will offer the best streaming service for TV shows and movies, hopefully on a global basis Andy Rendlich, who led Netflix DVD for 12 years, will be the CEO of Qwikster

The old price was a $9.99/month option where customers could access movies via either DVD or streaming New price would unbundle these two. $7.99/month was the fee for DVDs while it costed an additional $7.99/month fee for online streaming Customers that wanted both faced a 60% price increase, since $7.99*2 = $15.98/month, which is $5.99 higher than the old combined fee of $9.99 New Pricing Logic

Attempted to push customers into online streaming, where costs were historically lower with higher profit margins Balancing Between DVDs & Streaming Now investing in their internet content-based platform, they were betting on the fact that their long-term subscribers would grow or stabilize As investment/resources funneled to streaming, Netflix began to liquidate fixed assets associated with their DVD business. Slower transition, since customers realized streaming is easier than DVDs, they will exponentially divest their interest from the DVD business Expected 10 million (40%) out of its expected 25 million subscribers in 2011 to be on a streaming-only plan, with 3 million (12%) on a DVDonly plan, and the remaining 12 million (48%) to have a combination DVD/streaming plan. 65% for Streaming & 35% for DVD

Netflix has a large number of competitors, each delivering video content to viewers through various mediums of technology: Impact of Key Competitors DVD rental via kiosks/stores Pay-for-play streaming Streaming through a monthly subscription Netflix expected that revenues would grow from the price increase and costs would decline due to the increasing number of subscribers choosing the more cost-effective streaming option

Impact of Key Competitors: Redbox Redbox kiosks feature the company's signature red color and are located at convenience stores, fast food restaurants, grocery stores, mass retailers, and pharmacies By November 2012, Redbox had over 42,000 kiosks at more than 34,000 locations. In September 2016, Redbox held 51.8% market share of the physical rental market Redbox Automated Retail LLC is an American company specializing in DVD, Blu-ray, 4K UHD, and video game rentals via automated retail kiosks

It is a media player, media library, Internet radio broadcaster, and mobile device management application developed by Apple Inc. Impact of Key Competitors: itunes Used to play, download, and organize digital multimedia files, including music and video, on personal computers running the macos and Windows operating systems. Users manage purchases through itunes Store Music was the original focus. In 2005, Apple expanded on the core features with video support, later also adding podcasts, e-books, and a section for managing mobile apps for Apple's ios operating system

It s an Internet video on demand service that is developed, owned, and operated by Amazon Impact of Key Competitors: Prime Video Offers television shows and films for rent or purchase and Prime Video, a selection of Amazon Studios original content and licensed acquisitions included in the Amazon's Prime subscription In some countries, Amazon Video can be purchased as an individual subscription separate from Amazon Prime Amazon Video additionally offers Amazon Channels, which allows viewers to subscribe to other suppliers' content, including HBO in the United States

Financial Analysis Subscribers growing at a rapid rate Sales and Operating Expenses increases proportionately

Financial Analysis Increasing Cost of Subscription and fulfillment expenses Acquisition of streaming content library costs more 2009 $64.2 millions vs 2010 $406.2 millions

Financial Analysis Net Profit Margin still growing but Gross Profit Margin stop growing Better cost control on marketing costs Proceeds from sale and disposal of DVDs

Financial Analysis

Free Cash Flow to Equity FCFE Valuation Equity Value Does not Include Cash Flow to Debt Holders FCFE = Net Income + D&A Net Increase in Working Capital Capital Expenditures + Change in Debt Best Way to Perform Valuation for Equity Investment

Growth Rate Assumptions Drivers User Base Growth CAGR of 25.3% Target Market Share of 150 Million Users by 2020 Internet Penetration by Country Market Share Increase, Decrease in Cable Company Market Share Base Case 25.3% Growth Through 2020 with Terminal Growth Rate at 5% High Case 35.3 % Growth Through 2020 with Terminal Growth Rate at 5% Low Case 15.3 % Growth Through 2020 with Terminal Growth Rate at 3%

Capital Structure in FY2010 Weighted Average Cost of Capital & Return on Equity E/V = 89.6% D/V = 10.4% Cost of Debt Interest Expense / LT Debt 8.4% Good Estimate Going Forward Return on Equity 11% Estimate Derived from S&P Historical Returns Risk Free Rate 3.07% 10-Yr U.S. Treasury Rate in 2010 Beta Unlevered 1.20 Industry Beta for Software Companies

Valuation DCF

Sensitivity of FCFE & FCFF

Growth Rate Sensitivity

Netflix DVD s SWOT Analysis Tangible Can Watch Offline Strengths Wait Time Weaknesses Liability for Consumer/Distributor Fragile Easy to Scratch Opportunities International Opportunities Threats Growth of Streaming Business Disc Drives Being Removed from Laptops

Netflix Streaming SWOT Analysis Strengths Instant Access Can Watch Related Movies Easily Downloadable Weaknesses Streaming is Only as Fast as Device/Wi-Fi Learning Curve of Use Opportunities User Growth in Domestic and International Markets Decrease in Cable Market Share Netflix Originals Threats Cost Increase of licensing

Why Brooks Should Buy More Shares Industry Innovator Stock Price is Less Than Company Valuation High Growth Potential

How Netflix can improve communicating product changes to consumers Constant Social Media Engagement Newsletters/Emails

Networking with cable tv, tv providers, and Hollywood studios Allow advertising space to marketers Exclusive licensing agreements

Appendix