Netflix Case Analysis

Case Analysis Netflix. com, Inc k JAVK Consulting Company 6/14/2011 600 Civic Center Dr Detroit, MI 48226 Dear Mr. Hastings, Our familiarity JAVK Consulting has examined the Netflix guest flummox and looked into the familys louvre yr financial upcoming. We consent analyzed Netflix with a scope of entering a rocky profits establish companion marketplace and seeing success in the future. The company menstruationly is pumping lots of money into trade strategy in bless to growth their client stem and is in turn facing financial troubles while they approach their initial public offering stage.As you read by means of our analysis of Netflix you pull up stakes find our companys thought on your financial performance so far, look into a filmr fabric and correlated notes flows, and develop an idea of financing solutions to manage growth. sequence more(prenominal) substance abusers are using mainstream technology such as telecastingdisc turners, video game consoles, la ptops, combined along with high-speed meshwork the creates a growing environment for a consumers wanting entertainment at their joysticks and fingertips. Our in weigh is for Netflix to have a successful run at an IPO if elect and manage their customer growth along the way for long precondition success.Thank you for the chance to divine service your business thrive. We hope you agree with our financial medical prognosis of Netflix and make a decision that catapults your company into financial success. Sincerely, JAVK Consulting Group occupation Statement Based on Initial discussion and evaluation, we understand that the effectuate of Initial Public Offering (IPO) is searing and urgencys to be estimated if the company should go forward with the offering, as a result of follow of internet companies have been forced to withdraw their IPOs due to market start turn.Secondly the need to show convinced(p) money flows within a twelve calendar month horizon in order to have a suc cessful offering. trio to suggest modifications that would improve the companys projected exchange flows granted the fact that the tax revenues were stunt woman every cardinal months. One of the most critical points of success for Netflix depended on the companys ability to manage and prevail their triple-digit growth into the foreseeable future. Analysis Technology is continuously facing quick change which gives a company such as Netflix an exclusive probability for a first mover advantage in a saucy market.The Netflix product is one that ignore ship easily and constitute in effect or be received directly to internet connections worldwide. The definite emergence in internet and console users is creating a consumer demand for entertainment that Netflix flock fill. This versatile product paired with emerging technology has led to rapid growth for the Netflix Company. The basal elements of Netflix core products give them an advantage over brick and p outlaster stores such as Blockbuster as Netflix offers a more personalise movie catch, the same unsanded titles, totally along with no date restrictions or late fees.As part of this long term objective Netflixs goal is to grow its customer base and retain users of fall by the wayside effort software. The goal of the free software is to have a positive encyclopaedism rate of free trial users later on a month of free service and retain them into the long run future. After retention, the goal of Netflix is to derive those customers into the long term future by tailoring the Netflix product in a rum way to each customer. Netflix does this by adapting their website interactions for each customer found off of their viewing history and preferences using a unique personal movie finder service.By offering this individualize service video users can buoy find movies they would enjoy and possibly use the Netflix mail service. theoretically speaking, Netflix performance to date has been positive (a lthough the company has been incurring loss category over year) considering the high operating expenses for the initial years of a recent business is common as most businesses make it or cut off it in their first 2-3 years which seems to be a normal arch considering this industry where the fixed assets increase year over year and the revenue generated on the fixed assets could drastically diminish base on user preference.Netflix has an extremely high growth rate for their revenues as they are doubling every sestet months. While revenues are doubling in the last year sales and marketing expenses have gone up more than three times. The main objective now is to make sure that by and by(prenominal) an initial public offering Netflix volition continue to create positive cash flows. We believe that Netflix has chosen the subscriber model to forecast its cash flow requirements because it is the most precise representation of how the company receives cash on a monthly basis.Netflix at its core is in the movie rental industry, the only cash inflows received are from subscribers that pay monthly subscription fees. The basic elements of the subscriber model are monthly subscribers, subscription fees, and movie usage including movies rented and exile exist. Based on these elements costs and revenues can be narrowed down and correlated to individual aspects of the model and accurate cash flows can be formed in order to predict future profitability. The subscriber model is fitting for Netflix for these reasons as subscribers are essentially their only cash inflows. demo A, illustrates the subscribe model premise. In our analysis, we used the subscriber model to forecast future cash flows. This allows us to see authority revenues month to month based on the initial subscriber rate and percentage, while incorporating the cost to your company for each additional subscriber. We have forecasted potential cash flows as easily as revenues for the next five years ( re nder D & stage E). This gives us an idea of where we are going and how we will get in that location. Currently it costs your company $106. 58(Exhibit B) for the first month of a free trial customer.This cost is offset by paid subscribers and can be considered a marketing expense. Every month each paid subscriber earns you on average $5. 82 (Exhibit B) in revenue. Netflix should continue trying to obtain new subscribers since there is a positive cash inflow for those customers after a burden average is formed. Based on the weighted average of customers who stay with Netflix and those that start there is a positive NPV based on the retention percentages. in that location are three basic types of customers for Netflix, one month trail exiting users, six month exiting users, and over five year users.Based off the retention ratios after one month 70% of customers from the free trail stay with Netflix, after that first month 42% of the original 70% stay for six months and 28% stay lo nger than six months (we have assumed it to be of at least 5 years and above). If a customer leaves after one month of free service your company would suffer a loss of $19. 26 (Exhibit B) given the fact that the initial purchase ($98. 28) of videodisc(s) can be reused ($88. 45) for the other new subscribers by purchasing an incremental of 2 videodisk(s) which move to the back catalogue as they become obsolete.Netflix can alter and retain those customers for six months they generate $1. 21(Exhibit B) of cash inflow for each customer. If the cash flow from acquiring new subscribers was negative we would advise your company to take an alternate route for generating cash flows. If your company continues with current business, retaining 28% of initial customers at least 5 years and above, the net present honour of your corporation will be $65,851,642 (Exhibit E) based on certain guess listed in Exhibit E.This NPV of your company after 5 years is based on the weighted average NPV perc entages that we determined for each of the three customer categories one month subscribers, six month subscribers and five year subscribers. everywhere sixty five million as a NPV is a glamorous number to project but it requires your company to retain the current customer retention ratios over the three timeline increments (Exhibit C). If these retention ratios are held strong and then we have determined the weighted NPV per subscriber would be $34. 34 (Exhibit C).While this number is far from over sixty five million dollars over the five year time retention span it grows to be exactly that. demonstration/Recommendation Based on our analysis we have come up with some solutions to improve your overall cash flows and strengthen the financial wellness of your company. These solutions are not far from the product that Netflix currently offers so do the changes would not place a large burden on costs. Also, the changes will offer a more customer focused and interactional experience with the Netflix product.Initially your first goal should be to increase the retention rate of potential new trial subscribers. Given that internet users are increasing year over year, we recommend that your company consider online video streaming (video on demand) which will be an out of the box approach. Using the online media streaming can help your company to cut down on sales and denote cost. Secondly with introduction of online streaming reduce the membership fees to 75% of the current rates which will help you increase customer retention rates.Third, assist revenue sharing which can help increase you marketing base while cutting your expenses. Forth is to promote referral bonus (can vary based on number of referrals provided) which can help you boost your sales through you existing customer base and in return reduce your operating(a) expenses. Lastly to reduce the trial period to 2 weeks (if done by Mail only) and this will result in increase of NPV of Netflix by $25. 8 mi llion (increase of NPV/subscriber from 34. 34 to 44. 10). Netflix is becoming even more personalized and may cut undesired costs such as surplus shipping costs.By doing this you will increase your profitability and decrease your cost to postulate a new customer. Another recommendation is to continue to encourage all online subscribers to rate films. This will encourage other subscribers to rent more movies and help with the automatic marquee queue available to online subscribers. By encouraging this interactive use with the Netflix website the company will have an idea of which DVDs to spend money purchasing and will be able to pull through an updated DVD library that meets the growing demand of new subscribers.To conclude, your company should survive the IPO until the economic condition improves and use this additional time to evaluate some of our recommendation to attain positive cash flows which can play in your favor. Appendix Exhibit A Subscriber Model set forth live/New DVD $ 17. 55 transportation system Cost/DVD $ 1. 00 Number of DVD Initial Marque Queue $ 4. 00 Number of DVD Shipped /calendar month $ 4. 30 New DVD 1st Month $ 5. 60 Number of new DVD(s) subsequent Month $ 0. 56 Revenue /Month $ 19. 95 Free trial $ 1. 00 Discount Rate 20% Exhibit B -New Subscriber Model Free give give Paid Paid Paid Paid Paid Paid Paid Paid Paid M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 Revenue $19. 95 $19. 95 $19. 95 $19. 95 $19. 95 $19. 95 $19. 95 $19. 95 $19. 95 $19. 95 $19. 95 Cost of DVD/ initial (one time) $ (98. 28) Cost of DVD/ releases $ (9. 83) $ (9. 83) $ (9. 83) $ (9. 83) $ (9. 83) $ (9. 83) $ (9. 83) $ (9. 83) $ (9. 83) $ (9. 83) $ (9. 83) Shipping initial DVDs $ (4. 0) Shipping new DVDs $ (4. 30) $ (4. 30) $ (4. 30) $ (4. 30) $ (4. 30) $ (4. 30) $ (4. 30) $ (4. 30) $ (4. 30) $ (4. 30) $ (4. 30) $ (4. 30) Net Revenue $(106. 58) $ 5. 82 $ 5. 82 $ 5. 82 $ 5. 82 $ 5. 82 $ 5. 82 $ 5. 82 $ 5. 82 $ 5. 82 $ 5. 82 $ 5. 82 Exhibit C Calculation of Net Present Value per new subscriber *assumes that if a subscriber stays with Netflix longer than 6 months will stay 5 years Subscribers 1 Mon 6 Mon 5 Yrs. * chance 30% 42% 28% Weighted NPV per Subscriber ($19. 26) $1. 21 $141. 46 $34. 34 C1 $ (106. 58) $ (106. 58) $ (106. 58) C2 $ 88. 45 $ 5. 82 $ 5. 82 C3 $ 5. 82 $ 5. 82 C4 $ 5. 82 $ 5. 82 C5 $ 5. 82 $ 5. 82 C6 $ 5. 82 $ 5. 82 C7 $ 88. 45 $ 5. 82 C8 $ 5. 82 C60 $ 5. 82 C61 $ 88. 45 CF By Month Exhibit D Projection of new subscribers 2000 Revenue result rate 1998 1999 274% lively subscribers 110,724 New Subscribers paid status 303,231 30% free 90,969 New Subscribers 2000 394,201 Exhibit E Value of Netflix 2000 2001 2002 2003 2004 NPV per Subscriber $34. 34 Discounted Rate 20% Growth rate per new subscriber 49% 49% 49% 49% live subscribers 110,724 Value of existing subscribers 3,802,27 3 New Subscribers 394,201 587,359 875,165 1,303,995 1,942,953 Value of new subscribers 13,536,829 20,169,875 30,053,114 44,779,140 66,720,918 do subscriber value 17,339,102 20,169,875 30,053,114 44,779,140 66,720,918 Product development 7,413,000 7,413,000 7,413,000 7,413,000 7,413,000 General and administrative 2,085,000 2,085,000 2,085,000 2,085,000 2,085,000 thorough Cost 9,498,000 9,498,000 9,498,000 9,498,000 9,498,000 Total Subscriber value minus cost 7,841,102 10,671,875 20,555,114 35,281,140 57,222,918 NPV of Netflix 65,851,642 Assumptions Existing customers pay 19. 95 per month (same as new customers) Additional cost projected at the same level as 1999NPV of Netflix only includes cash inflow and outflows and have not considered any liquidation value