TOP CONTRIBUTORS

Dave Cleveland

Matthew Martos

Netflix (NASDAQ: NFLX) is the world's largest video rental subscription service, having pioneered the model and charging customers a flat monthly fee for unlimited video rentals without late fees^[1]. As of the end of FY2009, Netflix has a library of over 90,000 titles, far larger than the average video store, as well as a subscriber base of 12.3 million, a 31% YoY increase^[2].

In the movie rental space Netflix faces competition mainly from Blockbuster, which has introduced and aggressively marketed a competing video-by-mail service known as Total Access to go along with its traditional in-store rentals.

The stiffest challenge faced by Netflix in the long term is not Blockbuster, but growing demand for digital movie rentals accessible from the internet and cable providers. To keep pace, Netflix developed a digital rental service that allows subscribers to download and view movies and television programs instantly on their personal computers. In addition, Netflix has forged or attempted to forge partnerships with leaders in consumer electronics to stream movies and TV episodes directly to members' TVs. These devices currently include Blu-ray disc players and new Internet TVs from LG Electronics ; Blu-ray disc players from Samsung; digital video players from Roku (who manufactured Netflix's streaming receiver box); the Xbox 360 game console from Microsoft; digital video recorders from TiVo and in January 2010, the Nintendo Wii^[3][4].

Company Overview

Netflix is a subscriber based service that allows customers to rent DVDs through the mail and online. A dot-com era creation, it was started in 1997 by Reed Hastings in Los Gatos, California. Through a sophisticated supply chain and an effective customer rating system, it has honed its competitve edge over Blockbuster in the subscription-based online rental space. Their 50 regional shipping centers across the United States help almost 95% of their customers receive their DVDs within a day of shipping, while their rating system gives customers recommendations based on their rental history^[5].

Business and Financial Metrics

In FY2009, Netflix grew its customer base from 9.4 to 12.3 million total subscribers, a 31% YoY growth and over 1 millon additions coming in the last quarter^[2]. Of these 12.3 million, 97%, are paid subscribers. Total revenues for the year amounted to $1.67 billion, a 22% increase from FY2008's $1.4 billion in revenues. Fueled by content growth and cost-cutting, Netflix's bottom line also showed strong growth, with net income surging 40% on a YoY basis to $83.1 million. Subscriber acquisition cost, which represents the total marketing expense allocated to each customer addition, declined YoY from $29.12 to $25.48^[2], as did churn rate, which decreased from 4.2% to 3.9% YoY. This improvement bodes well for Netflix as it indicates customers are generally happier with the services Netflix has to offer.

Features

• Netflix sends you your movies: Subscribers choose which movies they want to rent at www.netflix.com. They can create a queue of films online and when movies are returned the next movie on their queue is shipped out immediately.

• Free DVD shipping and postage: The cost of sending movies back to Netflix is included in the subscription. Each DVD is sent in a reusable envelope that is addressed to the nearest Netflix facility.

• No late fees: Subscribers can keep DVDs indefinitely. The only disadvantage to doing so is that the next movie in their queue won't be sent until they have fewer DVDs than their plan allows at home.

• Online Viewing: Netflix subscribers have the ability to watch over 8,000 movies and TV episodes from the Netflix library directly on their PC^[7]. The amount of time subscribers can stream videos depends on their subscription plan. In most plans, subscribers can view the same number of hours per month as they spend in dollars. That is, a subscriber on a $9.99 per month plan could stream 10 hours of video to their computer per month. However, with Netflix's $16.99 unlimited plan subscribers can stream an unlimited number of hours per month.^[8]

• Other Viewing Options: In addition to their online viewing service, Netflix released the Netflix box, a set-top unit built by Roku, in early 2008. The unit allows customers to view netflix movies directly on their home television without dealing with the by-mail rental process. In July 2008, Netflix announced that they would also begin streaming videos to Microsoft's Xbox 360 over the Xbox Live platform^[9].

• Free Trials: Netflix offers a 2 week free trial to any new customer.

Trends and Forces

Opportunities to integrate with broadband-enabled devices allows for stable recurring revenue streams

Netflix has partnered up with different device manufacturers in an effort to integrate its platform into different broadband-enabled devices. In January 2010, Netflix announced partnerships with Funai, Panasonic, Sanyo, Sharp, and Toshiba, which will allow Netflix to distribute its thousands of movies and TV episodes through the digital televisions of consumers^[10].

PPV, On-Demand and TiVo Undermine Demand for the Netflix Product

The emergence of new technology in the media industry is a potential obstacle to Netflix. Technologies such as high-definition pay-per-view, video on-demand, and DVR enhance people's options for home movie viewing and lessen the need to rent discs. Cable and satellite companies are continually enhancing these offerings to compete with each other, undermining Netflix's core business as they increase the library of movies that their customers can view for free with an on-demand subscription. Netflix will have to find an answer to the convenience of VOD and TiVo if it hopes to retain its market share in the long term.

Online movie viewing may make the Netflix product obsolete in the long term

The growing popularity of online video viewing threatens Netflix viability and on January 16, 2007 the company announced that it would begin offering instant online viewing capabilities to its subscribers at no additional cost.^[11] With this feature customers can view movies directly on their personal computers through the Netflix website.

Piracy could lower the demand for the Netflix product

The ability of consumers to illegally replicate DVDs is a major concern for companies like Netflix. Piracy allows people to receive the product Netflix offers without paying for a subscription and this can certainly hurt their earnings. Intellectual property laws and regulations can help to prevent such piracy and to protect Netflix in such cases. The illegal copying of intellectual property has been a major concern over the past years, especially in China, where regulations and enforcement are much more loosely applied.

Competition

Netflix competes with a number of online and retail media rental service providers as well as with cable and satellite television providers. Its most important competitor is Blockbuster, the country's largest retail video rental store chain. Other competitors include: Tivo, which provides digital video recording (DVR) hardware and service, Amazon.com, who launched an online rental and purchase service called Unbox in 2006, and subscription-based TV channels such as HBO and Showtime.

Comparison to Blockbuster

In 2004, Blockbuster introduced its Total Access program, which allows subscribers to rent movies by mail and furthermore, subscribers have the option to return rented DVDs to Blockbuster stores. Total Access was the first service to provide direct competition for Netflix, which at that time enjoyed 97% of the market share for rentals through the mail^[12]. Total Access allows subscribers to rent movies by mail and furthermore, subscribers have the option to return rented DVDs to Blockbuster stores.

Online Video Competitors

• TiVo & Amazon Unbox: In September 2006, Amazon launched its Amazon Unbox service which provides TV shows and movies for rental and purchase. The service is also available to TiVo subscribers who can rent movies directly to their DVR to watch in their home.
• Apple & Fox : Apple and Fox teamed up to begin offering movie rentals through the Apple iTunes store starting in early 2008^[13]. This service provides increased competition in the online movie rental market, specifically in digital rentals. Furthermore, the AppleTV, which was introduced in January 2007, allows people to rent and stream movies, television programs and YouTube.com videos directly to their television.

References

1. ↑ NFLX 2008 10-K pg. 1  
2. ↑ ^{2.0 2.1 2.2} "Netflix Announces Q4 2009 Financial Results" Netflix Investor Relations, 01/28/09
3. ↑ "Netflix Announces Upcoming Schedule of Events with the Financial Community" Netflix, Inc
4. ↑ "Netflix Confirms It's Coming to the Wii, But Most Wiis Aren't Internet Connected" Seeking Alpha 01/14/10
5. ↑ "How Netflix Transformed the Home Entertainment Industry" The Epoch Times, 9/30/09
6. ↑ "Netflix," Morningstar Investment Research
7. ↑ Netflix Quarterly Report (10-Q), Third Quarter 2007.
8. ↑ www.netflix.com
9. ↑ "Netflix Brings On-Demand Video to the Xbox: Another PC to TV Bridge", www.seekingalpha.com, July 16, 2008
10. ↑ "Netflix Announces Multiple Partners to Instantly Stream Movies and TV Episodes from Netflix to the TV" Netflix Press Release, 01/07/10
11. ↑ Press Release January 16, 2007, retrieved 12/28/07.
12. ↑ Jennifer Netherby, "Blockbuster Nips Netflix Market Share, Video Business, 3/3/2005, retrieved 12/27/2007.
13. ↑ Liz Gannes,"Apple to Announce Movie Rentals at MacWorld?", Matoumba.com, retrieved December 27, 2007.