Netflix (NFLX)

• Article
• Discussion
• Edit
• History
• Bookmark

See all Bulls Reasons Bulls: Reasons To Buy Strong Partnerships with Microsoft and Tivo 0% agree Strong Partnerships with Microsoft and Tivo By December Netflix will have two important partnerships with Tivo and Microsoft Xbox 360 to stream HD movie right to their homes. View or Edit Reason 0 votes 0% agree Stickiness factor and acquisitions 0% agree Stickiness factor and acquisitions Subscriber levels have grown every year since Netflix's inception. Their churn rate has been decreasing in recent years, which is a sign that their customers are quite satisfied with their product. View or Edit Reason 0 votes 0% agree Largest online retail service 0% agree Largest online retail service Netflix is the largest online rental service in the market with over 7 million subscribers and a library of over 90,000 titles. They enjoy a significant advantage in market share over their closest competitor, Blockbuster. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Uncertainty about new technological developments 0% agree Uncertainty about new technological developments New technological developments could hurt Netflix's business model if offering such products proves to be more expensive or even unprofitable. View or Edit Reason 0 votes 0% agree IP infraction could hurt profit margins 0% agree IP infraction could hurt profit margins Intellectual property rights and violations could be detrimental to Netflix's earnings. If such laws and regulations are not strongly enforced Netflix could see serious effects. View or Edit Reason 0 votes 0% agree More competition could mean slower growth for Netflix 0% agree More competition could mean slower growth for Netflix Increased competition in the online media and video rental markets could provide slower growth for Netflix in the future. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

Top Contributors Dave Cleveland Related Articles Blockbuster (BBI) Apple (AAPL) Amazon.com (AMZN) Best Buy (BBY) Blu-ray vs. HD DVD Related Blog Posts » See All Related Posts powered by Wikinvest Wire

In the online rental space Netflix faces competition mainly from Blockbuster (BBI), which in the past two years has introduced and aggressively marketed a competing video-by-mail service known as Total Access to go along with its traditional in-store rentals. However, the stiffest challenge faced by Netflix in the long term is not Blockbuster, but growing demand for digital movie rentals. Netflix has responded to this demand, introducing a digital rental service in January 2007 that allows subscribers to download and view movies and television programs instantly on their personal computers.

For now, BBI and NFLX retain their large customer base because internet download speeds have not caught up with the demand for home movies, and broadband carriers cannot support high-definition downloads.

[edit] Overview

Netflix is a subscriber based service that allows customers to rent DVDs through the mail and online. Netflix makes nearly all of its revenue through subscriber fees, which vary with the different subscription plans that it offers. The main costs of their business include marketing and technology and development expenses.^[1]

[edit] Subscription Plans

Netflix offers 5 different subscription plans that vary in monthly price from $4.99-23.99. A description of these plans can be seen in the table below.

[edit] 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. (Note: Netflix was required to change the design of its signature red square enveloped due to changes in postal regulations - as of May 2008, the square red mailers would have each incurred a $0.20 surcharge because the square shape is harder to process than normal rectangular pieces of mail.)^[2]
• No late fees: Subscribers can keep DVDs for as long as they like. 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.^[3] This feature is included in all of Netflix's subscription plans but to varying degrees. The amount of time subscribers can stream videos to their computers 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.^[4]
• 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 of 2008 Netflix announced that they would also begin streaming videos to Microsoft's Xbox 360 over the Xbox Live platform.^[5]
• Free Trials: Netflix offers a 2 week free trial to any new customer.

[edit] Business Financials

Below are some key financial metrics for Netflix. Over the past three years Netflix has seen significant growth in its subscriber base from 2.6 million in 2004 to over 8.6 million in 2008. This growth is largely attributed to their decreasing churn rate, which fell to 3.9% in 2006 from 4.0% in 2005.^[1] The churn rate is a metric that allows companies (generally, whose revenues are generated by subscriptions) to measure the percentage of subscription cancellations during a specific period. In Netflix's case, the churn rate has been decreasing for the last few years. The company has noticed that older subscribers (that is, long-time subscribers) are less likely to cancel their subscriptions than newer subscribers. As their subscriber base "ages" they are seeing decreasing churn and a faster growth of their subscriber base.^[1]

The next chart shows Netflix's Subscriber Acquisition Cost (SAC) for the years 2004-2006. This metric to evaluate the effectiveness of their business model. SAC measures the amount Netflix spends for each new customer it gains. Over past three years Netflix's SAC has been increasing. There are a few ways to explain this increase, but it is most likely due to the different types of subscribers the company has. The increasing SAC can be explained through the progression of marketing techniques and the types of subscribers that Netflix targets over time. Over time the yield from any given marketing strategy will be exhausted and the company must branch out in new ways to attract subscribers. Developing new marketing strategies and increasing the scope of the marketing strategy is expensive. While this rising cost certainly isn't helping revenues, it is expected and worked into the companies business model.^[1] Netflix has expanded its marketing techniques to include online advertising through major portals such as Yahoo! (YHOO), MSN and AOL , as well as creative television commercials and print ads. To attract skeptical customers Netflix has offered free trial periods to new subscribers.

The chart below shows Netflix's Gross Margin for the years 2004-2006. Netflix has seen positive results in this metric, which measures the percentage of revenues that are profits. Netflix's margins have been very strong over the last few years and increased 5.4% from 2005 to 2006. By reducing overall costs and growing their subscriber base Netflix has been able to show strong profit margins since its inception in 2001.

[edit] Key Trends and Forces

[edit] Exclusive focus on Blu-ray DVDs presents short term opportunities.

In March 2006 the first high definition DVDs hit the market, and Netflix quickly announced that it would offer HD DVDs as soon as titles became available.^[6] About a month later Blockbuster announced that it too would begin offering some HD and Blu-ray DVDs in its online library.^[7] But in January 2008, Netflix, Blockbuster, and major DVD retailers like Wal-Mart Stores (WMT) and Best Buy (BBY) announced that they would begin phasing out HD DVDs and offer only Blu-ray discs. Exclusive focus on Blu-ray technology should boost the format's popularity, and the economies of scale created when hardware manufacturers and production companies switch to producing these discs exclusively should bring down prices for the equipment. Since Blu-ray discs are much more expensive than a standard DVD, this could encourage new owners of Blu-ray players to rent rather than buy, driving up subscriptions for Netflix.

[edit] 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.

[edit] 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.^[8] With this feature customers can view movies directly on their personal computers through the Netflix website.

[edit] 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.

[edit] 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 (BBI), 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.

[edit] 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.^[9] Total Access allows subscribers to rent movies by mail and furthermore, subscribers have the option to return rented DVDs to Blockbuster stores. Blockbuster has been gaining market share from Netflix since this program's inception. The below table compares the cost and variety of mail service subscription options of Blockbuster (BBI) and Netflix.^[10]

[edit] Online Video Competitors

• TiVo (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 (AAPL) & Fox : Apple and Fox teamed up to begin offering movie rentals through the Apple iTunes store starting in early 2008.^[11] 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.

[edit] References

1. ↑ ^{1.0 1.1 1.2 1.3} Netflix Annual Report, 10-k
2. ↑ MSN Money - Top Stocks: Post office seeing red over Netflix envelopes, December 6, 2007
3. ↑ Netflix Quarterly Report (10-Q), Third Quarter 2007.
4. ↑ www.netflix.com
5. ↑ "Netflix Brings On-Demand Video to the Xbox: Another PC to TV Bridge", www.seekingalpha.com, July 16, 2008.
6. ↑ Press Release January 24, 2006, retrieved 12/28/07
7. ↑ Blockbuster Queuing Up HD DVD Titles, www.homemediamagazine.com, April 13, 2006, retrieved 12/28/07.
8. ↑ Press Release January 16, 2007, retrieved 12/28/07.
9. ↑ Jennifer Netherby, "Blockbuster Nips Netflix Market Share, Video Business, 3/3/2005, retrieved 12/27/2007.
10. ↑ Netflix, Blockbuster
11. ↑ Liz Gannes,"Apple to Announce Movie Rentals at MacWorld?", Matoumba.com, retrieved December 27, 2007.