Topics: Renting, DVD, Rental shop Pages: 13 (3754 words) Published: February 17, 2013, Inc.
In July 2000, Reed Hastings, chairman and CEO of, Inc., faced a critical decision. Three months earlier, following one of the worst episodes on record for the NASDAQ market, NetFlix had submitted its S-1 filing for its initial public offering (IPO).1 As a result of the market downturn, many Internet companies had been forced to withdraw their IPOs. Investment bankers indicated to Hastings that NetFlix would need to show positive cash flows within a twelve-month horizon in order to have a successful offering. Hastings knew that NetFlix was at a crucial stage. With revenues doubling every six months, NetFlix was enjoying tremendous success. But continued success depended on the company’s ability to sustain triple-digit growth for the foreseeable future. Soon, Hastings would have to decide whether or not to proceed with the company’s anticipated IPO. Hastings asked Barry McCarthy, the chief financial officer, to re-evaluate the cash flow requirements of the company’s current business plan, to suggest modifications that would improve the company’s projected cash flows, and to make a recommendation on whether the company should go forward with its planned offering. As McCarthy reviewed the existing NetFlix business model, he considered possible changes that might allow the company to proceed with its planned IPO and yet sustain the type of future growth that would be necessary for the company to achieve its long-run objectives. McCarthy was acutely aware of the company’s current financing need, but he worried about the effect that changes to the business plan might have on the company’s current operations.

The Company, Inc. was founded in 1997 by Reed Hastings and Marc Randolph. NetFlix operated an Internet-based unlimited rental subscription service for digital video disc (DVD) formatted movies. The DVD provided a new technology for storing and playing movies with image and sound quality exceeding that of traditional videocassettes. A DVD was similar in size to an audio compact disc and was capable of holding an entire feature-length film, as well as additional information such as subtitles in different languages, additional shorter videos about the making of the film or other related subject matter, and information about the actors, director, and producers. With its high quality and additional features, the new DVD technology provided an attractive alternative to traditional videocassettes for the home video market. By combining the superiority of the new DVD

1 After reaching a historical high of 5,048 on March 10, 2000, the NASDAQ Composite Index had fallen 25% to 3,794 by

April 18, 2000, the day of the NetFlix S-1 filing. ________________________________________________________________________________________________________________ Professor E. Scott Mayfield prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2000 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

201-037, Inc.

technology with the convenience of the Internet, NetFlix provided a new way to select and to rent home movies. Randolph managed production of the NetFlix web site, including the features, functionality, and content on the site. Randolph believed that consumers were often frustrated in their efforts to select and view movies at traditional video stores because of limited selections...
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