Netflix Strategy

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NETFLIX: A COMPANY ANALYSIS

Table of Contents
I. Wall Street Journal Article and Executive Summary ..4 I A. Wall Street Journal Article 4 I B. Executive Summary ..5 II. External Analysis ..7 II A. Industry Definition ..7 II B. Six Industry Force Analysis ..8 II C. Macro Environmental Forces Analysis, Economic Trends, and Ethical Concerns ..15 II D. Competitor Analysis ..17 II D. 1 Netflix’s Competitors ..17 II D. 2 Netflix’s Primary Competitors ..17 II D. 3 Primary Competitors’ Business Level and Corporate Level Strategy ..18 II D. 4 How Competitors Achieve Their Strategic Position ..18 II D. 5 Willingness to Pay ..21 II D. 6 Comparative Financial Analysis ..22 II D. 7 Implications of Competitor Analysis ..23 II E. Intra-Industry Analysis ..24 III. Internal Analysis ..24 III A. Business Definition/Mission ..24 III B. Management Style ..24 III C. Organizational Structure, Controls and Values ..25 III C. 1 Organizational Structure ..25 III C. 2 Organizational Controls ..25 III C. 3 Organizational Values ..25 III D. Strategic Position Definition ..26 III D. 1 Corporate Level ..26 III D. 2 Business Level ..27 III D. 3 Resource & Capability Level ..28 Value Minus Cost Profile ..28 Value Chain ..28 VRIO Analysis ..28 Consumer Retention Analysis ..29 4Ps Analysis ..29 Product Life Cycle ..30 III E. Financial Analysis ..31 III E. 1 Netflix Financial Performance Analysis ..31 III E. 2 Valuation of Netflix ..32 III E. 3 Scenario Analysis ..33 IV. Analysis of the Effectiveness of the Strategy ..34 V. Recommendations ..35 V A. Short-Term and Long-Term Recommendations ..35 V A. 1 Short-Term Recommendations ..35 V A. 2 Long-Term Recommendations ..36 V B. Strategy Implementation ..38 V B. 1 Short-Term Strategy Implementation: Video Game Industry ..38 V B. 2 Long-Term Strategy Implementation: Streaming ..38 V C. Corporate Social Responsibility and Ethical Decision-Making Practices ..39 VI. Conclusions ..39 VII. Bibliography ..40

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VIII. Main Appendix ..43 Exhibit 1: Video Entertainment Industry Diagram ..43 Exhibit 2: Average Weekly Hours of Consumption by Age ..43 Exhibit 3: Average Weekly Hours of Consumption by Age Chart ..44 Exhibit 4: Leisure Activities at Home, by Age ..45 Exhibit 5: Hours Available for Leisure per Week ..46 Exhibit 6: Industry Six Forces Analysis ..47 Complements .. 47 Threat of Entry ..48 Supplier Power ..50 Buyer Power ..53 Rivalry ..55 Substitutes ..56 Exhibit 7: Market Share (Retail and Rental) ..57 Exhibit 8: Market Share (Rental) ..57 Exhibit 9: Average Annual Sales Growth ..58 Exhibit 10: Average Gross Profit Margin ..58 Exhibit 11: Average Return on Assets ..59 Exhibit 12: Average Debt-to-Equity ..60 Exhibit 13: Current Ratio ..60 Exhibit 14: Average Collection Period ..61 Exhibit 15: Average Asset Turnover ..61 Exhibit 16: Average Inventory Holding Period ..62 Exhibit 17: Industry Financial Ratios ..63 Exhibit 18: Netflix, Inc. Organizational Chart ..69 Exhibit 19: BCG Matrix ..69 Exhibit 20: VRIO Framework ..70 Exhibit 21: Value Chain ..71 Exhibit 22: Netflix, Inc. 2008 Income Statement ..71 Exhibit 23: Cost of Debt/Cost of Equity ..72 Exhibit 24: WACC Weights ..73 Exhibit 25: Netflix, Inc. Income Statement Plus Warner Bros. Agreement Changes ..74 Exhibit 26: Cost of Debt/Cost of Equity ..75 Exhibit 27: WACC Weights ..76 Exhibit 28: WACC Calculation ..78 Exhibit 29: Capital Expenditure ..79 Exhibit 30: Net Working Capital ..79 IX. Financial Background Appendix ..79 IX A. Netflix Current Value 2008 ..79 IX A. 1 Justification of Approaches ..79 IX A. 2 FCF Analysis ..80 IX A. 3 Growth Metrics ..82 IX A. 4 Free Cash Flows ..83 IX B. Netflix Valuation Incorporating the Warner Bros. Deal ..84 IX B. 1 FCF Analysis ..84 IX B. 2 Growth Metrics ..86 IX B. 3 Free Cash Flows ..88

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I. Wall Street Journal & Executive Summary
I A. Wall Street Journal Article
UPDATE: Netflix, Warner Bros. Reach New Deal By David B. Wilkerson January 6, 2010 Online DVD rental pioneer Netflix Inc. (NFLX) has...
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