Jenell Barnard Com 338 Winter 2016
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- Table of Contents
- Introduction
- About Netflix
- How They Stay on Top
- United States
- International
- Similarities
- Stock Market
- Expansion Plans
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Netflix: A Fortune 500 Company NETFLIX: A Fortune 500 company NETFLIX: a fortune 500 company Jenell Barnard Com 338 Winter 2016 Amy flood, Nicholas Jerrim, Levina Kattoola, Tiffany Lopez, Allison Robbins, erick white university of michigan-flint March 8, 2016
Memorandum
Here is our research-based analysis of the Fortune 500 Company we selected, Netflix. Our research indicated many of the reasons that have driven Netflix to its current spot as the premier streaming service available today. Their incredible selection and original content have been key to putting Netflix a step above their competition. We’ve also learned that while their financials are debt-heavy today, their investments are expected to pay off in propelling them into a more international dominance in the industry. Our analysis indicates that with a continued expansion in their original programming and the partnerships they have built in ensuring their service is broadly available, they will continue to show well in economic growth. Our only recommendation is one they are already following which is to expand these original programs into new international markets where they can further expand their market share. There are barriers in this direction such as existing deals between local telecom companies in many foreign markets; however, with a strong financial backing and a little time they should be able to overcome this easily. We were strongly supported in our research by each member of our group. We came up with a strong plan and kept each-other to our deadlines. It was clear to us early on that Netflix was a bright new company that interested us all and we thoroughly enjoyed researching the topic. We appreciate the value in not only building a report as a team, but in learning to do so effectively in a purely web-based environment. With technology continuously finding its way into business it will be crucial in the business world to be able to manage projects without direct interactions. Further, the research into Netflix has helped us be more aware of the pros and cons of the various streaming services; information which we will exploit thoroughly in our free time. Thank you for this opportunity and please reach out to any of our members if you have questions about the report.
Overview 2 Expansion 2 Debt 3
Profit 3 United States 3 International 3
HBO 4
Amazon 5 Hulu 6
Differences 6 Similarities 6 Stock Market 8 Investors 8 Expansion Plans 8 Conclusion 9 References 10 Table of ContentsFigure 1: Netflix Subscribers by Year 2 Figure 2: Top 10 Online Video Downstream Sources 4 Figure 3: Internet Traffic Competitive Comparison 7 Figure 4: Netflix Profit Comparison 2012-2015 7 iii Figure 5: Netflix, Inc. (NFLX) - NasdaqGS 8 NETFLIX: A FORTUNE 500 COMPANY IntroductionIn its pursuit of becoming the leading global provider of streaming movies and television, Netflix has been able to take the fastest route possible for expansion. While the road to success has not always been positive, Netflix has been able to overcome the trials and tribulations in the world of online controversy and prevail as a leader. By studying the online video desires of a vast array of people, scrutinizing the competitors’ products, examining the costs related to driving product distinctiveness, and the desire to be the best in its class, Netflix has been able to stay focused and continue to strive for excellence in its field. About NetflixNetflix.com is an on demand streaming service founded by Reed Hastings and Marc Randolph in Scotts Valley, California in 1997. Hastings was a high school math teacher and became founder of a multi-million dollar software company called Pure Software. Randolph was the co-founder of MicroWarehouse and later became VP of Marketing for Borland International. The two met while working together at Pure Software. Randolph was at a point that he wanted to make his next career move to be something related to internet sales. An idea came to light when he was forced to pay $40.00 in overdue fees for returning the movie Apollo 13 late. Around this time, Hastings had recently sold his Pure Software company for $700 million and was willing to invest $2.5 million cash into the start-up of a new business with Randolph (Fortune Magazine. 2009). This was the how Netflix.com was founded. 1 The Netflix.com official website went live for customer access on April 14, 1998 as a pay-per-rental model and then by September 1999 with a $30 million investment from Group Arnault, a monthly subscription membership was introduced (Funding Universe, 2016). This idea took off and by early 2000 the single pay-per-rental model was dropped. Also in 2000 revenue shares are signed with Warner Brothers and Columbia studios and became the introduction of CineMatch. During the next year, Netflix was in discussions with Best Buy and by 2001 began a partnership for exposure in over 1800 stores. In 2002 the company made the financial decision to go public and officially changes its name to Netlix, Inc. During the next 5 years, Netflix continues with the normal day to day business but went through many financial ups and down. They continued to incur severe losses until 2003 when a positive profit year was reported. Per a September 2002 article from The New York Times, Netflix was said to have over 670,000 monthly subscribers. The streaming video and DVD industry soared from 2002 to 2005. By 2005 Netflix had some 35,000 different film titles and shipped nearly 1 million DVD’s out every day (Funding Universe, 2016). Netflix ventured down different avenues over the next 10 years trying to capture any and all of the online and social media world as well as globally. 
Figure 1: Netflix Subscribers by Year (Rosoff, 2016) How They Stay on TopOverviewNetflix offers the luxury of watching a variety of shows for as long as you want with no commercial or interruptions at any time of the day. According to Netflix, they spend around $1 billion on advertising every year and about $800 million on technology and development (Steel, 2016). Since people have such broad tastes in what they want to watch, Netflix has offered a wide variety of options and categories. They also stay current on the most popular shows and movies, instead of having as many shows possible. They have also reached the point where they create their own original series. These have become a huge success for the company. “Orange is the New Black” was one of their first major hits. They have now created a spin-off reunion show for the hit 90’s show, “Full House” ("Financial Statements," n.d.). Creating their own shows and movies has greatly aided in the expansion and sustaining their number one spot for streaming networks. Expansion2 They do not have enough profit to continue to expand internationally. They currently have their company in fifty countries. Netflix has recently introduced their services to 130 new countries in the beginning of 2016 (Steel, 2016). The previous growth forecast was missed, which caused their subscriber numbers to drop from 1.9 million to 1.56 million. Their profit then dropped 48%, and led them to warn investors that the company would be running at break even profitability through all of 2016. They also stated they would start having material global profits in 2017. However, since their growth rates have climbed, investors have started to come back around in hopes that the growth continues in the United States, but internationally as well (Steel, 2016). DebtNetflix has started using debt to fund their expansion. What is the actual amount of debt they are in currently? Forbes magazine did an investigation on Netflix. They had Cory Johnson interview and investigate. He discovered that the company has a mysterious $3.68 billion in commitments that are not listed (Bedigian, 2012). Netflix frequently updates their income statements and balance sheets. I have attached the most recent income statement below for references. Cory Johnson has gone through Netflix’s quarterly and revealed that Netflix has to pay $2.37 billion due in less than three years, and up to $700 million due in less than just one year (Bedigian, 2012). ProfitHow can they earn a profit with such low service fees? Netflix offers three packages. The first is ‘Basic’, the second is ‘Standard’, and the third is ‘Premium’. Each package offers the first month of watching Netflix free. The main difference aside from the monthly price is the amount of screens that will allow Netflix to stream at once. ‘Basic’ allows 1 screen for $7.99, “Standard’ allows 2 for $9.99, and ‘Premium’ allows 4 for $11.99 ("Financial Statements," n.d.). By offering three different yet similar packages, it allows them to continue making a profit. If a customer is unhappy with any of the packages, they can cancel at any time, then they can choose a different offer if desired ("Financial Statements," n.d.). These offers are simple enough that it really comes down to how much you want to pay, and how many screens you would like to play at once. United StatesThere are about 70 million households in the United States that currently have Netflix. Across the world, there are about 74.76 million subscribers (Steel, 2016). However, as stated above, their profits dropped 48% in the missed growth forecast which dropped their profit to $43.2 million (Steel, 2016). There are misleading numbers as to the exact dollar amount from the United States alone. International3 They currently have their company in fifty countries. Netflix has recently introduced their services to 130 new countries in the beginning of 2016 (Steel, 2016). Netflix missed the previous growth forecast, which caused their subscriber numbers to drop from 1.9 million to 1.56 million. Their profit then dropped 48%, and led them to warn investors that the company would be running at break even profitability through all of 2016. They also stated they would start having material global profits in 2017. However, since their growth rates have climbed, investors have started to come back around in hopes that the growth continues in the United States, but internationally as well (Steel, 2016). Competition
Figure 2: Top 10 Online Video Downstream Sources (Kafka, 2012) HBOHBO and Netflix have been rivals for some time now. HBO Go, owned by Time Warner, is an internet streaming service that lets subscribers watch HBO programming from anywhere on several different devices. HBO Go offers some content that is similar to Netflix, like movies, TV shows, and exclusive original programming. Both companies offer a video on demand service and offer a wide variety of original movies. Both companies plan to expand in international markets and have started development already. Netflix and HBO Go are two very competitive companies and will continue to develop new and improved streaming technology to win over consumer’s subscriptions. 4 There are quite a few differences between these two rivals. Netflix has over 75 million members in over 190 countries and its market is more than $46 billion (Arnold, 2016). Netflix was the first company with streaming technology in terms of all-around value, Netflix is the most comprehensive on-demand provider out there, although HBO has a clear advantage when it comes to showing recent popular films. Almost a quarter of the 50 top-grossing movies of 2013 and 2014 are available to stream on HBO Go (Luckerson, 2015). HBO Go also has a better variety of sports, especially boxing. Netflix offers a wider variety and a good mix of both Television and film at a high quality. Both services offer an application that can be installed on devices such as smartphones and tablets, but the difference is HBO Go access is still very limited (Becker, 2016). The downside of HBO Go is that it requires a cable subscription to HBO in order to be used or it costs about $15 a month, where Netflix does not require any cable subscription and only costs $9 per month (Becker, 2016). When it comes to quality HBO Go is better overall. Although HBO’s library does not have the depth of Netflix, it is well worth it. AmazonAmazon prime offers some current TV shows available the day after they air, whereas Netflix typically has about a year delay between when the show airs and when it gets uploaded. It does get uploaded all at once though which means binge-watchers can blow through their favorite show all in one go (if that’s your thing). They are both add free in television watching; which is an advantage they both have over their huge competitor Hulu. It is worth noting that Amazon does advertise its own shows with a short clip at the beginning of each episode (Netflix Vs. Hulu Plus, 2015). Amazon offers viewing of pilot episodes where customer reviews dictate what shows will go on to get a full series. They’ve been trailing Netflix in original series but with this strategy they are catching up. Amazon Prime’s selection of films is severely lacking in comparison to Netflix, and Netflix regularly has Indie films which you likely never heard of (Netflix Vs. Hulu Plus, 2015). And so according to Consumer Reports, Netflix has a better selection and better availability based on device compatibility. Amazon gets a nod for all the extra features that come with the service which includes unlimited cloud phot storage, free music streaming of over 1 million songs, and they include the Amazon Prime free two-day shipping. Between the two, Consumer Reports puts Netflix barely ahead at 3.5 vs. 3.4. (Amazon Prime, 2015). In their original content departments Netflix has been leading in quantity, but Amazon just won out on quality at the Golden Globes. They picked up both Best Comedy and Best Musical Series for its show “Mozart in the Jungle” (Gibbs, 2016). So while Netflix continues to draw consumers with its original programming, it is clear that Amazon is making a dramatic entrance on this front and could be a dangerous competitor in years to come. Either way the real winner will be the viewers who are mesmerized by these shows. 5 Amazon’s programming also includes a lot of child friendly content in addition to their regular adult shows. This can be helpful for families with young children (Schwindt, 2015). HuluHulu was founded in 2007 as a joint venture between News Corp and NBC Universal (Lawler, 2012). Similar to services such as Netflix and Amazon Prime, it is an online video service that offers television shows, movies, and original content (Callahan, 2009). DifferencesThe major difference between Netflix and Hulu is its primary content. Hulu focuses on television shows, specifically current TV shows. Netflix on the other hand, only offers previous seasons of television shows. Hulu also offers some series that originate from cable channels with the notable exception of HBO. Overall, Netflix is considered by many observers to have the larger and higher quality content library, excluding current television shows. While both Hulu and Netflix have tiered pricing, Hulu offers HD viewing in its lowest price tier while Netflix offers HD in its Standard and Premium packages. In terms of HD offerings, Hulu doesn’t charge extra (Pierce, 2016). Hulu however, doesn’t offer ultra-high definition. Another difference between the two services is while Hulu offers a package with commercials; its lowest cost plan does have commercials. In stark contrast, Netflix has no advertising with all of its plans.
The cost of Hulu is tiered starting at $7.99 per month with limited commercials and $11.99 per month with no commercials. Similarly, Netflix also offers tiered pricing starting at $7.99 for the basic package but lacks HD and ultra HD, and can only be seen on one screen at a time. The standard package is $9.99 monthly and includes HD but no ultra HD, and can be seen on two screens at the same time. The premium package is $11.99 per month, has both HD and ultra HD viewing, and can be seen on up to four screens at the same time (Netflix, 2016). 6 Currently, both Netflix and Hulu offer original content. Netflix has scored critical and popular acclaim for original content such as Orange Is the New Black and House of Cards. Recently, Netflix also has produced hits such as Daredevil and Jessica Jones. Hulu also has increased its focus on original programming with shows such as the drama 11.22.63, a drama about a man that goes back in time to foil the John F. Kennedy assassination. Another original series on Hulu is the Mindy Project. Hulu picked up the fourth season of the show, and its loyal fan base, after it was cancelled by Fox. Hulu’s previous original programming focused on comedies that were produced with relatively lower budgets such as The Awesomes and East Los High (Pierce, 2016). 6 
Figure 1: Internet Traffic Competitive Comparison 
Figure 2: Netflix Profit Comparison 2012-2015 7 Stock MarketNetflix stock has had a shaky beginning this year with a decline in stock price. Yet, Netflix is one of the top three leading companies in the stock market today. (Moreno, 2016) The diagram below shows the most recent stock activity (Yahoo Finance, 2016): 
Figure 3: Netflix, Inc. (NFLX) - NasdaqGS 99.72 100.50 InvestorsNetflix investors have begun to dump shares for three reasons. First, cable prices are much cheaper in some regions of the world. The United States is Netflix’s biggest opportunity to profit. That being said, Netflix is almost fully immersed in the United States making it difficult to profit from U.S. sales. Netflix has to find a way to continue to grow beyond the United States. Furthermore, competition is getting intense for Netflix. Other companies are beginning to move in on territory that Netflix has occupied, therefore lowering costs. Lastly, content costs are going up and eventually this will become an issue for shareholders. (Nichols, 2016) Expansion Plans8 Netflix has big plans for expansion in the not so distant future. They are already expanding their horizons, but have a lot of foot work to do in order to see future benefits. January 6, 2016, Netflix was launched in an additional 130 countries, making it available everywhere except in China. They plan in the near future to expand to China, but for now they are exploring their options. Their plans for international expansion has caused the stock to soar. They would like to have the international expansion complete by year end. Although in the beginning of this year there is an obvious decline of the stock value, Netflix still continues to stay ahead of their competitors. Netflix projects that its global business will become solidly profitable in 2017 and beyond. This implies that the company will likely be through with its expansion. This should give long-term Netflix investors some reassurance since some had begun losing hope regarding whether the company’s international expansion will improve overall. (Corporation, 2016) ConclusionAs the information indicates, we believe that Netflix has a very clear advantage which will keep them ahead of their competition for some time. Their investments into new markets and new content, while temporarily hurting their stocks, will almost certainly pay off in the near future. The differences between Netflix and its domestic partners should give it an edge against its international competition as well, which is important as it is nearing its capacity in the US market. While the competition is fierce, there is strong evidence to suggest Netflix will remain the best bet in streaming services for many years. 9 9 References10 Alexandra Gibbs. (2016, January 11). Amazon trumps Netflix in Golden Globe wins. Retrieved March 31, 2016, from CNBC.com: http://www.cnbc.com/2016/01/11/amazon-trumps-netflix-at-the-golden-globe-awards.html Arnold, Thomas K. (January 2016). Netflix Still Part of The Home Entertainment Family. Home Media Magazine. 38,3. Becker, Sam. (February 2, 2016). Netflix, Hulu, HBO, or Amazon: Which Service is The Best Value. Money and Career Cheatsheet. http://www.cheatsheet.com/money-career/netflix-hulu-hbo-or-amazon-which-service-is-the-best-value.html/?a=viewall Callahan, R. H. (2009, January 22). Hulu Is A Big Hit. Retrieved from Forbes.com: http://www.forbes.com/2009/01/22/hulu-amazon-newscorp_leadership_clayton_in_rc_0121claytonchristensen_inl.html Jeff Blyskal. (2015, June 12). Video streaming face-off: Amazon Prime Instant Video vs. Netflix. Retrieved March 31, 2016, from ConsumerReports.org: http://www.consumerreports.org/cro/news/2015/06/netflix-vs-amazon-prime-video-streaming/index.htm Lawler, R. (2012, October 12). It’s Done: Early Hulu Investor Providence Equity Partners Has Sold Its Stake For $200M. Retrieved from Techcrunch.com: http://techcrunch.com/2012/10/12/providence-equity-sells-its-stake-in-hulu/ Luckerson, Victor. (April 17,2015). Forget TV-This Is Best Streaming Service For Movies. Time Magazine. Retrieved from http://time.com/3825376/best-movie-streaming-service-netflix-hbo-hulu-amazon/ Moreno, R. (2016, March 17). TheStreet. Retrieved from Yahoo Finance: http://www.thestreet.com/story/13498181/1/these-3-top-stocks-are-ready-to-lead-again-in-2016.html?puc=yahoo&cm_ven=YAHOO Move Over Netflix -- HBO Is Coming For You. (2016, March 2). TheStreet. Retrieved from http://libproxy.umflint.edu:2048/login?url=http://go.galegroup.com.libproxy.umflint.edu/ps/i.do?id=GALE%7CA444845053&sid=summon&v=2.1&u=lom_umichflint&it=r&p=ITOF&sw=w&asid=06f02f882be4cfc68aac52cc69bd7011 Netflix. (2016). Get Started. Retrieved from Netflix.com: https://www.netflix.com/getstarted Nichols, B. (2016, February 18). InvestorPlace. Retrieved from http://investorplace.com/2016/02/netflix-inc-nflx-stock-price-buy/#.VusMN4-cGDt Oriana Schwindt. (2015, December 21). Netflix vs. Amazon Prime vs. HBO: A Christmas TV Streaming Guide For The Cord-Cutter In Your Life. Retrieved March 31, 2016, from InternationalBusinessTimes.com: http://www.ibtimes.com/netflix-vs-amazon-prime-vs-hbo-christmas-tv-streaming-guide-cord-cutter-your-life-2234693 Pierce, D. (2016, February 15). The Ambitious 11.22.63 Is the Beginning of a Brand New Hulu. Retrieved from Wired.com: http://www.wired.com/2016/02/hulu-11-22-63/ Tech Times. (2015, March 23). Netflix vs. Hulu Plus vs. Amazon Prime: Which Streaming Service Is The Best For You? Retrieved March 31, 2016, from TechTimes.com: http://www.techtimes.com/articles/41601/20150323/netflix-vs-hulu-plus-vs-amazon-prime.htm 11 Yahoo Finance. (2016, March 17). Netflix, Inc (NFLX) – Nasdaq GS. United States: Yahoo. 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