Netflix Case Study

Netflix(2000)

1.From the Case material，I see that Netflix is going to build u.s leading media sources platform and take control of homemade market . It combines video rental service, online movie and drama subscription, original movie and drama production , also it cater to the taste of both conservative people and young generation and finally get the subscriber to convert from free to paid status. And now Netflix is trying to compete with many other country’s cable TV and network television .

2.a

As the Netflix subscribers watched about 4.3 movies per month, and the round shipping fee is about 1$, the monthly shipping costs per subscriber for the trial month 4*1+4.3=8.3$ and for each paid month is 4.3*1=4.3$

b. Calculate the total monthly disc acquisition costs of discs per subscriber for free-trial subscribers and paid subscribers.

5.6*$17.55=$98.28      monthly new released movie fee 0.56*$17.55=9.83

c.Using the above, draw up a timeline of activities, costs and revenues for a continuing new subscriber. On the time axis, show the expected activities and cash flows for a subscriber at or during time 0, 1st month, 2nd month, 3rd month, etc.

Cash flow for trial month: -( 98.28+8.3)=-106.58

Cash flows for the following periods :5.82

d.        Lay out the calculations to find the expected value (net present value) a new NetFlix subscriber. You have probabilities of retention / drop and will have developed a time line of costs and revenues. If you calculate cash flows for subscribers that drop after the first month, subscribers that drop after six months, and subscribers that are retained, you can determine expected values. Use a 20% annual discount rate. Use beginning of month cash flows and discounting for first year, mid year discounting for additional flows out to year five (the assumed end of net cash inflows). Is the expected Net Present Value positive?  Does adding customers make economic sense?

20%/12=1.67%

After trial month fee:5.82

NPV of not convert to paid-status subscribers=-84.01

NPV of convert to paid-status for six months= 28.43

NPV of continued subscribers 38.69

Expected NPV=58.64

After class thinking:

1. Revenue sharing is a extremely judicious plan for NetFlix which not only helps Netflix improve their NPV 3 times than the company without the plan, but also helps Netflix’s DVD cost.  I think DVD cost is a crucial item in calculating the value of Netflix, if Netflix sign a agreement with DVD producers, it can reduce the DVD cost from 17.55$ to 3$ or less. Obvisouly, this a huge diference between 17.55$ and 3$.
2. Subscriber model is also a good model to value how much net income or net loss a subscriber can create. Companies like Netflix who heavily rely on the subscribers are able to monitor the cost in creating a new subscriber or retaining a subscriber. For example, the Wall Street Journal’s raw material is paper and paper is cheaper than DVD. So they can adjust the probability of droping or keeping the subscription in the model. Also, like Amazon ,the big company can afford the negative NPV, so they give new subscriber a 6 month free trial.
3. The fluctuation of the Expected cash flows in Subscriber model is really interesting. The first year, from 3rd month to 6th month is 4.07  and from 8th to 12th is only 1.63, from 2nd year to 4th year is19.56. But the end of the subcribtion month expected cash flows have less difference, 2nd month is 30.61, 7th month is 38.78 and 5th  year is 44.32. So if a subscriber keep their subscription as they have already planned, like 1 month or 6 month , he might not affect much on theNetflix Cash flow. But if a subscriber accidently cancel their plan, like the subscriber accidently drop at the 4th month will have important impact on Netflix cahs flows.