Netflix Inc Overweight

MORGAN STANLEY RESEARCH NORTH AMERICA

Morgan Stanley & Co. Incorporated Scott Devitt [email protected] +1 (1)212 761 3365 Colter J. Van Domelen [email protected] +1 (1)212 761 7678

August 16, 2010

Stock Rating Netflix Inc Overweight

Industry View EPIX Deal Highlights Growth Attractive Strategy; Adjusting Estimates Key Ratios and Statistics Reuters: NFLX.O Bloomberg: NFLX US

Internet & Consumer Software / United States of America EPIX content deal delivers top-line catalyst: We view Shr price, close (Aug 16, 2010) $137.22 Netflix’s multi-year online distribution agreement with Mkt cap, curr (mm) $7,454 EPIX as a significant catalyst that could drive 52-Week Range $137.90-39.27 higher-than-expected subscriber / revenue growth in the near- and long-term (we estimate 18.6MM ending Fiscal Year ending 12/09 12/10e 12/11e 12/12e subscribers / $2.16B in revenue for C2010E vs. ModelWare EPS ($) 1.98 2.75 3.63 4.94 guidance range of 17.7-18.5MM / $2.14-2.16B). Netflix’s Prior ModelWare EPS ($) - 3.02 4.27 5.44 online distribution deals with EPIX and Starz (who have EPS ($)** 2.11 3.00 4.01 5.42 Prior EPS ($)** - 3.25 4.68 5.93 exclusive rights to ~40% of studio output during the Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare premium TV window), the exclusive output deal with framework (please see explanation later in this note). ** = Based on consensus methodology Relativity Media, and a growing TV / back-catalog film e = Morgan Stanley Research estimates library give Netflix the strongest content offering / value proposition in the digital video space, in our view. Our Revised Estimates vs. Prior

C2010E C2011E C2012E C2013E C2014E C2015E Our Estimate 18,556 25,163 30,836 35,636 40,338 44,899 Adjusting estimates on higher content costs Subscribers (000s) Prior Estimate 18,481 23,255 27,980 32,685 37,409 42,111 near-term + top-line strength / fixed-cost leverage % Change 0% 8% 10% 9% 8% 7% long-term: We estimate Netflix will pay ~$180MM per Our Estimate $2,164 $2,872 $3,593 $4,187 $4,761 $5,329 Revenue ($MM) Prior Estimate $2,163 $2,747 $3,293 $3,828 $4,401 $4,980 year in fees to EPIX as part of the content deal, which % Change 0% 5% 9% 9% 8% 7% will likely pressure gross margin in the near-term. As a Our Estimate 37.6% 36.1% 35.4% 37.4% 38.8% 40.3% Gross Margin Prior Estimate 38.4% 38.4% 38.4% 38.4% 38.4% 38.4% result, we are bringing our above-consensus C2010E / Ppts Change -1% -2% -3% -1% 0% 2%

C2011E EPS estimates down to $2.75 / $3.63 from Our Estimate 12.4% 12.5% 13.7% 16.9% 19.1% 21.4% Operating Margin Prior Estimate 13.5% 15.3% 16.4% 17.3% 18.3% 19.4% $3.02 / $4.27. Longer-term, earnings estimates go up Ppts Change -1% -3% -3% 0% 1% 2%

as: 1) subscriber / revenue growth is higher than Our Estimate $2.75 $3.63 $4.94 $7.07 $8.96 $11.12 GAAP EPS Prior Estimate $3.02 $4.27 $5.44 $6.61 $7.94 $9.37 previously estimated owing to improved value % Change -9% -15% -9% 7% 13% 19% proposition; 2) the fixed-cost nature of Netflix’s long-term digital content deals create leverage as cost per subscriber declines in the back-end of these Source: Morgan Stanley Research agreements; and 3) postage / fulfillment / DVD content acquisition costs decline as Netflix subscribers continue to adopt digital streaming faster than we anticipated.

Implications for Starz deal renewal: In our view, Netflix’s current content agreement with Starz is limited to primarily back-catalog content (~75% of Starz Play Morgan Stanley does and seeks to do business with content) and gives Netflix narrow access to Disney companies covered in Morgan Stanley Research. As content (less than 100 films in total, only ~15 that are still a result, investors should be aware that the firm may in the premium TV window). We believe Netflix will have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors renew the Starz content deal in CQ4:11E at a higher should consider Morgan Stanley Research as only a price than the current agreement (we expect ~$235MM single factor in making their investment decision. per year vs. ~$20-30MM per year for current agreement) For analyst certification and other important but will require broader access to Starz content. disclosures, refer to the Disclosure Section, located at the end of this report. MORGAN STANLEY RESEARCH August 16, 2010 Netflix Inc

Netflix (NFLX, $137, Overweight)

Risk-Reward View: Sustained Subscriber and Earnings Growth Why Overweight? $200 • Investment in digital has significantly 180 $180 (+31%) increased Netflix’s consumer value

160 proposition. Addressable market

$ 137.22 $145 (+6%) expands well beyond DVD rental 140 • As more business shifts to digital, 120 there is an opportunity to expand

100 margins while continuing to improve

$85 (-38%) content. Netflix op. margin of 12.4% in 80 C2010E, vs. premium TV of 35%+ 60 • Netflix has created a scale-based

40 competitive advantage around user experience and monetization of 20 content that otherwise has limited 0 value in the supply chain. Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11

Base Case (Aug-11) Historical Stock Performance Current Stock PriceWARNINGDONOTEDIT_RRS4RL~NFLX.O~ Key Value Drivers Source: FactSet, Morgan Stanley Research • Strong growth in ending subscribers Fair Value $145 Fair value of $145 is based on our DCF model (+42% Y/Y in CQ2) • Expanding operating margin (14.9% Bull 19x Upside Accelerated share gains as Netflix keeps digital competitors in CQ2 vs. 12.9% in CQ2:09) Case Case C11e at bay; material international contribution. Continued lead in $180 EV / EBITDA digital video monetization. 5-year revenue CAGR of 21% • Declining subscriber acquisition cost (C2010E-C2015E), operating margin of 23% by 2015E. (SAC), we estimate $22.30 per gross subscriber add in C2010E (-12% Y/Y) Base 18x Base Subscriber growth continues to accelerate, margins improve • Netflix streaming device / content Case Case C11e long-term on fixed-cost leverage. Subscriber growth accelerates deals improve value proposition $145 EV / EBITDA to +50% / +51% Y/Y, while streaming content costs increase to nearly 20% of revenue by CQ4E. 5-year revenue CAGR of 20% Potential Catalysts (C2010E-C2015E), operating margin of 21% by 2015E. • Uptake of digital offering on Nintendo Bear 15x Strong competition from kiosks and digital, margins Wii / iPad which launched in CQ2 Case Downside pressured from costs of digital streaming content. Competition • Licensing deals with studios that $85 Case C11e from kiosks / VOD pressure share gains. 5-year revenue CAGR of increase streaming content library EV / EBITDA 17% (C2010E-C2015E), operating margin of 17% by 2015E. • Blockbuster share decline SWOT Analysis – Netflix Key Questions

Strengths Weaknesses • How will the shift to digital streaming 1. Market / brand leadership in subscription-based 1. Delivery by mail does not offer instant gratification impact Netflix? Specifically, what online streaming and DVD-by-mail 2. Some competitors offer new releases to impact will the EPIX deal have on 2. Strong value proposition with “all-you-can-eat” customers 28-days earlier than Netflix subscription plans and hybrid distribution gross margin? 3. Broadest digital device penetration among • Will studios become more receptive of streaming providers Netflix as a revenue stream? Opportunities Threats 1. Continued subscriber growth acceleration due to 1. Competitive threat from the kiosk business model Key Risks success with digital streaming product 2. Long term risk from consumer shift to digital 2. Operating margin expansion as model shifts to streaming including competing offers, such as • Competitive threat from the kiosk digital cable + satellite VOD / Amazon VOD / Apple business model / increasing 3. International expansion iTunes / Hulu Plus / Wal-Mart + Vudu / Best Buy CinemaNow competition in digital video Source: Morgan Stanley Research, Framework based on Michael Porter’s Competitive Strategy • Rising digital content licensing costs

2 MORGAN STANLEY RESEARCH August 16, 2010 Netflix Inc

What the EPIX deal means for Netflix

Expanded Digital Content Library Exhibit 2 The online distribution deal with EPIX will allow Netflix Netflix’s Current Content Library is Under- subscribers to stream a selection of EPIX content from Penetrated by Films from EPIX’s Content Partners Paramount, Lions Gate and MGM starting September 1st. This Starz Play Titles deal changes the content investment landscape for Netflix by opening up a major channel for acquiring film content in the Television Titles premium TV window. Between the distribution agreements with Warner Titles EPIX and Starz (who control ~40% of studio film output during Sony Pictures Titles the premium TV window – based on C2009 box office results), Lionsgate + Lionsgate Titles Paramount Titles Netflix’s recent exclusive output deal with Relativity Media, and Expected to its growing TV / back-catalog film libraries, the Netflix content Universal Studios Titles Increase with Epix offering is becoming very compelling to consumers and should Deal Fox Titles continue to represent one of Netflix’s most significant customer acquisition tools going forward. Paramount Titles Buena Vista Titles Exhibit 1 EPIX + Starz Have Exclusive Rights to ~40% of Miramax Titles

Studio Output During Pay TV Window 0 200 400 600 800 1,000 1,200

# of Titles in Streaming Library 60% 53% EPIX + Starz Have Note: Starz Play titles overlap with some Sony Pictures / Buena Vista / Miramax Titles. Source: 50% Access to ~40% of Company data, Morgan Stanley Research Studio Output 40% 28% 30% EPIX Deal by the Numbers 20% We estimate the EPIX deal will cost Netflix ~$180MM per year 11% over the next five years (with ~$15MM / ~$45MM expensed in 10% 6% Percent of 2009 Box Office Box 2009 of Percent CQ3E / CQ4E). Ben Swinburne, the Morgan Stanley Media 0% Analyst, estimates that Netflix paid market rates for the EPIX HBO Starz EPIX Showtime deal on a per film basis (~$8-10MM per film), but below WB Fox Universal DreamWorks SKG Dreamworks Animation Sony historical premium TV pricing on a per subscriber basis (we Disney Overture Paramount estimate Netflix will pay ~$0.98 / ~$0.88 per average paying LGF MGM Summit The Weinstein Brothers subscriber per month in CQ3E / CQ4E, vs. industry average for Source: BoxOfficeMojo.com, Morgan Stanley Research MSOs of ~$4-6). While this deal comes at a higher cost per subscriber than Netflix’s agreement with Starz (details on the economics of the Starz deal below), we believe Netflix will gain Netflix’s deal with EPIX will introduce more films from deeper access to EPIX content than it receives under the Paramount, Lionsgate and MGM to the constantly improving current Starz Play agreement. digital library. The current content selection has only a small slate of back-catalog Paramount titles – just over 100 titles by Exhibit 3 our estimates (Paramount produces and distributes 10-20 films Estimated EPIX Deal Terms CQ3:10E CQ4:10E C2011E C2012E C2013E C2014E C2015E per year and has the largest share of total box office of the EPIX Deal Cost ($000s) $15,000 $45,000 $180,000 $180,000 $180,000 $180,000 $120,000 Average Paying Subscribers (000s) 15,360 17,071 21,329 27,501 32,704 37,379 41,937 three EPIX content partners) – a decent-sized collection of Monthly Cost per Avg. Paying Subscriber $0.98 $0.88 $0.70 $0.55 $0.46 $0.40 $0.32 Lions Gate films and few MGM titles. Broader access to films Source: Morgan Stanley Research from these three studios should make the service more compelling for mainstream consumers and may help drive subscriber growth acceleration over the next two quarters (we It is also worth noting that the fixed-cost nature of Netflix’s estimate +50% / +51% Y/Y growth in CQ3E / CQ4E vs. +42% streaming content distribution agreements, such as the Starz / Y/Y in CQ2) and potentially into C2011E. EPIX deals, translate into higher costs per subscriber at the

3 MORGAN STANLEY RESEARCH August 16, 2010 Netflix Inc

outset of the contract, but declining cost per subscriber over studio has consistently generated 10-20% of the total box time as long as Netflix continues to expand the subscriber office over the past five years (we estimate less than 100 base. Disney films are currently in the Netflix streaming library, and only ~15 of these are still in the premium TV window). As a Exhibit 4 result, we believe a Starz Play renewal at a higher price would Economics of EPIX Deal Improve Substantially if be contingent on Netflix being able to access more exclusive Subscriber Base Continues to Expand Starz content that is still in the premium TV window. $1.20 45MM

40MM We estimate a Starz deal renewal would likely cost Netflix $0.98 $1.00 ~$235MM per year. Starz has access to roughly twice as many $0.88 35MM big new release box office titles per year as EPIX (but less $0.80 30MM library content), which we believe justifies a higher price tag for $0.71 25MM Netflix than the EPIX deal. That said, our estimate translates $0.60 $0.56 into ~$0.73 per average paying subscriber per month in $0.47 20MM C2012E (the first full year of the expected contract renewal), $0.41 $0.40 15MM $0.32 roughly consistent with the EPIX deal terms on a per subscriber basis. 10MM

$0.20 (MM) Subscribers Paying Average 5MM Exhibit 5 EPIX Deal Monthly Cost per Avg. Paying Sub Avg. Paying Cost per Monthly Deal EPIX Estimated Starz Deal / Renewal Terms $0.00 MM CQ3:10E CQ4:10E C2011E C2012E C2013E C2014E C2015E CQ3:10E CQ4:10E C2011E C2012E C2013E C2014E C2015E Starz Deal Cost ($000s) $6,500 $6,500 $68,333 $235,000 $235,000 $235,000 $235,000 EPIX Deal Monthly Cost per Avg. Paying Subscriber Average Paying Subscribers (MM) Average Paying Subscribers (000s) 15,360 17,071 21,329 27,501 32,704 37,379 41,937 Starz Deal Monthly Cost per Avg. Paying Su $0.14 $0.13 $0.27 $0.71 $0.60 $0.52 $0.47 Source: Company data, Morgan Stanley Research Note: We expect Netflix to renew the Starz deal in CQ4:11E. Source: Company data, Morgan Stanley Research

Implications for the Starz Deal Renewal Starz was the first premium TV network to team up with Netflix Exhibit 6 and give the online streaming service access to exclusive pay We Expect a Starz Deal Renewal in CQ4:11E at Rates TV content. Starz first began offering content from its two Similar to EPIX Deal $0.80 45MM exclusive content providers (Disney and Sony) and from its Starz Deal $0.71 Renewal collection of library films to Netflix in C2008, after Vongo, $0.70 40MM

b Estimated in Starz’s in-house, over-the-top video effort, saw little consumer CQ4:11E $0.60 35MM adoption / financial success. The current online distribution $0.60 ) $0.52 30MM deal with Starz (which was announced on 10/1/2008 and we $0.50 $0.47 believe will be up for renewal in the fall of C2011) gives Netflix 25MM $0.40 the ability to stream Starz Play content for ~$26MM per year, 20MM $0.27 by our estimates. $0.30 15MM

$0.20 (MM Subscribers Paying Average $0.14 10MM While the substantial disparity between the Starz and EPIX $0.13 Starz Deal Monthly Cost per Avg. Paying Su per Avg. Paying Cost Monthly Deal Starz deal rates (we estimate the Starz deal will cost Netflix ~$0.13 $0.10 5MM per average paying subscriber per month in CQ4E vs. ~$0.88 $0.00 MM for the EPIX deal in CQ4, the first full quarter of the agreement) CQ3:10E CQ4:10E C2011E C2012E C2013E C2014E C2015E suggests that Netflix will have to pay a much higher price for Starz Deal Monthly Cost per Avg. Paying Subscriber Average Paying Subscribers (MM) Starz content if and when that agreement is renewed, we Source: Company data, Morgan Stanley Research believe the renewal will include much broader access to Starz content than Netflix enjoys today. In our view, Netflix pays such a low rate for Starz Play content today primarily because the Changing Estimates current deal with Starz offers only a limited selection of content: We are adjusting our estimates to reflect the increased digital 1) Starz Play is primarily back-catalog content (we estimate content costs associated with the EPIX agreement, along with ~75% of Starz Play titles were released before 2005), and 2) higher subscriber and revenue numbers in C2011E and the agreement offers very few Disney titles even though the beyond as the Netflix streaming value proposition dramatically

4 MORGAN STANLEY RESEARCH August 16, 2010 Netflix Inc

improves with the addition of more video content from subscriber later in the life of the deal as long as the Paramount, Lions Gate and MGM, in our view. subscriber base continues to expand).

Exhibit 7 Exhibit 8 Our Revised Estimates vs. Prior Increase in Digital Content Acquisition Expense C2010E C2011E C2012E C2013E C2014E C2015E Offset by Declining Postage as a Percent of Our Estimate 18,556 25,163 30,836 35,636 40,338 44,899 Subscribers (000s) Prior Estimate 18,481 23,255 27,980 32,685 37,409 42,111 Revenue % Change 0% 8% 10% 9% 8% 7% C2009A C2010E C2011E C2012E C2013E C2014E C2015E Subscription Expense $909.5 $1,144.8 $1,578.7 $2,008.9 $2,268.7 $2,529.1 $2,764.8 Our Estimate $2,164 $2,872 $3,593 $4,187 $4,761 $5,329 Y/Y Growth 19% 26% 38% 27% 13% 11% 9% Revenue ($MM) Prior Estimate $2,163 $2,747 $3,293 $3,828 $4,401 $4,980 % of Revenue 54% 53% 55% 56% 54% 53% 52% % Change 0% 5% 9% 9% 8% 7% Digital Content Acquisition $90.7 $261.4 $708.5 $1,048.0 $1,242.7 $1,403.1 $1,590.2 Y/Y Growth 95% 188% 171% 48% 19% 13% 13% Our Estimate 37.6% 36.1% 35.4% 37.4% 38.8% 40.3% % of Revenue 5% 12% 25% 29% 30% 29% 30% DVD Content Acquisition $333.4 $310.9 $221.6 $243.8 $231.0 $248.3 $203.6 Gross Margin Prior Estimate 38.4% 38.4% 38.4% 38.4% 38.4% 38.4% Y/Y Growth 1% -7% -29% 10% -5% 7% -18% Ppts Change -1% -2% -3% -1% 0% 2% % of Revenue 20% 14% 8% 7% 6% 5% 4% Postage Expense $473.6 $553.1 $613.8 $668.1 $727.1 $783.2 $842.0 Our Estimate 12.4% 12.5% 13.7% 16.9% 19.1% 21.4% Y/Y Growth 24% 17% 11% 9% 9% 8% 8% Operating Margin Prior Estimate 13.5% 15.3% 16.4% 17.3% 18.3% 19.4% % of Revenue 28% 26% 21% 19% 17% 16% 16% Ppts Change -1% -3% -3% 0% 1% 2% Digital Delivery Expense $11.7 $19.4 $34.7 $48.9 $67.9 $94.5 $129.0 Y/Y Growth 146% 66% 79% 41% 39% 39% 37% Our Estimate $2.75 $3.63 $4.94 $7.07 $8.96 $11.12 % of Revenue 1% 1% 1% 1% 2% 2% 2% GAAP EPS Prior Estimate $3.02 $4.27 $5.44 $6.61 $7.94 $9.37 Source: Company data, Morgan Stanley Research % Change -9% -15% -9% 7% 13% 19% Source: Company data, Morgan Stanley Research

• Operating Margins – Our operating margin estimates • Subscribers: Our ending subscriber estimate stays adjust primarily as a result of shifting gross margins, but relatively unchanged for C2010E, as the EPIX deal was also reflect our expectation for even lower subscriber likely factored into management’s C2010E guidance acquisition costs going forward. We expect SAC to issued alongside CQ2 earnings results, in our view. For continue to decline as marketing initiatives around C2011E-C2015E, we are taking our ending subscriber digital content and distribution deals are more effective numbers up ~8-10% due to the improvement in the and word of mouth advertising from the growing content library, combined with Netflix’s stronger subscriber base continues to attract new subscribers, competitive standing in the premium TV market (given which should benefit profitability over time. Netflix now has deals with EPIX and Starz, who control access to ~40% of studio output during the premium TV • EPS – We are taking our C2010E EPS estimate down window). to $2.75 from $3.02 (compared to consensus at $2.81 and management’s guidance range of $2.58 to $2.86) • Revenue – Revenue estimates increase ~5-9% for to reflect the impact from increased content spend on C2011E-C2015E, as stronger-than-expected the gross and operating margins. Our C2011E-C2012E subscriber growth is offset slightly by declining ARPU EPS estimates also come down to reflect the cost of the as a large portion of new subscribers choose the $8.99 / EPIX and Starz agreements. However, from month plan. C2013E-C2015E, EPS estimates increase materially as margins improve and revenue growth flows through to • Gross Margin – Our gross margin estimates for the bottom line. C2010E-C2012E decline ~1-4 percentage points to reflect the increased content spending associated with Reiterate Overweight Rating the EPIX agreement and Starz deal renewal (which we We reiterate our Overweight rating on Netflix shares as the expect to happen in CQ4:11E). For C2013E-C2015E EPIX content agreement should act as a subscriber / revenue we expect gross margin to remain flat to up +1 growth catalyst in the near- and long-term. The deal also percentage point from prior estimates as Netflix benefits partially mitigates one of the risks to sustained subscriber from an accelerated shift to streaming (as the improved growth that we previously identified, in which exclusivity content offering encourages subscribers to stream agreements between film studios and premium TV networks more and ship fewer DVDs, driving postage cost down would restrict Netflix’s access to digital content despite the further than we previously anticipated) and the fixed company’s financial ability and strategic desire to acquire cost nature of its streaming content distribution digital content more aggressively. agreements (which lead to declining content costs per

5 MORGAN STANLEY RESEARCH August 16, 2010 Netflix Inc

While the margin expansion that we previously had estimated will likely be subdued by higher content acquisition expense in the near-term, we believe Netflix’s strategy of investing in content and technology will benefit the company competitively and financially in the mid- to long-term.

Morgan Stanley is currently acting as financial advisor to Lions Gate Entertainment Corp. ("Lions Gate") with respect to the unsolicited tender offer by certain entities affiliated with Carl Icahn (collectively, the "Icahn Group") to acquire up to 13,164,420 of the outstanding shares of common stock of Lionsgate, as announced on February 16, 2010. Together with the common stock of Lions Gate already held by the Icahn Group, the tender offer could result in the Icahn Group owning approximately 29.9% of the outstanding common shares of Lions Gate.

The tender offer is subject to the condition that Lions Gate not enter into any material transaction outside of the ordinary course of business and other customary conditions. This report and the information provided herein is also not intended to (i) provide advice with respect to the tender offer, (ii) serve as an endorsement of the tender offer, or (iii) result in the procurement, withholding or revocation of a tender in the tender offer or any other action by a security holder.

Lions Gate has agreed to pay fees to Morgan Stanley for its financial services.

Please refer to the notes at the end of the report.

6 MORGAN STANLEY RESEARCH August 16, 2010 Netflix Inc

Exhibit Index

Exhibit 9 – NFLX – Quarterly Income Statement

Exhibit 10 – NFLX – Annual Income Statement

Exhibit 11 – NFLX – Quarterly Revenue Breakdown

Exhibit 12 – NFLX – Annual Revenue Breakdown

Exhibit 13 – NFLX – Quarterly Historical Balance Sheet

Exhibit 14 – NFLX – Quarterly Historical Cash Flow Statement

Exhibit 15 – NFLX – Discounted Cash Flow Valuation

7 MORGAN STANLEY RESEARCH August 16, 2010 Netflix Inc

Exhibit 9 Netflix – NFLX – Quarterly Income Statement (US$ in Thousands, Except per Share Data) C2008A C2009A C2010E 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 9/10E 12/10E Reported Gross Revenue $326,183 $337,614 $341,269 $359,595 $394,098 $408,509 $423,120 $444,542 $493,665 $519,819 $553,075 $597,688 Company revenue guidance $416-422MM $440-446MM $490-496MM $517-525MM $546-554MM $580-596MM Subscription 187,156 193,769 186,573 193,635 217,456 227,316 233,091 231,598 259,560 265,387 293,607 326,294 Content Delivery 93,538 93,551 98,138 100,666 116,235 118,622 124,309 126,118 139,554 140,340 148,171 144,405 Postage 92,697 92,570 96,901 98,962 113,829 116,081 121,358 122,302 135,820 135,893 143,076 138,272 Digital Delivery 841 981 1,236 1,704 2,405 2,541 2,951 3,816 3,733 4,447 5,095 6,132 Content Acquisition 93,618 100,218 88,435 92,969 101,221 108,694 108,782 105,480 120,006 125,047 145,436 181,890 Streaming Content Expense 7,993 9,348 10,427 18,675 20,679 21,351 23,205 25,513 33,953 45,247 70,800 111,446 DVD Content Expense 85,624 90,870 78,008 74,294 80,543 87,343 85,577 79,967 86,053 79,800 74,636 70,444 Fulfillm ent 35,543 36,210 37,797 39,085 41,692 41,825 42,084 43,829 47,426 49,240 51,989 56,183 Cost of Goods Sold 222,699 229,979 224,370 232,720 259,148 269,141 275,175 275,427 306,986 314,627 345,596 382,477 Gross Profit $103,484 $107,635 $116,899 $126,875 $134,950 $139,368 $147,945 $169,115 $186,679 $205,192 $207,479 $215,211 Technology and Development 19,271 21,337 22,418 22,957 23,129 25,929 28,845 32,186 35,530 35,487 38,715 41,838 Marketing 54,386 39,529 48,757 55,155 61,799 45,773 58,104 70,282 74,576 73,777 83,256 89,449 General And Administrative 12,220 11,926 10,243 9,251 11,516 11,724 10,031 12,063 14,379 13,630 14,380 15,540 Loss / (Gain) on disposal of DVDs (833) (2,263) (1,628) (1,603) (1,097) (118) (1,604) (1,741) (1,653) (1,972) (1,659) (1,793) Stock Compensation Expense 3,130 2,905 3,035 3,194 3,132 3,278 3,232 2,976 5,502 6,928 5,254 5,678

Total Operating Expenses (Incl. Stock Com p) $88,174 $73,434 $82,825 $88,954 $98,479 $86,586 $98,608 $115,766 $128,334 $127,850 $139,946 $150,712 Total Operating Expenses (Excl. Stock Comp) 85,044 70,529 79,790 85,760 95,347 83,308 95,376 112,790 122,832 120,922 134,692 145,034 Depreciation and Amortization 63,929 65,200 56,239 56,720 58,479 62,248 66,308 70,499 73,151 74,452 82,270 89,981 Operating Income (Incl. Stock Com p) $15,310 $34,201 $34,074 $37,921 $36,471 $52,782 $49,337 $53,349 $58,345 $77,342 $67,533 $64,499 Operating Income (Excl. Stock Com p) $18,440 $37,106 $37,109 $41,115 $39,603 $56,060 $52,569 $56,325 $63,847 $84,270 $72,787 $70,177

EBITDA 21,792 42,389 42,717 47,062 45,646 61,795 58,955 63,587 69,204 86,651 77,017 74,725 EBITDA (Excl. Stock Com p) 24,922 45,294 45,752 50,256 48,778 65,073 62,187 66,563 74,706 93,579 82,271 80,403 Interest Expense 423 681 677 677 670 674 674 4,457 4,959 4,893 5,040 5,040 Interest and other (Income) / Expense (7,660) (2,404) (1,536) (852) (1,610) (866) (1,808) (2,444) (972) (921) (1,395) (1,393) Net Interest (Income) and Other (Income) (7,237) (1,723) (859) (175) (940) (192) (1,134) 2,013 3,987 3,972 3,644 3,646 Pre-Tax Income - Incl. Stock Com p $22,547 $35,924 $34,933 $38,096 $37,411 $52,974 $50,471 $51,336 $54,358 $73,370 $63,889 $60,852 Pre-Tax Income - Excl. Stock Comp $25,677 $38,829 $37,968 $41,290 $40,543 $56,252 $53,703 $54,312 $59,860 $80,298 $69,143 $66,530 Income Tax Expense 9,203 9,345 14,562 15,364 15,048 20,531 20,330 20,423 22,086 29,851 25,994 24,758 Tax Effects on Stock Compensation Expense 1,277 755 1,266 1,287 1,259 1,272 1,302 1,184 2,234 2,820 2,138 2,310 Minority Interest and Other 000000000000 Operating Net Incom e (incl. Stock Comp.) $13,344 $26,579 $20,371 $22,732 $22,363 $32,443 $30,141 $30,913 $32,272 $43,519 $37,895 $36,094 Operating Net Incom e (excl. Stock Com p.) $15,197 $28,729 $22,140 $24,639 $24,236 $34,449 $32,071 $32,705 $35,540 $47,627 $41,012 $39,462 Cumulative Effect of Change in Accounting000000000000 Extraordinary (Loss)/Gain - pre-tax 000000000000 Tax Effect of Extraordinary Item 000000000000 Reported Net Incom e $13,344 $26,579 $20,371 $22,732 $22,363 $32,443 $30,141 $30,913 $32,272 $43,519 $37,895 $36,094 Adjustment to Net Income for Dilutive Items Weighted Average Fully Diluted Shares Outstanding 64,840 63,857 62,272 60,311 60,709 59,660 57,938 55,479 54,775 54,324 54,378 54,433 Operating EPS (excl. Stock Com p.) $0.23 $0.45 $0.36 $0.41 $0.40 $0.58 $0.55 $0.59 $0.65 $0.88 $0.75 $0.72 Operating EPS (incl. Stock Com p.) $0.21 $0.42 $0.33 $0.38 $0.37 $0.54 $0.52 $0.56 $0.59 $0.80 $0.70 $0.66 Reported EPS (incl. Stock Com p.) $0.21 $0.42 $0.33 $0.38 $0.37 $0.54 $0.52 $0.56 $0.59 $0.80 $0.70 $0.66 Company GAAP EPS guidance $0.39-0.47 $0.38-0.47 $0.47-0.58 $0.62-0.73 $0.61-0.74 $0.58-0.73

0.28 0.28 Ke y M e tr ics ($0.08) ($0.19) Growth Rate Revenue (Y/Y) 6.8% 11.2% 16.1% 18.9% 20.8% 21.0% 24.0% 23.6% 25.3% 27.2% 30.7% 34.5% Revenue (Q/Q) 7.9% 3.5% 1.1% 5.4% 9.6% 3.7% 3.6% 5.1% 11.1% 5.3% 6.4% 8.1% Cost of Revenue (Y/Y) 14.3% 17.0% 15.4% 16.4% 16.4% 17.0% 22.6% 18.4% 18.5% 16.9% 25.6% 38.9% Cost of Revenue (Q/Q) 11.4% 3.3% (2.4%) 3.7% 11.4% 3.9% 2.2% 0.1% 11.5% 2.5% 9.8% 10.7% Operating Expenses excl. Stock Comp. (Y/Y) (11.8%) (3.4%) 6.7% 8.7% 12.1% 18.1% 19.5% 31.5% 28.8% 45.2% 41.2% 28.6% Operating Expenses excl. Stock Comp. (Q/Q) 7.8% (17.1%) 13.1% 7.5% 11.2% (12.6%) 14.5% 18.3% 8.9% (1.6%) 11.4% 7.7% Operating Income excl. Stock Comp. (Y/Y) 31.5% 8.8% 49.5% 74.8% 114.8% 51.1% 41.7% 37.0% 61.2% 50.3% 38.5% 24.6% Operating Income excl. Stock Comp (Q/Q) (21.6%) 101.2% 0.0% 10.8% (3.7%) 41.6% (6.2%) 7.1% 13.4% 32.0% (13.6%) (3.6%) EBITDA (Y/Y) 36.1% 15.8% 54.5% 78.0% 109.5% 45.8% 38.0% 35.1% 51.6% 40.2% 30.6% 17.5% EBITDA (Q/Q) (17.6%) 94.5% 0.8% 10.2% (3.0%) 35.4% (4.6%) 7.9% 8.8% 25.2% (11.1%) (3.0%) Recurring Net Income (Y/Y) 35.3% 24.3% 30.2% 44.9% 67.6% 22.1% 48.0% 36.0% 44.3% 34.1% 25.7% 16.8% Recurring Net Income (Q/Q) (15.0%) 99.2% (23.4%) 11.6% (1.6%) 45.1% (7.1%) 2.6% 4.4% 34.9% (12.9%) (4.8%) Margins as % of Revenue Gross Margin 31.7% 31.9% 34.3% 35.3% 34.2% 34.1% 35.0% 38.0% 37.8% 39.5% 37.5% 36.0% Operating Margin (incl. Stock Comp.) 4.7% 10.1% 10.0% 10.5% 9.3% 12.9% 11.7% 12.0% 11.8% 14.9% 12.2% 10.8% Operating Margin (excl. Stock Comp.) 5.7% 11.0% 10.9% 11.4% 10.0% 13.7% 12.4% 12.7% 12.9% 16.2% 13.2% 11.7% EBITDA Margin 6.7% 12.6% 12.5% 13.1% 11.6% 15.1% 13.9% 14.3% 14.0% 16.7% 13.9% 12.5% Adj. EBITDA margin 7.6% 13.4% 13.4% 14.0% 12.4% 15.9% 14.7% 15.0% 15.1% 18.0% 14.9% 13.5% Pre-Tax Margin 6.9% 10.6% 10.2% 10.6% 9.5% 13.0% 11.9% 11.5% 11.0% 14.1% 11.6% 10.2% Recurring Net Income 4.1% 7.9% 6.0% 6.3% 5.7% 7.9% 7.1% 7.0% 6.5% 8.4% 6.9% 6.0% Expense Analysis (as % of Revenue) Cost of Goods Sold 68.3% 68.1% 65.7% 64.7% 65.8% 65.9% 65.0% 62.0% 62.2% 60.5% 62.5% 64.0% Subscription COGS 57.4% 57.4% 54.7% 53.8% 55.2% 55.6% 55.1% 52.1% 52.6% 51.1% 53.1% 54.6% Fulfillment COGS 10.9% 10.7% 11.1% 10.9% 10.6% 10.2% 9.9% 9.9% 9.6% 9.5% 9.4% 9.4% General and Administrative 3.7% 3.5% 3.0% 2.6% 2.9% 2.9% 2.4% 2.7% 2.9% 2.6% 2.6% 2.6% Marketing 16.7% 11.7% 14.3% 15.3% 15.7% 11.2% 13.7% 15.8% 15.1% 14.2% 15.1% 15.0% Research and Development 5.9% 6.3% 6.6% 6.4% 5.9% 6.3% 6.8% 7.2% 7.2% 6.8% 7.0% 7.0% Loss / (Gain) on disposal of DVDs (0.3%) (0.7%) (0.5%) (0.4%) (0.3%) (0.0%) (0.4%) (0.4%) (0.3%) (0.4%) (0.3%) (0.3%) Stock Compensation Expense 1.0% 0.9% 0.9% 0.9% 0.8% 0.8% 0.8% 0.7% 1.1% 1.3% 1.0% 1.0% Effective Tax Rate 40.8% 26.0% 41.7% 40.3% 40.2% 38.8% 40.3% 39.8% 40.6% 40.7% 40.7% 40.7% Cost of borrow ing 4.6% 6.8% 6.8% 6.9% 6.8% 6.9% 7.0% 46.6% 8.3% 8.2% 8.5% 8.5% 00000000 Footnotes Fiscal year ends in December. E = Morgan Stanley Research Estimates. Source: Morgan Stanley Research

8 MORGAN STANLEY RESEARCH August 16, 2010 Netflix Inc

Exhibit 10 Netflix – NFLX – Annual Income Statement

(US$ in Thousands, Except per Share Data)

C2005A C2006A C2007A C2008A C2009A C2010E C2011E Reported Gross Revenue $682,213 $996,660 $1,205,340 $1,364,661 $1,670,269 $2,164,247 $2,872,496 Company revenue guidance $1.666-1.672B $2.14-2.16B Subscription 393,788 532,621 664,407 761,133 909,461 1,144,849 1,578,700 Content Delivery 159,000 245,000 305,863 385,893 485,283 572,470 648,576 Postage 159,000 245,000 304,358 381,131 473,570 553,062 613,845 Digital Delivery 0 0 1,504 4,762 11,714 19,408 34,731 Content Acquisition 234,788 287,621 358,544 375,240 424,178 572,378 930,124 Streaming Content Expense 0 0 9,475 46,443 90,748 261,446 708,492 DVD Content Expense 234,788 287,621 349,069 328,797 333,429 310,932 221,632 Fulfillment 70,762 93,439 121,334 148,635 169,430 204,838 257,508 Cost of Goods Sold 464,550 626,060 785,741 909,768 1,078,891 1,349,686 1,836,208 Gross Profit $217,663 $370,600 $419,599 $454,893 $591,378 $814,561 $1,036,288 Technology and Development 30,942 44,771 67,492 85,983 110,089 151,570 205,383 Marketing 141,997 223,386 216,086 197,827 235,958 321,058 359,050 General And Administrative 29,395 30,130 46,774 43,640 45,334 57,929 90,340 Loss / (Gain) on disposal of DVDs (1,987) (4,797) (7,196) (6,327) (4,560) (7,077) (14,362) Stock Compensation Expense 14,327 12,696 11,976 12,264 12,618 23,362 35,906

Total Operating Expenses (Incl. Stock Comp) $214,674 $306,186 $335,132 $333,387 $399,439 $546,842 $676,317 Total Operating Expenses (Excl. Stock Comp) 200,347 293,490 323,156 321,123 386,821 523,480 640,411 Depreciation and Amortization 106,990 157,111 225,466 242,088 257,534 319,855 449,744 Operating Income (Incl. Stock Comp) $2,989 $64,414 $84,467 $121,506 $191,939 $267,718 $359,971 Operating Income (Excl. Stock Comp) $17,316 $77,110 $96,443 $133,770 $204,557 $291,081 $395,877 EBITDA 12,123 80,317 106,686 153,960 229,983 307,597 404,680 EBITDA (Excl. Stock Comp) 26,450 93,013 118,662 166,224 242,601 330,959 440,587 Interest Expense 407 0 591 2,458 6,475 19,931 19,862 Interest and other (Income) / Expense (5,753) (15,904) (20,340) (12,452) (6,728) (4,682) (1,770) Net Interest (Income) and Other (Income) (5,346) (15,904) (19,749) (9,994) (253) 15,250 18,092 Pre-Tax Income - Incl. Stock Comp $8,335 $80,318 $104,216 $131,500 $192,192 $252,469 $341,879 Pre-Tax Income - Excl. Stock Comp $22,662 $93,014 $116,192 $143,764 $204,810 $275,831 $377,785 Income Tax Expense (3,492) 31,236 41,628 48,474 76,332 102,689 140,170 Tax Effects on Stock Compensation Expense 0 4,950 4,760 4,585 5,017 9,502 14,722 Minority Interest and Other 0 000000 Operating Net Income (incl. Stock Comp.) $11,827 $49,082 $62,588 $83,026 $115,860 $149,780 $201,709 Operating Net Income (excl. Stock Comp.) $26,154 $56,828 $69,804 $90,705 $123,461 $163,641 $222,893 Cumulative Effect of Change in Accounting 0 000000 Extraordinary (Loss)/Gain - pre-tax30,20007,0000000 Tax Effect of Extraordinary Item 0 0 (2,806) 0000 Reported Net Income $42,027 $49,082 $66,782 $83,026 $115,860 $149,780 $201,709 Adjustment to Net Income for Dilutive Items

Weighted Average Fully Diluted Shares Outstanding 65,518 69,075 68,902 62,836 58,447 54,478 55,567 Operating EPS (excl. Stock Comp.) $0.40 $0.82 $1.01 $1.44 $2.11 $3.00 $4.01 Operating EPS (incl. Stock Comp.) $0.18 $0.71 $0.91 $1.32 $1.98 $2.75 $3.63 Reported EPS (incl. Stock Comp.) $0.64 $0.71 $0.97 $1.32 $1.98 $2.75 $3.63 Company GAAP EPS guidance $1.82-1.90 $2.58-2.86

0.39 0.32 Ke y M e tr ics ($0.27) ($0.64) Grow th Rate Revenue (Y/Y) 36.3% 46.1% 20.9% 13.2% 22.4% 29.6% 32.7% Revenue (Q/Q) ------Cost of Revenue (Y/Y) 40.8% 34.8% 25.5% 15.8% 18.6% 25.1% 36.0% Cost of Revenue (Q/Q) ------Operating Expenses excl. Stock Comp. (Y/Y) 46.0% 46.5% 10.1% (0.6%) 20.5% 35.3% 22.3% Operating Expenses excl. Stock Comp. (Q/Q) ------Operating Income excl. Stock Comp. (Y/Y) (48.1%) 345.3% 25.1% 38.7% 52.9% 42.3% 36.0% Operating Income excl. Stock Comp (Q/Q)------EBITDA (Y/Y) (88.5%) 562.5% 32.8% 44.3% 49.4% 33.7% 31.6% EBITDA (Q/Q) ------Recurring Net Income (Y/Y) (45.2%) 315.0% 27.5% 32.7% 39.5% 29.3% 34.7% Recurring Net Income (Q/Q) ------Margins as % of Revenue Gross Margin 31.9% 37.2% 34.8% 33.3% 35.4% 37.6% 36.1% Operating Margin (incl. Stock Comp.) 0.4% 6.5% 7.0% 8.9% 11.5% 12.4% 12.5% Operating Margin (excl. Stock Comp.) 2.5% 7.7% 8.0% 9.8% 12.2% 13.4% 13.8% EBITDA Margin 1.8% 8.1% 8.9% 11.3% 13.8% 14.2% 14.1% Adj. EBITDA margin 3.9% 9.3% 9.8% 12.2% 14.5% 15.3% 15.3% Pre-Tax Margin 1.2% 8.1% 8.6% 9.6% 11.5% 11.7% 11.9% Recurring Net Income 1.7% 4.9% 5.2% 6.1% 6.9% 6.9% 7.0% Expense Analysis (as % of Revenue) Cost of Goods Sold 68.1% 62.8% 65.2% 66.7% 64.6% 62.4% 63.9% Subscription COGS 57.7% 53.4% 55.1% 55.8% 54.4% 52.9% 55.0% Fulfillment COGS 10.4% 9.4% 10.1% 10.9% 10.1% 9.5% 9.0% General and Administrative 4.3% 3.0% 3.9% 3.2% 2.7% 2.7% 3.1% Marketing 20.8% 22.4% 17.9% 14.5% 14.1% 14.8% 12.5% Research and Development 4.5% 4.5% 5.6% 6.3% 6.6% 7.0% 7.2% Loss / (Gain) on disposal of DVDs (0.3%) (0.5%) (0.6%) (0.5%) (0.3%) (0.3%) (0.5%) Stock Compensation Expense 2.1% 1.3% 1.0% 0.9% 0.8% 1.1% 1.3% Effective Tax Rate (41.9%) 38.9% 39.9% 36.9% 39.7% 40.7% 41.0% Cost of borrow ing 598.5% 0.0% 0.0% 6.7% 16.5% 8.4% 8.4%

Footnote s Fiscal year ends in December. E = Morgan Stanley Research Estimates. Source: Morgan Stanley Research

9 MORGAN STANLEY RESEARCH August 16, 2010 Netflix Inc

Exhibit 11 Netflix – NFLX – Quarterly Revenue Breakdown (US$ in Thousands, Except per subscriber data) C2008A C2009A C2010E 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 9/10E 12/10E Revenue Breakdown

Reported Gross Revenue $326,183 $337,614 $341,269 $359,595 $394,098 $408,509 $423,120 $444,542 $493,665 $519,819 $553,075 $597,688 Y/Y Growth 7% 11% 16% 19% 21% 21% 24% 24% 25% 27% 31% 34% Q/Q Growth 84151044511568 Company revenue guidance $416-422MM $440-446MM $490-496MM $517-525MM $546-554MM $580-596MM

Revenue Per Paid Subscriber $42.28 $41.33 $40.81 $40.74 $40.88 $39.87 $39.90 $39.12 $38.70 $36.87 $36.01 $35.01 Y/Y Growth (11%) (10%) (7%) (5%) (3%) (4%) (2%) (4%) (5%) (8%) (10%) (11%) Q/Q Growth (1) (2) (1) (0) 0 (2) 0 (2) (1) (5) (2) (3) Beginning Subscribers 7,479 8,243 8,411 8,672 9,390 10,310 10,599 11,109 12,268 13,967 15,001 16,642 Y/Y Growth 18% 21% 25% 23% 26% 25% 26% 28% 31% 35% 42% 50% Q/Q Growth 61023810351014711 Net Subscriber Additions 764 168 261 718 920 289 510 1,159 1,699 1,034 1,641 1,914 Y/Y Growth 59% (405%) (9%) 59% 20% 72% 95% 61% 85% 258% 222% 65% Q/Q Growth 69 (78) 55 175 28 (69) 76 127 47 (39) 59 17 % of Beginning Subscribers 10 2 3 8 10 3 5 10 14 7 11 12 Ending Subscribers 8,243 8,411 8,672 9,390 10,310 10,599 11,109 12,268 13,967 15,001 16,642 18,556 Y/Y Growth 21% 25% 23% 26% 25% 26% 28% 31% 35% 42% 50% 51% Q/Q Growth 10 2 3 8 10 3 5 10 14 7 11 12 Paid Subscribers 8,102 8,235 8,490 9,164 10,116 10,375 10,835 11,892 13,622 14,577 16,142 17,999 Y/Y Growth 21% 25% 24% 25% 25% 26% 28% 30% 35% 41% 49% 51% Q/Q Growth 11 2 3 8 10 3 4 10 15 7 11 12 % of Endings Subscribers 989898989898989798979797 Streaming Subscribers 1,154 1,514 1,908 2,629 3,712 3,922 4,555 5,889 7,682 9,151 10,484 12,618 Y/Y Growth 466% 274% 202% 220% 222% 159% 139% 124% 107% 133% 130% 114% Q/Q Growth 40312638416162930191520 % of Endings Subscribers 141822283637414855616368 Churn 3.9 4.2 4.2 4.2 4.2 4.5 4.4 3.9 3.8 4.0 3.8 3.6 Y/Y Growth (11%) (9%) 1% 4% 8% 6% 3% (7%) (10%) (12%) (14%) (9%) Q/Q Growth (4) 7 1 (0) (0) 6 (3) (10) (4) 5 (5) (4) Subscriber Acquisition Cost, Per Sub. $29.48 $28.89 $32.21 $26.67 $25.79 $23.88 $26.86 $25.23 $21.54 $24.37 $22.20 $21.50 Y/Y Growth (38%) (34%) (15%) (23%) (13%) (17%) (17%) (5%) (16%) 2% (17%) (15%) Q/Q Growth (15) (2) 11 (17) (3) (7) 12 (6) (15) 13 (9) (3) Subscriber Acquisition Cost,Total $54,892 $39,984 $49,217 $55,607 $62,231 $46,232 $58,555 $70,720 $75,218 $74,548 $83,256 $89,449 Y/Y Growth (24%) (12%) 0% 8% 13% 16% 19% 27% 21% 61% 42% 26% Q/Q Growth 6(27)231312(26)27216 (1)127 % of Total Net Revenue 17 12 14 15 16 11 14 16 15 14 15 15 Footnotes Fiscal year ends in December. E = Morgan Stanley Research Estimates. Source: Morgan Stanley Research.

10 MORGAN STANLEY RESEARCH August 16, 2010 Netflix Inc

Exhibit 12 Netflix – NFLX – Annual Revenue Breakdown

(US$ in Thousands, Except per subscriber data)

C2005A C2006A C2007A C2008A C2009A C2010E C2011E Revenue Breakdown

Reported Gross Revenue $682,213 $996,660 $1,205,340 $1,364,661 $1,670,269 $2,164,247 $2,872,496 Y/Y Growth 36% 46% 21% 13% 22% 30% 33% Q/Q Growth ------Company revenue guidance $1.666-1.672B $2.14-2.16B

Revenue Per Paid Subscriber $209.52 $195.81 $178.83 $165.51 $158.65 $144.81 $134.67 Y/Y Growth (18%)(7%)(9%)(7%)(4%)(9%)(7%) Q/Q Growth ------Beginning Subscribers 2,610 4,179 6,316 7,479 9,390 12,268 18,556 Y/Y Growth 76% 60% 51% 18% 26% 31% 51% Q/Q Growth ------Net Subscriber Additions 1,569 2,137 1,163 1,911 2,878 6,288 6,608 Y/Y Growth 40% 36% (46%) 64% 51% 118% 5% Q/Q Growth ------% of Beginning Subscribers 60 51 18 26 31 51 36 Ending Subscribers 4,179 6,316 7,479 9,390 12,268 18,556 25,163 Y/Y Growth 60% 51% 18% 26% 31% 51% 36% Q/Q Growth ------Paid Subscribers 4,026 6,154 7,326 9,164 11,892 17,999 24,660 Y/Y Growth 62% 53% 19% 25% 30% 51% 37% Q/Q Growth ------% of Endings Subscribers 96979898979798 Streaming Subscribers 0 0 823 2,629 5,889 12,618 17,866 Y/Y Growth ------220% 124% 114% 42% Q/Q Growth ------% of Endings Subscribers 0 0 11 28 48 68 71 Churn 4.5 4.1 4.3 4.2 4.2 3.8 3.7 Y/Y Growth 41% (7%) 5% (4%) 2% (11%) (2%) Q/Q Growth ------Subscriber Acquisition Cost, Per Sub. $38.80 $42.96 $40.87 $29.11 $25.48 $22.30 $21.50 Y/Y Growth 5% 11% (5%) (29%) (13%) (12%) (4%) Q/Q Growth ------Subscriber Acquisition Cost,Total $144,682 $225,527 $218,222 $199,699 $237,737 $322,470 $359,050 Y/Y Growth 44% 56% (3%) (8%) 19% 36% 11% Q/Q Growth ------% of Total Net Revenue 21 23 18 15 14 15 12 Footnotes Fiscal year ends in December. E = Morgan Stanley Research Estimates.

Source: Morgan Stanley Research

11 MORGAN STANLEY RESEARCH August 16, 2010 Netflix Inc

Exhibit 13 Netflix – NFLX – Quarterly Historical Balance Sheet

(US$ in Thousands, Except per Share Data)

1 C2007A C2008A C2009A C20 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 Assets: Cash & Equivalents $218,458 $184,182 $179,804 $177,439 $168,989 $144,289 $111,524 $139,881 $115,131 $87,471 $55,717 $134,224 $79,861 $107,327 Short-Term Investments 169,525 193,770 206,377 207,703 126,506 169,175 139,304 157,390 171,358 167,498 99,745 186,018 186,469 171,758 Current Content Library, Net 3,842 6,118 7,899 16,301 28,194 24,008 26,510 18,691 33,299 33,519 32,937 37,329 55,566 93,123 Prepaid Content 17,042 10,430 9,292 7,640 8,410 22,213 24,757 21,098 17,000 18,613 18,506 26,741 31,704 33,837 Content Library, Net 109,645 104,685 104,828 112,070 115,702 99,106 85,011 98,547 105,361 100,316 104,539 108,810 109,431 94,666 Net PP&E 91,533 95,920 102,967 113,175 126,110 129,553 128,541 124,948 123,817 120,346 122,119 131,653 127,165 123,292 Goodwill and Goodwill-like Intangibles 00000000000000 Deferred Tax Assets 16,269 16,844 17,078 16,865 17,413 19,621 19,831 22,409 23,107 17,225 17,244 15,958 18,791 21,951 Other Assets 24,963 25,715 24,924 27,805 32,050 33,934 42,984 32,460 37,804 44,710 38,973 39,001 39,306 48,018 Total Assets $651,277 $637,664 $653,169 $678,998 $623,374 $641,899 $578,462 $615,424 $626,877 $589,698 $489,780 $679,734 $648,293 $693,972 Liabilities & Equity: Accounts Payable $92,595 $67,048 $86,549 $99,951 $112,505 $104,876 $104,742 $100,344 $112,767 $101,634 $93,451 $91,475 $102,703 $120,031 Accrued Expenses 33,528 35,754 42,017 36,466 44,021 27,462 31,625 31,394 30,722 26,596 28,997 33,387 38,718 34,746 Income Taxes Payable 00000000000000 Deferred Revenue 64,234 60,522 56,321 71,665 68,375 67,886 65,895 83,127 80,623 80,495 79,123 100,097 100,109 101,419 Deferred Taxes 00000000000000 Total Debt 27,498 29,053 31,909 36,475 39,841 39,611 39,377 39,140 38,871 38,576 38,282 237,982 237,621 237,156 Minority Interest 00000000000000 Other Liabilities 1,899 1,973 2,787 4,629 4,170 12,602 11,990 14,264 17,582 18,026 17,725 17,650 22,407 23,980 Total Liabilities $219,754 $194,350 $219,583 $249,186 $268,912 $252,437 $253,629 $268,269 $280,565 $265,327 $257,578 $480,591 $501,558 $517,332 Preferred Stock 00000000000000 Retained Earnings (31,406) (5,912) 9,735 25,426 38,770 65,349 85,720 108,452 130,815 163,258 193,399 198,817 146,196 175,786 Common Stock and APIC 462,445 449,747 423,114 402,775 315,382 324,927 331,551 338,639 358,683 375,638 378,613 53 52 52 Treasury Stock 0 0 0 0 0 0 (90,028) (100,020) (142,739) (215,250) (340,362) 0 0 0 Other Equity Items 484 (521) 737 1,611 310 (814) (2,410) 84 (447) 725 552 273 487 802 Total Shareholders’ Equity $431,523 $443,314 $433,586 $429,812 $354,462 $389,462 $324,833 $347,155 $346,312 $324,371 $232,202 $199,143 $146,735 $176,640 Total Liabilities & Stockholder's Equity $651,277 $637,664 $653,169 $678,998 $623,374 $641,899 $578,462 $615,424 $626,877 $589,698 $489,780 $679,734 $648,293 $693,972

Balance Sheet Metrics Cash Balance Grow th Rate (45.4%) (15.7%) (2.4%) (1.3%) (4.8%) (14.6%) (22.7%) 25.4% (17.7%) (24.0%) (36.3%) 140.9% (40.5%) 34.4% Short-Term Investments - % of sales 13.9% 16.0% 17.6% 17.2% 9.7% 12.5% 10.2% 10.9% 10.9% 10.3% 5.9% 10.5% 9.4% 8.3% Prepaid Expenses - % of sales 1.4% 0.9% 0.8% 0.6% 0.6% 1.6% 1.8% 1.5% 1.1% 1.1% 1.1% 1.5% 1.6% 1.6% Deferred Taxes Assets- % of income tax expense 60.7% 28.3% 39.3% 45.7% 47.3% 52.5% 34.0% 36.5% 38.4% 21.0% 21.2% 19.5% 21.3% 18.4% Other Assets Grow th Rate 203.6% 100.4% 90.3% 85.6% 28.4% 32.0% 72.5% 16.7% 18.0% 31.8% (9.3%) 20.2% 4.0% 7.4% Days Payable 4331414546414239403431303035 Other Accrued Expenses - % of operating expenses 2.8% 3.3% 3.8% 3.2% 3.5% 2.2% 2.6% 2.4% 2.1% 1.9% 1.9% 2.1% 2.2% 2.0% Other Liabilities Grow th Rate 108.2% 91.4% 151.3% 312.9% 119.6% 538.7% 330.2% 208.1% 321.6% 43.0% 47.8% 23.7% 27.4% 33.0% Deferred Revenue - % of Sales 5.3% 5.0% 4.8% 5.9% 5.2% 5.0% 4.8% 5.8% 5.1% 4.9% 4.7% 5.6% 5.1% 4.9% Footnotes Fiscal year ends in December. E = Morgan Stanley Research Estimates. Source: Morgan Stanley Research

12 MORGAN STANLEY RESEARCH August 16, 2010 Netflix Inc

Exhibit 14 Netflix – NFLX – Quarterly Historical Cash Flow Statement

(US$ in Thousands, Except per Share Data) C2007A C2008A C2009A C2010E 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 Net Income $9,864 $25,580 $15,647 $15,691 $13,344 $26,579 $20,371 $22,732 $22,363 $32,443 $30,141 $30,913 $32,272 $43,519 Acquisition of Streaming Content Library (8,630) (4,249) (6,594) (15,348) (23,412) (7,982) (5,773) (11,123) (22,091) (9,343) (9,998) (22,785) (50,475) (66,157) Amortization of Content Library 49,442 50,985 48,237 54,751 57,570 57,012 47,596 47,579 49,304 53,235 56,690 60,261 62,292 65,143 Depreciation 4,793 5,319 5,945 6,162 6,482 8,188 8,643 9,141 9,175 9,013 9,618 10,238 10,859 9,309 Change in Prepaid Content (6,115) 6,612 1,138 1,652 (770) (13,803) (2,544) 3,659 4,098 (1,613) 107 (8,235) (4,963) (2,133) Change in Accounts Payable 13,185 (17,718) 5,997 15,091 8,680 7,092 (744) (7,917) 8,572 (6,549) (13,173) 8,894 16,878 19,263 Change in Accrued Expenses 7,699 14,244 11,433 (567) 7,826 (14,551) 4,730 171 2,945 (34) 2,752 7,506 13,746 7,917 Change in Deferred Revenue (5,444) (3,712) (4,201) 15,344 (3,292) (489) (1,989) 17,232 (2,504) (128) (1,372) 20,974 12 1,310 Change in Other Assets and Liabilities 138 74 814 1,842 (669) 8,433 (775) 2,148 2,423 325 (2,240) 1,177 3,879 1,840 Other Operating Cash Flow (7,938) (16,138) (6,590) (7,011) (1,697) (3,099) (9,020) 8,478 (8,652) (2,047) 5,786 (3,126) (7,295) (19,759) Cash Flow from Operations $56,994 $60,997 $71,826 $87,607 $64,062 $67,380 $60,495 $92,100 $65,633 $75,302 $78,311 $105,817 $77,205 $60,252 Capital Expenditures ($18,013) ($8,968) ($7,412) ($9,863) ($12,431) ($14,662) ($9,226) ($7,471) ($6,572) ($6,933) ($9,994) ($22,433) ($6,393) ($5,671) Acquisition of Content Library (62,411) (53,116) (33,615) (59,505) (51,316) (44,410) (28,828) (38,295) (46,499) (43,224) (46,273) (57,048) (36,902) (24,191) Change in ST Investments (168,812) (25,213) (10,708) 225 83,365 (44,255) 27,659 (16,395) (14,121) 5,238 68,378 (85,116) (1,212) 14,570 Other Investing Cash Flow 5,523 7,637 5,375 2,852 (1,485) 4,399 3,728 4,663 2,524 1,170 3,479 11,345 3,682 3,825 Net Cash Used in Investing Activities ($243,713) ($79,660) ($46,360) ($66,291) $18,133 ($98,928) ($6,667) ($57,498) ($64,668) ($43,749) $15,590 ($153,252) ($40,825) ($11,467) Cash Dividends $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Change in Debt (95) (97) (98) (100) (122) (230) (234) (237) (269) (295) (294) 192,595 (361) (465) Net Share issuance/(repurchase) 766 (27,534) (34,916) (28,565) (91,343) 4,524 (87,452) (6,761) (29,130) (62,733) (126,961) (70,237) (97,806) (32,036) Change in Preferred Stock 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Financing Cash Flow 4,076 12,018 5,170 4,984 820 2,554 1,093 753 3,684 3,815 1,600 3,584 7,424 11,182 Net Cash Provided by Financing Activities $4,747 ($15,613) ($29,844) ($23,681) ($90,645) $6,848 ($86,593) ($6,245) ($25,715) ($59,213) ($125,655) $125,942 ($90,743) ($21,319) Other Cash Flow - Including Effect of Exchange Rate 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Beginning Cash and Cash Equivalents 400,430 218,458 184,182 179,804 177,439 168,989 144,289 111,524 139,881 115,131 87,471 55,717 134,224 79,861 Inc. (Dec.) in Cash and Cash Equivalents (181,972) (34,276) (4,378) (2,365) (8,450) (24,700) (32,765) 28,357 (24,750) (27,660) (31,754) 78,507 (54,363) 27,466 Ending Cash and Cash Equivalents 218,458 184,182 179,804 177,439 168,989 144,289 111,524 139,881 115,131 87,471 55,717 134,224 79,861 107,327 Minimum Cas h Balanc e 117,236 89,035 57,127

Footnote s Fiscal year ends in December. E = Morgan Stanley Research Estimates. Source: Morgan Stanley Research

13 MORGAN STANLEY RESEARCH August 16, 2010 Netflix Inc

Exhibit 15 Netflix – NFLX – Discounted Cash Flow Valuation

(US$ in M illions, Except per Share Data) Actual Calendar Year ending December 31, Projected Calendar Year ending December 31, 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Net Revenue $997 $1,205 $1,365 $1,670 $2,164 $2,872 $3,593 $4,187 $4,761 $5,329 $5,892 $6,457 $7,004 $7,532 % Net Revenue Growth 46% 21% 13% 22% 30% 33% 25% 17% 14% 12% 11% 10% 8% 8% EBITDA (1) $234 $322 $376 $462 $611 $846 $1,121 $1,429 $1,709 $1,954 $2,094 $2,178 $2,437 $2,752 EBITDA as % of Net Revenue 23% 27% 28% 28% 28% 29% 31% 34% 36% 37% 36% 34% 35% 37% Cash Taxes from Operations ($36) ($46) ($53) ($81) ($112) ($155) ($213) ($306) ($393) ($494) ($527) ($550) ($645) ($769) Cash Taxes as % of EBITDA 15% 14% 14% 18% 18% 18% 19% 21% 23% 25% 25% 25% 26% 28% Capital Expenditures ($197) ($288) ($255) ($303) ($473) ($562) ($667) ($746) ($768) ($819) ($859) ($892) ($913) ($920) % Y/Y Capex Growth 42% 46% -11% 19% 56% 19% 19% 12% 3% 7% 5% 4% 2% 1% % of Net Revenue 20% 24% 19% 18% 22% 20% 19% 18% 16% 15% 15% 14% 13% 12% Change in Net Working Capital $35 $58 $12 $24 $82 $39 $34 ($2) ($10) ($86) $10 $23 ($11) ($18) Change in NWC as % of Net Revenue 4% 5% 1% 1% 4% 1% 1% (0%) (0%) (2%) 0% 0% (0%) (0%) Unlevered Free Cash Flow $36 $45 $80 $101 $108 $167 $275 $374 $539 $555 $718 $759 $868 $1,046 % of Net Revenue 4% 4% 6% 6% 5% 6% 8% 9% 11% 10% 12% 12% 12% 14%

Perpetuity Grow th Rate / Terminal Value at 12.0% Hurdle Rate Hurdle 4.0% 4.3% 4.5% 4.8% 5.0% Rate Equity Value as of 6/30/10 Valuation Date $13,958 $14,443 $14,960 $15,513 $16,105 11.5% $8,180 $8,376 $8,586 $8,811 $9,053 11.7% $7,928 $8,111 $8,306 $8,515 $8,740 Terminal Value / Implied EBITDA Multiple 12.0% $7,574 $7,740 $7,916 $8,104 $8,306 5.1x 5.2x 5.4x 5.6x 5.9x 12.2% $7,354 $7,508 $7,673 $7,849 $8,037 $13,958 $14,443 $14,960 $15,513 $16,105 12.5% $7,043 $7,183 $7,333 $7,492 $7,661

DCF VALUATION FOR 6/30/10 - 10 YEAR CASH FLOW Net Present Value of Cash Flow s $2,779 Hur dle Plus: NPV of Terminal Value (4.5% Grow th) 5,095 Rate Equity Value per Share as of 6/30/10 Valuation Date (2) Plus: Cash, Equivalents and Equity Investments 279 11.5% $149 $153 $157 $161 $165 Less: Debt and Minority Interest (237) 11.7% $145 $148 $152 $155 $160 Implied Equity Value $7,916 12.0% $138 $141 $145 $148 $152 Fully Diluted Shares Outstanding (MM) 55 12.2% $134 $137 $140 $143 $147 Implied Equity Value per Share (1) $145 12.5% $129 $131 $134 $137 $140

Footnotes (1) EBITDA equal to operating income excluding stock compensation and extraordinary items plus depreciation and amortization. (2) Equity value per share based on treasury share method diluted share count as if implied valuation price w as used for calculation. Assumptions Revenue: DCF assumes a 16% C2009-C2019E revenue CAGR. EBIT DA: Grow th in research & development and sales & marketing expenses offset by D&A add-back from projected capital spending plan. Working Capital: Working Cap is relatively neutral to valuation. Capital Expenditures: Capex grow s w ith free cash flow as company reinvests heavily over next ten years. Hur dle Rate : Note that w e use a Hurdle Rate rather than the Weighted Average Cost of Capital (WACC) as the discount rate for our DCF analysis. We believe that a Hurdle Rate is more appropriate because it more accurately reflects w hat w e view as company-specific risks. Methodology: In determining cash flow s, w e forecast out revenue, EBITDA, cash taxes, w orking capital changes, and capex through C2018E. Free cash flow in a year is equal to operating income plus depreciation & amortization plus stock compensation minus cash taxes from operations minus w orking capital uses minus capex. We then use the hurdle rate to calculate the present value of each year's free cash flow . The terminal value is the C2018E terminal adjusted free cash flow multiplied by the future grow th rate and divided by the difference betw een the hurdle rate and the future grow th rate. The net present value is the sum of the present value of all the free cash flow s. To determine equity value per share, w e subtract debt and add cash to the net present value and then divide by shares outstanding. EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization; NPV = Net Present Value Source: Morgan Stanley Research. E= Morgan Stanley research Estimates

DCF Valuation is found using a 12.0% hurdle rate and 4.5% terminal growth rate

14 MORGAN STANLEY RESEARCH August 16, 2010 Netflix Inc

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15 MORGAN STANLEY RESEARCH August 16, 2010 Netflix Inc

Coverage Universe Investment Banking Clients (IBC) % of % of % of Rating Stock Rating Category Count Total Count Total IBC Category Overweight/Buy 1095 42% 380 44% 35% Equal-weight/Hold 1123 43% 388 45% 35% Not-Rated/Hold 14 1% 4 0% 29% Underweight/Sell 362 14% 93 11% 26% Total 2,594 865

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16 MORGAN STANLEY RESEARCH August 16, 2010 Netflix Inc

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17 MORGAN STANLEY RESEARCH

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Industry Coverage:Internet & Consumer Software

Company (Ticker) Rating (as of)Price* (08/16/2010)

Scott Devitt Ancestry.com Inc. (ACOM.O) O (12/15/2009) $19.7 Blue Nile Inc (NILE.O) E (08/20/2009) $41.85 Digital River Inc (DRIV.O) E (08/20/2009) $26.46 GSI COMMERCE (GSIC.O) O (11/19/2009) $22.43 Mercadolibre Inc. (MELI.O) E (08/20/2009) $67 Netflix Inc (NFLX.O) O (07/30/2010) $137.22 OpenTable Inc. (OPEN.O) E (08/20/2009) $52.38 Overstock.com Inc (OSTK.O) U (08/20/2009) $14.03 Shutterfly Inc (SFLY.O) E (02/11/2010) $23.02 Vistaprint N.V. (VPRT.O) E (03/12/2010) $28.79 eBay (EBAY.O) O (05/13/2010) $22.05 Mary Meeker Amazon.com (AMZN.O) O (03/18/2002) $126.07 Dice Holdings, Inc. (DHX.N) E (02/29/2008) $6.95 Google (GOOG.O) O (09/28/2004) $485.59 TechTarget, Inc. (TTGT.O) E (06/26/2007) $4.65 WebMD Health Corp. (WBMD.O) E (05/12/2008) $51.27 Yahoo! (YHOO.O) O (12/23/2009) $13.79 drugstore.com (DSCM.O) E (03/18/2002) $1.87

Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted.