Netflix Revenues by Business Segments

REPORT PREPARED FOR: NETFLIX BUSINESS MODEL ANALYSIS

BY DIGITAL GURU : Nitish Kumar Esha Sharma Beenu Mathews Vladimir Baskov

POSTGRADUATE DIPLOMA IN BUSINESS APMG 8119: DIGITAL ENTERPRISE 2015

>>APMG 8119: DIGITAL ENTERPRISE Netflix.com

“We promise our customers stellar service, our suppliers a valuable partner, our investors the prospects of sustained profitable growth, and our employees the allure of huge impact.”

>>APMG 8119: DIGITAL ENTERPRISE Netflix.com

• Netflix was founded in 1997 by software executives Reed Hastings and Marc Randolph to offer online movie rentals mailed to the customers’ doors. • Netflix is now the leading internet subscription service for streaming movies and TV shows with over 62 million members in over 50 countries enjoying more than 100 million hours of content per day.

>>APMG 8119: DIGITAL ENTERPRISE Services

• Netflix provides a diverse and customizable library of movies and television shows available for unlimited streaming or mail delivery at low cost and user-convenience. • Netflix customers are avid movie and television watchers that are not very particular in the viewing selection. They value easy and immediate access, as well as the portability and transferability of the product. • Consumers are typically younger and tech-savvy. Netflix has an international audience. • Streaming is available online, on mobile devices, and game consoles such as the Wii, Xbox, and PlayStation. • Netflix retains their customers by continuously growing their library of content, producing Exclusive Netflix content such as ‘House of Cards’ and ‘Orange is the New Black’. • Netflix’s ability to recommend content to watch based on user interests and preferences is a unique customization feature.

>>APMG 8119: DIGITAL ENTERPRISE

COMPETITORS

>>APMG 8119: DIGITAL ENTERPRISE Market Share

44.50% 45% 36% 40% 35% 30% 25% 20% 13% 15% 6.50% 10% 5% 0% Netflix Amazon Hulu Plus Others

>>APMG 8119: DIGITAL ENTERPRISE • Netflix launched its operations in New Zealand in March 2015. Netflix launched its service at a cost $9.99 a month with one month free subscription. This is a lot cheaper than its competition in New Zealand. It’s half the price of Sky TV's Neon, and also cheaper than Spark's $12.99/month Lightbox and the $12.99/month Quickflix. • Netflix will be the first streaming video on-demand service to offer ultra high definition, or four times the picture quality of HD. Sky TV's Neon is still on standard definition (SD), let alone HD or Ultra HD. • Netflix also brought its multiplatform approach to NZ, which includes making its content available through apps on various brands of smart TV, Xbox, PlayStation 4, Nintendo Wii, iOS and Android phones and tablets, Google Chromecast and Apple TV. • Quickflix, the pioneer in making its content available through multiple devices in NZ can’t match Netflix range of options.

>>APMG 8119: DIGITAL ENTERPRISE Netflix Business Model Canvas

>>APMG 8119: DIGITAL ENTERPRISE Digital Business Model

• Netflix works on a classical service business model in the video-on-demand industry where users of the service and payers are the same. • Netflix was the first of its kind who offered entertainment content using video streaming in exchange for subscription fee. Netflix is a B2C subscription business and does not carry any advertising. • Netflix allow the account holder to register up to six devices per account. Netflix Digital Tribes / Target Customers

•Netflix tries to cater to everyone who has an excess to internet. In regards to demographics, Netflix targets both males and females between the ages of 17-60. •Netflix’s products are targeted towards the lower-middle class and up. •Netflix offers movie and TV titles that cater to different racial and ethnic groups. •In regards to psychographics, Netflix appeals to people who are too busy to go out and shop for desirable titles •Netflix also targets those who are movie buffs and TV fans. Netflix Revenue Model

>>APMG 8119: DIGITAL ENTERPRISE NETFLIX REVENUES BY BUSINESS SEGMENTS

Netflix has three operating segments: Domestic streaming, which refers to the content streaming business in the US; International streaming, which refers to the streaming business from countries other than US; and Domestic DVD, which refers to the DVD-by-mail services business in the US.

In 2014, Netflix generated $5.5 billion of total revenues. Of these total revenues, Netflix generated: • $3.4 billion revenues, 62.3% of the total, from the domestic streaming business; • $1.3 billion revenues, 23.8% of the total, from the international streaming business. The share of international streaming revenue increased from 8% in 2012 to 23.8% in 2014; • $765 million revenues, 13.9% of the total, from domestic DVD business. The share of domestic DVD business declined from 31.5% in 2012 to 13.9% in 2014.

>>APMG 8119: DIGITAL ENTERPRISE Netflix Quarterly Revenues

• In quarter two of 2015 Netflix reached total revenues of $1.64 billion, up 22.7% yoy, from $1.34 billion in Q2’14. • The quarterly revenues yoy growth remains steady. Netflix continues to make shift towards providing the exclusive content and expanding the original content. It helps them differentiate the service and motivates the users to join Netflix. • Nearly ninety percent of Netflix members have engaged with Netflix original content. Netflix continues to invest in not only series, documentaries and stand-up but also original feature films.

>>APMG 8119: DIGITAL ENTERPRISE http://www.expedia.co.nz Netflix quarterly profits

• Netflix Q2’15 operating profit reached $74.9 million, down from $129.6 million in Q2’14. • The Q2’15 operating margin reached 4.6%, down from 9.7% in Q2’14. • Netflix Q2’15 net profit reached $26.3 million, down from $71.0 million in Q2’14. • The Q2’15 net margin reached 1.6%, down from 5.3% in Q2’14.

>>APMG 8119: DIGITAL ENTERPRISE Cost Analysis

Netflix spent $607 million, $472 million, and $270 million on marketing, technology and development, and general and administrative expenses respectively.

>>APMG 8119: DIGITAL ENTERPRISE Key Costs & Operating Expenses Areas:

• Cost of Revenue: This includes content expenses and other cost of revenue. For the domestic and international streaming segments, content expenses include amortization of the streaming content library and other expenses associated with the licensing and acquisition of the streaming content.

• Streaming Delivery: 1.8GB of date is used to watch a 2 hour movie and it would cost 6 cent for Netflix to deliver a movie. 3GB data is used to watch the HD movies and it would cost 9 cent for one HD movie.

• Content: In 2014, Netflix’s spend more money on programming than HBO, Amazon and Hulu. It is estimated that Netflix will spend $US5 billion in 2016 for programming. Because of this huge cost Netflix has invested more money to generate original content. But the implementation of original content is very expensive and Netflix cost $100 million dollars for first two seasons of House cards alone. >>APMG 8119: DIGITAL ENTERPRISE Key Costs & Operating Expenses Areas:

• Marketing: Advertising expenses include promotional activities such as television and online advertising. Payments to affiliates and device partners include fixed fee and/or revenue sharing payments. Marketing expenses are immaterial for the domestic DVD segment.

• Technology and development: These consist of payroll and related costs incurred in making improvements to the service offerings, including testing, maintaining, and modifying the user interface, recommendation, merchandising, and streaming delivery technology, as well as the telecommunication systems and infrastructures. These also include the costs associated with computer hardware and software.

• General and administrative: These consist of payroll and related expenses for corporate personnel, as well as professional fees and other general corporate expenses. >>APMG 8119: DIGITAL ENTERPRISE Key Costs & Operating Expenses Areas:

Location Estimated Square Footage Lease Expiration Date Primary Use

Los Gatos, 250,000 March 2018 Global streaming corporate office, California general and administrative, marketing and technology and development Beverly Hills, 79,000 August 2018 Global content acquisition, marketing California and general and administrative Santa Clara, 23,000 October 2016 Global streaming customer service center California Columbus, Ohio 90,000 August 2016 Domestic DVD receiving and storage center, processing and shipping center for the Columbus area Fremont, 57,000 March 2019 Domestic DVD corporate office, general and California administrative and technology and development

Property: Netflix don’t own properties and they prefer to lease the properties for the primary usage. They entered into the lease agreement for the global distribution centre. And expiration of the lease will be a huge cost for Netflix.

>>APMG 8119: DIGITAL ENTERPRISE Financial Risk

• The Netflix’s revenue and expenses is highly co related with the Euro, The Canadian Dollar, Brazilian Real and The British pound. So there will be a negative influence on the revenue and net income of company which is expressed in US dollar due to the changes of exchange rate. • Netflix cash from operations continues to be negative due to Netflix investments in originals which is working capital intensive

>>APMG 8119: DIGITAL ENTERPRISE

VALUE CREATION

Netflix has a clear view of it’s target market and customers, and has concentrated on markets where they have strength and more competitive edge. Digital technology is changing the way companies work and the way customers expect them to work. Many opportunities exist to profit from digital business models. But building radically new ones can be expensive, difficult, and highly risky. There are many opportunities to do something perhaps less revolutionary, yet still highly valuable – evolving the business models using digital technology.

>>APMG 8119: DIGITAL ENTERPRISE Digital business model

VALUE CREATION

>>APMG 8119: DIGITAL ENTERPRISE What makes the difference ?

The Role of Innovation Future

In today’s age, internet streaming is • Customer Growth replacing the traditional TV and Netflix strives to grow 60-90 million apps are replacing channels. Netflix members in the domestic market is leading the way to internet TV. over 5 years (2015-2020) based on Netflix not only optimized their upon their past trajectory and • Original Content mail delivery rental service, but continued growth of internet video. Netflix will continue to grow their were first movers in the internet original content offering as they rental subscriptions market and has gain scale and confidence. The goal now become the dominant player. • Domestic Margin Structure is to premiere a new original show Netflix will grow content spending or season every two and a half Netflix has been able to capture and marketing slightly slower than weeks (20 new shows or seasons consumer attention and keep it they grower. Over 5 years (2015- per year). 2020), they want to move the 30% through their growing library of shows and movies, as well as their contribution margin close to 40%. production of original content. With • Global Expansion so much content at an affordable Netflix wants to expand cost, Netflix is successful and internationally as fast as possible growing. while staying profitable. Expected completion of global expansion is 2016. They should return o growing >>APMG 8119: DIGITAL ENTERPRISE global profits in 2017 and beyond.

Reference

•Albattikhi, M. (2015). Business Model Canvas Workshop. Retrieved from http://www.slideshare.net/MohammadAlbattikhiMB/business-model-canvas-workshop- 47361091. •Business model “Canvas”. Retrieved from https://en.wikipedia.org/wiki/Business_Model_Canvas. •Follow, S. 2015. The economics of Netflix. Retrieved from https://stephenfollows.com/the- economics-of-netflix/. •Lindsay, MM. (2014). Netflix: Target Market. Retrieved from https://storify.com/mmlindsay/netflix-target-market. •Mikhalkina, T. (2014). Netflix Business Model. Retrieved from http://www.cass.city.ac.uk/data/assets/pdf_file/0017/220517/Netflix.pdf. •Netflix. Retrieved from https://en.wikipedia.org/wiki/Netflix •Netflix (2015). Retrieved from http://ir.netflix.com/index.cfm. •Wikinvest.com. Retrieved from http://www.wikinvest.com/stock/Netflix_(NFLX)/Filing/10- K/2014/10-K/D18086827#sC6B9E5BE634C5CF0F4ED0127B0AB0FF3

>>APMG 8119: DIGITAL ENTERPRISE