2NameStudent NameAssignmentTextbook Case Analysis Exec.docx

2
Name:
Student Name
Assignment:
Textbook Case Analysis Executive Summary – Week
Date Submitted:
Course (include the section number:
MG495 Business Policy
Statement of Academic Integrity:
I certify that:
1. I prepared this document specifically for this class;
2. I am the author of this document;
3. I am fully disclosing and giving proper credit to any outside
assistance received in its preparation;
4. I cited sources of information (e.g., data, ideas, charts, etc.)
and used this material to support this document.
5. I did not receive any assistance / help / guidance from others.
Student’s Signature (type your full name):
Writing a Textbook Business Case Analysis Executive Summary
Comment by : To be eligible for grading:
the assignment must follow APA formatting,
Incorporate all prior feedback of APA/grammar errors
provide an opening,
employ discussion about the topics identified in the Syllabus
by using the to the headings provided (Synopsis of the Case,
Relevant Factual Information about the problem/decision the

organization faced, Explanation of relevant concepts, theories
and applications derived from the course materials,
Recommendations and alternative recommendations),
end with a conclusion,
Supply an APA formatted reference page
Contain appropriate in-text citation throughout
The length of the paper should not exceed three pages.
Student Name
Park University
Writing a Textbook Business Case Analysis Executive Summary
Comment by : This should be a restatement of your
paper’s title. See the sample page at p. 41 of the Publication
Manual
Only provide the page number in the right hand corner. Do not
provide a running header unless the item is for publication APA
rule 8.03. See the sample paper starting at p. 41 of the
Publication Manual
Double space, indent the first word of each paragraphs and use
12 point Times new Roman font justified to the left margin. See
rule 8.03 (APA, 2009).
APA does not permit the use of the word introduction as a level
heading (APA, 2009, Rule 3.03 p. 63) In fact, the opening does
not even carry a heading, except for a restatement of the paper’s
title. One is assumed by its placement at the beginning. Your
opening should provide specific and meaningful information
relevant to the business issue of the case. Appropriate in-text
citation must be provided. The executive summary should be
analytical in nature encompassing a forward thinking view.
Comment by :

Synopsis of the Case Comment by : Us the topic headings
and descriptions provided to draft the case analysis.
The content of the synopsis should present relevant background
facts about the case under examination. The information
provided should be supported by APA in-text citation. Provide
only facts related to the business aspects of the case. Discussion
of the background should be minimal (i.e., a paragraph, two at
most), but still analytical.
Relevant Factual Information about the Problem or Decision the
Organization Faced
State the precise problem or decision the organization faced.
The section should include information that addressed the
business issue under examination. This section should be no
longer than a single paragraph.
Explanation of Relevant Concepts, Theories and Applications
Derived from Course Materials
This section should be the bulk of your paper. Analysis of the
business problem or decision in light of the course concepts
must be presented, as well as the business lesson another
organization could learn from this situation. Besides citation to
the text, learners must conduct research in the University
library related to the top. Citing the textbook only is not enough
to demonstrate you understand and can apply the course
objectives. Here is where comparative and contrasting positions
should be considered and examples and illustrations provided.
Recommendations
Provide logical recommendations to address the business lesson
identified above. The recommendations need not to be specific
to the organization examined, but should consider how other
organizations, if similarly situated, could lessen the impact of
the problem or decision identified. Recall, that the organization
under examination has already moved pasted this problem so
any recommendations made, at this point, are fruitless. The
focus of this section should be on what other companies should
be aware of to address similar problems or decisions. Citation to

the textbook alone is insufficient for analysis in this section.
Learners should conduct research in the University’s library to
support their positions. Depth of scholarship is not
demonstrated by providing personal opinions alone, but by
using examples, analogies, comparison and illustrations from
the academic literature. Not only does this synthesize the
material to assist the reader’s understanding, it is an effective
way to present the academic sources and extend the discussion
of your ideas. This section should be a paragraph or two.
Alternative Recommendations
This section is not a continuation of the prior. Provide
suggestions for how to avoid the problem or decision the
examined organization faced. Analysis here should be may be
forward- thinking, predictive or, most likely, preventative in
nature but tied to the thesis statement. Again, opinion is
insufficient to provide the required academic analysis. Sources,
other than the text, must be provided to sustain the statements
made. This section should be a paragraph, at most.
Conclusion
End the assignment with a summary of the important points
made in the document. No new information may be presented.
Writing a conclusion can be done by rewording the opening or
reformulation the topic sentences of each paragraph to make a
summary for the reader. This section should be a paragraph, at
most.
References Comment by : Please review reference list
format starting at page 180 of the Publication Manual. Like the
other portions of the paper, references should be double spaced;
however, second and subsequent lines of a source are indented.
The first line is not.

A minimum of 150 words each question and References
(questions #1 - 7) KEEP QUESTION WITH ANSWER EACH
QUESTIONS NEED TO HAVE A SCHOLARY SOURCE with a
Hyperlink
1. Lay out the design for two between-subjects experiments: a)
an experiment involving an experimental group and a control
group, and b) a factorial design with three independent
variables that have three, and two levels respectively.
2. Discuss some of the advantages of using a between-subjects
design.
3. Compare and contrast:
· Between-subjects with within-subjects designs
· Small N designs with large N designs.
In what circumstances would you use the within-subjects design
and in what circumstances would you use the large N design?
4. Discuss how to minimize the problems of fatigue, boredom,
or practice effects in within-subject designs.
5. Since obtaining statistical significance is easier to obtain
with a directional hypothesis (one-tailed test) than with a non-
directional hypothesis (two-tailed test), why would anyone ever
design a study with a nondirectional hypothesis?
6. Explain the purpose of a null hypothesis. Why are both a
research/alternative hypothesis and a null hypothesis necessary

in statistics?
7. How can internal and external validity be increased in an
experiment?

Case 15 Netflix, Inc.
The 2011 Rebranding/Price Increase Debacle
Alan N. Hoffman
Bentley University
In 2011, Netflix was the world’s largest online movie rental
service. Its subscribers paid to have DVDs delivered to their
homes through the U.S. mail, or to access and watch unlimited
TV shows and movies streamed over the Internet to their TVs,
mobile devices, or computers. The company was founded by
Marc Randolph and Reed Hastings in August, 1997 in Scotts
Valley, California, after they had left Pure Software. Hastings
was inspired to start Netflix after being charged US$40 for an
overdue video.1 Initially, Netflix provided movies at US$6 per
rental, but moved to a monthly subscription rate in 1999,
dropping the single-rental model soon after. From then on, the
company built its reputation on the business model of flat fee
unlimited rentals per month without any late fees, or shipping
and handling fees.
In May 2002, Netflix went public with a successful IPO, selling
5.5 million shares of common stock at the IPO price of US$15
per share to raise US$82.5 million. After incurring substantial
losses during its first few years of operations, Netflix turned a
profit of US$6.5 million during the fiscal year 2003.2 The
company’s subscriber base grew strongly and steadily from 1
million in the fourth quarter of 2002 to over 27 million in July
2012.3
By 2012, Netflix had over 100,000 titles distributed via more
than 50 shipment centers, insuring customers received their
DVDs in one to two business days, which made Netflix one of
the most successful dotcom ventures in the past two decades.4
The company employed almost 4100 people, 2200 of whom
were part-time employees.5 In September 2010, Netflix began
international operations by offering an unlimited streaming plan
without DVDs in Canada. In September 2011, Netflix expanded
its international operations to customers in the Caribbean,
Mexico, and Central and South America.

Key to Netflix’s success was its no late fee policy. Netflix’s
profits were directly proportional to the number of days the
customer kept a DVD. Most customers wanted to view a new
DVD release as soon as possible. If Netflix imposed a late fee,
it would have to have multiple copies of the new releases and
find a way to remain profitable. However, because of the no-
late-fee rule, the demand for the newer movies was spread over
a period of time, ensuring an efficient circulation of movies.6
On September 18, 2011, Netflix CEO and co-founder Reed
Hastings announced on the Netflix blog that the company was
splitting its DVD delivery service from its online streaming
service, rebranding its DVD delivery service Qwikster as a way
to differentiate it from its online streaming service, and creating
a new website for it. Three weeks later, in response to customer
outrage and confusion, Hastings rescinded rebranding the DVD
delivery service Qwikster and reintegrating it into Netflix.
Nevertheless, by October 24, 2011, only five weeks after the
initial split, Netflix acknowledged that it had lost 800,000 U.S.
subscribers and expected to lose yet more, thanks both to the
Qwikster debacle and the price hike the company had decided
was necessary to cover increasing content costs.7
Despite this setback, Netflix continued to believe that by
providing the cheapest and best subscription-paid, commercial-
free streaming of movies and TV shows it could still rapidly and
profitably fulfill its envisioned goal to become the world’s best
entertainment distribution platform.
The authors would like to thank Barbara Gottfried, Ashna
Dhawan, Emira Ajeti, Neel Bhalaria, Tarun Chugh, and Will
Hoffman for their research and contributions to this case. Please
address all correspondence to: Dr. Alan N. Hoffman, Dept. of
Management, Bentley University, 175 Forest Street, Waltham,
MA 02452-4705, voice (781) 891-2287, [email protected]
bentley.edu. Printed by permission of Alan N. Hoffman.
Online Streaming
By the end of 2011, Netflix had 24.4 million subscribers,
making it the largest provider of online streaming content in the

world.8 Subscription numbers had grown exponentially,
increasing 250% from 9.3 million in 2008. At the same time,
Netflix proactively recognized that the demand for DVDs by
mail had peaked, and the future growth would be in online
streaming. With 245 million Internet users in the United States,
and 2.2 billion9 worldwide, Netflix saw the opportunity to
expand its online streaming base both domestically and
internationally to become a dominant world player. In 2011,
Netflix expanded into Canada and Central America, and in 2012
into Ireland and the United Kingdom.10
The scarce resource for the online video industry was
bandwidth, the amount of data that can be carried from one
point to another in a given time period.11 With the introduction
of Blu-ray discs, the demand for higher- and better-quality
picture and sound streaming increased, which in turn increased
the demand for higher bandwidths. At the same time, cheaper
Internet connections and faster download speeds made it easier
and more affordable for customers to take advantage of the
services Netflix and its competitors offered. If the cost of
Internet access was to increase, it would directly affect sales in
the industry’s streaming segment.
Netflix was a leader in developing streaming technologies,
increasing its spending on technology and development from
US$114 million (2009) to US$258 million in 201112 (8% of its
revenue),13 and initiating a US$1 million five-year prize in to
improve the existing algorithm of Netflix’s recommendation
service by at least 10%. Because Netflix had already developed
proprietary streaming software and an extensive content library,
it had a head start in the online streaming market, and with
continued investments in technological enhancements, hoped to
maintain its lead.14 However, increased competition in
streaming, ISP fair-use charges, and piracy were some of the
major challenges it faced.
In March 2011, Netflix made its services readily available to
consumers through Smart-phones, tablets and video game
consoles when only 35% of the total U.S. market were using

Internet-enabled Smartphones.15 Thus, the expansion potential
for Netflix in this market was substantial. The Great Recession
of 2008–2010 was a boon for Netflix as people cut down on
high-value discretionary spending, choosing “value for money”
Internet offerings instead.16 However, in its annual letter to
shareholders, Netflix acknowledged that many of its customers
were among the highest users of data on an ISPs network and in
the near future it expected that such users might be forced to
pay extra for their data usage, which could be a major deterrent
for the growth of Netflix because most of its customers are
highly price sensitive.
Demographics
The number of Internet users in the United States had increased
from about 205 million in 2005 to 245 million in 2012.17
According to a research report by Mintel investment research
database, the percentage of people using the Internet to stream
video has jumped from 5% (2005) to 17% (2011), significantly
growing the market for online streaming services such as
Netflix. At the same time, the recession of 2008–2010, with its
high unemployment and slow economic growth had a significant
impact on the spending habits of U.S. consumers. More and
more people chose to forego an evening at the movie theatre in
favor of home movie rentals to save on costs.18 By 2011, the
crucial 18- to 34-year-old demographic saw the Internet as its
prime source of access to entertainment. However, this
demographic, was particularly sensitive to price fluctuations.
When Netflix changed its pricing structure in the third quarter
of 2011, subscriptions immediately dropped off 3%. Mintel
Research reported that only 15% of the under 18–25 age bracket
of its customers were ready to pay US$16/month for premium
content via Netflix. In addition, the proliferation of free content
over the Internet—Mega video, for example, with around 81
million unique visitors and a maximum exposure in the 18–33
demographic became a strong competitor for Netflix, further
limiting the pricing power Netflix could exercise.19
The Mintel report also found that American households with

two or more children and a household income of US$50,000 or
more had a very favorable attitude toward Netflix;20 Netflix
fostered this trend by cutting a deal with Disney21 that gave it
access to content exclusively targeting young children.
At the same time that Netflix was increasing its customer base
among the 18- to 34-year-olds and households with young
children, both of whom preferred streaming, it lost ground with
affluent Baby Boomers who still preferred to rent the DVDs
over the Internet. Thus, Netflix needed to fine-tune its strategy
to include this older demographic since people over 60 had
US$1 trillion in discretionary income per year, and fewer
familial responsibilities, making them a prime target
demographic for expanding Netflix’s customer base.22
The availability of high-speed Internet at home and the shift to
online TVs created opportunities for Netflix. The company
recognized that to fully leverage the current world of
technological convergence, it needed to compete on as many
platforms as possible, and created applications for the Xbox,
Wii, PS3, iPad, Apple TV, Windows phone, and Android. The
company also collaborated with TV manufacturers to integrate
Netflix directly into the latest televisions.23
Netflix’s Competitors
Netflix’s great operational advantage in the DVD rental market
was its nationwide distribution network, which prevented the
entry of many of its potential competitors. While only Netflix
provided both mail delivery and online rentals, with the growth
of online streaming, Netflix’s advantage shrank and it faced
increasing competition from Blockbuster, Wal-Mart, Amazon,
Hulu, and Redbox.
Netflix’s one-time strongest competitor, Blockbuster LLC,
founded in 1985, and headquartered in McKinney, Texas,
provided in-home movie and game entertainment, originally
through over 5000 video rental stores throughout the Americas,
Europe, Asia, and Australia, and later by adding DVD-by-mail,
streaming video on demand, and kiosks. Its business model
emphasized providing convenient access to media entertainment

across multiple channels, recognizing that the same customer
might choose different ways to access media entertainment on
different nights. Competition from Netflix and other video
rental companies forced Blockbuster to file for bankruptcy on
September 23, 2010, and on April 6, 2011, satellite television
provider Dish Network bought it at auction for US$233
million.24
Redbox Automated Retail, LLC, a wholly owned subsidiary of
Coinstar Inc., specialized in DVD, Blu-ray, and rentals via
automated retail kiosks. By June 2011, Redbox had over 33,000
kiosks in over 27,800 locations worldwide,25 and was
considering launching an online streaming service, perhaps for
as cheaply as US$3.95 per month.
Vudu, Inc., formerly known as Marquee, Inc., founded in 2004,
a content delivery media technology company acquired by Wal-
Mart in March 2010, worked by allowing users to stream movies
and TV shows to Sony PlayStation3, Blu-ray players, HDTVs,
computers, or home theaters. VUDU Box and VUDU XL
provided access to movies and television shows; users also
needed a VUDU Wireless Kit to connect VUDU Box/VUDU XL
to the Internet. Based in Santa Clara, California, the company
was the third most popular online movie service, with a market
share of 5.3%.26 Vudu had no monthly subscription fee, instead
users deposited funds to an online account which was reduced
depending on how many movies the user rented. In other words,
you paid for only what you watched.
In February 2011, Amazon.com, a multinational electronic
commerce company, announced the launch for Amazon Prime
members of unlimited, commercial-free instant streaming of all
movies and TV shows to members’ computers or HDTVs. In
addition, Amazon Prime members were given access to the
Kindle Owners’ Lending Library, allowing them to borrow
selected popular titles for free with no due date. For non-
Amazon Prime members, 48-hour on-demand rentals were
available for US$3.99, or the title could be bought outright.27
Hulu Plus was the first ad-supported subscription service for TV

shows and films that could be accessed by computers, television
sets, mobile phone, or other digital devices. Like Netflix, the
streaming service cost US$8 per month, but unlike Netflix, Hulu
offered more recent TV episodes and seasons. However,
subscribers had to put up with ads, and Hulu’s movie selection
was much more limited than Netflix’s selection.
Marc Schuh, an early financial backer of Netflix, observed that
copying software was relatively simple.28 Anyone could buy
the best servers, processors, operating systems, and databases—
but timing was crucial.29 Barnes & Noble waited 17 months to
enter the fray against Amazon, so that by 2012, Amazon had
eight times the profit and 30 times the market capitalization of
Barnes & Noble. Similarly, in the same year that Netflix’s
profits increased sevenfold, Blockbuster lost over 1 billion
dollars.30 Technology with correct timings can help a company
gain competitive advantage over rivals. Other barriers to entry
include investments in infrastructure aiding supply chain and
delays from major production houses for gaining permission to
stream their titles.Rising Content Costs
In the DVD rental business, the rental company had the first
sale doctrine, in which the company was permitted to rent a
single disc many times to recover the cost of the content. But
this doctrine did not apply to digital content, and the
technological shift away from the DVD rental business was in
part responsible for the excessive increase in content cost for
Netflix.31
In addition, Netflix’s dependence on outside content suppliers
such as the six major movie studios and the top television
networks contributed significantly to rising costs for the
company. As an example, Liberty Media Corporation’s Starz
LLC had been an early Netflix supplier. In 2011, Starz
demanded US$300 million to renew its deal with Netflix,
testament to the power of suppliers in relation to market
demand from an increasing number of competitors. On
September 1, 2011, Netflix customers learned they would lose
access to newer films from the Walt Disney Company and the

Sony Corporation after talks to obtain those movies from Starz
broke down. The loss created the impression of a major setback,
even though the films were making up a smaller share of
viewing than previously.
However, Netflix did sign new deals with the CW Network,
DreamWorks Animation, and Discovery Communications in
2011.Global Expansion
Beginning in 2007, Netflix shifted its focus to its streaming
business in response to their customers’ move to streaming in
preference to DVD rentals and the rising cost of mailing DVDs.
Conveniently, expanding its streaming business did not require
expanding its physical infrastructure. This strategy has proven
to be a major differentiator as it expands internationally in the
Americas and Europe.
By the end of 2011, the company had started operations in
Canada and 43 countries in Latin America, and planned to start
European operations in early 2012. At the end of the third
quarter of 2011, Netflix had 1.48 million international
subscribers with predictions of 2 million by the end of the
year.32 The United Kingdom was considered a huge potential
market. Twenty million UK households had broadband Internet,
and 60% of those households subscribed to a paid movie
service. In Latin America, four times that number had Internet
access,33 making international expansion there especially
attractive to subscriber-hungry Netflix.
However, international expansion was potentially risky, as
Netflix faced rising content costs from higher studio charges. In
addition, international expansion required both broadening its
content offerings and tailoring those offerings to meet the
specific needs of each of its international markets, which
Netflix feared would further increase content costs. It was clear
that the correct content mix was crucial, yet a huge challenge
for Netflix.
In addition, as Canada and the United Kingdom were already
developed markets, Netflix faced local competition from a
proliferation of DVD rental/streaming services. In the United

Kingdom, for instance, Virgin and Sky already had strong brand
recognition and balance sheets, and the Sky network had already
contracted exclusive first-pay window rights to movies from all
six major American studios, tough competition that could easily
delay profitability from international operations.
Lower per capita income and slower Internet speeds, especially
in Latin America, were further potential problems for Netflix’s
international expansion. In Canada, low data usage limits per
subscriber were a concern for a data hungry service such as
Netflix.Financial Results
In 2011, Netflix surpassed US$3.2 billion in sales, an annual
revenue growth of 50% over 2010 (US$2.1 billion, see Exhibits
1–3). Subscriber growth was the most important metric for
Netflix because its revenue growth was directly correlated to its
subscriber growth. Netflix grew from 12 million subscribers in
2009 to 20 million in 2010, and then to 27 million in 2012.
International operations were set to expand to become a major
source of sales growth for the company in the coming years.
Exhibit 1
Netflix, Inc. Consolidated Statements of Operations55 (in
thousands, except per-share data)
Year ended December 31
2011
2010
2009
Revenues
$3,204,577
$2,162,625
$1,670,269
Cost of revenues:
Subscription
1,789,596

1,154,109
909,461
Fulfillment expenses
250,305
203,246
169,810
Total cost of revenues
2,039,901
1,357,355
1,079,271
Gross profit
1,164,676
805,270
590,998
Operating expenses:
Marketing
402,638
293,839
237,744
Technology and development
259,033
163,329
114,542
General and administrative
117,937
64,461
46,773
Legal settlement
9,000
—
—
Total operating expenses
788,608

521,629
399,059
Operating income
376,068
283,641
191,939
Other income (expense):
Interest expense
(20,025)
(19,629)
(6,475)
Interest and other income
3,479
3,684
6,728
Income before income taxes
359,522
267,696
192,192
Provision for income taxes
133,396
106,843
76,332
Net income
$226,126
$160,853
$115,860
Net income per share:
Basic
$4.28

$3.06
$2.05
Diluted
$4.16
$2.96
$1.98
Weighted-average common shares outstanding:
Basic
52,847
52,529
56,560
Diluted
54,369
54,304
58,416
Exhibit 2
Netflix, Inc. Consolidated Balance Sheets55 (in thousands,
except share and per-share data)
As of December 31
2011
2010
Assets
Current assets:
Cash and cash equivalents
$508,053
$194,499
Short-term investments
289,758

155,888
Current content library, net
919,709
181,006
Prepaid content
56,007
62,217
Other current assets
57,330
43,621
Total current assets
1,830,857
637,231
Non-current content library, net
1,046,934
180,973
Property and equipment, net
136,353
128,570
Other non-current assets
55,052
35,293
Total assets
$3,069,196
$982,067
Liabilities and stockholders’ equity
Current liabilities:
Content accounts payable
$924,706
$168,695
Other accounts payable
87,860

54,129
Accrued expenses
63,693
38,572
Deferred revenue
148,796
127,183
Total current liabilities
1,225,055
388,579
Long-term debt
200,000
200,000
Long-term debt due to related party
200,000
—
Non-current content liabilities
739,628
48,179
Other non-current liabilities
61,703
55,145
Total liabilities
2,426,386
691,903
Commitments and contingencies (Note 5)
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized
at December 31, 2011 and 2010; no shares issued and
outstanding at December 31, 2011 and 2010
—
—

Common stock, $0.001 par value; 160,000,000 shares
authorized at December 31, 2011 and 2010; 55,398,615 and
52,781,949 issued and outstanding at December 31, 2011 and
2010, respectively
55
53
Additional paid-in capital
219,119
51,622
Accumulated other comprehensive income
706
750
Retained earnings
422,930
237,739
Total stockholders’ equity
642,810
290,164
Total liabilities and stockholders’ equity
$3,069,196
$982,067
Exhibit 3
Netflix, Inc. Consolidated Statements of Cash Flows55 (in
thousands)
Year Ended December 31
2011
2010
2009
Cash flows from operating activities:
Net income
$226,126
$160,853

$115,860
Adjustments to reconcile net income to net cash provided by
operating activities:
Additions to streaming content library
(2,320,732)
(406,210)
(64,217)
Change in streaming content liabilities
1,460,400
167,836
(4,014)
Amortization of streaming content library
699,128
158,100
48,192
Amortization of DVD content library
96,744
142,496
171,298
Depreciation and amortization of property, equipment, and
intangibles
43,747
38,099
38,044
Stock-based compensation expense
61,582
27,996
12,618
Excess tax benefits from stock-based compensation
(45,784)
(62,214)
(12,683)
Other non-cash items

(4,050)
(9,128)
(7,161)
Deferred taxes
(18,597)
(962)
6,328
Gain on sale of business
—
—
(1,783)
Changes in operating assets and liabilities:
Prepaid content
6,211
(35,476)
(5,643)
Other current assets
(4,775)
(18,027)
(5,358)
Other accounts payable
24,314
18,098
1,537
Accrued expenses
68,902
67,209
13,169
Deferred revenue
21,613
27,086
16,970
Other non-current assets and liabilities

2,883
645
1,906
Net cash provided by operating activities
317,712
276,401
325,063
Cash flows from investing activities:
Acquisition of DVD content library
(85,154)
(123,901)
(193,044)
Purchases of short-term investments
(223,750)
(107,362)
(228,000)
Proceeds from sale of short-term investments
50,993
120,857
166,706
Proceeds from maturities of short-term investments
38,105
15,818
35,673
Purchases of property and equipment
(49,682)
(33,837)
(45,932)
Proceeds from sale of business
—
—
7,483
Other assets

3,674
12,344
11,035
Net cash used in investing activities
(265,814)
(116,081)
(246,079)
Cash flows from financing activities:
Principal payments of lease financing obligations
(2,083)
(1,776)
(1,158)
Proceeds from issuance of common stock upon exercise of
options
19,614
49,776
35,274
Proceeds from public offering of common stock, net of issuance
costs
199,947
—
—
Excess tax benefits from stock-based compensation
45,784
62,214
12,683
Borrowings on line of credit, net of issuance costs
—
—
18,978
Payments on line of credit
—
—

(20,000)
Proceeds from issuance of debt, net of issuance costs
198,060
—
193,917
Repurchases of common stock
(199,666)
(210,259)
(324,335)
Net cash provided by (used in) financing activities
261,656
(100,045)
(84,641)
Net increase (decrease) in cash and cash equivalents
313,554
60,275
(5,657)
Cash and cash equivalents, beginning of year
194,499
134,224
139,881
Cash and cash equivalents, end of year
$508,053
$194,499
$134,224
Supplemental disclosure:
Income taxes paid
$79,069
$56,218
$58,770
Interest paid
19,395
20,101

3,878
Source:
http://files.shareholder.com/downloads/NFLX/2097321301x0x5
61754/3715da18-1753-4c34-8ba7-
18dd28e50673/NFLX_10K.pdf
However, by 2012, Netflix faced challenges from its pricing
changes in the United States and its expansion into international
markets, even stating that it expected revenue per subscriber to
drop from its 2011 level of US$11.5634 as subscribers choose
the streaming only option of US$7.99 over the more expensive
streaming and DVD delivery option. For future revenue growth,
Netflix needed to increase its subscribers numbers both
domestically and internationally.
In terms of net income, Netflix had steadily improved its bottom
line in conjunction with strong top line growth. The company
had a net income of US$226 million in 2011 for a growth rate of
40% over the previous year’s US$160 million net income. Over
the five years from 2006–2011, the company saw an average net
income growth of 31% per year that, coupled with high revenue
growth, was instrumental to Netflix’s high stock valuation.
However, recently, its operating margin slid from 15% in 2010
to 2.9% in 2012, a drop directly attributable to the higher cost
of content acquisition.
Until the end of 2007, Netflix had no long-term debt on its
books, but it began to acquire long-term debt in 2008 as a result
of its decision to invest in building a strong content library and
expand overseas. At the end of 2011, Netflix had US$508
million in cash and US$200 million in long-term debt.Netflix’s
Success
Netflix went from being a company that exclusively mailed
DVDs to the largest media delivery company in the world by
making some smart strategic decisions. For instance, Netflix
jumped on the streaming bandwagon even though it was not
really ready. At the time, the online content available for
streaming was extremely limited—less than 10% of the content
that was available from Netflix’s DVDs holdings.

At that time, Netflix’s mail-order DVD business was very
popular, and customers did not seem to mind waiting a day or
two for their DVDs. Netflix then went ahead and offered
streaming content, a bold decision that anticipated an as yet
unexpressed need for the immediate gratification of streaming,
and made Netflix the first entrant into the market for streamed
video. It was clear to Netflix that the use of DVDs would
gradually decline, and Netflix’s aggressive adoption of
streaming videos was a sharp marketing move, that gave it an
edge in the global economy.
After its initial launch of online streaming, Netflix kept up to
date with new trends and customer preferences, especially the
quickly changing preferences of Generation Y, which were
influenced by branding, social media, and media saturation.
Netflix utilized all the platforms that Generation Y would find
appealing, from computers and TVs, to Smartphones and
tablets.
Continually bearing in mind that the two most important things
for Netflix’s customers were price per content, and quality of
content, Netflix kept its priorities straight and never stopped
improving the quality of its content, or the platforms for
delivering that content.
Netflix also focused on increasing customer engagement. It
allowed customers to rate movies they viewed, thereby
enhancing the customer experience and creating a community of
viewers. And, by tracking the movies a customer viewed,
Netflix was able to track customer preferences, and offer
targeted recommendations for viewing. Netflix also exploited
customer loyalty to attract new customers, for instance, through
its “refer-a-friend” offer of one free month of service for both
the new customer and the referrer to attract new users who
wanted to try the service risk-free.The 2011 Price
Increase/Rebranding Debacle
Netflix continued to grow robustly by offering a combined DVD
mail and unlimited streaming service at a flat rate of US$9.99 a
month, a rate that was key to Netflix’s ability to offer a great

value for money service. But with increased competition and
expensive new content deals, the company found it increasingly
difficult to maintain its operating margin levels. In the third
quarter of 2011, Netflix implemented a 60% price increase,
from US$10 to US$16 a month for unlimited streaming and
DVDs by mail, which immediately resulted in the loss of
800,000 subscribers, pointing to the company’s very limited
latitude with regard to pricing.35
In response, Netflix took action that very shortly proved
disastrous. In addition to raising its prices and shifting its
business model to focus on online streaming. Netflix also
attempted to restructure its operations by spinning off its DVD
delivery service and rebranding it Qwikster. Rebranding a well-
known product or service such as Netflix usually only works if
a company was trying to simplify its brand, almost never the
other way around, which was, unfortunately what Netflix tried
to do. Netflix attempted to introduce a new entity, Qwikster, by
splitting the old entity into two: with two separate websites, two
separate queues, two separate sets of recommendations, two
separate customer bases, two separate billing avenues, and two
new sets of rules customer had to learn about. While Netflix had
banked on the competitive advantage of offering “affordability,
instant access and usability,” the introduction of a separate
website undercut instant access and usability. Customers,
critics, and Wall Street responded harshly.
Apart from losing over 800,000 subscribers after its price
increase, and losing half of its market capitalization, Netflix’s
rebranding strategy did not seem justifiable to its customers.
Netflix botched the rebranding because it neglected due
diligence prior to launching it and its price increases. Market
research would surely have indicated customer resistance to
both. Heavily focused on increasing profits, Netflix did not
effectively strategize the rebranding/ repricing plan, nor did it
anticipate resistance or prepare strategy implementation
scenarios. A new strategy should not only increase revenues and
profits, it should consider relationship and brand image gains

and losses. In springing the rebranding on customers, Netflix
undercut the quality of the experience it had previously offered,
and the negative reaction was not mitigated by the company’s
public apology or its rescinding of its decision to split its
services. The botched rebranding led to a dilution of Netflix’s
brand, and loss of customer trust. Re-establishing its brand
image became a priority for Netflix, though it was not very easy
to do. The company needed to offer something genuinely useful
to its customers at just the right cost, while increasing the
quality of the content offered and enhancing customer
experience.
Finally, in order for Netflix to expand internationally, it needed
to invest in the technological infrastructure in the international
markets that it lacked but which it desperately needs due to
heavy competitions and other legal concerns that appear
there.Strategic Challenges Ahead for Netflix
Netflix’s top management needed to address many issues to
maintain the company’s leading position in the home video
market. A strategic plan was needed to:
1. Repair the PR damage from the rebranding and price
increases of 2011.
2. Focus on growing its subscriber base both at home and
abroad.
3. Maintain a healthy cash position to meet the growing content
cost obligations.
4. Invest in innovative user interface and streaming
technologies to create a solid platform for the shift from DVD
delivery to streaming.References
· Blockbuster Wins 3-Month Restructuring Extension. Reuters.
20 Jan 2011. URL: http://t.co/iZPsUi5
· Video On Demand, Wikipedia, Accessed: 31-Jan-2011, URL:
http://en.wikipedia.org/wiki/Video_on_demand
· Netflix Annual SEC Report (2010) URL:
http://files.shareholder.com/downloads/NFLX/1159919179x0xS
1193125-10-36181/1065280/filing.pdf
· http://www.fundinguniverse.com/company-histories/Netflix-

Inc-company-History.html
· 2 10-K Netflix Annual Report – 2010
· Hoovers company profile—Netflix Inc.
· Datamonitor. Netflix Inc. Company Profile. 23 Jun. 2010
·
http://money.cnn.com/2011/10/24/technology/netflix_earnings/i
ndex.htm
· Datamonitor. Blockbuster Inc. Company Profile. 30 Dec. 2010
· http://www.redbox.com/release_20110811
· http://www.theatlanticwire.com/business/2011/08/walmarts-
facebook-powered-future/41843/
· http://www.csmonitor.com/Innovation/2011/0713/Five-
alternatives-to-Netflix/Amazon-Prime-instant-video
· http://facstaff.uww.edu/mohanp/netflix.html
· Information System: A Manager’s Guide to Harnessing – John
Gallaugher
· FY 2008, and June 2009 market cap figures for both firms
·
http://www.barnesandnobleinc.com/newsroom/financial_only.ht
ml
· http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-
reportsOther
· Movies to Go. The Economist. July 9, 2005
·
http://insight.kellogg.northwestern.edu/index.php/Kellogg/articl
e/a_surprising_secret_to_netflixs_runaway_success
·
http://searchenterprisewan.techtarget.com/definition/bandwidth
·
http://slatest.slate.com/posts/2011/06/02/nnessee_netflix_law_n
ew_measure_makes_it_illegal_to_share_login_.html
· http://www.wired.com/threatlevel/2011/09/netflix-video-
privacy/
· http://www.reelseo.com/time-warner-netflix-sued-providing-
captions-video-streams/
· http://news.cnet.com/8301-13578_3-20072619-38/netflix-

sued-by-deaf-group-over-lack-of-subtitles/
· http://arxiv.org/PS_cache/cs/pdf/0610/0610105v2.pdf
·
http://www.nytimes.com/2010/03/13/technology/13netflix.html
· http://news.cnet.com/8301-10784_3-9926311-7.html
· S&P Net Advantage
· IDC Technology Research Firm Source: S&P Industry Survey
· 10-Q Netflix Quarterly Fillings-Q3-2011
· 10-K Netflix Annual Report – 2010
http://www.cnn.com/2011/08/31/tech/mobile/smartphone-
market-share-gahran/index.html
· S&P Industry Survey
· 10-Q Netflix Quarterly Fillings-Q3-2011
· Morningstar Analyst Report
· Euromonitor Bentley Library Database
· http://www.emarketer.com/blog/index.php/time-spent-
watching-tv-tops-internet/
· Media Usage & Online Behavior—Mintel Report Oct 2011
· http://www.reuters.com/article/2011/10/31/us-netflixdisney-
idUSTRE79U0O420111031
·
http://www.businessweek.com/magazine/content/05_43/b395620
1.htm
· Mintel Investment Research
· Annual Shareholder letter Netflix 2011
· Consolidated Financial Statement 10k
· Netflix 10k 2011
· Netflix Factsheet
·
http://www.google.com/adplanner/planning/site_profile#siteDet
ails?identifier=megaupload.com Quarterly Letter to the
shareholders 3Q 2011
· http://www.ibtimes.com/articles/256810/20111128/netflix-
estimates-revised-jefferies-guidance-capital-raise.htm
· Company Fillings 8k 3Q
· Blockbuster Creditors Should Call It Quits, Poll Says,

TheStreet, 30 Jan 2011. URL: http://t.co/TcSPlun
· Blockbuster Wins 3-month Restructuring Extension, Reuters,
20 Jan 2011. URL: http://t.co/iZPsUi5
· Grossman, Robert J. Tough Love at Netflix. HR Magazine
(Apr 2010): 36–41
· Fuoco-Karasinski. Netflix Bucks Traditional Total Rewards,
WorldatWork workspan (8/07)
· Goldfarb, Jeffrey, & Holding, Reynolds. Incentives Play Role
in Success of Netflix. The New York Times. (May 8, 2011).
·
http://files.shareholder.com/downloads/NFLX/2097321301x0x5
61754/3715da18-1753-4c34-8ba7-
18dd28e50673/NFLX_10K.pdf
· http://ir.netflix.com/management.cfmNotes
1. 1.http://www.fundinguniverse.com/company-
histories/Netflix-Inc-company-History.html.
2. 2. 10-K Netflix Annual Report – 2010.
3. 3. Hoovers company profile – Netflix Inc.
4. 4. Datamonitor, Netflix Inc. Company Profile. 23 Jun. 2010.
5. 5. Datamonitor, Netflix Inc. Company Profile. 23 Jun. 2010.
6.
6.http://insight.kellogg.northwestern.edu/index.php/Kellogg/arti
cle/a_surprising_secret_to_netflixs_runaway_success
7.
7.http://money.cnn.com/2011/10/24/technology/netflix_earnings
/index.htm
8. 8. S&P Advantage
9. IDC Technology Research Firm Source: S&P Industry Survey
10. 10. 10-Q Netflix Quarterly Filings – Q3-2011
11.
11.http://searchenterprisewan.techtarget.com/definition/bandwid
th
12. 12. Consolidated Financial Statement 10-K
13. 13. 10-K Netflix Annual Report – 2010
14. 14. 10-K Netflix Annual Report – 2010
15. 15.http://www.cnn.com/2011/08/31/tech/mobile/smartphone-

market-share-gahran/index.html
16. 16. S&P Industry Survey
17. 17. Euromonitor, Bentley University Library Database
18. 18. S&P Industry Survey
19.
19.http://www.google.com/adplanner/planning/site_profile#site
Details?identifier=megaupload.com
20. 20. Media Usage & Online Behavior – Mintel Report Oct.
2011
21. 21.http://www.reuters.com/article/2011/10/31/us-
netflixdisney-idUSTRE79U0O420111031
22.
22.http://www.businessweek.com/magazine/content/05_43/b395
6201.htm
23. 23. Annual Shareholder Letter – Netflix 2011
24. 24. Datamonitor, Blockbuster Inc. Company Profile. 30 Dec.
2010
25. 25. http://www.redbox.com/release_20110811
26.
26.http://www.theatlanticwire.com/business/2011/08/walmarts-
facebook-powered-future/41843/
27. 27. http://www.csmonitor.com/Innovation/2011/0713/Five-
alternatives-to-Netflix/Amazon-Prime-instant-video
28. 28. http://facstaff.uww.edu/mohanp/netflix.html
29. 29. Information System: A manager’s guide to harnessing –
John Gallaugher
30. 30. Movies to Go. The Economist. July 9, 2005
31. 31. Morningstar Investment Report
32. 32. Quarterly letter to the shareholders 3Q 2011
33. 33. Quarterly letter to the shareholders 3Q 2011
34. 34. Company Filings – 8K 3Q
35. 35. 10-Q Netflix Quarterly Filings – Q3-2011

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