READ THE CASE ANALYSIS CHAPTER IN THE TEXT BOOK!I. State clearly.docx

READ THE CASE ANALYSIS CHAPTER IN THE TEXT
BOOK!
I. State clearly the main problem or challenge(s) that
management faces and other strategic issues within the case
a. Do not recite what's given in the case such as history
b. show evidence of the management weaknesses from the case
1. Does management have a flawed strategy as compared to its
market?
2. Is management too dependent on its founder(s), are there
succession issues?
3. Is management reluctant to change, doesn’t embrace new and
use new technology?
Natalie Section I
II. Strategic Analysis
a. Strategic tools:
1.five forces model, -
2. strategic group map,-
3.PESTEL,
4. VRIN, -
5.analyze the vision, mission, what are the core values, and
value proposition, determine the generic strategy -
6. determine the generic strategy of the company -
b. other tools: SWOT, etc
III. Financial Analysis
a. financial statement analysis
b. ratio analysis-
c. line graphs, pie charts, bar graphs,etc.-
Conclusions-
Recommendations-
This is the whole paper. The red highlight is my part.

T
hroughout 2010 and the first six months of
2011, Netflix was on a roll. Movie enthusiasts
were flocking to become Netflix subscribers
in unprecedented numbers, and shareholders were
exceptionally pleased with Netflix’s skyrocketing stock
price. During those 18 months from January 1, 2010
through June 30, 2011, the number of domestic Netflix
subscribers doubled from 12.3 million to 24.6 million,
quarterly revenues climbed from $445 million to $770
million, and quarterly operating income climbed from
$53 million to $125 million. Netflix’s swift growth in
the U.S. and its promising potential for expanding
internationally pushed the company’s stock price to an
all-time high of $304.79 on July 13, 2011, up from a
close of $55.19 on December 31, 2009. Already sol-
idly entrenched as the biggest and best-known Inter-
net subscription service for watching TV shows and
movies, the only question in mid-2011 seemed to be
how big and pervasive Netflix’s service might one day
become in the larger world market for renting movies
and TV episodes.
Then, over the next four months, Netflix announ-
ced a series of strategy changes and new initiatives
that tarnished the company’s reputation and sent the
company’s stock price into a tailspin:
• In mid-July 2011, Netflix announced a new pric-
ing plan that effectively raised the monthly sub-
scription price by 60 percent for customers who
were paying $9.99 per month for the ability to (1)

receive an unlimited number of DVDs each month
(delivered and returned by mail with one title out
at a time), and (2) watch an unlimited number of
movies and TV episodes streamed over the Inter-
net. The new arrangement called for a total separa-
tion of unlimited DVDs and unlimited streaming
to better reflect the different costs associated with
the two delivery methods and to give members a
choice: a DVD-only plan, a streaming-only plan,
or the option to subscribe to both. The monthly
subscription price for the unlimited streaming plan
was set at $7.99 a month. The monthly subscrip-
tion price for DVDs only—one out at a time—was
also set at $7.99 a month. If customers wanted
both unlimited streaming and unlimited DVDs,
they had to sign up for both plans and pay a total
of $15.98 a month ($7.99 1 $7.99)—Netflix said
it was discontinuing all plans that included both
streaming and DVDs by mail. For new Netflix
members, the changes were effective immediately.
For existing members, the new pricing started for
charges on or after September 1, 2011.
Customer reaction was decidedly negative. Unhappy
subscribers posted thousands of comments on Netflix’s
site and Facebook page. Over the next eight weeks,
Netflix’s stock price dropped steadily to around $210–
$220 per share, partly because of rumors that perhaps
as many as 600,000 Netflix customers had canceled
their subscriptions.
The stock price slide was exacerbated by media
reports that Starz, a premium movie channel offered
by many multichannel TV providers, had bro-
ken off talks with Netflix regarding renewal of the

contract whereby Starz supplied Netflix with cer-
tain Starz-controlled movies and TV shows that
Netflix could then provide either on DVDs or via
streaming to its subscribers. The substance of the
breakdown in negotiations centered on the much
higher price that Starz was asking Netflix to pay
to renew its rights to distribute Starz content to
Netflix subscribers—Starz was rumored to have
C
A
S
E
11
Netflix in 2012: Can It Recover
from Its Strategy Missteps?
Arthur A. Thompson
The University of Alabama
Copyright © 2012 by Arthur A. Thompson. All rights reserved.
C-128 Part 2 Cases in Crafting and Executing Strategy
then, in something of a bombshell, went on to
reveal that Netflix was separating its DVD-by-mail
subscription service and its unlimited streaming
subscription service into two businesses operating
at different websites. Hastings said the DVD-by-
mail service would be renamed Qwikster, with its
own website ( www.qwikster.com ) and its own

billing. Current Netflix subscribers who wanted
DVDs by mail would have to go to www.qwikster
.com and sign up for the plan. He indicated that the
Qwikster website would be operational in a matter
of weeks—see Exhibit 1 for the full text of the post
by Hastings.
demanded as much as $300 million annually to
renew its license with Netflix, versus the $30 million
annually that Netflix had been paying. 1 (Netflix’s
licensing agreement with Starz later expired in
March 2012, and the content was removed from its
library of offerings to subscribers.)
• On September 18, 2011, in an attempt at dam-
age control, Netflix CEO Reed Hastings in a post
on the Netflix blog at http://blog.netflix.com/
apologetically said that the basis for the new pric-
ing had been poorly communicated and person-
ally took the blame for the miscue. He elaborated
on the rationale behind the new pricing plans and
An Explanation and Some Re! ections
I messed up. I owe everyone an explanation.
It is clear from the feedback over the past two months that many
members felt we lacked respect and humility in the
way we announced the separation of DVD and streaming, and
the price changes. That was certainly not our intent,
and I offer my sincere apology. I’ll try to explain how this
happened.
For the past ! ve years, my greatest fear at Net" ix has been that
we wouldn’t make the leap from success in DVDs
to success in streaming. Most companies that are great at

something – like AOL dialup or Borders bookstores – do
not become great at new things people want (streaming for us)
because they are afraid to hurt their initial business.
Eventually these companies realize their error of not focusing
enough on the new thing, and then the company ! ghts
desperately and hopelessly to recover. Companies rarely die
from moving too fast, and they frequently die from
moving too slowly.
When Net" ix is evolving rapidly, however, I need to be extra-
communicative. This is the key thing I got wrong.
In hindsight, I slid into arrogance based upon past success. We
have done very well for a long time by steadily
improving our service, without doing much CEO
communication. Inside Net" ix I say, “Actions speak louder than
words,” and we should just keep improving our service.
But now I see that given the huge changes we have been
recently making, I should have personally given a full
justi! cation to our members of why we are separating DVD and
streaming, and charging for both. It wouldn’t have
changed the price increase, but it would have been the right
thing to do.
So here is what we are doing and why:
Many members love our DVD service, as I do, because nearly
every movie ever made is published on DVD, plus lots
of TV series. We want to advertise the breadth of our incredible
DVD offering so that as many people as possible
know it still exists, and it is a great option for those who want
the huge and comprehensive selection on DVD. DVD by
mail may not last forever, but we want it to last as long as
possible.

I also love our streaming service because it is integrated into
my TV, and I can watch anytime I want. The bene! ts of
our streaming service are really quite different from the bene! ts
of DVD by mail. We feel we need to focus on rapid
improvement as streaming technology and the market evolve,
without having to maintain compatibility with our DVD
by mail service.
So we realized that streaming and DVD by mail are becoming
two quite different businesses, with very different
cost structures, different bene! ts that need to be marketed
differently, and we need to let each grow and operate
independently. It’s hard for me to write this after over 10 years
of mailing DVDs with pride, but we think it is necessary
and best: In a few weeks, we will rename our DVD by mail
service to “Qwikster”.
We chose the name Qwikster because it refers to quick delivery.
We will keep the name “Net" ix” for streaming.
EXHIBIT 1 Reed Hastings’s Blog Posting, September 18,
2011
(Continued)
Case 11 Netflix in 2012: Can It Recover from Its Strategy
Missteps? C-129
standalone businesses, Netflix sent personal e-mails
to all U.S. subscribers stating that it was scrapping
its Qwikster proposal and that U.S. members would
continue to use one website, one account, and one
password for their movie and TV watching enjoy-
ment under the Netflix brand. Simultaneously, Net-

flix issued a press release and posted statements on
the Netflix blog at http://blog.netflix.com/ say-
ing it was abandoning the Qwikster strategy. In the
blog, Reed Hastings said, “It is clear that for many
of our members two websites would make things
more difficult. So we are going to keep Netflix as
one place to go for streaming and DVDs.”
• On October 24, 2011, Netflix announced that in
early 2012 it would begin offering unlimited TV
Hastings’s announcement about Netflix’s strat-
egy to split the DVDs-by-mail business from the
Internet streaming business and to create Qwikster
sparked a second furor from already disgruntled
subscribers and further adverse investor reaction
(the stock price plunged from around $208 per
share to about $115 per share over the next three
weeks). Netflix’s strategy to split the DVDs-by-mail
business from the Internet streaming business drew
harsh criticism from Wall Street analysts and busi-
ness commentators; virtually all knowledgeable
industry observers expressed amazement that Netf-
lix executives would even contemplate such a move.
• On October 10, 2011, three weeks after Hast-
ings disclosed the plan to divide Netflix into two
Source: Posting at Net! ix Blog, http://blog.netflix.com/ ,
September 18, 2011, accessed March 6, 2012.
Qwikster will be the same website and DVD service that
everyone is used to. It is just a new name, and DVD members
will go to qwikster.com to access their DVD queues and choose
movies. One improvement we will make at launch is to
add a video games upgrade option, similar to our upgrade option

for Blu-ray, for those who want to rent Wii, PS3 and
Xbox 360 games. Members have been asking for video games
for many years, and now that DVD by mail has its own
team, we are " nally getting it done. Other improvements will
follow. Another advantage of separate websites is simplicity
for our members. Each website will be focused on just one thing
(DVDs or streaming) and will be even easier to use. A
negative of the renaming and separation is that the
Qwikster.com and Net! ix.com websites will not be integrated.
So if
you subscribe to both services, and if you need to change your
credit card or email address, you would need to do it in
two places. Similarly, if you rate or review a movie on
Qwikster, it doesn’t show up on Net! ix, and vice-versa.
There are no pricing changes (we’re done with that!). Members
who subscribe to both services will have two entries
on their credit card statements, one for Qwikster and one for
Net! ix. The total will be the same as the current charges.
Andy Rendich, who has been working on our DVD service for
12 years, and leading it for the last 4 years, will be the
CEO of Qwikster. Andy and I made a short welcome video.
(You’ll probably say we should avoid going into movie
making after watching it.) We will let you know in a few weeks
when the Qwikster.com website is up and ready.
It is merely a renamed version of the Net! ix DVD website, but
with the addition of video games. You won’t have to
do anything special if you subscribe to our DVD by mail
service.
For me the Net! ix red envelope has always been a source of
joy. The new envelope is still that distinctive red, but
now it will have a Qwikster logo. I know that logo will grow on
me over time, but still, it is hard. I imagine it will be the
same for many of you. We’ll also return to marketing our DVD

by mail service, with its amazing selection, now with the
Qwikster brand.
Some members will likely feel that we shouldn’t split the
businesses, and that we shouldn’t rename our DVD by mail
service. Our view is with this split of the businesses, we will be
better at streaming, and we will be better at DVD by
mail. It is possible we are moving too fast – it is hard to say.
But going forward, Qwikster will continue to run the best
DVD by mail service ever, throughout the United States. Net! ix
will offer the best streaming service for TV shows
and movies, hopefully on a global basis. The additional
streaming content we have coming in the next few months is
substantial, and we are always working to improve our service
further.
I want to acknowledge and thank our many members that stuck
with us, and to apologize again to those members,
both current and former, who felt we treated them thoughtlessly.
Both the Qwikster and Net! ix teams will work hard to regain
your trust. We know it will not be overnight. Actions speak
louder than words. But words help people to understand actions.
Respectfully yours,
Reed Hastings, Co-Founder and CEO, Net! ix
EXHIBIT 1 (Concluded)
subscribers in Canada and that member counts in
Latin America and the Caribbean should exceed

500,000 by year-end 2011. However, Netflix’s con-
tribution losses from international operations
jumped from $9.3 million in the second quarter of
2011 to $23.3 million in the third quarter of 2011,
owing to increased expenses associated with the
startup of operations in Latin America and the
Caribbean.
On the day following the release of Netflix’s third
quarter financial results, the company’s stock price
dropped from $118.84 to close at $77.37.
• On November 21, 2011, Netflix announced that it
had raised $400 million in new capital by (1) sell-
ing 2.86 million shares of common stock to certain
mutual funds and accounts managed by T. Rowe
Price Associates for $70 per share (which generated
proceeds of $200 million) and (2) selling a $200
million aggregate principal amount of Zero Cou-
pon Convertible Senior Notes due December 1,
2018 to a private party. Any time after six months,
Netflix had the option of converting the Zero Cou-
pon Notes into shares of Netflix common stock at
an initial conversion rate of 11.6533 shares of com-
mon stock per $1,000 principal amount, subject
to the satisfaction of certain conditions. Netflix
executives said that the company did not intend to
spend any of the newly raised capital. Rather, the
company intended to use the capital as a safety net
since the company’s cash on hand and future cash
flows from operations would likely be squeezed in
upcoming quarters by the ongoing need to:
• Make cash payments for additions to its library
of titles available for streaming.

• Absorb the expected contribution losses from
international operations over the next five to
seven quarters.
In the weeks following the announcement of the $400
million in new financing, Netflix’s stock price dropped
to as low as $62.37 and traded in the range of $65 to
$71 for most all of December 2011.
Financial statement data for Netflix for 2000–2011
are shown in Exhibits 2 and 3 .
INDUSTRY ENVIRONMENT
Since 2000, the introduction of new technologies and
electronics products had rapidly multiplied consumer
opportunities to view movies. It was commonplace
shows and movies instantly streamed over the
Internet to some 26 million households in the
United Kingdom and Ireland—20 million of these
households had high-speed broadband Internet
service and thus could stream movies to their TVs,
computers, or other devices. This move repre-
sented the third strategic initiative to expand Net-
flix’s international reach. Netflix began streaming
to members in Canada in 2010, and in September
2011 it initiated streaming services to 43 countries
in Latin America and the Caribbean; there were
four times as many households with high-speed
broadband service in these 43 countries as there
were in Canada. In all three cases, Netflix estimated
that it would take about two years after the initial
launch to attract sufficient subscribers to generate
a positive “contribution profit”—Netflix defined
“contribution profit (loss)” as revenues less cost of
revenues and marketing expenses; cost of revenues

included subscription costs and order fulfillment
costs.
In announcing the company’s entry into Latin
America and the Caribbean, Netflix said it was
establishing a single low monthly price of 99 pesos
for subscribers in Mexico and a price of US$7.99
for customers in the 42 countries in Central
America, South America, and the Caribbean. In
Brazil, Netflix content was available in Portu-
guese; in eight other South American countries
and all of the Central America countries, Netf-
lix content was made available in Spanish; in the
Caribbean, Netflix was available in English and
Spanish. As part of its September entry into Latin
America and the Caribbean, Netflix had entered
into regional license agreements to obtain movies
and TV shows in Spanish and Portuguese from a
large variety of major motion picture and television
studios, including Walt Disney Studios, Paramount
Studios, Sony Pictures Television, NBCUniversal
International Television, CBS Television, MGM,
Lionsgate, Summit, Relativity, BBC Worldwide, TV
Bandeirantes, Televisa, Telemundo, TV Azteca, TV
Globo, Caracol, Telefe, and RCTV.
Also, on October 24, Netflix announced that
the number of domestic subscribers dropped by
a net of 810,000 during the third quarter of 2011,
thus resulting in operating profits, a net income,
and earnings per share that were below Wall Street
estimates and investor expectations. Internation-
ally, the company said it had reached 1 million

Missteps? C-131
2000 2005 2007 2009 2010 2011
Revenues $ 35.9 $682.2 $1,205.3 $1,670.3 $2,162.6 $3,205.6
Cost of revenues:
Subscription costs 24.9 393.8 664.4 909.5 1,154.1 1,789.6
Ful! llment expenses 10.2 72.0 121.3 169.8
203.2 250.3
Total cost of revenues 35.1 465.8 786.2 1,079.3 1,357.4
2,039.9
Gross pro! t 0.8 216.4 419.2 591.0 805.3 1,164.7
Operating expenses
Technology and development 16.8 35.4 71.0 114.5 163.3 259.0
Marketing 25.7 144.6 218.2 237.7 293.8 402.6
General and administrative 7.0 35.5 52.4 51.3 64.5 117.9
Other 9.7 (2.0) (14.2) (4.6) —
9.0
Total operating expenses 59.2 213.4 327.4 399.1 521.6 788.8
Operating income (58.4) 3.0 91.8 191.9 283.6 376.1
Interest and other income (expense) (0.2) 5.3 20.1
0.3 (15.9) (16.5)

Income before income taxes — 8.3 110.9 192.2 267.7
359.5
Provision for (bene! t from) income taxes — (33.7)
44.3 76.3 106.8 133.4
Net income $ (58.5) $ 42.0 $ 66.7 $ 115.9 $ 160.8 $
226.1
Net income per share:
Basic $(20.61) $0.79 $0.99 $2.05 $3.06 $4.28
Diluted (20.61) 0.64 0.97 1.98 2.96 4.16
Weighted average common shares outstanding:
Basic 2.8 53.5 67.1 56.6 52.5 52.8
Diluted 2.8 65.5 68.9 58.4 54.3 54.4
Note: Totals may not add due to rounding.
Source: Company 10-K reports for 2003, 2006, and 2009.
EXHIBIT 2 Netflix’s Consolidated Statements of Operations,
2000–2011
(in millions, except per share data)
2000 2005 2007 2009 2010 2011
Selected Balance Sheet Data:
Cash and cash equivalents $ 14.9 $212.3 $177.4 $134.2 $194.5
$ 508.1

Short-term investments — — 207.7 186.0 155.9 290.0
Current assets n.a. 243.7 432.4 416.5 637.2 1,830.9
Net investment in content library n.a. 57.0 128.4 146.1 362.0
1,966.6
Total assets 52.5 364.7 679.0 679.7 982.1 3,069.2
Current liabilities n.a. 137.6 208.9 226.4 388.6 1,225.1
Working capital* (1.7) 106.1 223.5 190.1 248.6 605.8
Stockholders’ equity (73.3) 226.3 429.8 199.1 290.2 642.8
Cash Flow Data:
Net cash provided by operating activities $(22.7) $157.5 $277.4
$325.1 $276.4 $ 317.7
Net cash used in investing activities (25.0) (133.2) (436.0)
(246.1) (116.1) (265.8)
Net cash provided by (used in) ! nancing activities 48.4 13.3
(64.4) (84.6) (100.0) 261.6
EXHIBIT 3 Selected Balance Sheet and Cash Flow Data for
Netflix, 2000–2011
(in millions of $)
* De! ned as current assets minus current liabilities.
Sources: Company 10-K reports for 2003, 2005, 2007, 2008,
2009, and 2011.

• Using a TV remote to order movies instantly
streamed directly to a TV on a pay-per-view basis
(generally referred to as “video-on-demand” or
VOD). Cable, satellite, and fiber-optic providers of
multichannel TV packages were promoting their
VOD services and making more movie titles avail-
able to their customers. In 2011, roughly 40 million
U.S. households (15 percent) spent about $1.3 billion
on VOD movie rentals. 2
• Purchasing DVDs from such retailers as Walmart,
Target, Best Buy, Toys “R” Us, and Amazon.com .
DVD sales, however, had declined for the past three
years, partially a reflection of growing consumer
preferences to rent rather than purchase DVDs of
movies and TV episodes.
• Renting DVDs from Blockbuster and other local
retail stores or from standalone rental kiosks like
Redbox and Blockbuster Express. Physical-disc ren-
tals at traditional brick-and-mortar locations had
been trending downward for five to eight years,
but the downward spiral accelerated in 2010–2011.
Blockbuster’s share of physical disc rentals dropped
from 23 percent in 2010 to 17 percent in 2011. 3
The chief beneficiary of declining rentals at brick-
and-mortar movie rental locations was Redbox.
Since 2007, when Redbox first began deploying its
distinctive red vending machine kiosks, Redbox’s
share of physical-disc DVD and Blu-ray movie
rentals in the U.S. had mushroomed to 37 percent
as of 2011 (up from 25 percent in 2010).

• Renting DVDs online from Netflix, Blockbuster,
and several other subscription services that either
mailed DVDs directly to subscribers’ homes or
streamed the content to subscribers via broadband
Internet connections. In 2011, Netflix had about a
30 percent share of the physical DVD rental market
and about a 56 percent share of streaming rentals. 4
• Utilizing the rental or download services of such
providers as Apple’s iTunes store, Amazon Instant
Video, Hulu.com , VUDU.com , Best Buy Cinema
Now, Sony PlayStation Network, and Google’s
YouTube.
• Most recently, a new class of user interface
apps had become available that enabled sub-
scribers to the services of multichannel TV
providers (like cable or satellite operators) to
watch certain TV shows, movies, and other
programs at their convenience rather than
at scheduled broadcast times. This service—
called TV Everywhere—gave subscribers the
in 2012 for movies to be viewed at theaters, on air-
line flights, in hotels, from the rear seats of motor
vehicles equipped with video consoles, in homes, or
most anywhere on a laptop PC or handheld device like
an Apple iPhone, iPad, or iPod touch. Home viewing
was possible on PCs, televisions connected to a digital
video disc (DVD) player, and video game consoles. As
of 2012, more than 90 percent of U.S. households had
DVD players connected to their TVs, enabling them
to play movie DVDs. Households with big-screen
high-definition TVs and a Blu-ray player could rent a
Blu-ray DVD and enjoy a significantly higher picture

quality. In recent years, millions of households had
upgraded to high-speed or broadband Internet service
and purchased Blu-ray DVD devices, video game con-
soles, and/or televisions with built-in connectivity to
the Internet, enabling them to view content streamed
over the Internet. However, heading into 2012, it was
clear that the 134 million U.S. households with high-
speed Internet service and Internet-connected Blu-ray
players, video game consoles, TVs, computers, tab-
lets, and/or smartphones were rapidly shifting from
renting physical DVDs to watching movies and TV
episodes streamed over the Internet.
Increasing numbers of devices had recently app-
eared in electronics stores (or become available from
cable, satellite, and fiber-optic TV providers) that
enabled TVs to be connected to the Internet and receive
streamed content from online providers with no hassle.
These devices made it simple for households to order
streamed movies with just a few clicks instead of travel-
ing to a video rental store or waiting for a disk to be deliv-
ered through the mail. In 2012, more than 700 different
devices were capable of streaming content from Netflix.
Consumers could obtain or view movie DVDs
and TV episodes through a wide variety of distribu-
tion channels and providers. The options included:
• Watching movies on assorted cable channels
included in the TV and entertainment packages
provided by traditional cable providers (such as
Time Warner, Comcast, Cox, and Charter), direct
broadcast satellite providers (such as DIRECTV
and DISH Network), or fiber-optics providers (like
AT&T and Verizon that had installed thousands
of miles of fiber-optic cable that enabled them to

simultaneously provide TV packages, telephone,
and Internet services to customers).
• Subscribing to any of several movie-only channels
(such as HBO, Showtime, and Starz) through a
cable, satellite, or fiber-optics provider.
Missteps? C-133
from renting movie DVDs until 30 to 60 days follow-
ing the date DVD titles could be sold by retailers. For
example, in January 2012, Warner Home Entertain-
ment increased the availability date for rental DVDs
top kiosks and subscription-by-mail services to 58
days. Movie studios and TV networks were expected to
continue to experiment with the timing of the releases
to various distribution channels and providers, in
an ongoing effort to discover how best to maximize
revenues.
Market Trends in Home Viewing
of Movies
The wave of the future in the market for renting mov-
ies and TV content was unquestionably in streaming
movies and TV shows to Internet-connected TVs,
computers, and mobile devices. Streaming had the
advantage of allowing household members to order
and instantly watch the movies and TV programs they
wanted to see. Renting a streamed movie could be
done either by utilizing the services of Netflix, Block-
buster Online, Amazon Instant Video, Apple’s iTunes,
and other streaming video providers or by using a TV
remote to place orders with a cable, satellite, or fiber-

optics provider to instantly watch a movie from a list
of several hundred selections that changed periodi-
cally. With a few exceptions, rental prices for pay-per-
view and VOD movies ranged from $1 to $6, but the
rental price for popular recently released movies was
usually $3.99 to $5.99. During 2011, several movie
studios had experimented with charging up to $30
for films released to pay-per-view and VOD providers
for showing after eight weeks in theaters, but disap-
pointingly small viewer response to such high-priced
rentals quickly put an end to this strategy. 7 In 2012,
many in-home movie viewers saw unlimited Internet
streaming from subscription services as a better value
than pay-per-view—the rental costs for two pay-per-
view movies usually exceeded the $7.99 monthly price
for unlimited streaming currently being charged by
Netflix.
Several strategic initiatives to promote increased
use of streaming video were underway in 2012.
• The owners of Hulu—Providence Equity Partners,
The Walt Disney Company (owner of the ABC net-
work), News Corp. (the parent of Fox Broadcasting
and Fox Entertainment) and Comcast (the owner
of NBCUniversal)—had for several years offered a
free online video service at www.hulu.com where
option to watch programs on Internet-connected
TVs and computers, iPads, iPhones, Android
phones, and other devices. HBO’s TV Every-
where application—called HBO GO—enabled
HBO subscribers to have anytime, anywhere
access to all HBO shows, hit movies, and other
programs through participating multichannel TV
providers. In 2012, most multichannel TV pro-

viders and the owners of most channels carried
on cable and satellite networks were exploring
TV Everywhere options and packages for inter-
ested viewers.
• Pirating files of movies and other content from
Internet sources via the use of illegal file-sharing
software. Piracy was widely thought to be a con-
tributing factor to declining sales of movie
DVDs. In 2011–2012, movie studios were becom-
ing increasingly concerned that digital piracy
could become a tidal wave. 5 Much of Netflix’s
streaming library was rumored to be available
through online piracy.
In recent years, movie studios had released filmed
entertainment content for distribution to movie
DVD retailers and to companies renting movie
DVDs about 17 weeks after a film first began show-
ing in theaters. After about three months in theaters,
movie studios usually released first-run films to pay-
per-view and video-on-demand (VOD) providers
(prior to the last several years, the release window
had been about six months). However, in October
2011, a Kevin Spacey film was released in theaters
and through both Netflix and Time Warner Cable
on the same day; the movie grossed $3.5 million at
theaters and the studio realized more than $5 million
each from Netflix and Time Warner Cable. 6 Premium
TV channels like HBO, Starz, Cinemax, and Show-
time were next in the distribution window, typically
getting access to premium films one year after initial
theater showings. Movie studios released films for
viewing to basic cable and network TV some two to
three years after theatrical release. TV episodes were
often made available for Internet viewing shortly

after the original air date.
Recently, however, some movie studios had experi-
mented with shortened release periods, including mak-
ing new release titles available to video-on-demand
providers or for online purchase on the same date
DVDs could be sold by retailers. Other movie studios
had implemented or announced their intention to
implement policies preventing movie rental providers
expanding its library of apps optimized for Google
TV, all in an attempt to facilitate easy consumer
discovery of content that was available for stream-
ing to TVs and/or Android devices. In addition,
Google had invested in a new subsidiary called
Google Fiber that was actively exploring plans
to enter the Internet service and/or TV provider
marketplaces by offering a one-gigabit-per-second
Internet service coupled with an on-demand TV
service that enabled customers to watch what they
wanted when they wanted without ever having
to record anything. In March 2012, Google filed
applications with the Missouri Public Service Com-
mission and the Kansas Corporation Commission
for approval to offer a video service to subscribers
in the Kansas City area—the proposal called for
Google to use national and regional programming
collection points to send IPTV (a television-over-
Internet technology) across its private fiber-optic
network (Google Fiber) to subscribers in Kansas
City. It remained to be seen whether Google could
secure broadcast rights from the owners of various

TV channels and Hollywood movie studios to lure
customers; however, Google’s YouTube was spend-
ing hundreds of millions of dollars funding new
TV channels that were scheduled to be available
online and could be a part of Google’s TV package.
Time Warner Cable was the dominant TV provider
in Kansas City, while Direct TV, DISH Network,
and AT&T’s U-verse had smaller customer bases.
Apple TV was a tiny box that enabled users to play
high-definition content from iTunes, Netflix, You-
Tube, and live sports events (professional baseball,
hockey, and basketball) on TVs, or to stream content
to TVs from an iPad, iPhone, or iPod touch, or to
stream music and photos from computers to TVs. In
March 2012, Netflix and Apple implemented an agree-
ment whereby Apple TV users could sign up for Net-
flix services directly through their Apple TV device,
using their iTunes account.
IHS Screen Digest Research had forecast that
streaming content would exceed 3.4 billion views in
2012. 8 It also expected that movie viewing online in
2012 would exceed combined viewing on DVDs and
Blu-ray devices for the first time. 9
Competitive Intensity
The movie rental business was intensely competitive
in 2012. Local brick-and-mortar stores that rented
DVD discs were in the throes of a death spiral, as a
growing number of their customers switched either
viewers could watch a selection of hit TV shows and
movies from the libraries of ABC, NBC, Fox Broad-
casting, Walt Disney Studios, Universal Studios,
Fox Entertainment, and a few others; the revenues

to support the free Hulu site came from advertis-
ers whose commercials were inserted into all of the
free programs. But in mid-2011, three years after
creating the Hulu site, the owners became reluctant
to continue giving their content away for free and
began an effort to sell the venture. In October 2011,
the sales process was abandoned; Google, the DISH
Network, Amazon, and Yahoo were rumored to
have contemplated or made offers to acquire Hulu.
Shortly thereafter, Hulu began actively promoting
an advertising-supported unlimited streaming ser-
vice called Hulu Plus where, for $7.99 per month,
subscribers could watch a much larger selection of
premium movies and primetime TV shows inter-
spersed with commercials.
• Time Warner Cable, Comcast, Charter, DISH Net-
work, DIRECTV, HBO, Showtime, and others were
in the early stages of promoting their TV Every-
where concept and program offerings that enabled
customers to watch certain TV shows free at any time
on any Internet-connected device (including com-
puters and such mobile devices as iPads and smart-
phones) as long as they were paying subscribers.
For example, DIRECTV had created a device called
Nomad to help subscribers watch their recorded
programs anywhere; Nomad allowed subscribers
to synchronize their smartphone, laptop, or tablet
with recorded content on their DVRs and watch
the recorded programs anywhere, anytime. DISH
Network had introduced a “Sling Adapter” that—in
conjunction with an Internet-connected DVR and
a free DISH remote access app downloaded onto
a mobile device—enabled customers to watch TV
programs at their convenience on any Internet-
connected device. However, for TV Everywhere

to reach its full potential, each cable, satellite, and
fiber-optic multichannel TV provider had to nego-
tiate agreements for online rights to each channel’s
programming. As of early 2012, just a few multi-
channel TV providers had secured online rights to
as many as 15 channels, but this was expected to be
temporary.
• Google and Apple were rolling out new versions
of their Google TV and Apple TV products to try
to win traction with consumers. Google had part-
nered with LG, Vizio, and Samsung to introduce
TVs equipped with Google TV and was rapidly
Missteps? C-135
vending machine kiosks in 29,300 locations in every
state of the United States and in Puerto Rico. In Febru-
ary 2012, Redbox agreed to acquire about 9,000 Block-
buster-branded DVD kiosks operated by NCR Corp.
Redbox and Netflix (with its DVDs-by-mail subscrip-
tion option) were positioned to dominate the physical
DVD rental segment for the foreseeable future.
The main battle in the movie rental marketplace
was in the VOD and Internet streaming segments
where several classes of competitors employing a vari-
ety of strategies were maneuvering to win the view-
ing time of consumers, capture enough revenue to
be profitable, and become one of the market leaders.
Competitors offering pay-per-view and VOD rentals
were popular options for households and individu-
als that rented movies occasionally (once or at most

twice per month), since the rental costs tended to be
less than either the monthly subscription prices for
unlimited streaming or the monthly fees to access
premium movie channels like HBO, Starz, Cinemax,
and Showtime. However, competitors offering unlim-
ited Internet streaming plans tended to be the most
economical and convenient choice for individuals and
households that watched an average of three or more
titles per month and for individuals that wanted to be
able to watch movies or TV shows on mobile devices.
Netflix was the clear leader in Internet streaming
in 2012, with over 23 million streaming subscribers
that watched an average of 30 hours of video monthly
and some 60,000 titles that could be viewed on an
Internet-connected device. 10 But Netflix had numer-
ous ambitious rivals that saw huge revenue and profit
opportunities in using online technology to provide
movies, TV programming, and other entertainment
content to all types of Internet-connected devices on
an anywhere, anytime basis.
Netflix’s two most important subscription-based
instant streaming rivals included:
• Hulu Plus —The subscription fee for Hulu Plus was
$7.99 per month for unlimited streaming, and new
subscribers got a one-week free trial. All Hulu Plus
content included advertisements as a means of help-
ing keep the monthly subscription price low. The
Hulu Plus library of offerings included all current
season episodes of popular TV shows, over 15,000
back season episodes of 380 1 TV shows, and over
425 movies, many in high-definition.
• Amazon Prime Instant Video —This service entailed

becoming an Amazon Prime member for a fee of
$79 per year (after a one-month free trial). All Ama-
zon Prime members were entitled to free two-day
to obtaining their DVDs at Redbox vending kiosks
or utilizing Internet streaming services of one kind
or another. Blockbuster, once a movie rental power-
house with over $4.5 billion in annual rental revenues
and more than 9,000 company-owned and franchised
stores in a host of countries, was a shadow of its for-
mer self in 2012. After losing over $4 billion during
the 2002–2010 period, closing thousands of store
locations, and launching several unsuccessful strategic
attempts to rejuvenate revenues and return to profit-
ability, Blockbuster filed for Chapter 11 bankruptcy
protection in September 2010. Following a bank-
ruptcy court auction, DISH Network emerged in April
2011 as the owner of Blockbuster’s operations in the
United States and certain foreign countries for a win-
ning bid valued at $321 million. From the acquisition
date of April 26, 2011 through December 31, 2011,
Blockbuster operations contributed $975 million in
revenue and $4 million in net income to DISH Net-
work’s consolidated results of operations. Going into
2012, Blockbuster was operating some 1,500 retail
stores in the United States, but DISH Network man-
agement had announced that it expected to close over
500 domestic Blockbuster stores during the first half
of 2012 as a result of weak store-level financial perfor-
mance and that additional stores might also need to be
closed. For the time being, Blockbuster was offering
movies and video games for sale and rental through its
retail stores, the blockbuster.com website (via a DVDs-
by-mail subscription service), and pay-per-view VOD
service. In addition, DISH Network subscribers could
access [email protected] to obtain movies, video

games, and TV shows through Internet streaming,
mail and in-store exchanges, and online downloads.
Movie Gallery, once the second-largest movie
rental chain, filed for Chapter 11 bankruptcy protec-
tion in February 2010 and, shortly thereafter, opted
to liquidate its entire movie rental business and close
1,871 Movie Gallery, 545 Hollywood Video, and 250
Game Crazy store locations. Within months, Movie
Gallery ceased to exist.
The big winner in renting DVD discs was Red-
box. Redbox had entered the movie rental business in
2007 with a vending machine–based strategy whereby
Redbox self-service DVD kiosks were placed in lead-
ing supermarkets, drug stores, mass merchants like
Walmart, convenience stores, and fast-food restau-
rants (McDonald’s). Customers could rent new-release
movie DVDs for $1 per day (the price was raised to
$1.20 per day in fall 2011). Retailers with Redbox
kiosks were paid a percentage of the rental revenues.
Going into 2012, Redbox had deployed 35,400 of its
streaming to enable subscribers to watch certain TV
shows or movies free at any time on any Internet-
connected device was the best long-term solution for
competing effectively with Netflix’s Internet stream-
ing service. In 2012, most every major network
broadcaster, multichannel TV provider, and premium
movie channel was investing in Internet apps for all
types of Internet-connected TVs, laptops, video game
consoles, tablets, and smartphones and otherwise

positioning themselves to offer attractive TV Every-
where packages. HBO with its HBO GO offering
( www.hbogo.com ) and Showtime with its Showtime
Anytime offering ( www.showtimeanytime.com )
were both trying to gain more viewing hours with
their subscribers. Pricing for TV Everywhere offerings
was simple—users just entered an authentication code
verifying their subscription status at the appropriate
website. Subscribers then clicked on whichever offer-
ing interested them to initiate instant streaming to
their device.
According to market research done by The NPD
Group, 15 percent of U.S. consumers aged 13 and
older used pay-TV VOD services from their mul-
tichannel cable, satellite, and fiber-optic providers
in the 12 months ending August 2011; this trans-
lated into 40 million users and rental revenues of
$1.1 billion. 11 However, there were four million fewer
VOD users who paid additional fees to watch movies
from these same providers in August 2011 com-
pared to August 2010. This was attributed to the
growing number of attractive VOD offerings from
rival online VOD providers such as iTunes, Amazon
Instant Video, VUDU, and others that instantly
streamed rentals over the Internet. The NPD Group
estimated that Internet streaming accounted for one
out of every six VOD rentals in 2011 and that the
share of Internet-streamed VOD rentals was likely to
continue to grow, chiefly because many consumers
saw the prices of Internet-streamed rentals as a better
value and believed such providers had more movie-
title selections. 12
NETFLIX’S BUSINESS MODEL
AND STRATEGY

Since launching the company’s online movie rental
service in 1999, Reed Hastings, founder and CEO
of Netflix, had been the chief architect of Netflix’s
subscription-based business model and strategy that
had transformed Netflix into the world’s largest online
entertainment subscription service and revolutionized
shipping on all Amazon orders, unlimited com-
mercial-free streaming of 17,000 movies and TV
programs, one free Kindle book rental each month,
and assorted other perks. In March 2012, there
were an estimated 3.5 to 5 million Amazon Prime
members. New Amazon Prime members were enti-
tled to a one-month free trial. While Amazon had
originally created its Amazon Prime membership
program as a means of providing unlimited two-
day shipping to customers that frequently ordered
merchandise from Amazon and liked to receive
their orders quickly, in 2012 it was clear that Ama-
zon was also endeavoring to brand Amazon Prime
as a standalone streaming service at a subscription
price below that of Netflix. In addition, Amazon
competed with Netflix’s DVDs-by-mail subscrip-
tion service and with VOD and pay-per-view pro-
viders via its Amazon Instant Video offering, which
enabled any visitor to the Amazon website to place
an online order to instantly watch on a pay-per-
view basis any of the 42,000 movies or TV shows in
Amazon’s rental library.
In February 2010, Walmart announced its intention to
distribute movies over the Internet and had acquired
VUDU, a leading provider of digital technologies that
enabled online delivery of entertainment content. In
2012, VUDU was the largest home entertainment
retailer in the United States with the capability to

stream about 20,000 movie titles (including some 4,000
HD titles with Dolby Surround Sound) to Internet-
connected TVs, Blu-ray players, computers, iPads and
other tablets, and video game consoles (Xbox 360 and
PlayStation 3). Movies were available the same day
they were released on DVD or Blu-ray discs and could
be purchased or rented without a subscription; the
rental fee was $2 per night for two nights. First-time
users were eligible for free VUDU movie credits that
could be used for a one-month trial period. In April
2012, Walmart initiated an exclusive in-store disc-to-
digital service powered by VUDU technology which
enabled people to bring their DVD and Blu-ray col-
lections from partnering movie studios (Paramount,
Sony, Fox, Universal, and Warner Bros.) to a Walmart
Photo Center and have digital copies of the DVDs
placed in a personal VUDU account. Then, VUDU
account holders could log on to VUDU.com and view
their movies any time, any place on more than 300 dif-
ferent Internet-connected devices.
The growing rush among multichannel TV provid-
ers to offer subscribers attractive TV Everywhere pack-
ages signaled a widespread belief that using Internet
Missteps? C-137
be returned to inventory and used to fill incoming
orders from subscribers.
Exhibit 4 shows Netflix’s various subscription
plan options during 2010–2012. The most popular
DVD-by-mail plans were those with one, two, or three

titles out at a time.
The Streaming Option Netflix launched its
Internet streaming service in January 2007, with
instant-watching capability for 2,000 titles on personal
computers. Very quickly, Netflix invested aggressively
to enable its software to instantly stream content to a
growing number of “Netflix-ready” devices, includ-
ing Sony’s PlayStation 3 consoles, Microsoft’s Xbox
360, Nintendo’s Wii, Internet-connected Blu-ray
players and TVs, TiVo DVRs, and special Netflix
players made by Roku and several other electron-
ics manufacturers. At the same time, it began licens-
ing increasing amounts of digital content that could
be instantly streamed to subscribers. Initially, Netflix
took a “metered” approach to streaming, in essence
offering an hour per month of instant watching on
a PC for every dollar of a subscriber’s monthly sub-
scription plan. For example, subscribers on the $16.99
per month plan, which provides unlimited DVD
rentals with three discs out at a time, received 17
hours a month of movies and TV episodes watched
instantly on their PCs while those on the $4.99 limited
plan were entitled to 5 hours of instant streaming. In
January 2009, Netflix switched to an unlimited stream-
ing option on all of its monthly subscription plans for
unlimited DVD rentals; the limited plan continued
to have a monthly streaming limit. Netflix had about
6,000 movie titles available for streaming as of January
2009 and about 20,000 titles in mid-2010.
Then in July 2011, Netflix announced that effec-
tive September 1, 2011 it would no longer offer a sin-
gle subscription plan including both DVD-by-mail
and streaming in the United States. Domestic sub-
scribers who wished to receive DVDs-by-mail and

also watch streamed content had to elect both a DVD-
by-mail subscription plan and a streaming subscrip-
tion plan. By December 31, 2011, Netflix had a total of
21.7 million domestic streaming subscribers (includ-
ing 1.52 million who were in their free-trial period)
and 11.2 million domestic DVD-by-mail subscrib-
ers (including 210,000 who were in their free-trial
period); almost 6.6 million Netflix members had
both a streaming subscription and a DVD-by-mail
subscription.
All new Netflix subscribers received a free
one-month trial. At the end of the free trial period,
the way that many people rented movies and previ-
ously broadcast TV shows. Hastings’s goals for Netf-
lix were simple: Build the world’s best Internet movie
service, keep improving Netflix’s offerings and ser-
vices faster than rivals, attract growing numbers of
subscribers every year, and grow long-term earnings
per share. Hastings was a strong believer in moving
early and fast to initiate strategic changes that would
help Netflix outcompete rivals, strengthen its brand
image and reputation, and fortify its position as indus-
try leader.
Netflix’s Subscription-Based
Business Model
Netflix employed a subscription-based business model.
Members could choose from a variety of subscription
plans whose prices and terms had varied over the
years. Originally, all of the subscription plans were
based on obtaining and returning DVDs by mail, with
monthly prices dependent on the number of titles out
at a time. But as more and more households began to
have high-speed Internet connections, Netflix began

bundling unlimited streaming with each of its DVD-
by-mail subscription options, with the long-term
intent of encouraging subscribers to switch to watch-
ing instantly streamed movies rather than using DVD
discs delivered and returned by mail. The DVDs-by-
mail part of the business had order fulfillment costs
and postage costs that were bypassed when members
opted for instant streaming.
The DVD-by-Mail Option Subscribers who
opted to receive movie and TV episode DVDs by mail
went to Netflix’s website, selected one or more mov-
ies from its DVD library of over 120,000 titles, and
received the movie DVDs by first-class mail gener-
ally within one business day—more than 97 percent
of Netflix’s subscribers lived within one-day delivery
of the company’s 50 distribution centers (plus 50 other
shipping points) located throughout the United States.
During the 2004–2010 period, Netflix had aggres-
sively added more distribution centers and shipping
points in order to provide members with one-busi-
ness-day delivery on DVD orders. Subscribers could
keep a DVD for as long as they wished, with no due
dates, no late fees, no shipping fees, and no pay-per-
view fees. Subscribers returned DVDs via the U.S.
Postal Service in a prepaid return envelope that came
with each movie order. The address on the return
envelope was always the closest distribution center/
shipping point so that returned DVDs could quickly
no late fees and no due dates on DVD rentals (which
eliminated the hassle of getting DVDs back to local

rental stores by the designated due date), (5) the con-
venience of being provided a postage-paid return
envelope for mailing DVDs back to Netflix, and
(6) the convenience of ordering and instantly watch-
ing movies streamed to their TVs or computers with
no additional pay-per-view charge.
Management believed that Netflix’s subscriber
base consisted of three types of customers: those who
liked the convenience of home delivery and/or instant
streaming, bargain hunters who were enthused about
being able to watch many movies for an economical
monthly price, and movie buffs who wanted the abil-
ity to choose from a very wide selection of films and
TV shows.
members automatically began paying the monthly fee,
unless they canceled their subscription. All paying
subscribers were billed monthly in advance. Payments
were made by credit card or debit card. Subscribers
could cancel at any time.
Exhibit 5 shows trends in Netflix’s subscriber
growth in the United States. Exhibit 6 shows quarterly
trends in Netflix subscriptions and profitability by
market segment.
New subscribers were drawn to try Netflix’s
online movie rental service because of (1) the wide
selection, (2) the extensive information Netflix pro-
vided about each movie in its rental library (includ-
ing critic reviews, member reviews, online trailers,
and subscriber ratings), (3) the ease with which they
could find and order movies, (4) Netflix’s policies of
Monthly Subscription Price

Subscription Plan Choices June 2010
Nov. 22, 2010
through June 2011
September 2011
through 2012
Unlimited DVD Plans:
1 title out at a time $8.99 plus unlimited
streaming
$9.99 plus unlimited
streaming
$7.99
2 titles out at a time $13.99 plus unlimited
streaming
streaming
$11.99
streaming
streaming
$15.99
streaming

streaming
$21.99
5 to 8 titles out at a time $29.99–$47.99 plus
unlimited streaming
$34.99–$53.99 plus
unlimited streaming
$27.99–$43.99
Unlimited streaming (no DVDs) Not available $7.99 $7.99
Unlimited streaming plus DVDs
Unlimited streaming plus 1 DVD title out at
a time
— — $15.98
Unlimited streaming plus 2 DVD titles out at
a time
— — $19.98
Unlimited streaming with 3–8 DVDs $23.98–$51.98
Limited plan:
• 1 DVD title out at a time $4.99 $4.99 $4.99
• A maximum of 2 DVD rentals per month

• 2 hours of video streaming to a PC or
Apple Mac per month (this plan did not
allow members to stream movies to TVs
via a Net! ix-ready device)
• Limited streaming selection
EXHIBIT 4 Netflix’s Subscription Plans, 2010–2012
Source: Company records and postings at www.netflix.com .
Missteps? C-139
2000 2005 2007 2009 2010
Jan. 1 – June
30, 2011
July 1 – Dec.
31, 2011
Total subscribers at beginning
of period 107,000 2,610,000 6,316,000 9,390,000 12,268,000
19,501,000 24,594,000
Gross subscriber additions
during period 515,000 3,729,000 5,340,000 9,322,000
15,648,000 11,614,000 9,930,000
Subscriber cancellations
during the period 330,000 2,160,000 4,177,000 6,444,000
8,415,000 6,521,000 10,129,000

Total subscribers at end of
period 292,000 4,179,000 7,479,000 12,268,000 19,501,000
24,594,000 24,395,000
Net subscriber additions
during the period 185,000 1,569,000 1,163,000 2,878,000
7,233,000 5,093,000 (199,000)
Free trial subscribers at end
of period n.a. 153,000 153,000 376,000 1,566,000 1,331,000
1,537,000
Subscriber acquisition cost $49.96 $38.78 $40.86 $25.48 $18.21
$14.70 $15.41
Average monthly revenue per
paying subscriber n.a. $17.94 $14.95 $13.30 $12.20 $11.49
$12.35
EXHIBIT 5 Domestic Subscriber Data for Netflix, 2000–2011
n.a. 5 not available.
Sources: Net" ix’s 10-K Reports, 2010, 2009, 2005, and 2003
and Net" ix Quarterly Report for the period ending June 30,
2011, posted in
the investors relations section at www.netflix.com , accessed
March 16, 2012.
Three Months Ended
September 30, 2011 December 31, 2011 March 31, 2012
Domestic Streaming
Free subscriptions at end of period 937 1,518 1,388

Paid subscriptions at end of period 20,511 20,153 22,022
Total subscriptions at end of period 21,448 21,671 23,410
Revenue n.a. $476,334 $ 506,645
Cost of revenues and marketing expenses n.a. 424,224
440,157
Contribution pro# t $ 52,110 $ 66,508
International Streaming
Free subscriptions at end of period 491 411 646
Paid subscriptions at end of period 989 1,447 2,409
Revenue $ 22,687 $ 28,988 $ 43,425
Cost of revenues and marketing expenses 46,005 88,731
146,108
Contribution pro# t $ (23,318) $ (59,743) $ (102,683)
Domestic DVDs-by-Mail
Free subscriptions at end of period 115 126 131
Paid subscriptions at end of period 13,813 11,039 9,958
Revenue $370,253 $ 319,701

Contribution pro# t $193,765 $ 146,133
EXHIBIT 6 Quarterly Trends in Netflix Subscriptions and
Profitability, by Market
Segment, Quarter 3, 2011 through Quarter 1, 2012 (in 000s)
(Continued)
• Promoting rapid transition of U.S. subscribers to
streaming delivery rather than mail delivery.
• Expanding internationally.
A Comprehensive Library of Movies and
TV Episodes Since its early days, Netflix’s strat-
egy had been to offer subscribers a large and diverse
selection of DVD titles. It had been aggressive in
seeking out attractive new titles to add to its offerings.
Because of this, its library of offerings had grown
from some 55,000 titles in 2005 to about 120,000
titles in 2012, although the number of titles available
for streaming was only about 30,000 as mid-2012
approached. The lineup included everything from the
latest available Hollywood releases to releases several
decades old to movie classics to independent films to
hard-to-locate documentaries to TV shows and how-
to videos, as well as a growing collection of cartoons
and movies for children 12 and under. Netflix’s DVD

Netflix’s Strategy
Netflix had a multipronged strategy to build an ever-
growing subscriber base that included:
• Providing subscribers with a comprehensive selec-
tion of DVD titles.
• Acquiring new content by building and maintain-
ing mutually beneficial relationships with enter-
tainment video providers.
• Making it easy for subscribers to identify movies
and TV shows they were likely to enjoy and to put
them in a queue for either instant streaming or
delivery by mail.
• Giving subscribers a choice of watching streaming
content or receiving quickly delivered DVDs by mail.
• Spending aggressively on marketing to attract sub-
scribers and build widespread awareness of the
Netflix brand and service.
Three Months Ended
September 30, 2011 December 31, 2011 March 31, 2012
Consolidated Operations
Free unique subscribers at end of period* 1,437 1,948 2,056
Paid unique subscribers at end of period* 23,832 24,305 27,083
Total unique subscribers at end of period* 25,269 26,253
29,139

Revenue $821,839 $875,575 $ 869,791
759,833
Contribution pro! t 196,114 186,132 109,958
Other operating expenses 99,272 124,260 111,893
Operating income 96,842 61,872 (1,935)
Other income (expense) (3,219) (5,037) (5,090)
Provision for income taxes 31,163 21,616 (2,441)
Net income $ 62,460 $ 35,219 $ (4,584)
Note: Net" ix de! ned “contribution pro! t (loss)” as revenues
less cost of revenues and marketing expenses. Cost of revenue
includes
expenses related to the acquisition and licensing of content
(streaming content license agreements, DVD direct purchases
and DVD
revenue sharing agreements with studios, distributors and other
content suppliers), as well as content delivery costs related to
providing
streaming content and shipping DVDs to subscribers (which
includes the postage costs to mail DVDs to and from our paying
subscribers,
the packaging and label costs for the mailers, all costs
associated with streaming content over the Internet, the costs of
operating and
staffing shipping centers and customer service centers, DVD
inventory management expenses, and credit card fees).
*Since some Net" ix members in the United States subscribed

to both streaming and DVD-by-mail plans, they were counted as
a single
unique subscriber to avoid double counting the same subscriber.
n.a. 5 not applicable. During July and August of the third
quarter of 2011, Net" ix’s domestic streaming content and
DVD-by-mail opera-
tions were combined. Subscribers in the United States were able
to receive both streaming content and DVDs under a single
hybrid plan.
Accordingly, revenues were generated and marketing expenses
were incurred in connection with the subscription offerings as a
whole.
Therefore, the company did not allocate revenues or marketing
expenses for the domestic streaming and domestic DVD
segments prior to
the fourth quarter of 2011.
Source: Net" ix records posted in the Financial Statements
portion of the investor relations section at www.netflix.com ,
accessed March
19, 2012.
EXHIBIT 6 (Concluded)
Missteps? C-141
agreement (so as to match up content payments with
the stream of subscription revenues coming in for
that content). Following the expiration of the license
term, Netflix either removed the content from its
library of streamed offerings or negotiated an exten-
sion or renewal of the license agreement. Netflix

greatly accelerated its acquisition of new streaming
content in 2010 and 2011, increasing its streaming
library to around 60,000 titles, up from about 17,000
titles in 2009. Netflix’s payments to movie studios for
streaming rights in 2010–2011 exceeded its payments
for DVD distribution rights—see Exhibit 7 . In 2010–
2011, Netflix’s rapidly growing subscriber base gave
movie studios and the network broadcasters of popu-
lar TV shows considerably more bargaining power to
negotiate higher prices for the new content that Net-
flix sought to acquire for its content library. Netflix
management was fully aware of its weakening bar-
gaining position in new content acquisition, and the
higher prices it was having to pay to secure stream-
ing rights largely accounted for why the company’s
contribution profits from streaming were lower than
from DVD rentals—see Exhibit 6 . However, Netflix
executives expected that long-term growth in the
number of streaming subscribers would enable the
company to earn attractive profits on its streaming
business, despite the increased costs of acquiring
attractive new content.
Netflix had incurred obligations to pay $3.91 bil-
lion for streaming content as of December 31, 2011,
up from $1.12 billion as of December 31, 2010. Some
of these obligations did not appear on the company’s
year-end 2011 balance sheet because they did not
meet content library asset recognition criteria (either
the fee was not known or reasonably determinable for
a specific title or the fee was known but the title was
not yet available for streaming to subscribers). Cer-
tain of Netflix’s new licensing agreements also had
variable terms and included renewal provisions that
were solely at the option of the content provider. The
expected timing of Netflix’s streaming content pay-

ments was as follows: 13
library far outdistanced the selection available in local
brick-and-mortar movie rental stores and the 200
to 400 titles available in Redbox vending machines,
but it was on a par with the number of titles avail-
able at Amazon. In mid-2012, Netflix’s streaming
library contained more titles than any other stream-
ing service.
New Content Acquisition Over the years,
Netflix had spent considerable time and energy estab-
lishing strong ties with various entertainment video
providers and leveraging these ties to both expand
its content library and gain access to new releases as
early as possible—the time frame that Netflix gained
access to films after their theatrical release was an
important item of negotiation for Netflix (in 2011,
Netflix was able to negotiate access to certain films
produced by Lionsgate within one year of their initial
theatrical release for showing to members in the UK
and Ireland). Also, in 2011, Netflix had successfully
negotiated exclusive rights to show a number of titles
produced by several studios.
In August 2011, Netflix introduced a new “Just
for Kids” section on its website that contained a large
selection of kid-friendly movies and TV shows. In
March 2012, all of the Just for Kids selections became
available for streaming on PlayStation 3 game con-
soles. As of early March 2012, over 1 billion hours of
Just for Kids programming had been streamed to Net-
flix members.
New content was acquired from movie studios
and distributors through direct purchases, revenue-

sharing agreements, and licensing agreements to
stream content. Netflix acquired many of its new-
release movie DVDs from studios for a low upfront
fee in exchange for a commitment for a defined
period of time either to share a percentage of sub-
scription revenues or to pay a fee based on content
utilization. After the revenue-sharing period expired
for a title, Netflix generally had the option of return-
ing the title to the studio, purchasing the title, or
destroying its copies of the title. On occasion, Netflix
also purchased DVDs for a fixed fee per disc from
various studios, distributors, and other suppliers.
Netflix had about 140,000 titles in its DVD library as
of April 2012.
In the case of movie titles and TV episodes
that were delivered to subscribers via the Internet
for instant viewing, Netflix generally paid a fee to
license the content for a defined period of time, with
the total fees spread out over the term of the license
Less than one year $ 797.6 mil
Due after 1 year and through 3 years 2,384.4
Due after 3 years and through 5 years 650.5
Due after 5 years 74.7
Total streaming obligations $3,907.2 mil
movies and then sorted the movies in each cluster

from most liked to least liked based on over 3 billion
ratings provided by subscribers. In 2010–2011, Netflix
added new movie ratings from subscribers to its data-
base at a rate of about 20 million per week. Those sub-
scribers who rated similar movies in similar clusters
were categorized as like-minded viewers. When a sub-
scriber was online and browsing through the movie
selections, the software was programmed to check
the clusters the subscriber had rented/viewed in the
past, determine which movies the customer had yet
to rent/view in that cluster, and recommended only
those movies in the cluster that had been highly rated
by viewers. Viewer ratings determined which available
titles were displayed to a subscriber and in what order.
When streaming members came upon a title they
wanted to view, that title could, with a single click, be
put on their “instant queue”—a list for future viewing.
A member’s instant queue was immediately viewable
with one click whenever the member went to Netflix’s
website. With one additional click, any title on a mem-
ber’s instant queue could be activated for immediate
Netflix’s Convenient and Easy-to-Use
Movie Selection Software Netflix had devel-
oped proprietary software technology that allowed
members to easily scan a movie’s length, appropri-
ateness for various types of audiences (G, PG, or R),
primary cast members, genre, and an average of the
ratings submitted by other subscribers (based on 1 to
5 stars). With one click, members could watch a short
preview if they wished. Most importantly perhaps was
a personalized 1- to 5-star recommendation for each
title that was based on a subscribers’ own ratings of
movies previously viewed, movies that the member
had placed on a list for future streamed viewing and/
or mail delivery), and the overall or average rating of

all subscribers.
Subscribers often began their search for movie
titles by viewing a list of several hundred personalized
movie title “recommendations” that Netflix’s software
automatically generated for each member. Each mem-
ber’s list of recommended movies was the product of
Netflix-created algorithms that organized the com-
pany’s entire library of titles into clusters of similar
Expenditures for Additions
to DVD Library (in 000s)
Expenditures for Additions
to Streaming Content
Library (in 000s)
Total Expenditures for New
Content (in 000s)
2009
Quarter 1 $ 46,499 $ 22,091 $ 68,590
Quarter 2 43,224 9,343 52,567
Quarter 3 46,273 9,998 56,271
Quarter 4 57,048 22,785 79,833
Annual Total $193,044 $ 64,217 $ 257,261
2010
Quarter 1 $ 36,902 $ 50,475 $ 87,377

Quarter 2 24,191 66,157 90,348
Quarter 3 29,900 115,149 145,049
Quarter 4 32,908 174,429 207,337
Annual Total $123,901 $ 406,210 $ 530,111
2011
Quarter 1 $ 22,119 $ 192,307 $ 214,426
Quarter 2 19,065 612,595 631,660
Quarter 3 20,826 539,285 560,111
Quarter 4 23,144 976,545 999,689
Annual Total $ 85,154 $2,320,732 $2,405,886
EXHIBIT 7 Netflix’s Quarterly Expenditures for Additions to
Content Library,
2009–2011
Source: Company cash ! ow data, posted in the investor
relations section at www.netflix.com , accessed March 16,
2012.
Missteps? C-143
When a subscriber placed an order for a specific
DVD, the system first looked for that DVD at the

shipping center closest to the customer. If that center
didn’t have the DVD in stock, the system then checked
for availability at the next closest center. The search
continued until the DVD was found, at which point
the regional distribution center with the ordered DVD
in its inventory was provided with the information
needed to initiate the order fulfillment and shipping
process. If the DVD was unavailable anywhere in the
system, it was wait-listed. The software system then
moved to the customer’s next choice and the process
started all over. And no matter where the DVD was
sent from, the system knew to print the return label
on the prepaid envelope to send the DVDs to the ship-
ping center closest to the customer to reduce return
mail times and permit more efficient use of Netflix’s
DVD inventory. No subscriber orders were shipped
on holidays or weekends.
By early 2007, Netflix had 50 regional distribu-
tion centers and another 50 shipping points scattered
across the U.S., giving it a one-business-day delivery
capability for 95 percent of its subscribers and, in
most cases, also enabling one-day return times. As
of 2010, additional improvements in Netflix’s distri-
bution and shipping network had resulted in a one-
business-day delivery capability for 98 percent of Net-
flix’s subscribers.
In 2007, when entertainment studios became
more willing to allow Internet delivery of their con-
tent (since recent technological advances prevented
streamed movies from being pirated), Netflix moved
quickly to better compete with the growing numbers
of video-on-demand providers by adding the feature
of unlimited streaming to its regular monthly sub-
scription plans. The market for Internet delivery of

media content consisted of three segments: the rental
of Internet delivered content, the download-to-own
segment, and the advertising-supported online deliv-
ery segment (mainly, YouTube and Hulu). Netflix’s
objective was to be the clear leader in the rental seg-
ment via its instant watching feature.
Giving subscribers the option of watching DVDs
delivered by mail or instantly watching movies
streamed to subscribers’ computers or TVs had consid-
erable strategic appeal to Netflix in two respects. One,
giving subscribers the option to order and instantly
watch streamed content put Netflix in a position to
compete head to head with the growing numbers
of video-on-demand providers. Second, providing
streamed content to subscribers had the attraction of
viewing. In spring 2011, a number of the world’s lead-
ing consumer electronics companies began plac-
ing a Netflix button on their remotes for operating
newly purchased TVs, Blu-ray disc players, and other
devices that had built-in Internet connections—
the button provided Netflix subscribers with a one-
click connection to their instant queue. Clicking on
a remote with a Netflix button resulted in all of the titles
in a subscriber’s instant queue appearing on the TV
screen within a few seconds; streaming was instantly
initiated by clicking on whichever title the sub-
scriber wished to watch. In the case of members with
DVD-by-mail subscriptions, members browsing
the title library on Netflix’s website could with one
click place a title on their list (or queue) to receive it
by mail. DVD subscribers specified the order in which
titles in their personal queue were to be mailed out
and could alter the lists or the mailing order at any
time. It was also possible to reserve a copy of upcom-

ing releases. Netflix management saw the movie rec-
ommendation tool as a quick and personalized means
of helping subscribers identify titles they were likely
to enjoy.
Netflix management believed that over 50 percent
of the titles selected by subscribers came from the
recommendations generated by its proprietary soft-
ware. The software algorithms were thought to be par-
ticularly effective in promoting selections of smaller,
high-quality films to subscribers who otherwise might
not have discovered them in the company’s mas-
sive and ever-changing collection. On average, about
85 percent of the titles in Netflix’s content library were
rented each quarter, an indication of the effectiveness
of the company’s recommendation software in steer-
ing subscribers to movies of interest and achieving
broader utilization of the company’s entire library
of titles.
A Choice of Mail Delivery vs. Streaming
Up until 2007–2008 when streaming technology had
advanced to the point that made providing video-
on-demand a viable option, Netflix concentrated its
efforts on speeding the time it took to deliver sub-
scriber orders via mail delivery. The strategy was to
establish a nationwide network of distribution centers
and shipping points with the capability to deliver
DVDs ordered by subscribers within one business day.
To achieve quick delivery and return capability, Net-
flix created sophisticated software to track the loca-
tion of each DVD title in inventory and determine the
fastest way of getting the DVD orders to subscribers.

Marketing and Advertising Netflix used
multiple marketing channels to attract subscribers,
including online advertising (paid search listings,
banner ads, text on popular sites such as AOL and
Yahoo, and permission-based e-mails), radio stations,
regional and national television, direct mail, and print
ads. The costs of free monthly trials were treated as
a marketing expense. It also participated in a vari-
ety of cooperative advertising programs with studios
through which Netflix received cash consideration in
return for featuring a studio’s movies in its advertis-
ing. In recent years, Netflix had worked closely with
the makers of Netflix-ready electronics devices to
expand the number of devices on which subscribers
could view Netflix-streamed content; these expenses
were all considered marketing expenses and some-
times took the form of payments to various consumer
electronics partners for their efforts to produce and
distribute these devices.
Management had boosted marketing expendi-
tures of all kinds (including paid advertising) from
$25.7 million in 2000 (16.8 percent of revenues)
to $142.0 million in 2005 (20.8 percent of revenues)
to $218.2 million in 2007 (18.1 percent of revenues).
When the recession hit in late 2007 and 2008, manage-
ment trimmed 2008 marketing expenditures to $199.7
million (14.6 percent of revenues) as a cost contain-
ment measure, but in 2009 marketing expenditures
resumed their upward trend, climbing to $237.7 mil-
lion (14.2 percent of revenues). Marketing expenses
rose even more dramatically to $298.8 million in 2010
and to $402.6 million in 2011 owing to:

• Increased adverting efforts, particularly in the
newly entered countries of Canada, Latin America,
the United Kingdom, and Ireland.
• Increased costs of free trial subscriptions.
• Increased payments to the company’s consumer
electronics partners.
Advertising campaigns of one type or another were
underway more or less continuously, with the lure of
one-month free trials usually being the prominent ad
feature. Advertising expenses totaled approximately
$205.9 million in 2009, $181.4 million in 2008, and
$207.9 million in 2007—ad expenses for 2011 and
2010 were not publicly reported.
Transitioning to Internet Delivery of
Content Netflix’s core strategy in 2012 was to
grow its streaming subscription business domes-
tically and globally. Since launching streaming to
being cheaper than (1) incurring the postage expenses
on DVD orders and returns, (2) having to obtain and
manage an ever-larger inventory of DVDs, and (3)
covering the labor costs of additional distribution cen-
ter personnel to fill a growing volume of DVD orders
and handle increased numbers of returned DVDs. But
streaming content to subscribers was not cost-free;
it required server capacity, software to authenticate
orders from subscribers, and a system of computers
containing copies of the content files placed at various
points in a network so as to maximize bandwidth and
allow subscribers to access a copy of the file on a server
near the subscriber. Having subscribers accessing a
central server ran the risk of an Internet transmission

bottleneck. Netflix also utilized third-party content
delivery networks to help it efficiently stream movies
and TV episodes in high volume to Netflix subscribers
over the Internet. According to one report, Netflix
incurred a cost of about 5 cents to stream a movie to a
subscriber compared to costs of about $1 in roundtrip
mailing and labor fees for a DVD. 14
Netflix executives believed that the strategy of
combining streaming and DVDs-by-mail into a single
monthly subscription price during the 2007 to Sep-
tember 2011 period enabled Netflix not only to offer
members an attractively large selection of movies for
one low monthly price but also to enjoy a competitive
advantage vis-à-vis rivals as compared to providing
a postal-delivery-only or Internet-delivery-only sub-
scription service. Furthermore, Netflix management
believed the company’s combination postal-delivery/
streaming service delivered compelling customer
value and customer satisfaction by eliminating the
hassle involved in making trips to local movie rental
stores to choose and return rented DVDs.
In March 2012, six months after instituting
separate plans for streaming and DVDs-by-mail,
Netflix instituted as yet unannounced and some-
what subtle changes at its website. A support page
appeared at www.netflix.com that sent people reg-
istering for a free trial subscription to “ dvd.netflix.
com ” if they wanted to sign up for a DVD-by-mail-
only account. 15 In addition, Netflix began redirect-
ing DVD-by-mail customers to a separate web page
when they tried to rate movies on Netflix’s main site,
and DVD-by-mail-only subscribers that searched
for movie titles were only shown titles that were also
available for streaming rather than the heretofore

full library of DVD titles. 16 Furthermore, ratings and
recommendations by DVD and streaming customers
were separated.
Missteps? C-145
to remain healthy despite shrinking volume, due to
the lower postage costs and order fulfillment costs
associated with declines in the number of DVD discs
being ordered by DVD-by-mail subscribers.
In March 2012, there were reports that Netflix
was in exploratory discussions with multichannel
TV providers about offering its streaming content
as an add-on option alongside such premium movie
channels as HBO, Showtime, and Starz. 18 One benefit
from such a strategic approach was said to be the
likelihood that customers who purchased Netflix
through a multichannel TV provider would be more
likely to remain a subscriber. Anywhere from 30 to
70 percent of Netflix’s subscribers canceled their sub-
scriptions each year (see Exhibit 3 )—the percentage
of existing subscribers that canceled their subscrip-
tions was referred to as the “churn rate.” For Netflix
to grow its subscriber base in upcoming years, it
had to overcome its churn rate by attracting enough
new subscribers to more than offset subscriber
cancellations. The appeal of offering Netflix through
multichannel TV providers was that pay-television
channels had a customer churn rate of only 20 to
25 percent. At an investor event in San Francisco in
late February 2012, Reed Hastings said that partner-
ing with cable companies to offer Netflix streaming

as an add-on option was a natural progression for
the company. 19
International Expansion Strategy
Making Netflix’s streaming service available to grow-
ing numbers of households and individuals outside
the United States was a central element of Netflix’s
long-term strategy to grow revenues and profits. Net-
flix executives were fully aware that international
expansion would temporarily depress overall com-
pany profitability since it took roughly two years to
build a sufficiently large subscriber base in newly
entered country markets to have sufficient revenues to
cover all the associated costs. The biggest cost to enter
new countries was the expense of obtaining licenses
from movie studios and the owners of TV shows to
stream their content to subscribers in these countries.
The second biggest cost was related to the incremental
advertising and marketing expenses needed to attract
new subscribers and grow subscription revenues fast
enough to achieve profitability within the targeted
two-year time frame.
In 2011, Netflix’s international streaming segment
(Canada and Latin America) reported a contribution
Internet-connected devices in 2007, the company had
continuously improved the streaming experience of
subscribers in three major ways:
• Expanding the size of its streaming content library,
currently about 60,000 titles.
• Working with consumer electronics partners to
increase the number of Internet-connected devices
that could be used to view Netflix-streamed content.

• Improving the ease with which subscribers could
navigate Netflix’s website to locate and select con-
tent they wanted to watch.
The result had been rapidly growing consumer accep-
tance of, and interest in, the delivery of TV shows and
movies directly over the Internet. Netflix subscribers
watched over 2 billion hours of streaming video in the
fourth quarter of 2011, an average of approximately
30 hours per member per month (which equated to
a cost of $0.27 per hour of viewing, given the current
$7.99 subscription price). 17 During this same period,
the company realized a contribution profit of $52.1
million on its domestic streaming business segment
(see Exhibit 6 ).
Going forward, Netflix executives expected that
the number of members with DVD-by-mail subscrip-
tions would decline, as subscribers migrated from
DVD-by-mail plans to Internet streaming plans and
as subscribers with both DVD-by-mail and stream-
ing subscriptions opted for streaming-only subscrip-
tions. An ever-smaller fraction of new subscribers was
expected to opt for the DVD-by-mail plan. Manage-
ment saw no need to proactively encourage or try to
accelerate the decline in domestic DVD-by-mail sub-
scriptions beyond the actions already taken—rather
the strategy was to simply let subscribers choose
whichever plan or plans they wished, since the com-
pany had ample ability to provide a satisfying experi-
ence to both DVD and streaming subscribers. Netflix
management projected that the number of domestic
DVD subscribers would decline from just over 11.0
million at the end of 2011 to about 9.5 million at the
end of March 2012, with smaller sequential declines

in future quarters. Early indications were that the
number of Netflix streaming subscribers in the United
States would rise by about 1.7 million in the first quar-
ter of 2012.
In the near term, the falloff in revenues from
declining domestic DVD subscriptions was projected
to be offset by revenue gains from ongoing growth
in the numbers of domestic streaming subscribers.
Domestic DVD contribution margins were expected
the company returned to global profitability, it did not
intend to launch additional international expansion.
Highlights of Netflix’s
Performance in Quarter 1 of 2012
For the first three months of 2012, Netflix reported
revenues of $869.8 million (21.0 percent higher than
the revenues of $718.6 million in the first quarter of
2011) and a net loss of $4.6 million (versus net income
of $60.2 million in the first quarter of 2011). The net
loss for the quarter stemmed from contribution losses
of $102.7 million in the international streaming seg-
ment; however, Netflix added 1 million more paying
international subscribers during Quarter 1 and had
another 600,000 international subscribers enrolled
in free trials. International streaming revenues were
$43.4 million in the first quarter, versus revenues of
$29.0 million for the fourth quarter of 2011 and $12.3
million for the first quarter of 2011.
In the United States, the total number of stream-

ing subscribers (including free-trial subscribers) rose
from 21.7 million at the end of the fourth quarter of
2011 to 23.4 million at the end of the first quarter of
2012. Total paying subscribers jumped by 1.85 million
during the quarter (from 20.15 million as of Decem-
ber 31, 2011 to 22.0 million as of March 31, 2012). Not
surprisingly, the number of domestic DVD subscrib-
ers dropped by almost 1.1 million during the quarter
to a total of 10.1 million as of March 31. Nonetheless,
the customer count exceeded management’s expecta-
tions, and contribution profits from this segment were
$146.1 million—seven million of the DVD subscribers
were also streaming subscribers. Viewing per member
was at a record high level during the quarter.
Reed Hastings indicated that Netflix would likely
add a net of 7 million domestic streaming subscribers
during 2012 (about the same number added in 2010)
and end the year with approximately 27.2 million
domestic streaming customers. He also said that:
• It would take longer than eight quarters after ini-
tial entry for the company’s operations in Latin
America, the UK, and Ireland to reach sustained
profitability, owing to ongoing investments in con-
tent improvements and somewhat slower-than-
expected growth in membership.
• The company expected to return to global
profitability in the second quarter of 2012 because
of increasing contribution profits in domestic
streaming, slow erosion of contribution profits in
loss of $103.1 million. Top management had projected
that the added international expenses of expanding
service to the UK and Ireland in January 2012 would

result in total international contribution losses for
Canada, Latin America, United Kingdom, and Ireland
of between $108 million and $118 million in Quarter
1 of 2012.
Netflix planned to continue to invest in expand-
ing its streaming content libraries in Latin America,
the United Kingdom, and Ireland throughout 2012
and beyond, just as it had done since launching its ser-
vice in Canada. According to CEO Reed Hastings and
CFO David Wells, a bigger content library: 20
improves the consumer experience, builds strong word
of mouth and positive brand awareness, and drives
additional acquisition [of new subscribers], all ele-
ments of a strong foundation for long-term success.
Nonetheless, Netflix’s entry into Latin Amer-
ica presented unique challenges not encountered
in the other international markets. The concept of
on-demand streaming video (outside of piracy and
YouTube) was not something most Latin American
households were familiar with, which required Netflix
to do more work in driving consumer understanding
and acceptance of the company’s streaming service.
Moreover, in Latin America, a smaller fraction of
households had fewer Internet-connected TVs, Blu-
ray players, and other devices that readily connected
to Netflix’s service. Plus, in many locations there was
an underdeveloped Internet infrastructure, relatively
low credit card usage among households and indi-
viduals, and consumer payment challenges for ecom-
merce. Many Latin American banks turned down all
ecommerce debit card transactions due to fraud risk.
NETFLIX’S PERFORMANCE

PROSPECTS IN 2012
Management’s latest forecast for 2012 called for mod-
est quarterly losses throughout 2012 and a loss for the
whole year, due entirely to the sizable contribution
losses in the international segment. However, con-
tinued growth in the number of domestic streaming
subscribers was expected to produce contribution
margins of 10–12 percent during 2012, comfortably
above the company’s long-term domestic streaming
target of 8 percent, and in line with the 10.9 percent
domestic streaming contribution margin in the fourth
quarter of 2011. Netflix management said that until
Missteps? C-147
base and (2) having growing numbers of subscrib-
ers in a growing number of countries enabled Netf-
lix to more quickly reach the global scale needed to
license global content rights economically.
Initial investor reaction to all this was decidedly nega-
tive. In the week following the April announcement
of Netflix’s first-quarter results, full-year expecta-
tions, and future plans, Netflix’s stock price—which
had climbed to $129 per share in mid-February before
falling back to the $105–$110 range in mid-April—
dropped about $25 per share and then over the next
10 days slid further, trading as low as $72.49.
the domestic DVD segment, and narrowing con-
tribution losses in the international streaming
segment. Netflix had positive free cash flow of $2

million during the first three months of 2012.
• Given the strong response to the launch of the com-
pany’s service in the UK, the company planned to
enter another European market in Q4 of 2012.
Quickly investing the growing profits from the
company’s domestic business in additional global
expansion had two key advantages: (1) entering for-
eign markets ahead of other streaming rivals made
it easier for Netflix to build a profitable subscriber
ENDNOTES
1 Michael Liedtke, “Net! ix’s Online Gaps Likely
to Continue,” Associated Press, April 9, 2012,
accessed April 16, 2012 at www.sltrib.com/
sltrib/money/538815 .
2 NPD Group press release, February 16,
2012, accessed March 13, 2012 at
www.npd.com .
3 NPD Group press release, January 19, 2012,
accessed March 13, 2012 at www.npd.com .
4 Ibid.
5 See Daniel Frankel, “Analyst to Studios: It’s
Time to Force Early VOD on Theater Chains,”
posted at www.paidcontent.org , accessed
March 12, 2012.
6 Frankel, “Analyst to Studios: It’s Time to Force

Early VOD on Theater Chains.”
7 See, for example, Bret Lang, “Lionsgate
Tests Early VOD Waters with Taylor Laut-
ner’s ‘Abduction,’” The Wrap, posted at www.
thewrap.com , August 10, 2011, accessed
March 12, 2012 and also Frankel, “Analyst to
Studios: It’s Time to Force Early VOD on The-
ater Chains.”
8 According to information in Amanda Alix, “Is
Net! ix Trying to Pull Another Qwikster?” The
Motley Fool, posted March 29, 2012 at www.
fool.com and accessed on March 30, 2012.
9 William Launder, “Online Movie Viewing to
Outpace DVD, Blu-ray Views this Year,” The
Wall Street Journal, posted at http://online
.wsj.com on March 23, 2012, accessed March
30, 2012.
10 Michael Liedtke, “Net! ix’s Online Gaps
Likely to Continue,” Associated Press, April 9,

2012, accessed April 16, 2012 at www.sltrib
.com/sltrib/money/538815 .
11 NPD Group press release, February 16,
2012, accessed March 13, 2012 at
www.npd.com .
12 Ibid.
13 Net! ix’s 2011 10-K Report, p. 62.
14 Michael V. Copeland, “Reed Hastings:
Leader of the Pack,” Fortune, December 6,
2010, p. 128.
15 Amanda Alix, “Is Net! ix Trying to Pull
Another Qwikster?” The Motley Fool, posted
March 29, 2012 at www.fool.com and
accessed on March 30, 2012.
16 Ibid.
17 Letter to Shareholders, January 25, 2012,
p. 1; posted in the investor relations section at
www.netflix.com , accessed March 28, 2012.
18 Angela Moscaritolo, “Report: Net! ix Looking
to Partner with Cable Companies,” PC Maga-
zine, posted at www.PCMag.com on March
7, 2012, accessed March 7, 2012; and John

Jannarone, “Net! ix Risks Tangle with Cable,”
The Wall Street Journal, March 29, 2012,
p. C12.
19 Moscaritolo, “Report: Net! ix Looking to Part-
ner with Cable Companies.”
20 Letter to Shareholders, January 25, 2012,
p. 6; posted in the investor relations section at
www.netflix.com , accessed March 28, 2012.
2. strategic group map
5.analyze the vision, mission, what are the core values, and
value proposition, determine the generic strategy
6. determine the generic strategy of the company
Its’ all separate part. Don’t need intro and conclusion. Start it
as a part of the whole paper. Our paper is about Netflix, these
are my parts. 2 pages for each part. So 6 total.

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