INTRODUCTION Netflix is known as an American Media Service Provider which is found on 29 August 1997
Netflix is known as an American Media Service Provider which is found on 29 August 1997. Its founders are Marc Randolph and Reed Hastings and Netflix’s headquarters is located at Scott Valley, California. Currently Reed Hastings is the Chief Executive Officer of Netflix. In the beginning Netflix introduced a monthly subscription concept on a low price and currently it operated as an internet television network providing subscription service streaming movies and TV episodes over the Internet and sending DVDs by mail.2 Netflix have been a dominant online streaming service provider from the beginning.3 Its shares have increased over 80% to date on May this year.
The current issues faced by Netflix Inc. is :
• Programming bill debt.4
• Decreasing number of subscriptions.5
Netflix Inc is an online streaming provider in the television network industry. The company’s strategic business unit (SBU’s) are online streaming it can be divided into few segments of individual network which is domestic streaming, international streaming and domestic DVD.6
Strategic Business Unit (SBU’s) of Netflix Inc.
-Unlimited Rental DVD service
– VOD via the internet
– DVD mailers
SBU’s within the subscribers in television network
• North Korea
• Territory of China
The main source of income generated by Netflix Inc is from:
Subscriptions which is paid by the subscribers for the access of content on Netflix and DVD delivery. Another source of income is Monthly membership fees where 3 plans are offered to the subscribers according to the content provided ; Basic (Standard Definition), Standard (High Definition) and Premium(Ultra High Definition).7 Its costs on the plan differs from one country to another.
FINANCIAL HIGHLIGHTS 2013-2017
? Sales increased from 2477.54 billion to 2636.64 in first quarter of 2017.8
? Operating income is generated to over 0.839 billion in year 2016.9
? Share price decreased by almost 0.91 % to 0.30% on 2017.10
? Number of subscribers increased to 32% in 2013 compared to the year earlier.11
Hulu 2 billion USD was generated in United States which is high compared to 2015 a year earlier from 2016.12
FUNDAMENTAL METRIC NETFLIX
Revenue $12.8 bil
Operating income $1 bil
Net income $670.8 mil
Operating margin 8%
Free cash flow ($1.8 bil)
Most of the revenue generated by Netflix is from Domestic Streaming which shows the highest revenue in year 2017 amounts to 6153,025 USD.
Hulu is now competing with Netflix making its revenue high of 10 million subscribers currently who have subscribed Hulu Tv.13
HBO Now was launched in April 2015 its amongst the competitor list of Netflix as the company generate over 5.5 billion in 2017.14
• In 2015, Netflix’s domestic subscribers was 6.0 mil and decreased to 5.7 mil in 2015 continually decreased earlier in 2017 and increased to 4.9 mil later.15
• Other source of Netflix’s growth comes from domestic revenue streaming which shows an increase of 11% of average revenue per subscriber.
• HBO Go’s revenue on 2017 rise from $8.6 bil to 9% and gained 13% of operating income amounts to $1.9 bil.16
• Netflix shows a decline in year 2015(4.51%) and fell continuously in year 2016(4.30%), this is because all the earnings is generated to its international expansion.17
• Despite HBO Go and Hulu in year 2015 till 2016 Netflix’s operating margin fell and rise in year 2017(7.17%) thus, Netflix made an effort to increase revenue ad.
• HBO Go and Hulu’s subscription revenue is the cause for the increase in operating margin, where HBO Go’s operating margin shows (21.84%) in 2014 to 2016(26.73%).18
• Compared to Netflix Inc, Hulu and HBO Go is also in a good competition with Netflix. Netflix margin shows an expansion in year 2017 this is a good sign for the company.
• Netflix Inc’s operating margin is affected by three main factors which is ;-
– International streaming
– Domestic streaming
• The decline or increase number of any three factors mentioned above determine the operating margin of Netflix Inc and its competitors.
• Net profit margin indicates the revenue of the company over its expenses.
• Netflix Inc Net profit margin shows drastic changes which declined in between year 2014(4.85%) to 2015(1.81%) and continued to rise at 4.78% in 2017.
• In year 2017, Netflix Inc gained income to USD 559 million which determined the growth in the recent years from 2015 to 2017.19
• HBO Go and Hulu shows similar growth in the net profit margin where it shows a rise of percentage in the net profit margin in 2017 (16.78%) HBO and (21.20%).
• The decrease of Netflix Inc in from year 2014 to 2015 is because of the lower number of subcriptions which is the main source of income.
• The international expansion of subscribers and its content is the ways which leads to growth Netflix Inc.20
• In the 1st quarter of 2015 ,the debt issue associated with the interest expense increased and loss on foreign currency denomination impacted to the declination of net margin in from 2014 to 2015.21
• This liquidity ratio is to determine the ability of a company to pay its short-term obligations.
• In year end of 2014 and 2013, December the short-term investments amounts to $1200.4 million which leads to the increase in year 2015 amounted $2,310.7 million.22
• The short-term investments of Netflix Inc impacted the current ratio in year 2013(1.42) to 2014(1.47) and in 2015(1.54). Similarly, HBO Go also increases with the first three years of 2014 till 2015.
• The cause of Hulu’s fall in current ratio for the past five years in investment;
– Hulu held securities (available-for-sale) amounts to $305 million in 2013 and continued to decrease of $81 million in 2016 and $91 million in 2015.
– Traded in cost method investments and leverage leases which decline over the five years period.23
• A company should have good long-term estimation to meet its current obligations.
• Quick ratio or Acid –test ratio is known to measure the liquidity of a company’s asset over its current liabilities.
• It is clearly noticeable in the above chart Hulu is continuously decreasing for the past 5 years due to its increasing number of total current liabilities which amounts to $11,704 million in 2013 and lastly amounted $16,842 million in 2016.24
• Hulu’s quick ratio shows that the company would not be able to pay back the current liabilities in full.
• Netflix Inc is shows fluctuations in the number of ratio throughout five years. It has quick ratio of 1.40 which specifies that Netflix Inc’s short-term financial is good.
o HBO Go’s quick ratio fluctuates over the years where the company has the ability to pay back the current liabilities fully as its total assets amount to $69,209 million in 2017.
• Thus, a company’s liquidity position is determined on the higher number of quick ratio.
• Asset turnover is the ability of how fast a company can turn its asset into sales.
• Netflix Inc asset turnover shows that the company is quickly turning its assets into cash where it continuously decline over the past 5 years from 2013(0.93 days) to 2017(0.72 days).
• HBO Go fluctuates in the number of asset turnover in past 5 years because its cash amount varies by each year which does not show a constant decrease or increase. From year 2013 till 2017 it amounts to $ 1,816(2013), $ 2618 million(2014), $ 2155 million(2015), $ 1539(2016) and $ 2621(2017).25
• Where else, Hulu increases in past 4 years and in the fifth year shows a decreased ratio this is due to its decreasing amount of product sales in 2016,$ 8502 million. The higher the number of sales, the quicker the asset turnover of a company.26
• Payables turnover determines the days a company must pay its suppliers.
• In year 2013 Netflix Inc shows the ratio of 12.7 days and increases in the following two years and shows a slight decrease. In the following two years from 2014(19.61 days) to 2015(20.15 days) Netflix Inc shows a higher ratio this is due to its credit terms.
• HBO Go and Hulu is similar to Netflix Inc the number of payable days fluctuates form year 2013 to 2017. Both the companies take a longer period of time because the hold more cash that they take longer time to payback to their suppliers.
• Netflix Inc number of ratio shows that the company is quick in paying back its supplier because of its small number of days in contrast, the number of days payables of Hulu is big in number that it indicates Hulu takes a longer period of days to pay its supplier the reason behind this circumstances is that the company have more cash in its account or due to its credit terms of the supplier.27
• Debt to equity ratio is a measured by the amount of a company’s total debt to the amount of total stockholders equity.
• Netflix Inc shows high debt to equity ratio in the past five years. It can be seen that Netflix Inc is unable to finance its debt to equity where in year 2016 the long term debt of Netflix Inc increased drastically from $ 885,849 (2015) to $ 2,371,362(2016).28
• Number of debt to equity of Hulu shows fluctuations each year this indicates that Hulu is trying to limit its funding and lowers its creditworthiness.
• HBO Go increases from 2013(0.67 times) to 2015(1.01 times) and continued to fall from 2016(1 times) to 2017(0.84 times) similar to Hulu.
• Thus, a company must balance its debt to equity in the amount of debt financing that it should not be hostile with its growth with debt.
• Debt to Asset measures the financial leverage,it shows the percentage of assets financed by total debt.
• Netflix Inc shows higher debt to asset as the company may face risk to pay back its debt because the ratio increases from 0.24(2016) to 0.34(2017).
• Both HBO Go and Hulu differs from each other where it can be seen that HBO Go increases and fall but Hulu is opposite of HBO Go where it decline and increases on the same number of ratio as in the beginning.
• This indicates that all the companies is trying to keep track of their fundings and limiting the debt of the company.29
• Earnings Per Share(EPS) is to measure a company’s EPS to know if all the convertible securities is exercised.
• Netflix Inc EPS shows slight changes from 2013(0.26) to 2016(0.43) and lead high to 1.25 in 2017.
o HBO Go’s EPS continued to increase throughout the five years because of the outstanding shares which decreases each year.30
• Similarly, Hulu faces the same issue over the five years where the share price falls increases each year this justifies that the company is failing to exercise its option.31
• Revenue per share ratio calculates the total revenue by shares outstanding.
• Netflix Inc is showing increase in each year as its revenue per share and this is seen in the competitor company which is HBO Go and Hulu.
• Every year as the revenue increases over the share price it strengthens the company’s business activity.
o Netflix Inc revenue is $ 4,374,562 million (2013) and lead high to $ 11,692,713 million (2017). 32
o HBO Go revenue last year (2017) $ 31,271 where its share price amount to $ 790.7 million.33
MARKETING ANALYSIS (4P’S)
• Products are good services which satisfies the need of customers comes in intangible and tangible form. DVD rentals delivery is the starting service provided by Netflix where customers get their choice of DVD’s delivered to them at fixed rate per month. The right choice of movies and television shows and VoD online are provided through online streaming to Netflix’s subscribers. Netflix have stepped into film production and television shows where Netflix have acquired the broadcasting rights as an online distributor.34
• The delivery of online media and TV shows by Netflix have always been unique despite its competitors and the release of episodes for viewers have been identified as unique ones. The entire seasons of Netflix’s movies are released to its viewers to watch.35
• Netflix is positioned at the 190th place on the Brand League Table in year 2017.36
• Netflix’s revenue starts to hike up because of its pricing strategy. Basically, Netflix has three plan which priced $7.99 (Basic), $10.99 (Standard) and $13.99 (Premium).37
• There are two main differences for each plans of Netflix which is the quality and the number of subscribers. HD resolution is available for Standard plan and Ultra HD resolution is available for Premium plan, all these plan can be cancelled at any time after watching the free trial.
• Subscription price differs according to each country. Japan is ranked at 1st place as it has the cheapest plan rate of Netflix subscription.38
• Netflix is accessed through computer or laptop but today Netflix’s technology development have taken to the next level where its accessible through;
– Third party devices (Xbox or Wii)
• Payment for the studio of different countries for streaming rights is done.
• Netflix headquarters is situated at Los Gatos, California.39
• Netflix uses the advanced digital technology to retain the existing customers as well as to acquire new customers.40
• Free trial is allowed when first user’s signup for the online streaming service this allows customers to make a choice between committing to the plan or drop the plan.
• Social media is used as a platform for Netflix to advertise its product through Facebook, Twitter and Instagram thus, it is seen that Netflix is trying to connect with their new customers and increase the demand.41
CEO of Netflix : Reed Hastings Location – Los Gatos, California, United States
Changes In Management
DIGITALISATION OF NETFLIX INC
• A game plan was developed.
• Online service was introduced in 2006,thus this brought impact to the DVD market.43
NETFLIX’S CONTENT MARKETING
• Netflix produced its own content.
• Exclusive TV shows was produced.44
PERSONALIZATION OF ENTERTAINMENT
• Homepage of the customer’s is personalized according to customer’s taste.
• Netflix’s uses a formula to predictions of customers on video rating.45
Netflix’s offers more employee benefits:
? Up to 12 months’ maternity and paternity leave.
? Unlimited vacation days, within reason.
? Open working hours (at the California office).
? Health, vision, and dental insurance.
? Employee stock purchase plan.
? Mobile phone discounts.48
Netflix Inc Recruitment Process50
? Netflix Board Practices
– Senior management meetings are attended by the board of members periodically, monthly or quarterly.
– 30 page online memos are prepared and is allowed to access the data on the company’s internal system.
? Quarterly memo – shared to the 90 executives and the board.
? Culture and Leadership
– Netflix culture focus on:-
? Individual intiative
? Information sharing
– Netflix decide to invest in third party content.
– Expanded internationally.
– Investment in production of proprietary.