Kim Kruse March 17, 2011 BUSN 460- Strategic Planning and Policy Netflix Background/Strategy
Netflix is the worlds largest online entertainment entertainment subscription subscription service. Subscribers Subscribers pay a monthly fee based on what package they want. All packages include unlimited online streaming streaming and unlimited DVDs DVDs each month, but the price you pay will determine how many DVDs you can have at home at any given time. Netflix has grown to to provide one day delivery service service to all its customers. customers. The library of movies has grown larger l arger and larger each year to what can be watched instantly or through mail. Wal-Mart and Netflix has entered into an agreement to to which they would refer to each other for online streaming and buying the actual actual DVD. Netflix has grown tremendously since 1999 1999 when they first launched the online service. Revenues and movie titles had both both increased dramatically over the last 5 years. Netflixs strategy is providing customers customers with a wide range of movies, an easy way to choose the movies, fast delivery of the selections, no due dates for fo r the return, a convenient drop it in the mail return procedure, procedure, all together with aggressive marketing to attract subscribers and build awareness of the Netflix brand and services worldwide. worldwide. Netflix wanted to avoid people having the hassle to go to the store, pick out a movie at the store, and then having to return the movie by a certain date. In 2008, Netflix has joined with LG Electronics, so subscribers could watch movies on their television screens. Also in 2008, they combined with Starz Entertainment to provide a more movies that would be available online to stream and was included in the subscription fee already without raising the prices. Netflix based their market on the idea that DVDs and Blu-rays would be the main format for the coming years. Management believes that internet internet streaming will surpass the mail delivery option in the future and the mail option will only be a small fraction of Netflixs main business. Along with Netflixs strategy, they have a wide choice of subscription plans that many people and families can choose from to fit their needs. Netflix has also created a software device, within within the main database, to recommend movies to customers that they might like to see based upon what they have already watched and rated, of which 50% of rentals and online streaming come from this service. They also offer quick delivery capabilities to all customers using the mail option. Customers will receive receive their DVD within one shipping day. The distribution centers centers are spread throughout the USA and try to use the closest one to the customer if distribution center has the movie in stock. If that center doesnt it then moves to the next closest one to give the customer the movie they have selected they want next from their list. Netflix has several licenses licenses with many companies companies for all the movies. Half way in 2008, Netflix had a net value of $126.9 million of content (DVDs). Netflix also uses several marketing channels to attract customers. customers. They have used online advertising (banner ads, paid search listings, text text on popular sites, and permission based emails), radio radio stations, television, direct direct mail, and print ads. They also produced advertising featuring a certain movie in which Netflix would get some cash back for. Netflix also provided free trials to attract more customers to try the service out. Problems and Issues
One problem that Netflix faces is other competitors. Netflix was the only company in the market and faced competitive pressure coming from the threat of entry of new rivals, like Blockbuster. Blockbuster is one company that has tried to compete in the same market. Blockbuster had a different strategy on how they would compete in the home delivery and online movie market. Both companies were offering similar services except for Blockbuster offered an actual store location that customers could use too. An issue that Netflix has is the availability to watch the movies on television. Netflix has DVDs sent to home whenever the customer wants, but the customer also has the availability to watch several movies online on their PC. The customers cannot watch the movies directly on their television unless they have the DVD. Vending machines Illegal downloading Financial
2004
2005
2006
2007
Operating Income/Revenue Profits After Taxes/Total Equity
3.875%
.440%
6.461%
7.567%
13.82%
18.56%
11.40%
16.18%
Current Assets/Current Liabilities Current AssetsCurrent Liabilities Current Market Price Per Share/EPS
1.974
.9678
.7037
.6437
92.4
148.8
235.0
203.9
29.286
34.177
33.205
26.900
NETFLIX Operating Profit Margin Return on Stockholders Equity Current Ratio
Working Capital Price/Earnings Ratio
Netflix is doing well in all the financial areas. Their operating profit margin has increased every year, except in 2005, but then made a great increase in 2006. Netflixs return on stockholders equity has floated around a little bit, but is normally at an above average level, which is 12-15%. The current ratio of Netflix has been decreasing over the 4 years shown above. This number should be greater than 1.0 in order to pay off current liabilities, but it isnt too bad for Netflix, because they do not have that many assets, because a lot of their business is done online. This can also be helped with working capital. Working capital for Netflix has grown, except in 2007 when the economy started to turn. These are internal funds that they have available to pay off current liabilities and to not borrow as many funds in the future. The price/earnings ratio of Netflix has varied for these years. It is well above what is rated good for companies, 20, but they show a strong investor confidence in the firms outlook and earnings in growth are good.
Blockbuster Background/Strategy
Blockbuster used to be the global leader in the movie rental industry. They had thousands of stores in the USA and had some in 24 other countries. However when the market got more competitive, Blockbuster fell hard having to close several hundred stores across the world and posted net losses. This was partly because of the split between Blockbuster and Viacom, which when the split happened there was an arrangement for all shareholders to receive a special divided on $5 causing a huge financial burden. In 2007, Blockbuster appointed a new CEO to the company to try and get Blockbuster back on top. Blockbusters strategic vision in 2002 was to become the complete source for movies and video games in the rental and retail area. They were the leader in the movie and game rental market already, they wanted to further increase sales and in-store selection of movies and gaming equipment. To help with this vision and strategy, Blockbuster purchased a video game retailer in England. This helped boost them in the gaming industry with video games for rent and also equipment such as the gaming systems themselves. They had experts in gaming work during peak hours so that customers could have help available if they had any questions. Blockbuster also came up with a movie subscription service where people could rent out as many movies as they could in one month and the price determining how many they could have out at one time. They also expanded to online rentals in 2004. Blockbuster had 3 plans for which customers could choose from depending on how many DVDs they wanted to have at one time, all with unlimited rental limits. Online subscribers were sent two coupons each month for free instore rentals. The distribution centers across the USA sent out videos daily to the customers based upon the movies they have in their queue. This move to be online was Blockbusters idea of being anywhere, anytime. In 2004, they cut the price of the plans, opened more distribution centers, had two week free trial periods for new customers, and they also integrated their online and in-store subscription program. In 2005, Blockbuster discontinued the late fees for in-store rentals. This helped them in the beginning but many stores across the nation lost revenue because the movies werent returning on time. Having movies not returned on time, cost stores more money to stock additional copies of the popular films. In 2007, Blockbuster moved to redo their strategy as they fulfilled their previous one. They wanted to focus on growing its core movie rental business, broadening the product offerings at local stores, and develop new channels for delivery of digital movies. One of the first things the new CEO did was improved the availability of new releases in movies. They boosted inventory by 20% to 60% in one year, which helped boost their sales back up. They also expanded their selection of independent films, refurbished stores, placed vending machines in high-traffic areas, created several more options of plans, and Blockbuster also purchased Movielink, an online movie downloading service, which these all help boost their revenue. Blockbuster expanded their inventory of movies for rent, but also the selection available to buy. They also included video game consoles for sale along with video games. Blockbuster expanded their selection of video games as well. The acquisition of Movielink let Blockbuster customers the availability to rent or own movies online.
Problems/Issues
Financial
2004
2005
2006
2007
Operating Income/Revenue Profits After Taxes/Total Equity
-20.703%
-6.692%
1.333%
.706%
-117.5%
-92.45%
5.42%
-12.43%
Current Assets/Current Liabilities Current AssetsCurrent Liabilities Current Market Price Per Share/EPS
.8401
1.080
1.112
1.024
-231.7
105.9
157
30.7
-.722
-.848
.040
-.115
BLOCKBUSTER Operating Profit Margin Return on Stockholders Equity Current Ratio
Working Capital Price/Earnings Ratio
Overall Blockbuster didnt do too well over these 4 years, especially in 2004 the worst of the 4 years. Their operating profit margin in 2004 and 2005 were both negative. This shows the profitability of current operations for the company. Blockbusters return on stockholders equity is well below the average during these 4 years. The average return is from 12-15%, of which Blockbusters was negative for 3 years and at 5% in 2006, which is still lower than the average. Blockbusters current ratio is alright through these 4 years. This ratio should be larger than 1 and the higher the better to show that they can pay off current liabilities and assets can be converted into cash easily. Working capital shows the companys internal funds available to pay its current liabilities on time and money available to not borrow funds. Blockbuster has a negative amount in 2004, but the years after are positive showing that the company has some money to work with but not much because the amounts are low. The price/earnings ratio shows the companys growth outlook to the future. Blockbuster has a negative outlook for 3 years and a very small one in 2006. Any price/earnings ratio should be around 20 or if they are at risk or plan to grow slowly at 12. Blockbuster is well below 12, showing no growth at all.
