2004 Netflix example essay topic

Company Background Netflix Inc. incorporated in 1997 and made its first public offering in 2002. Netflix is an online movie rental service which provides its 3,000,000 subscribers access to over 40,000 DVD titles. Although Netflix stocks nearly every title available on DVD, it does not stock titles containing adult content. The Netflix program allows subscribers to rent as many DVD's as they want, and keep them for as long as they want. Three DVD's can be out at a time, as soon as one is returned the next DVD on the subscriber generated movie list is shipped out. The DVD's are delivered for free by the United States Postal Service from regional distribution centers located throughout the United States.

Netflix can have most titles delivered to 90% of its subscribers within one business day of the shipping date. The company provides a personalized movie recommendation service that creates customized recommendations for the subscriber. This system is based on customer rental history and the ratings the customers provide to Netflix. The ratings system is a simple 5 star system where 1 star is equal to a bad movie and 5 stars is equal to an excellent movie. Netflix also provides decision making information to the subscriber about each movie the company provides. This information includes the length, rating, cast and crew, special features, screen formats, and plot synopses.

Netflix also provides movie reviews written by Netflix editors, subscribers, and movie critics. In addition Netflix provides the average rating that other subscribers gave the title, and displays other titles that the subscriber might enjoy. Netflix has revenue sharing agreements with more than 67 studios and distributors, and also purchases titles directly from studios, distributors, and independent producers. The major competitors for Netflix are Movie Gallery, Trans World Entertainment, Blockbuster, and Intermix Media. Industry Trends Since 1999 the growth of spending on DVD purchases and rentals has been incredible. According to Alexander & Associates, "Rapidly growing consumer activity and spending has built this industry into a major market phenomenon.

The DVD format for enjoying pre-recorded entertainment at home is extraordinarily popular and consumers are changing their behavior to accommodate it". o The VHS market totaled nearly $20 billion in 1999 captured less than $6.9 billion in 2004 and will be less than half of that in 2005. o Consumer spending on rentals of VHS tapes has fallen from nearly $12 billion in 2003 to #3.4 billion in 2004. o The video rental stores such as Blockbuster and Hollywood Video have suffered from dramatic drops in VHS rental spending. But new companies such as Netflix have enjoyed strong growth. o Ticket sales for movie theaters are down nearly 6% since 2002. This is due in part by some movie goers deciding to pass on the theatre and wait for the DVD. This is because the average price of a ticket is over $6 today and some markets charge up to $10.

With the cost of a DVD falling toward the $15 price range, and unlimited rentals for under $20, many people are opting for the convenience and savings of skipping the theatre. o The television industry has found that consumer spending on TV programs on DVD can reach $5 million per episode. With programming costs sky-rocketing this revenue will change program development and ownership patterns. o Hollywood studios are the big winners in the new industry trend. Their home video business is now called home entertainment, and since 2002 has been increasing its focus on the DVD format. This may be the reasoning behind the DVD releases of blockbuster movies shortly after their theatre run. DVD's continue to grow more popular with existing users and in 2005 DVD's are expected to convert more than 15,000 new households to its format every day.

These new customers will bring new behaviors and preferences that will continue to restructure the home entertainment industry. The new high definition DVD's are scheduled to be introduced this year. The ability to see sporting events in high-def has convinced allot of people that they are ready to pay for high-def DVD's. Netflix Financial Ratios Acid Test We decided to use the acid test to calculate the short-term solvency of Netflix because it is considered a more accurate measurement. The acid test showed us that in 2003 Netflix could pay its liabilities 2.2 times over without having to rely on the sale of inventory.

In 2004 Netflix could pay its liabilities 1.97 times over. We noticed that the ratio fell slightly between 2003 and 2004. This was attributed mainly to the reduction in the subscription fee from $21.95 a month to $19 a month in order to fight off competition from Blockbuster Video's online services. Debt Ratio This ratio measures the percentage of the company assets that are financed by its creditors.

In 2003 creditors financed 35.9% of the assets and in 2004 creditors financed 37.9% of the assets. Even with the slight increase in the debt ratio the company is attractive to lenders because it owns more than it owes and can service its debt easily. Debt to Equity The debt equity ratio compares how much the business was financed through debt and how much was financed through shareholder equity. What we found is that for every dollar of stockholder equity there was 56 cents of debt in 2003 and 61 cents debt in 2004. Although a debt to equity relationship is good for business we believe that Netflix could be a little more aggressive in this area.

Times Interest Earned and Cash Interest Coverage This is the amount of times interest was earned in 2003 was 16.6 times and 129.1 times in 2004. The high number for the year 2004 indicated that Netflix earned its interest obligation 129 times over. Gross Profit Margin, Operating Profit Margin, and Net Profit Margin The gross profit margin fell slightly from 45.5% in 2003 to 45.3% in 2004. Meanwhile the operating profit margin increased from 1.6% to 3.8% in 2004, in addition the net profit margin increased from 2.4% to 4.3% in 2004. There was little change in the gross profit margin but the company improved its operating and net profit margins. It looks as if Netflix was able to slow the growth of its operating expenses while increasing sales.

ROI (Return on Investment) and ROE Return on Equity The return on investment, although not spectacular, increased from 3.7% in 2003 to 8.6% in 2004, the return on equity also increased from 5.8% in 2003 to 13.8% in 2004. Analysis Through the course of this project we have learned a little bit more about Netflix. We learned that Netflix is short term solvent since it is able to pay its short term debts 1.97 times over, which is positive for future financing needs. Netflix has solid debt management which is shown by low debt to assets ratios and low debt to equity ratios. This shows that Netflix has kept its debt load low, which is amazing for a company that's only been publicly traded for two years, and started out $20 million in the hole. The times interest earned ratio shows the commitment that Netflix has to responsible debt management by having the ability to pay its interest obligations easily.

All four of these ratios show us that Netflix is in a good position to service both their long and short term debt obligations, and that they have kept their debt load low and under control. We have found that the gross, operating, and net profit margins are showing us that the company is beginning to post some gains and are improving their profitability. In addition the ROI has increased nearly 4% and the ROE has increased 7%. We see this as a responsible rate of growth which allows sales and sales revenues to keep pace with the growth of the company. By controlling their growth Netflix has been able to expand its operations and control their debt.

Recommendations Although Netflix has been extremely efficient about the way they are controlling their debt load we believe that they may be missing some opportunities to expand their services. Netflix could possibly free up some cash to explore the market opportunities for service to the video game enthusiast. Other than that we really think that if Netflix keeps improving at the steady pace its going, the company will have a bright future.