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Netflix, Inc.

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About Netflix, Inc.

Netflix and chill? More like Netflix and bill the increasing numbers of global viewers who subscribe to the video streaming service. The world's leading internet streaming company distributes movies and TV shows in a variety of genres and languages to a whopping 139 million monthly (and growing) paid subscribers in more than 190 countries. Netflix creates its own content and strikes deals with other producers for the rights to distribute programming. To keep viewers binging, it deploys sophisticated algorithms to predict viewer preferences and make recommendations on what to watch. Netflix still sends DVDs to US customers through the mail, though the legacy business gets smaller every year.

IPO

Netflix went public in 2002, when it raised $82.5 million. The company said it would use the funds to pay off debts and boost promotion by offering free trials.

Operations

Netflix's business is organized in three operating segments: domestic streaming (about 48% of revenue), international streaming (about 49% of revenue), and domestic DVD (about 3% of revenue). Domestic streaming derives revenues from monthly membership fees to subscribers in the US, while the international streaming segment does the same to subscribers outside of the US. The legacy domestic DVD segment charges a monthly membership fee for DVD rental to US customers via the US Postal Service.

For its streaming services, the company offers different subscription plans at various price points based on the quality of streaming (Standard Definition, HD, or Ultra HD) and the number of internet-connected screens on which a viewer can watch at the same time (one, two, or four). All plans include unlimited viewing of available TV shows and movies, and can be canceled at any time. The company's content is commercial-free, giving it a leg up in an increasingly competitive market filled with many advertising-supported rivals.

Geographic Reach

The Los Gatos, California-based Netflix has moved beyond the borders of the US to reach more than 190 countries. The company has been busy aggressively expanding its global footprint, launching streaming in countries from Cuba to Japan to Australia. Its streaming service is available in all but four or so countries. Netflix has also created and licensed content for local markets across the globe. These moves have paid off, with international subscriptions accounting for about 49% of revenue in 2018 compared to about 45% in 2017. 

To grow overseas, Netflix must contend with international rivals that may offer pirated content via bootleg DVDs, illegal downloads, or unauthorized streaming. The service is not available in China, one of the few markets it has yet to penetrate. While the nation presents opportunity for significant subscriber growth, Netflix faces rigid restrictions there.  As a workaround, the company has been spending to acquire and produce Mandarin-language content to court Chinese audiences living elsewhere.

 

Sales and Marketing

Netflix has spent increasing amounts of money on advertising, surpassing $1.8 billion in 2018, up from about $1 billion in 2017, $842 million in 2016, and some $714 million in 2015. It offers a month-long free trial at sign-up to first-time subscribers, a key marketing strategy for the company.

In 2019, it rolled out price changes to its US streaming plans, raising the Standard plan (two HD streams) from $10.99 to $12.99 per month; the Premium plan (up to four Ultra HD streams) from $13.99 to $15.99 per month; and the Basic plan (with a single non-HD stream) from $7.99 to $8.99 per month.

Financial Performance

 

 

The widespread growth of broadband technology and the proliferation of internet-connected devices is driving more audiences to consume digital media content, providing ample opportunity for Netflix to grow its streaming business across the globe. Revenues increased an impressive 186% over the past five years, jumping from $5.5 billion in 2014 to $15.8 billion in 2018. Over the same period, profit levels fluctuated, dipping some in 2015 and 2016 but rising higher in 2017 and 2018.

In 2018 revenues increased $4.1 billion, or 35%, compared to 2017, primarily driven by the growth in average number of streaming paid memberships. Netflix added 29 million paid subscribers in 2018, 33% higher than the 22 million it added in 2017. It also raised subscription fees in some markets and shifted to higher priced plans, boosting average monthly revenue per paying customer. Domestic streaming revenue increased 24% year-to-year and international streaming grew 53%. Revenue from the legacy DVD business continued to drop.

Net income hit $1.2 billion in 2018, up 117% from the prior year's $559 million. Growth in revenue, operating income, and operating margin enabled the company to absorb higher expenses as it continued to invest heavily on programming, marketing, and headcount. Netflix spent $12 billion on content in 2018, up 35% from $8.9 billion in 2017.

Cash at the end of 2018 was $2.6 billion, an increase of $500 million from 2017. Cash from operations contributed $2.7 billion to the coffers, while investing activities used $33 million. Financing activities used about $4 billion. The company had $10.4 billion in long-term debt, versus $6.5 billion the year earlier.

Strategy

The company's strategy is to grow its streaming membership globally, improving its members' experience by making massive investments in content. Netflix invested a staggering $12 billion in cash on content in 2018, a figure that analysts expect will grow to around $15 billion in 2019. Netflix is making these investments to face its rivals head on. The company has plenty of existing competition from the likes of Hulu, Amazon, and YouTube; going forward it faces newer streaming product launches from mega media firms Disney, WarnerMedia, and NBCUniversal. 

The firm continues to explore strategic agreements with TV networks and pay channels while also producing content in-house. Major Hollywood stars including Brad Pitt and Jane Fonda have developed Netflix-only programs, and the company has signed successful TV producers like Shonda Rhimes and Ryan Murphy to exclusive development deals. Netflix lures in audiences with new movie releases such as The Irishman, a crime drama from Martin Scorsese, and breakout TV hits such as Stranger Things.

To stay ahead, the company is challenging conventional movie industry norms in more ways than one. Netflix received much criticism from the Hollywood studio system for disrupting the traditional concept of the "release window" (which allows some time to pass after a movie opens in theaters before it becomes available on other viewing platforms), and refusing to grant movie theaters an exclusive release. However, it changed its policy in 2019, giving its Oscar nominated film Roma an exclusive (but limited) theatrical run before streaming it into homes in order for it to be considered for an Academy Award.

Mergers and Acquisitions

Netflix has only made a few minor acquisitions since it was founded, and its CEO has said the company has no plans to make any major buys in the future. A rare purchase was the 2017 acquisition of Millarworld, a comic book publisher whose characters include Kick-Ass and Kingsman. With the transaction, Netflix gained access to comics in the popular superhero and science fiction genres. Terms of the deal were not disclosed.

Company Background

Marc Randolph and Reed Hastings founded the DVD-by-mail service in 1997 as a challenge to Blockbuster Video. (Hastings said he got the idea after being hit with a $40 late fee from Blockbuster for failing to return his copy of Apollo 13, which was overdue by about a month.) The company launched its streaming service in 2007, placing a big (and eventually winning) bet on the popularity of accessing entertainment content via subscriptions over the internet. 

Netflix released its first original TV series, House of Cards, in 2013. The critically-acclaimed show was also a hit with audiences, putting the streaming company on the map as a producer of high quality content.

Netflix, Inc.

100 WINCHESTER CIR
Los Gatos, CA 95032-1815
Phone: 1 (408) 540-3700

Stats

Employer Type: Publicly Owned
Stock Symbol: NFLX
Stock Exchange: , NASDAQ
Chairman, President, and CEO: Reed Hastings
Partner Manager: Amy Rosenthal
CFO: David Wells
Employees (This Location): 166
Employees (All Locations): 7,100