Case
Supplementary Resources
Abstract
In 2011 Netflix was the world's largest online movie rental service. Its subscribers paid to have DVDs delivered to their homes through the U.S. mail, or to access and watch unlimited TV shows and movies streamed over the Internet to their TVs, mobile devices, or computers. The company was founded by Marc Randolph and Reed Hastings in August, 1997 in Scotts Valley, California, after they had left Pure Software. Hastings was inspired to start Netflix after being charged $40 for an overdue video. Initially, Netflix provided movies at $6 per rental, but moved to a monthly subscription rate in 1999, dropping the single-rental model soon after. From then on, the company built its reputation on the business model of flat fee unlimited rentals per month without any late fees, or shipping and handling fees.
This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.
2024 Sage Publications, Inc. All Rights Reserved
Resources
Exhibit 1: Netflix Consolidated Statement of Operations
(In thousands, except per share data; year end December 31)
2011 | 2010 | 2009 | |
Revenues | $3,204,577 | $2,162,625 | $1,670,269 |
Cost of revenues: | |||
Subscription | 1,789,596 | 1,154,109 | 909,461 |
Fulfillment expenses | 250,305 | 203,246 | 169,810 |
Total cost of revenues | 2,039,901 | 1,357,355 | 1,079,271 |
Gross profit | 1,164,676 | 805,270 | 590,998 |
Operating expenses: | |||
Marketing | 402,638 | 293,839 | 237,744 |
Technology and development | 259,033 | 163,329 | 114,542 |
General and administrative | 117,937 | 64,461 | 46,773 |
Legal settlement | 9,000 | - | - |
Total operating expenses | 788,608 | 521,629 | 399,059 |
Operating income | 376,068 | 283,641 | 191,939 |
Other income (expense): | |||
Interest expense | (20,025) | (19,629) | (6,475) |
Interest and other income | 3,479 | 3,684 | 6,728 |
Income before income taxes | 359,522 | 267,696 | 192,192 |
Provision for income taxes | 133,396 | 106,843 | 76,332 |
Net income | $226,126 | $160,853 | $115,860 |
Net income per share: | |||
Basic | $4.28 | $3.06 | $2.05 |
Diluted | $4.16 | $2.96 | $1.98 |
Weighted-average common shares outstanding: | |||
Basic | 52,847 | 52,529 | 56,560 |
Diluted | 54,369 | 54,304 | 58,416 |
Exhibit 2: Netflix Consolidated Balance Sheets
(In thousands, except per share data; year end December 31)
2011 | 2010 | |
Assets | ||
Current assets: | ||
Cash and cash equivalents | $508,053 | $194,499 |
Short-term investments | 289,758 | 155,888 |
Current content library, net | 919,709 | 181,006 |
Prepaid content | 56,007 | 62,217 |
Other current assets | 57,330 | 43,621 |
Total current assets | 1,830,857 | 637,231 |
Non-current content library, net | 1,046,934 | 180,973 |
Property and equipment, net | 136,353 | 128,570 |
Other non-current assets | 55,052 | 35,293 |
Total assets | $3,069,196 | $982,067 |
Liabilities and Stockholders’ Equity | ||
Current liabilities: | ||
Content accounts payable | $924,706 | $168,695 |
Other accounts payable | 87,860 | 54,129 |
Accrued expenses | 63,693 | 38,572 |
Deferred revenue | 148,796 | 127,183 |
Total current liabilities | 1,225,055 | 388,579 |
Long-term debt | 200,000 | 200,000 |
Long-term debt due to related party | 200,000 | - |
Non-current content liabilities | 739,628 | 48,179 |
Other non-current liabilities | 61,703 | 55,145 |
Total liabilities | 2,426,386 | 691,903 |
Commitments and contingencies (Note 5) | ||
Stockholders’ equity: | ||
Preferred stock, $0.001 par value; 10,000,000 shares authorized at December 31, 2011 and 2010; no shares issued and outstanding at December 31, 2011 and 2010 | - | - |
Common stock, $0.001 par value; 160,000,000 shares authorized at December 31, 2011 and 2010; 55,398,615 and 52,781,949 issued and outstanding at December 31, 2011 and 2010, respectively | 55 | 53 |
Additional paid-in capital | 219,119 | 51,622 |
Accumulated other comprehensive income | 706 | 750 |
Retained earnings | 422,930 | 237,739 |
Total stockholders’ equity | 642,810 | 290,164 |
Total liabilities and stockholders’ equity | $3,069,196 | $982,067 |
Exhibit 3: Netflix Consolidated Statements of Cash Flows
(In thousands, except per share data; year end December 31)
2011 | 2010 | 2009 | |
Cash flows from operating activities: | |||
Net income | $226,126 | $160,853 | $115,860 |
Adjustments to reconcile net income to net cash provided by operating activities: | |||
Additions to streaming content library | (2,320,732) | (406,210) | (64,217) |
Change in streaming content liabilities | 1,460,400 | 167,836 | (4,014) |
Amortization of streaming content library | 699,128 | 158,100 | 48,192 |
Amortization of DVD content library | 96,744 | 142,496 | 171,298 |
Depreciation and amortization of property, equipment and intangibles | 43,747 | 38,099 | 38,044 |
Stock-based compensation expense | 61,582 | 27,996 | 12,618 |
Excess tax benefits from stock-based compensation | (45,784) | (62,214) | (12,683) |
Other non-cash items | (4,050) | (9,128) | (7,161) |
Deferred taxes | (18,597) | (962) | 6,328 |
Gain on sale of business | - | - | (1,783) |
Changes in operating assets and liabilities: | |||
Prepaid content | 6,211 | (35,476) | (5,643) |
Other current assets | (4,775) | (18,027) | (5,358) |
Other accounts payable | 24,314 | 18,098 | 1,537 |
Accrued expenses | 68,902 | 67,209 | 13,169 |
Deferred revenue | 21,613 | 27,086 | 16,970 |
Other non- current assets and liabilities | 2,883 | 645 | 1,906 |
Net cash provided by operating activities | 317,712 | 276,401 | 325,063 |
Cash flows from investing activities: | |||
Acquisition of DVD content library | (85,154) | (123,901) | (193,044) |
Purchases of short-term investments | (223,750) | (107,362) | (228,000) |
Proceeds from sale of short-term investments | 50,993 | 120,857 | 166,706 |
Proceeds from maturities of short-term investments | 38,105 | 15,818 | 35,673 |
Purchases of property and equipment | (49,682) | (33,837) | (45,932) |
Proceeds from sale of business | - | - | 7,483 |
Other assets | 3,674 | 12,344 | 11,035 |
Net cash used in investing activities | (265,814) | (116,081) | (246,079) |
Cash flows from financing activities: | |||
Principal payments of lease financing obligations | (2,083) | (1,776) | (1,158) |
Proceeds from issuance of common stock upon exercise of options | 19,614 | 49,776 | 35,274 |
Proceeds from public offering of common stock, net of issuance costs | 199,947 | - | - |
Excess tax benefits from stock-based compensation | 45,784 | 62,214 | 12,683 |
Borrowings on line of credit, net of issuance costs | - | - | 18,978 |
Payments on line of credit | - | - | (20,000) |
Proceeds from issuance of debt, net of issuance costs | 198,060 | - | 193,917 |
Repurchases of common stock | (199,666) | (210,259) | (324,335) |
Net cash provided by (used in) financing activities | 261,656 | (100,045) | (84,641) |
Net increase (decrease) in cash and cash equivalents | 313,554 | 60,275 | (5,657) |
Cash and cash equivalents, beginning of year | 194,499 | 134,224 | 139,881 |
Cash and cash equivalents, end of year | $508,053 | $194,499 | $134,224 |
Supplemental disclosure: | |||
Income taxes paid | $79,069 | $56,218 | $58,770 |
Interest paid | 19,395 | 20,101 | 3,878 |
Exhibit 4
Netflix Management Team
Reed Hastings, Founder and CEO
Reed Hastings has served as the Chief Executive Officer since September 1998 and the Chairman of the Board since inception. Mr. Hastings served as Chief Executive Officer of Pure Atria Software, a maker of software development tools, from its inception in October 1991 until it was acquired by Rational Software Corporation, in August 1997. Mr. Hastings currently serves as a member of the board of directors of Microsoft. Mr. Hastings holds an M.S.C.S. degree from Stanford University and a B.A. from Bowdoin College.
Kelly Bennett, Chief Marketing Officer
Kelly Bennett became Netflix Chief Marketing Officer in July 2012 after nearly a decade at Warner Bros. where he was most recently Vice President Interactive, World Wide Marketing with the pictures group, leading international online campaigns for Warner Bros. movies. Before that Kelly ran digital marketing for Warner Bros. Pictures in Europe, the Middle East and Africa and worked in promotion and business development at the company. He previously held executive positions at Dow Jones International and Ignition Media as well as being a partner in online marketing agency Cimex Media. The Canada-born Bennett is a graduate of Simon Fraser University.
Jonathan Friedland, Chief Communications Officer
Mr. Friedland joined Netflix in February 2011 from The Walt Disney Company, where he was SVP, Corporate Communications. Before that, he spent over 20 years as a foreign correspondent and editor, mainly with The Wall Street Journal, in the U.S., Asia and Latin America and co-founded the Diarios Rumbo chain of Spanish-language newspapers in Texas. Mr. Friedland, who has a MSc. Economics from the London School of Economics and a BA from Hampshire College, was a member of the WSJ team that won the Pulitzer Prize for its coverage of the 9/11 attacks.
Bill Holmes, Chief Business Development Officer
Bill Holmes joined Netflix in 2008 and has most recently served as Vice President, Business Development, in charge of the company’s global partnerships across the consumer electronics, gaming, operator, service provider and retail markets. Prior to joining Netflix, Mr. Holmes served as Vice President Business Development & Strategy at DivX, Inc. where he oversaw the launch and global adoption of the DivX Certified program into hundreds of millions of consumer electronics devices. Mr. Holmes holds a B.A. degree from Trinity University.
Neil Hunt, Chief Product Officer
Neil Hunt has served as the Company’s Chief Product Officer since 2002 and as its Vice President of Internet Engineering from 1999 to 2002. From 1997 to 1999, Mr. Hunt was Director of Engineering for Rational Software. Mr. Hunt holds a doctorate in computer science from the University of Aberdeen, U.K. and a bachelor’s degree from the University of Durham, U.K.
David Hyman, General Counsel
David Hyman has served as the Company’s General Counsel since 2002. Mr. Hyman also serves as the Company’s secretary. Prior to joining Netflix, Mr. Hyman served as General Counsel of Webvan, Inc., an Internet-based grocery delivery service. Mr. Hyman holds a J.D. and a B.A. degree from the University of Virginia.
Patty McCord, Chief Talent Officer
Patty McCord has served as the Company’s Chief Talent Officer since 1998. Prior to joining Netflix, from 1994 to 1997, Ms. McCord served as Director of Human Resources at Pure Atria, which was acquired by Rational Software, where she managed all human resources functions and directed all management development programs.
Ted Sarandos, Chief Content Officer
Ted Sarandos has served as the Company’s Chief Content Officer and Vice President of Content since 2000. Prior to joining Netflix, Mr. Sarandos was Vice President of Product and Merchandising for Video City.
David Wells, Chief Financial Officer
David Wells has served as the Company’s Chief Financial Officer since December 2010 and its Vice President of Financial Planning & Analysis from August 2008 to December 2010. He held the position of Director of Operations Planning & Analysis from March 2004 to August 2008. Prior to joining Netflix, Mr. Wells served in progressive roles at Deloitte Consulting from August 1998 to August 2004. Mr. Wells holds an M.B.A and M.P.P. from The University of Chicago and an undergraduate degree in both Accounting and English from the University of Virginia.
Netflix Board of Directors
Richard Barton, Chief Executive Officer and Chairman of the Board, Zillow, Inc.
Richard Barton has served as one of the Company’s directors since May 2002. In late 2004, Mr. Barton co-founded Zillow, Inc. where he is now Executive Chairman of the Board. Additionally, Mr. Barton is a Venture Partner with Benchmark Capital. Previously, Mr. Barton founded Expedia, Inc. in 1994 and was its President, Chief Executive Officer and director from November 1999 to March 2003. Mr. Barton was a director of InterActiveCorp from February 2003 until January 2005. Mr. Barton also serves as a director for Avvo, Inc. and Glassdoor.com. Mr. Barton holds a B.S. in industrial engineering from Stanford University.
A. George (Skip) Battle, Investor
A. George (Skip) Battle has served as one of the Company’s directors since June 2005. Mr. Battle was previously Executive Chairman of the Board of Ask Jeeves, Inc. which was acquired by IAC/InterActiveCorp in July 2005. He was Chief Executive Officer of Ask Jeeves from 2000 to 2003. From 1968 until his retirement in 1995, Mr. Battle served in management roles at Arthur Andersen LLP and then Andersen Consulting LLP (now Accenture), where he became worldwide managing partner of market development and a member of the firm’s executive committee. Educated at Dartmouth College and the Stanford Graduate School of Business, Mr. Battle currently serves as Chairman of the Board of Fair Isaac Corporation, a director of Advent Software, Inc. OpenTable, Inc. and Expedia, Inc., and a member of the board of the Masters Select family of mutual funds. He was previously a director of PeopleSoft, Inc.
Timothy Haley, Managing Director, Redpoint Ventures
Timothy M. Haley has served as one of the Company’s directors since June 1998. Mr. Haley is a co-founder of Redpoint Ventures, a venture capital firm, and has been a Managing Director of the firm since October 1999. Mr. Haley has been a Managing Director of Institutional Venture Partners, a venture capital firm, since February 1998. From June 1986 to February 1998, Mr. Haley was the President of Haley Associates, an executive recruiting firm in the high technology industry. Mr. Haley currently serves on the board of directors of several private companies. Mr. Haley holds a B.A. from Santa Clara University.
Reed Hastings, Chief Executive Officer, President, Chairman of the Board
Reed Hastings has served as the Chief Executive Officer since September 1998 and the Chairman of the Board since inception. Mr. Hastings served as Chief Executive Officer of Pure Atria Software, a maker of software development tools, from its inception in October 1991 until it was acquired by Rational Software Corporation, in August 1997. Mr. Hastings currently serves as a member of the board of directors of Microsoft. Mr. Hastings holds an M.S.C.S. degree from Stanford University and a B.A. from Bowdoin College.
Jay Hoag, General Partner, Technology Crossover Ventures
Jay Hoag has served as one of the Company’s directors since June 1999. Since June 1995, Mr. Hoag has served as a founding General Partner at Technology Crossover Ventures, a private equity and venture capital firm. Mr. Hoag serves on the board of directors of Tech Target and several private companies. Previously Mr. Hoag served on the boards of directors of TheStreet.com, Altiris, Inc. and eLoyalty Corporation. Mr. Hoag holds an M.B.A. from the University of Michigan and a B.A. from Northwestern University.
Leslie Kilgore
Leslie Kilgore served as the Company’s Chief Marketing Officer from 2000 till 2012. From February 1999 to March 2000, Ms. Kilgore served as Director of Marketing for Amazon.com, Inc., an Internet retailer. Ms. Kilgore served as a brand manager for The Procter & Gamble Company, a manufacturer and marketer of consumer products, from August 1992 to February 1999. Ms. Kilgore holds an M.B.A. from the Stanford University Graduate School of Business and a B.S. from The Wharton School of Business at the University of Pennsylvania.
Ann Mather
Ann Mather has served as a member of the board of directors since July 2010. Since September 2005, Ms. Mather has been a director of Glu Mobile Inc., a publisher of mobile games. Since November 2005, Ms. Mather has been a director of Google, Inc. and serves as chair of its audit committee. Since May 2010, Ms. Mather has been a director of MoneyGram International, a global payment services company, and serves as chair of its audit committee. Ms. Mather is also a director of Ariat International, Inc, a privately held manufacturer of footwear for equestrian athletes. Ms. Mather was previously a director of Central European Media Enterprises Group, a developer and operator of national commercial television channels and stations in Central and Eastern Europe, Zappos.com, Inc., a privately held, online retailer, until it was acquired by Amazon.com, Inc. in 2009, and Shopping.com, Inc., a price comparison web site, until it was acquired by eBay Inc. in 2005. Ms. Mather was chair of Shopping.com’s audit committee, and a member of its corporate governance and nominating committee. From 1999 to 2004, Ms. Mather was Executive Vice President and Chief Financial Officer of Pixar, a computer animation studio. Prior to her service at Pixar, Ms. Mather was Executive Vice President and Chief Financial Officer at Village Roadshow Pictures, the film production division of Village Roadshow Limited. From 1993 to 1999, she held various executive positions at The Walt Disney Company, including Senior Vice President of Finance and Administration for its Buena Vista International Theatrical Division. Ms. Mather holds a Master of Arts degree from Cambridge University.
This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.
2024 Sage Publications, Inc. All Rights Reserved