The Bull Case for Netflix

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• Management has proved its vision and adaptability.

• Superior technology with a huge database of viewing histories and preferences.

• Improving content selection with an emphasis on exclusivity.

• A compelling model that appears to be working.

• Creating a niche with children’s programming.

• Brand still has tremendous power.

“I believe that he is the smartest guy in the room of his own industry – and it is a HUGE industry.”

-- David Gardner, co-founder, The Motley Fool, on Reed Hastings, CEO, Netflix

Management has proved its vision and adaptability.

In 1998, management disrupted the VHS business with its DVD delivery model.

By 2010, its DVD-by-mail business drove $2 billion in sales.

Its DVD library is now the world’s largest with more than 200,000 titles.

Management has proved its vision and adaptability.

Management envisioned “digital delivery” in 1999, and launched

streaming in 2007.

It’s now the world’s largest Internet movie subscription service.

Management has proved its vision and adaptability.

Management powered ahead with international expansion even though domestic streaming was still thriving.

• Canada• Latin America• UK and Ireland• Sweden, Denmark, Norway, Finland

Management has proved its vision and adaptability.

• Management has proved its vision and adaptability.

• Superior technology with a huge database of viewing histories and preferences.

• Improving content selection with an emphasis on exclusivity.

• A compelling model that appears to be working.

• Creating a niche with children’s programming.

• Brand still has tremendous power.

“The Netflix website is essentially a highly instrumented market research

platform that has allowed the company to track, analyze and project consumer

behavior around entertainment consumption for 15 years.”

-- Gina Keating, author of Netflixed

Superior technology with a huge database of viewing histories and preferences.

• As of June 2012, it had more than 25 million users.

• About 30 million plays per day.• 4 million ratings per day.• 3 million searches per day.• More than 2 billion hours of streaming video

watched during last 3 months of 2011.

Superior technology with a huge database of viewing histories and preferences.

Source: http://gigaom.com/2012/06/14/netflix-analyzes-a-lot-of-data-about-your-viewing-habits/

75% of Netflix’s customers select movies based on the company’s recommendations. Netflix

aims to increase that number.

Superior technology with a huge database of viewing histories and preferences.

Netflix’s Asgard streaming technology is considered the best in the business.

Asgard is a web interface for application deployments and cloud management.

Superior technology with a huge database of viewing histories and preferences.

• Management has proved its vision and adaptability.

• Superior technology with a huge database of viewing histories and preferences.

• Improving content selection with an emphasis on exclusivity.

• A compelling model that appears to be working.

• Creating a niche with children’s programming.

• Brand still has tremendous power.

Netflix maintains a DVD library of more than 200,000 titles for its

subscribers.

Improving content selection with an emphasis on exclusivity.

Has the most streaming titles

60,000 (est.)

Improving content selection with an emphasis on exclusivity.

The recent deal with Disney dramatically improves its content

selection going forward.

Improving content selection with an emphasis on exclusivity.

• Management has proved its vision and adaptability.

• Superior technology with a huge database of viewing histories and preferences.

• Improving content selection with an emphasis on exclusivity.

• A compelling model that appears to be working.

• Creating a niche with children’s programming.

• Brand still has tremendous power.

It is the unseen aspects of Netflix’s business model, and its long head start,

which differentiate it from the competition…

-- Mario Cibelli, Marathon Partners

A compelling model that appears to be working.

In FY 2012, domestic subscriptionsexpected to grow 23%.

A compelling model that appears to be working.

So, a marginal streaming subscriber is almost pure contribution margin. There is a little bit for credit card, CS, and CD end fees, but it is pretty modest.

A marginal DVD subscriber has a number of variable costs -- the postage and DVD fees, in particular. So,

actually it is the opposite, which is the profitability of a new streaming subscriber, the contribution margin

is almost twice what it is for a DVD subscriber.

-- Ellie Mertz, CFO, Netflix, on streaming subscribers

A compelling model that appears to be working.

The more subs, the more content Netflix can buy, attracting more subs.

A compelling model that appears to be working.

Since it introduced streaming in 2007, acquisition cost/sub dropped from

$40.86 to $15.04 in 2011.

A compelling model that appears to be working.

• Management has proved its vision and adaptability.

• Superior technology with a huge database of viewing histories and preferences.

• Improving content selection with an emphasis on exclusivity.

• A compelling model that appears to be working.

• Creating a niche with children’s programming.

• Brand still has tremendous power.

Netflix found the most popular Starz content was animated.

Creating a niche with children’s programming.

Kids now have own profiles with history, ratings, queues and recommendations.

Creating a niche with children’s programming.

Access to Disney library will increase attractiveness vs. competitors.

Creating a niche with children’s programming.

• Management has proved its vision and adaptability.

• Superior technology with a huge database of viewing histories and preferences.

• Improving content selection with an emphasis on exclusivity.

• A compelling model that appears to be working.

• Creating a niche with children’s programming.

• Brand still has tremendous power.

Netflix's 2010 entry into Canada was successful and is already profitable.

Brand still has tremendous power.

Entered UK and Ireland in Jan. 2012 and gained 1 million subs in just 7 months.

Brand still has tremendous power.

The Bear Case for Netflix

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• Netflix’s customers are very price sensitive.

• Streaming will never be as profitable as DVDs.

• Netflix’s financials are weakening.

• International expansion poses enormous challenges.

• Revenue growth not keeping up with content costs.

• Other threats to streaming.

Netflix’s price hike in the 3rd quarter of 2011 resulted in 805,000 paid

subscribers jumping ship.

Netflix’s share price

Netflix’s customers are very price sensitive.

If Netflix raises streaming prices, it’ll lose customers. That makes it

difficult to pay for content.

Netflix’s customers are very price sensitive.

Date Old Price Std. 3 DVD

Plan

New Price Std. 3 DVD

Plan

Churn Previous Qtr.

Churn This Qtr.

Churn Subsequent

Qtr.

Reaction

6/15/04 $19.95 $21.99 4.7 5.6 5.6 Blockbuster mail service began 8/04. Lowered price to $17.99 effective Nov. 1.

6/30/05 $17.99 $17.99 5.0 4.7 4.3 Introduced lower price options.

9/30/06 $17.99 $17.99 4.3 4.2 3.9 Churn in Q2 dropped from 4.7% yr. ago due to price parity and less aggressive competition from Blockbuster.

3/31/07 $17.99 $17.99 3.9 4.4 4.6 Up from 4.1% yr. ago. Lowered price of entry plan from $5.99 to $4.99 in Q1 2007. Increase in churn in Q2 2007 attributed to increased competition.

7/22/07 $17.99 $16.99 4.4 4.6 4.3 Dropped price on two most popular plans.

9/30/10 $16.99 $16.99 4.0 3.8 3.7 Low churn prompts price hike in November.

11/22/10 $16.99 $19.99 3.8 3.7 3.9 Introduced unlimited streaming only for $7.99. Raised prices on 1 and 2 DVDs $1 to $9.99 and $14.99.

3/31/11 $19.99 $19.99 3.7 3.9 4.2

7/12/11 $19.99 $23.98 4.2 6.3 4.9 Unbundled DVD and streaming, charging $15.98 for 1 DVD + unlimited streaming

9/30/11 $19.99 $23.98 4.2 6.3 4.9 Lost 11.3% of domestic subs in Q3 2011. Churn in Q3 2010 was 3.8%.

2012 $19.99 $23.98 4.9 Stopped talking about churn. No longer a key metric?

Netflix’s customers are very price sensitive.

• Netflix’s customers are very price sensitive.

• Streaming will never be as profitable as DVDs.

• Netflix’s financials are weakening.

• International expansion poses enormous challenges.

• Revenue growth not keeping up with content costs.

• Other threats to streaming.

Comparing profit contribution for first 4 quarters after it turned positive for

DVDs vs. first 4 quarters for streaming shows DVDs more profitable.

Streaming will never be as profitable as DVDs.

To equal DVD profit, monthly price for streaming would have to more than

double to $17.60.

Streaming will never be as profitable as DVDs.

Alternatively, Netflix would need 30 million more subs.

Streaming will never be as profitable as DVDs.

Streaming will never reach peak DVD Profit Contribution per sub

of $26.19 in 2004.

Streaming will never be as profitable as DVDs.

• Netflix’s customers are very price sensitive.

• Streaming will never be as profitable as DVDs.

• Netflix’s financials are weakening.

• International expansion poses enormous challenges.

• Revenue growth not keeping up with content costs.

• Other threats to streaming.

Quick ratio has been declining, but was helped somewhat by convertible bond issued in Nov. 2011.

Netflix’s financials are weakening.

TTM cash flow from operations has decreasedin each of the last 4 quarters.

Netflix’s financials are weakening.

TTM free cash flow plunged in Q3 2012 due to slowing growth and increasing content costs to support international

expansion.

Netflix’s financials are weakening.

• Netflix’s customers are very price sensitive.

• Streaming will never be as profitable as DVDs.

• Netflix’s financials are weakening.

• International expansion poses enormous challenges.

• Revenue growth not keeping up with content costs.

• Other threats to streaming.

Q1 2012 Letter to Shareholders:

"Latin America presents unique challenges relative to our other markets; namely, low device penetration, high piracy, varying preferences for subtitles, and relatively low credit card usage for ecommerce. We are quickly learning what content works best in the region, and are adjusting our content library accordingly. We have already nearly doubled our content library since launch... Finally, as expected upon launch, we’ve found that processing ecommerce consumer payments is quite challenging as compared with North America and Europe.”

International expansion poses enormous challenges.

Q1 2011 Letter to Shareholders:

"We are still learning the seasonality curve and nuances specific to Canada, however, and we slightly over-forecast the quarter."

International expansion poses enormous challenges.

• Netflix’s customers are very price sensitive.

• Streaming will never be as profitable as DVDs.

• Netflix’s financials are weakening.

• International expansion poses enormous challenges.

• Revenue growth not keeping up with content costs.

• Other threats to streaming.

Revenue growth not keeping up with content costs.

• Netflix’s customers are very price sensitive.

• Streaming will never be as profitable as DVDs.

• Netflix’s financials are weakening.

• International expansion poses enormous challenges.

• Revenue growth not keeping up with content costs.

• Other threats to streaming.

• Increasing domestic competition from Hulu Plus, Amazon Prime and Redbox/Verizon.

• Carlos Slim's launch of Clarovideo in Mexico and other Latin American countries for $5/month undercutting Netflix by 37%. Collection simplified by adding to phone bill.

• HBO's coming entry in Scandinavia.

• Data caps imposed by broadband providers.

Other threats to streaming.

• Superior technology is a real advantage.

• Deal with Disney is a big step in the right direction and shows Disney's confidence in Netflix's future.

• It’ll be very challenging to grow sales enough to cover content investments needed to attract customers.

• Current inability to raise prices without losing subs hinders sales growth.

• Lack of affordable access to broadband and data caps may slow growth.

• Keep an eye on the rates of domestic and international streaming sub growth.