NetFlix.com, Inc.

Assignment Questions

1. Evaluate NetFlix business model.

a. Should NetFlix be acquiring new subscribers?
b. Does NetFlix create value by acquiring new subscribers?
2. Determine the expected cash flow of a new NetFlix subscriber.
3. Determine the value of a new subscriber.
4. Forecast the number of subscribers expected to be acquired in
future
5. Determine the expected future aggregate cash flow requirements
based on the forecasted acquisition on new succbscribers and the
company’s fixed operating expenses.

Hints:
1. Three most important cash flow events related to acquisition
a. The monthly subscription fee
b. The cost associated with shipping discs to the subscriber
c. The cost of acquiring new discs (the library) to support
the rental activity of new subscriber
2. Arrive at the cost and revenues of a new subscriber starting from the
time he/she enrols as a member for atleast first three months.
3. Arrive at the basic costs interms of shipping cost, disc acquiring cost
etc, - cost per customer per month, when a customer continues to
remain with NetFlix and also the cost when a new customer enrols.
4. Draw an outcome tree for a new subscriber with the given
probabilities and cost.
 Drop after 1
month cost
/savings?
?

Sign up for trial Drop after 6 month

month Cost ? cost /savings ?

?
?

Convert to
paid status

?
Retain for 6 mont
cost/ savings?
? = Probability

5. Based on the outcome tree and the given probabilities arrive at

value (NPV of a new customer) for a customer (consider the PV of
expected cash flow for first five years with the relevant
probabilities).
6. Given the expected cash flows and the growth in sales of DVD at
50% a proxy for new subscriber growth arrive the aggregate cash
flows.

Possible Assumptions
1. discount rate 20%
2. perpetuity growth rates 3%
3. G & A growth rate 3%
4. Product develop growth rate 3%