Is Netflix Building A House of Cards

IMD-1085
12.05.2020
IS NETFLIX BUILDING
A HOUSE OF CARDS?
François-Xavier Cart-Tanneur, Hannes Rupprecht, Jan Söderström and Joris van

Raak (IMD EMBA 2019) prepared this case under the supervision of Professor Stefan
Michel as a basis for class discussion rather than to illustrate either effective or
ineffective handling of a business situation.
Copyright © 2020 by IMD – Institute for Management Development, Lausanne, Switzerland (www.imd.org). No
part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means
without the prior written permission of IMD.
This document is authorized for use only in Dr. Harms Rainer's Strategic Management - DCP Term - III at Institute of Management Technology - Dubai from Dec 2023 to Jun 2024.
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IS NETFLIX BUILDING A HOUSE OF CARDS?
Reed Hastings, Netflix’s CEO, was thinking, “After the quarter is before the quarter,” as
he started preparing his storyline for 2019’s fourth quarter reporting. In 2019’s third
quarter, Reed, together with his chief finance officer Spencer Neumann, his chief content
officer Ted Sarandos and his chief product officer Greg Peters, confidently reported
strong financial results with revenues up 31% and operating income doubled versus the
previous year’s same period. Even though Netflix was slightly short of its net additions
of paying subscribers, the market reacted much better than after its second quarter
results. Reaching only 2.7 million global paid net adds versus the targeted 5.0 million for
the quarter made the media generate quite a few negative comments.
After more than twenty years of running Netflix, Reed had become stoic when reading
negative coverage on his company. But the Forbes article – “All the reasons Why Netflix
is Doomed” 1 – may have held some elements of truth if Reed was honest with himself.
With good reason, Reed hired Rachel Whitestone as the new chief communications
manager in August 2018, Spencer in January 2019 and Jackie Lee-Joe as the new chief
marketing officer in September 2019.
Maybe the next quarter’s announcement presented an opportunity to change people’s

perceptions about Netflix’s dependency on licensed content as well as a number of other
issues, including the increasing cost of securing creative talent, the growing price
sensitivity of customers and the impact of new competition. With the right mix of skills
and experience in the new leadership team, could Netflix reinvent itself once more and
address those issues with a different strategy?
It wasn’t just that subscriber growth was slowing and the financing of its own content was
getting increasingly scrutinized. Had the company grown so fast mainly due to a lack of
real competition? Reed had hired some very competent people, so it was about time to
come up with a holistic answer to this existential question: Is there a better way to remain
attractive to customers? Does Netflix need to transform itself despite its current growth?
Netflix initially transformed itself from a DVD distributor into an online streaming
business; it then went on to vertically integrate into content production – Netflix Originals.
After the disastrous Qwikster launch cancellation, Netflix kept a close eye on what its
customers wanted. The first Netflix Original – “House of Cards” – became an instant
success, and many other series won both the customers’ hearts and the critics’
appreciation. In truth, profoundly understanding its customers had become its core.
Somehow, Reed had hoped that these skills would be a massive entry barrier, yet the
high-quality content that was streaming had attracted new competition of significant size
and with considerable spending power. Netflix had to decide if investing heavily in
content production continued to be a sufficient competitive advantage.
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COMPETITIVE LANDSCAPE
Netflix was facing, for the first time ever, competition with deeper pockets, such as
Amazon, Apple, Disney, YouTube (owned by Google’s parent company Alphabet) and
others. Each one of these players fought for screen time, were well established, tech-
savvy and had to be successful in the accelerating “streaming war.”
• Disney Plus. Disney’s titles had been a real asset to Netflix, but when Disney
launched its streaming service, it started pulling its content from Netflix. According
to CNET, when Disney launched in November 2019, it focused on the US, Canada
and Netherlands in the first round and went live with 500 films and 7,500 television
episodes, reaching more than 10 million sign-ups in a single day. By comparison,
it took HBO three years to reach five million users (2019). 2 CNBC said that Disney
Plus was likely to grow to 160 million subscribers thanks to the company’s
unmatched brand recognition, extensive premium content and unparalleled
ecosystem to market the service. 3
Disney, prior to launching its own streaming services, had focused on gathering
relevant content through the acquisitions of Marvel Studios and 21st Century Fox.
With the latter came an indirect 65% stake in Hulu, a subscription video-on-demand
(SVoD) service with around 30 million subscribers. Different from Netflix, Disney did
not seem to believe in the value of so-called binge viewing; instead, it released
episodes of its original series on a weekly basis following the traditional TV schedule.
There were two more fundamental differences: Pricing started at $7 a month and
customers were offered a bundle of Disney’s three streaming platforms, all running
on the same technology, including Hulu and ESPN Plus for $13 a month.
• Apple TV Plus. In November 2019, Apple entered the stage with its own streaming
service – Apple TV Plus. Being one of the market leaders in content selling and
distribution, Apple now also integrated content production and streaming. To get
the ball rolling, as the Financial Times wrote, Apple hosted a star-studded event in
March 2019 at which Hollywood heavyweights including Oprah Winfrey and Steven
Spielberg joined Mr Cook on stage to promote the streaming service. “They are in
a billion pockets, y’all – a billion pockets,” Ms. Winfrey said of Apple, as she
launched her plans for new documentaries and live book club shows that would be
exclusive to the iPhone maker (2019). 4
Through its Apple TV app, Apple launched in over 100 countries for $4.99 a month,
making it the cheapest add free streaming service so far, and with the ability to
share between six different family members. 5 Less competitive is the content
library, which started out with less than 20 announced original shows. And within
the first two weeks of launching, the head of programming left Apple. Apple TV
Plus will not host any licensed content as Apple intends to continue to sell it on
Apple TV (pay-per-view model). But like Amazon Prime, Apple TV Channels will
be launched in 2020. 6
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• Amazon Prime Video. Launched at the end of 2016 across most markets,
Amazon Prime Video went through different iterations, eventually evolving into a
stand-alone streaming service. For $7.99 a month, subscribers got access to not
only Amazon Studios content but also third-party content such as HBO, Showtime
and Cinemax through Amazon Channels. Amazon was the leader in offering a
channel experience, similar to cable TV. Further, Amazon entered the hybrid SVoD
market by extending its offering to live sports, capturing one of the last appointment
TV events in order to directly engage with the audience. i Sports perhaps sat
outside of the normal SVoD saturation. 7 As for Amazon’s number of streaming
subscribers, Netflix would have to go with the public estimates of around 100
million across 200 countries because Amazon did not report them separately.
• Other Hollywood and Silicon Valley competitors. There were other players
Netflix needed to keep an eye on. In fact, other industry players had entered the
content creation space in order to compete in the changing media and
entertainment industry. Former distributors of content like AT&T did so by acquiring
Time Warner, which included HBO, for more than $85 billion in October 2016. And
in 2018, Comcast won the bid for Sky for almost $40 billion against 21st Century
Fox, after failing to buy the latter earlier in the year. 8
Coming from the opposite side, Google’s YouTube TV, with its live TV offer with all
major channels but without the cable hassle, launched in 2017, which made
Netflix’s domestic expansion harder. YouTube pulled out of content creation and
entered the TV distribution space, going after the audiences that were willing to cut
the cable for SVoD but still wanted live TV as they knew it. For $49.99 a month,
YouTube provides 70+ channels including local sports and news but without the
cable box, contracts or any additional hidden fees.
Where and how to compete begged the question: What is Netflix? Is Netflix a data
analytics company that drove return on investment (ROI) through better customer
insights, or a media company streaming movies and TV shows or a content creator?
Netflix needed to have a close look at its resources and capabilities to be able to redefine
its competitive advantage.
i Appointment TV is when people watch a TV show at the time of its original broadcast.
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NETFLIX’S KEY STRENGTHS

Reed felt comfortable considering himself a visionary who has been at the forefront of
artificial intelligence (AI). His approach to risk taking and innovation had shaped Netflix
into a technology company that was able to reinvent itself several times over, winning
investors’ confidence and attracting and retaining talent.
Netflix was still building on the foundations that were laid when it pivoted into SVoD, a
small market at the time. In fact, according to the Motion Picture Association of America,
subscriptions to online video services (613 million) surpassed cable (556 million) for the
first time in 2018. 9 The company understood the opportunities linked to the rise of high-
speed broadband and mobile media devices such as smart phones and tablets. Netflix’s
ability to spread quickly was its integration into the rising smart TVs, connected gaming
consoles and set-top-box of the internet service providers (ISP). Since Netflix accounted
for substantial internet traffic, the digital infrastructure was essential for the experience
of its customers. At the time, Reed had to ensure that Netflix would get the bandwidth it
needed. Hence, he developed Netflix’s content delivery network (CDN), which allowed
the company to improve its content delivery and reduce delivery costs by giving the ISP
the choice to either pair directly with Netflix or install proprietary equipment in their
networks. This laid the foundation to continue increasing the quality of Netflix’s video
content to full HD and possibly even further, making Netflix the most efficient and reliable
streaming service.
Another element of Netflix’s success was the introduction of binge viewing. According to
Moffett Nathanson, “Breaking Bad” was 10 times more popular once it started streaming
on Netflix. 10 Reed remembered an interview he gave at the time to the New York Times
where he explained his insight: “We found an inefficiency.” 11 Netflix knew from the
experience in DVD rentals that people rented whole seasons of TV shows, so it
transferred that knowledge to online streaming.
Netflix also had the ability to understand and predict customer behavior. The data that
had been built over many years and applied across a large user base had helped Netflix
with everything from customer retention to content development including release date
scheduling, product schedule optimization, demand modeling and evaluation. In 2012,
Netflix revealed to Wired magazine, “We know what people watch on Netflix and we’re
able with a high degree of confidence to understand how big a likely audience is for a
given show based on people’s viewing habits.” 12 Netflix knew how to create a detailed
subscriber profile far better than conventional marketing practices. Knowing how people
behave and tailoring what each subscriber saw helped them with their retention. Direct
feedback models with A/B testing have also helped Netflix to continuously improve the
personalized experience.
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Part of the experience was the content quality and availability. Netflix produced content
today with tomorrow’s needs in mind. In order to secure the content for the future, all
Netflix productions were filmed in 6K, although it was streamed in 4K. By comparison,
HBO only streamed in 1080p. 13 Netflix also digitized and developed production
processes. One of Netflix’s tools was “Move,” which facilitated tracking a production
schedule for all the people involved. Another one was a mark-up tool for script reading,
as content engineering product director Chris Goss said to Variety, “We want to take the
script and turn it into an interactive breakdown tool.” 14
Reed felt there was more to be said on Netflix’s content strategy. Its technological
advancements shaped not only Netflix into the global company it had become, but also
the industry ecosystem – particularly the relationships with content partners and vice
versa.
CONTENT STRATEGY
Reed understood there was no long-term business in being a rerun company, just as
there was no long-term business in being a DVD-rental company. He remembered vividly
the allegory used by Ted in 2012: “If we were going to start having to fend for ourselves
in content, we had better start exercising that muscle now.” 15
But it was not a lighthearted choice for Netflix to take on the large studios it so much
depended on. As Netflix grew more successful, studios raised their prices, killing
margins. In-house production became a hedge against ever rising licensing costs,
making it easier for Netflix to say no. Reed smirked when Reuters in 2013 neatly
summarized Netflix’s strategic intent, explaining that “… the thing that Netflix aspires to,
which HBO already has, is an exclusive library of shows … it also becomes the only
place to watch certain shows with cultural-touchstone status. And presto, the decision is
no longer whether Netflix is worth the subscription price; rather, the question is whether
you can afford not to have it.” 16
And it all started in 2013 with “House of Cards.” Reed kept the article snippet of CNBC,
writing at the time, “This is a big deal: It’s Netflix’s first big debut in the premium original
content space, and it puts the streaming video player into direct competition with HBO,
Showtime and Starz, for both content and viewers. It’s a total transformation of the way
Netflix conceives of its relationship with content.” 17
Of course, Netflix’s content strategy was built on its ability to analyze what people wanted
to watch, how and when they watched it and how to make sense out of it. Mario Gavira,
an industry expert, wrote: “It took them six years to collect enough viewer data to
engineer a show that became a worldwide success: House of Cards. Since then, Netflix
has increasingly used this formula for content creation achieving success rates of 80%
compared to 30%–40% success rates of traditional TV shows.” 18
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According to The Economist, “House of Cards” – for which the cost of the first two
seasons amounted to $100 million – was a widely derided statement of intent at the time.
How could a mail-order video store take on networks and studios? By becoming an
industry in and of itself, as The Economist stated. 19 Later in 2017, Netflix won its first
Oscar; Reed was proud to beat HBO at its own game.
Netflix’s content library had grown broad and deep with award winning original content.
But could Reed say, hand on heart, that Netflix’s own content had become the subscriber
magnet they were hoping for? In October 2018, 63% of Netflix’s viewing was still from
licensed content, with NBC’s “The Office” still being number one and Warner Bros.
owned “Friends” coming in third. 20 To aggravate the situation, Forbes, in 2019, wrote that
in 2017, over 40% of Netflix subscribers in the US almost exclusively watched licensed
content and that in 2018, 85% of the $13 billion content spending went to originals.
Forbes thus argued that for that much money, Netflix should have been more than just
“on track” to have originals be the majority of viewing. And in the second quarter 2019
investor letter, Reed had to agree: “We think Q2’s content slate drove less growth in paid
net adds than we anticipated.” 21 At the same time, to successfully replace licensed
content and keep and attract new customers, Netflix had to continue investing in its own
content. Reed realized he needed to do a fresh sense check with his new CFO on the
sustainability of financing Netflix’s original content.
CONTENT INVESTMENTS
At the Q4 2018 investor interview, Reed explained that the sustained content production
growth fueled a “virtuous cycle,” “The more investment you’re putting in, the more people
are finding content that they love and the more they have value in the service. 22”
Therefore, in 2016, Netflix spent $8.7 billion on content vs. $13 billion in 2018 (refer to
Exhibit 1) and expected $15 billion to stay on course with Reed’s plan. 23 But investors
were showing increasing concern about Netflix’s ability to meet its subscriber targets.
With that, some voices challenged the sustainability of content spending.
Looking at his 2018 consolidated income statement (refer to Exhibit 2), Reed was
positive despite the market noise. Netflix’s revenues had grown from $8.8 billion in 2016
to $15.8 billion in 2018, demonstrating solid top-line growth. For the first time, the
international streaming business with $7.78 billion in revenues overtook the domestic
one (refer to Exhibits 3 and 4). Reed made sure to point out in the annual report that
the increase in consolidated revenues was primarily driven by the growth in the average
number of streaming paid memberships globally, mainly arising from non-US markets.
But he also knew that further price increases due to increasing competition and the lower
purchasing power of new markets were increasingly less likely to succeed, so future
revenue growth needed to come from additional subscribers. In fact, for the financial
analysts, subscriber numbers were considered the key indicator for Netflix’s business
prospects. 24 More subscribers meant more revenues and thus cash to be spent on
content used to attract new subscribers.
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Well aware of the investors’ views, Reed proudly looked back on close to 30 million more
subscribers added in 2018 alone, 10 million more than the year before, reaching almost
140 million paying members at the end of 2018 (refer to Exhibit 5). However, the future
was volatile. In July 2019, Netflix’s shares dropped 10% when it had to report a loss in
domestic paid subscribers during the second quarter for the first time since 2011, after
rolling out price hikes earlier in the year. Reed remained calm as he knew that strong
viewership of its new seasons of “Stranger Things,” “The Crown” and “Orange is the New
Black,” among other hits, helped buoy its subscriber growth. 25 In fact, for its 3Q19, CNBC
reported that the streaming giant crushed Wall Street’s earnings projections and added
slightly more paid subscribers internationally than expected during the period. However,
this was the last quarter before new Netflix’s rivals went live, starting with Apple TV Plus
and Disney Plus in November. 26
The continued content investments, as recorded in the balance sheet (refer to Exhibit 6),
had piled up $20 billion in content assets and $10.4 billion in long-term debt by the end
of 2018. What the statement did not show were Netflix’s content obligations (refer to
Exhibit 7) of around $20 billion as they only showed up when projects went on stream.
The management team and Reed were probably not concerned as sales and income
were moving up faster than those costs.
Investing in original content was not enough, though. Netflix’s “must-have” library also
needed to be promoted. Hence, the marketing spending reached $2.4 billion in 2018 vs.
only $1.1 billion in 2016, largely to promote those originals, as Reed explained to
investors in the annual report. Analysts expected even more in 2019 with $2.9 billion. 27
Reed kept telling investors that thanks to higher revenues and expanding operating
profits, positive cash flows would pay for the investments. But 2019 would be seen as
another year where Netflix would reach a record negative $3 billion in free cash flow,
using debt markets to fund the spending rate. While the cash flow statement (refer to
Exhibit 1 shows net income growing from $187 million in 2016, to $559 million in 2017
and to $1.2 billion in 2018, the additions to streaming content assets weigh heavy with
$8.7 billion in 2016, $9.8 billion in 2017 and $13 billion in 2018. Net cash used in
operating activities was, therefore, negative at $1.5 billion in 2016, $1.8 billion in 2017
and $2.7 billion in 2018. Only the issuance of new debt of $1.0 billion in 2016, $3.0 billion
in 2017 and $4.0 billion in 2018 kept the available cash at the end of the year positive.
Investors would have a close eye on the operating profits needed to service Netflix’s
growing debt. Looking at Netflix’s interest coverage ratio, the streaming company had
improved from a low of x2.3 in 2015 to x3.8 in 2018. But its new competitors were better
off (refer to Exhibit 9). Reed would continue to focus on adding subscribers.
To make sure the equation held up, Reed reflected on the user profitability, that is the
operating margin per paying member, and felt reassured. The last three years, from 2016
to 2018, told a story of success: By taking paid members from close to 90 million to just
under 140 million, while growing operating income from $380 million to $1.6 billion, unit
margins almost tripled from $4.3 to $11.5 (refer to Exhibit 10).
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It was true that adding subscribers was becoming increasingly costly, yet operating costs
had grown more slowly than revenues. This led to a heated topic between Reed and the
chief financial officer (CFO) who kept urging him to revise his approach to marketing as
the retain and acquisition costs of customers had grown almost twice as much as the
overall revenues. To make his concern more real, the CFO showed him that adding close
to 30 million subscribers would result in an additional $3.3 billion in costs, taking the unit
cost per new paying member to $117. A unit margin of $11.5 per member meant it would
take ten years to break even (refer to Exhibits 11 and 12).
Of course, Netflix’s financial fate not only depended on its individual performance but
also on the changing competitive landscape. How did its financial position stack up
against its competitors? Apple, Amazon, Disney and YouTube all had an abundance of
investment potential. And Disney perhaps did not even need to spend much. If these
companies had recently shifted their strategic focus, was it about time to rethink Netflix’s?
Reed kept hearing from his investors success stories about the rise of platforms like
YouTube, Uber, Alibaba, or Amazon Marketplace. But could Netflix not be more
successful if it kept on serving its customers the best video content experience?
NEXT STRATEGIC MOVES

To make accessing Netflix as easy as possible through as many channels as possible
had been part of Netflix’s fast rise. Now that Netflix had become the number one
streaming service, Reed felt less pain when deciding to stop allowing people to sign up
for its service through Apple’s iTunes store. After all, the platform had been charging him
15% on every sale, a blanket condition of being in the App Store. 28
Upon reflection, these platforms brought certain advantages with them. YouTube now
had more than 1 billion 29 users with more and more people, including artists, having their
own channels. About 300 hours of new videos were uploaded every minute for free,
perpetually driving content growth. Google in fact had decided to pull back YouTube’s
attempt to go into its own premium content. 30 By comparison, Netflix counted 152
million 31 paying subscribers in 2Q19 across 190 countries 32 while likely ramping up to
$15 billion in content spending in the same year.
Content was not equal to content and thus users were not equal to subscribers. Reed was
convinced that it was the way videos were made available to customers that made the
difference. And Netflix had developed a unique technology that helped customize that
experience. There was a high level of personalization 33 that a specific team within Netflix
Research was continuously improving. Thanks to a better understanding of what Netflix’s
users wanted to see, Netflix was able to understand what new content they would like to
discover. This not only held true for global blockbusters but also content around specific
local themes. And Reed felt proud that Netflix’s approach had helped them keep an
impressive 93% retention rate 34 and build strong international brand recognition.
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Although technology was essential to keeping a competitive advantage, Reed wondered

if video would be enough to retain Netflix’s customers going forward. In 2020, Netflix
planned to release its third mobile game 35 with Next Games based on the series
“Stranger Things.” Could video games be the next venture for Netflix? It could deploy its
know-how in creating content and offer video studios direct access to a wide base of
potential customers? Microsoft with Project xCloud and Google with its video platform
Stadia had been going in that direction since 2019. A recent McKinsey study on
platforms, which argued that platform business models generated better payoffs, 36 was
also giving him some concerns about his strategy.
Then there was advertising. But the user experience had always been at the heart of
Netflix’s development, so Reed struggled to embrace the idea. However, he could agree
to brand placement in shows like “Queer Eye for the Straight Guy” because it was less
intrusive and met consumers’ expectations of ad-free video consumption. 37 For the next
season of “Stranger Things,” Netflix had partnered with Coca-Cola 38 to place its products
in the series and Reed was pondering if partnering with large corporations would be a
viable side business without selling traditional adds. No doubt, adding new revenue
streams would be beneficial to Netflix to cover its growing expenses. But would this
improve its value creation and financial performance? Would investors understand such
a move and value it accordingly?
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Exhibit 1: Cash flow statement
Source: Netflix 10K 2018
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Exhibit 2: Consolidated income statement
Exhibit 3: Domestic streaming
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Exhibit 4: International streaming
Exhibit 5: Global streaming memberships and financial results
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Exhibit 6: Consolidated balance sheet
Exhibit 7: Contractual obligations
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Exhibit 8: Cash flow statement
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Exhibit 9: Overview of interest coverage ratio
Dec 14 Dec 15 Dec 16 Dec 17 Dec 18 Q3 19
Netflix 8.02 2.3 2.53 3.52 3.82 6.1
Amazon 0.85 4.86 8.65 4.84 8.77 7.97
Disney 49.9 40.55 27.36 21.76 12.12 5.53
Time Warner 4.5 5.03 5.5 6.58 N/A 7.19
AT&T 3.97 6.02 4.87 3.63 3.29 3.79
Google 163.33 186.15 191.26 264.97 275.37 399
Jun 16 Jun 17 Jun 18 Q3 19
21st Century Fox 109.67 110.22 51.51 8.86
Sep 15 Sep 16 Sep 17 Sep 18 Q3 19
Apple 97.18 41.23 26.41 21.88 19.29
Source: Authors based on data from Gurufocus.com
Exhibit 10: User profitability
2018 2017 2016 2018 vs. 2017 2017 vs. 2016

Paid Memberships 139’259 119’644 89’090 16% 34%
Operating Income in $ 1’605’226 838’679 379’793 91% 121%
Unit Margin in $ 11.53 7.01 4.26 64% 64%
Source: Authors’ calculation
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Exhibit 11: Operating expenses
2018 2017 2016 2018 vs. 2017 2017 vs. 2016

Revenues 15’794’341 11’692’713 8’830’669 35% 32%
Cost of Revenues 9’967’538 8’033’000 6’257’462 24% 28%
Marketing 2’369’469 1’436’281 1’097’519 65% 31%
Technology 1’221’814 953’710 780’232 28% 22%
General and Admin 630’294 431’043 315’663 46% 37%
Operating Costs 14’189’115 10’854’034 8’450’876 31% 28%
Exhibit 12: Growth costs

2018 2017 2016 2018 vs. 2017 2017 vs. 2016
Paid net membership additions 28’615 21’554 18’251 33% 18%
Additional operating costs in $ 3’335’081 2’403’158 N/A
Unit cost per new membership in $ 116.6 111.5 5%
Operating income in $ 1’605’226 838’679 379’793
Operating Income per membership in $ 11.53 7.01 4.26
Years to break even 10.1 15.9
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Is Netflix Building A House of Cards

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IMD-1085

François-Xavier Cart-Tanneur, Hannes Rupprecht, Jan Söderström and Joris van

Maybe the next quarter’s announcement presented an opportunity to change people’s

NETFLIX’S KEY STRENGTHS

NEXT STRATEGIC MOVES

Although technology was essential to keeping a competitive advantage, Reed wondered

Exhibit 1: Cash flow statement

Source: Netflix 10K 2018

Exhibit 2: Consolidated income statement

Source: Netflix 10K 2018

Exhibit 3: Domestic streaming

Source: Netflix 10K 2018

Exhibit 4: International streaming

Source: Netflix 10K 2018

Exhibit 5: Global streaming memberships and financial results

Source: Netflix 10K 2018

Exhibit 6: Consolidated balance sheet

Source: Netflix 10K 2018

Exhibit 7: Contractual obligations

Source: Netflix 10K 2018

Exhibit 8: Cash flow statement

Source: Netflix 10K 2018

Exhibit 9: Overview of interest coverage ratio

Dec 14 Dec 15 Dec 16 Dec 17 Dec 18 Q3 19

Netflix 8.02 2.3 2.53 3.52 3.82 6.1

Amazon 0.85 4.86 8.65 4.84 8.77 7.97

Disney 49.9 40.55 27.36 21.76 12.12 5.53

Time Warner 4.5 5.03 5.5 6.58 N/A 7.19

AT&T 3.97 6.02 4.87 3.63 3.29 3.79

Google 163.33 186.15 191.26 264.97 275.37 399

Jun 16 Jun 17 Jun 18 Q3 19

21st Century Fox 109.67 110.22 51.51 8.86

Sep 15 Sep 16 Sep 17 Sep 18 Q3 19

Apple 97.18 41.23 26.41 21.88 19.29

Source: Authors based on data from Gurufocus.com

Exhibit 10: User profitability

2018 2017 2016 2018 vs. 2017 2017 vs. 2016

Exhibit 11: Operating expenses

2018 2017 2016 2018 vs. 2017 2017 vs. 2016

Source: Authors’ calculation

Exhibit 12: Growth costs

Source: Authors’ calculation

Morgan says.” CNBC, March 6, 2019. <https://www.cnbc.com/2019/03/06/disneys-streaming-

Financial Times, August 19, 2019. <https://www.ft.com/content/4f7f4326-c2bf-11e9-a8e9-

March 21, 2019. <https://variety.com/2019/digital/news/netflix-look-behind-curtain-1203169528/>

Magazine, June 15, 2016. <https://www.nytimes.com/2016/06/19/magazine/can-netflix-survive-

Majority of Total U.S. Streams.” Variety, December 10, 2018.

$15 Billion This Year.” Variety, January 18, 2019. <https://variety.com/2019/digital/news/netflix-

CNBC, October 17, 2019. <https://www.cnbc.com/2019/10/16/netflix-q3-2019-earnings.html>

<https://fortune.com/2019/06/12/netflix-video-games/> (accessed May 6, 2020).

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