Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Netflix, Inc.
Case Overview
⚫Comprehensive analysis of a growth company
experiencing growing pains.
⚫Management claims them to be temporary
Overview of Business
⚫Rapidly growing DVD rental service, founded in 1998
and boasting 3 million subscribers by early 2005
⚫Business model centers on mailing DVDs to customers
using 35 warehouses spread around country.
⚫Steady growth in profitability through third quarter of
2004, but profitability slumps in fourth quarter of 2004
Business Strategy Analysis (1(i))
⚫Sources of competitive advantage relative to
traditional bricks and mortar DVD rental outlets
users who typically incur late fees
Business Strategy Analysis (1(ii))
⚫Sources of competitive advantage relative to
web-based rental services
–DVDs are currently most popular medium for
service to create a custom interface for each
subscriber
Business Strategy Analysis (2)
⚫Sustainability of Netflix’ Strategy
⚫Netflix strategy is fairly easy to replicate by existing
subscriber base. But switching costs are relatively
low, so this is unlikely to lead to significant long-run
sustainable advantage.
Accounting Analysis (3)
⚫Accounting for the Rental Library at Netflix:
amortization purposes, the Company determined that back-
catalogue titles have a significantly longer life than previously
estimated. As a result, the Company revised the estimate of
useful life for the back-catalogue DVD library from a “sum of
the months” accelerated method using a one year life to the
Accounting Analysis (3)
⚫Accounting for the Rental Library at
Blockbuster:
–The cost of a non-base stock (or “new release”) DVD, both in-
store and online, is amortized on an accelerated basis over a
six-month period to an estimated $4 residual value. The cost of
video games and in-store and online base stock (or “catalog”)
DVDs is amortized on an accelerated basis over a twelve-
and then on a straight-line basis over a six-month period to an
estimated $2 residual value.
Accounting Analysis (3)
⚫Evaluation
–Netflix’ amortizes its DVDs over a longer time
conservative time period used by Blockbuster
–Recent switch by Netflix from 1 year to 3 years on
back catalog looks like an attempt to manage
earnings upward
Accounting Analysis (4)
19,354 + 80,346-102,971 = -3,271
⚫(Note: Alternative approach is to subtract the increase in the
net DVD library on the balance sheet from reported operating
income. This approach involves estimation error, because
the DVD library is reduced by DVD sales as well as DVD
