NETFLIX

Assumptions - for both Q2 and Q3

# movies watched per month 4.3

# discs purchased for new subscriber 5.6
# "new release" discs purchased for each subsquent month 0.56
# "new release" discs purchased every 6 months 3.36
Price charged to customers $ 19.95
Revenue from new customers in a 6-month period $ 99.75
Revenue from retained customers in a 6-month period $ 119.70
Cost per disc $ 17.55
Churn: monthly 1.25%
Churn: 6-monthly 7.74%
Churn: annual 16.08%
Discount rate: monthly 1.17%
Discount rate: 6-monthly 7.24%
Discount rate: annual 15.00%
# paying subscribers as of December 31, 1999 120,000
# new subscribers during the first six months of 2000 150,000
Growth in new subscriber additions every six months 50%
Annual Opex $ 5,000,000
6-monthly Opex $ 2,500,000
Tax rate 35%

Q2: Pre-tax NPV of a new Netflix subscriber

Month M1
Period 0
Upfront cost (discs for new subscribers) $ (98.28)
Ongoing cost ("new releases")
Subscription fees
Net CF $ (98.28)

TV factor
Discount factor 1.00
Discount CF $ (98.28)

NPV $ 340.03
Q3: Fair market value of Netflix as of January 1, 2000

Year End-1999
6-monthly period
Period

Calculating customer numbers:

Existing customers at end 1999 120,000
New customers at H1 2000
New customers at H2 2000
New customers at H1 2001
New customers at H2 2001
New customers at H1 2002
New customers at H2 2002
New customers at H1 2003
New customers at H2 2003
New customers at H1 2004
New customers at H2 2004
New customers
Retained customers
Total customers

Revenue:
New customers
Retained customers
Total revenue

Costs:
Upfront costs (discs for new subscribers)
Ongoing costs ("new releases")
Opex
Depreciation (assume no depreciation)
Delivery costs (assume no delivery costs)
Total costs

EBIT
Taxes
EBIAT

+ D&A
- Increase in NWC
- Capex
 Proceeds from scraping

FCF
Discount factor
Discounted FCF

Sum of discounted FCF

Terminal value factor

Terminal value

NPV
 M2 M3 M4 M5 M6
1 2 3 4 5

$ (9.83) $ (9.83) $ (9.83) $ (9.83) $ (9.83)

$ 19.95 $ 19.95 $ 19.95 $ 19.95 $ 19.95
$ 10.12 $ 10.12 $ 10.12 $ 10.12 $ 10.12

0.99 0.98 0.97 0.95 0.94

$ 10.00 $ 9.89 $ 9.77 $ 9.66 $ 9.55
 2000 2001 2002
H1 H2 H1 H2 H1
0 1 2 3 4

110,714 102,147 94,242 86,949 80,221

150,000 138,393 127,683 117,803 108,687
225,000 207,589 191,525 176,704
337,500 311,383 287,287
506,250 467,075
759,375

150,000 225,000 337,500 506,250 759,375

110,714 240,539 429,514 707,660 1,119,974
260,714 465,539 767,014 1,213,910 1,879,349

14,962,500 22,443,750 33,665,625 50,498,438 75,747,656

13,252,468 28,792,535 51,412,854 84,706,930 134,060,888
28,214,968 51,236,285 85,078,479 135,205,368 209,808,544

14,742,000 22,113,000 33,169,500 49,754,250 74,631,375

6,528,584 14,184,112 25,327,596 41,729,309 66,042,627
2,500,000 2,500,000 2,500,000 2,500,000 2,500,000
- - - - -
- - - - -
23,770,584 38,797,112 60,997,096 93,983,559 143,174,002

4,444,384 12,439,173 24,081,384 41,221,809 66,634,542

1,555,534.32 4,353,711 8,428,484 14,427,633 23,322,090
2,888,849 8,085,462 15,652,899 26,794,176 43,312,453

- - - - -
- - - - -
- - - - -
 - - - - -

2,888,849 8,085,462 15,652,899 26,794,176 43,312,453

1.00 0.93 0.87 0.81 0.76
2,888,849 7,539,733 13,611,217 21,726,694 32,750,437

626,044,675

6.2
2,249,604,048

2,875,648,723
 M6 - TV
5

$ (9.83)
$ 19.95
$ 10.12

40.78
0.94
$ 389.43
 2002 2003 2004
H2 H1 H2 H1 H2
5 6 7 8 9

74,013 68,286 63,002 58,126 53,628

100,276 92,517 85,357 78,752 72,658
163,030 150,414 138,775 128,036 118,128
265,056 244,545 225,622 208,162 192,054
430,931 397,584 366,818 338,432 312,243
700,612 646,397 596,376 550,227 507,649
1,139,063 1,050,918 969,595 894,564 825,340
1,708,594 1,576,377 1,454,392 1,341,847
2,562,891 2,364,566 2,181,588
3,844,336 3,546,849
5,766,504
1,139,063 1,708,594 2,562,891 3,844,336 5,766,504
1,733,919 2,650,661 4,021,922 6,075,259 9,151,985
2,872,981 4,359,255 6,584,812 9,919,595 14,918,489

113,621,484 170,432,227 255,648,340 383,472,510 575,208,765

207,550,104 317,284,128 481,424,040 727,208,466 1,095,492,587
321,171,589 487,716,355 737,072,380 1,110,680,976 1,670,701,352

111,947,063 167,920,594 251,880,891 377,821,336 566,732,004

102,245,736 156,304,181 237,164,685 358,245,855 539,674,243
2,500,000 2,500,000 2,500,000 2,500,000 2,500,000
- - - - -
- - - - -
216,692,798 326,724,775 491,545,575 738,567,191 1,108,906,247

104,478,791 160,991,580 245,526,804 372,113,785 561,795,105

36,567,577 56,347,053 85,934,381 130,239,825 196,628,287
67,911,214 104,644,527 159,592,423 241,873,960 365,166,818

- - - - -
- - - - -
- - - - -
 - - - - -

67,911,214 104,644,527 159,592,423 241,873,960 365,166,818

0.71 0.66 0.61 0.57 0.53
47,884,713 68,805,475 97,852,027 138,292,222 194,693,309