Finance concepts and applications

Finance

The Netflix case focuses on the decision as to whether or not Netflix should file for an IPO. The market for IPOs is down in July 2000, and the CEO needs to decide if filing is the right thing to do. This requires an assessment of the company's long-range objectives and how filing for an IPO would help it to achieve these objectives. Netflix is an Internet company, focused on video rental, and the company is growing rapidly. However, the company's investment bankers have warned that Netflix needs to be cash flow positive within a year in order to have a successful IPO.

The long-term objective of Netflix is to build out its business and be the market leader in video rental. Already, Netflix is staking out a dominant position in the online rental business with its business model focused on sending DVDs to customers in the mail and having the customer return them when the customer is finished watching the DVD.

Netflix plans to achieve this long-term objective by building out economies of scale. The company secures its customers by offering a subscription service, with the intent of fostering brand loyalty. The company is also focused on the latest technologies because they are easy to ship and because Netflix wants to position itself as a technology-forward company compared to rivals like Blockbuster. Although Netflix does not state it explicitly, it likely wants to become the Blockbuster of the digital age.

To date, Netflix has taken good strides to meeting its objective. The company remains a minor player in content, but has experienced strong growth in recent months. This indicates that the company's business model is starting to resonate with consumers. It is too early, however, to determine if Netflix is going to achieve its objectives. Achieving its goals will probably take a decade or more, and there will be many critical strategic decisions between here and there. Thus, while Netflix has had success to date, it is difficult to assess at the time of the IPO whether or not Netflix will be successful.

Question 2.

The objective of the subscriber model is to bring in new customers with a month of free service, and then convert the free customer into a paying customer after that one month. The subscription model makes it easier for McCarthy to estimate revenues. With customers generally all paying the same price, the number of customers and the amount of revenue are tied to each other -- one only needs to estimate the number of new customers in order to estimate the revenue, less lost customers. With the free month, new customers are known before they become paying customers.