initial public stock oﬀering
Also known as “going public.”
The ﬁrst time a ﬁrm sells stock
to the public.
A ﬁrm that focuses on a
speciﬁc product, service, or
business model. An Internet
pure-play is a ﬁrm that only
operates through the Internet
channel (e.g. with no physical
stores or catalogs).
Netflix: David Becomes
After studying this case you should be able to:
1. Understand the basics of the Netﬂix business model.
2. Recognize the downside the ﬁrm may have experienced when going public.
3. Appreciate why other ﬁrms found Netﬂix’s market attractive, and why many analysts incor-
rectly suspected Netﬂix was doomed.
Entrepreneurs are supposed to want to go public. When a ﬁrm sells stock for the ﬁrst time, the com-
pany gains a ton of cash to fuel expansion and its founders get rich. Going public is the dream in the
back of the mind of every tech entrepreneur. But in 2007, Netﬂix founder and CEO Reed Hastings told
Fortune Magazine that if he could change one strategic decision, it would have been to delay the ﬁrm’s
initial public stock oﬀering (IPO)
. “If we had stayed private for another two to four years, not as
many people would have understood how big a business this could be”. Once Netﬂix was a public com-
pany, disclosure rules forced the ﬁrm to reveal just how proﬁtable the ﬁrm was. Unfortunately for
Hastings, others got wind that Netﬂix was on a money-minting growth tear, and these guys wanted in.
Hollywood’s best couldn’t have scripted a more menacing group of rivals for Hastings to face. First
in line with its own DVD-by-mail oﬀering was Blockbuster, a name synonymous with video rental.
Some 40 million US families were already card-carrying Blockbuster customers, and the ﬁrm’s eﬀorts
promised to link DVD-by-mail with the nation’s largest network of video stores. Alongside them was
Wal-Mart. Not just a big Fortune 500 company, at the time they were the biggest. Fortune 1. The
largest ﬁrm in the United States ranked by sales. In Netﬂix, Hastings had built a great ﬁrm, but let’s face
it, his was a dot-com, an Internet
without a storefront and with an overall customer base
that seemed microscopic compared to these behemoths.
Before all this, Netﬂix was feeling so conﬁdent that it had actually raised prices. Customers loved
the service, the company was dominating its niche, and it seemed like the ﬁrm could take advantage of
its position through a modest price hike, pull in more revenue, and use this to improve and expand the
business. But the ﬁrm was surprised by how quickly the newcomers mimicked Netﬂix with cheaper
rival eﬀorts. This new competition forced Netﬂix to cut prices even lower than they had been before the
price increase. To keep pace, Netﬂix also upped advertising at a time when online ad rates were in-
creasing. Big competitors, a price war, spending on the rise: how could Netﬂix possibly withstand this
onslaught? Some Wall Street analysts had even taken to referring to Netﬂix’s survival prospects as “The