41126-piy-ch03-01.pdf_18891

41126-piy-ch03-01.pdf_18891 - CHAPTER 3 Netflix: David...

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initial public stock offering (IPO ) Also known as “going public.” The first time a firm sells stock to the public. pure play 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). CHAPTER 3 Netflix: David Becomes Goliath 1. INTRODUCTION LEARNING OBJECTIVES 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) [1] . “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 pure play 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
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This note was uploaded on 02/02/2012 for the course BMGT 301 taught by Professor Wang during the Spring '08 term at Maryland.

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41126-piy-ch03-01.pdf_18891 - CHAPTER 3 Netflix: David...

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