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mail, with an increased emphasis on subscribers using the new VOD platform. The final year will be a further reduction in DVD usage with the eventually end to the DVD by mail option all together. With this new business strategy, Netflix’s new financial statements might be broken down as indicated in Exhibit 3 which forecasts Netflix’s financials from 2007-2009. 18
BUSI 690-D06: Group Case Study 1: NetflixNet Present Value AnalysisNet Present Value analysis of proposed strategy’s new cash flow indicates with an upfront investment of 175M, the streaming video project will gain 82.96M over a three year period as indicated in Appendix G. The net present value of the future cash flow was calculated based on a 6.8% discount rate, which is the weighted average cost of capital. Based on these figures, it is recommended to move forward with investing in the streaming video business model. The earnings per share (EPS) based on the new cash flow is 0.81 for FY2007, 1.71 for FY2008 and 1.14 for FY2009 as seen in Appendix H. Netflix will earn less than a dollar per share of outstanding stock in FY2007 and will see an increase in earnings pershare in 2008 by 0.90 and then a decrease in FY2009 by 0.57. EPS is used as a market prospect ratio and the higher earnings per share the better. Netflix’s EPS is earning at a lower rate compared to its competitor Amazon EPS for FY2007 is 1.150; FY2008 is 1.520 and FY2009 at 2.080. Netflix EBIT indicates their profitability regardless of their tax structure or interest payments of loans. Looking at FY2007, Netflix is projected to have substantial earnings before interest and taxes are applied as seen in Appendix I.Recommended Strategy and Long Term ObjectivesNetflix’s key challenge is the continually evolving market environment due to media format and technological innovations. Due to product and consumer preferences changing quickly, the marketplace is highly erratic and unpredictable where new entrants are a threat. Netflix forward thinking business strategy is essential to its viability. The recommended strategy for Netflix is to move to an online streaming video service with 19
BUSI 690-D06: Group Case Study 1: Netflixthe long term objective to reduce or eliminate DVD rentals and move toward content distribution. Netflix is at an optimal time in the market to transition from physical DVD contents to digital content distribution in order to maintain their competitive advantage. This strategy was selected since now Netflix is competing against internet sites that stream television and movie contents such as Vudu Inc. Consumers are adapting to the evolving technology and thus Netflix must stay at the forefront. Additionally, this strategy in the long run will reduce operating cost where the need for warehouses, transportation and physical inventory will no longer be needed. This strategy will require Netflix to invest in streaming technology, streaming titleand, more crucially, expand its profit sharing relations with studios and networks to include exclusive content control. While the physical DVD rental industry, including