1. What is Netflix’s long-run objective? How does Netflix plan to achieve its lo
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Question
1. What is Netflix’s long-run objective? How does Netflix plan to achieve its long-run objective? How would you assess Netflix’s business model 2. Why does McCarthy use a subscriber model to forecast Netflix’s future cash flow requirements? What are the basic elements of a subscriber model? 3. Construct an annual subscriber model for Netflix that can be used to forecast the expected cash flows for a new subscriber over the next five years. What is the value of a new Netflix subscriber? Assume a discount rate of 20%. Should Netflix be acquiring new subscribers? 4. Assuming that Netflix does not change its current business model, what is the value of Netflix.com? What changes, if any, would you suggest be made to its existing business model? What are the value implications of these changes?
Explanation / Answer
What is Netflix’s long-run objective? How does Netflix plan to achieve its long-run objective?
Netflix’s long-run objective to convert its free trial users to paid users as far as possible and to retain paid users in the long run.
Netflix plan to achieve its long-run objective by building and enhancing customer’s loyalty to brand. It provides various features to encourage them to stay with the company
Why does McCarthy use a subscriber model to forecast Netflix’s future cash flow requirements? What are the basic elements of a subscriber model?
McCarthy uses a subscriber model to forecast Netflix’s future cash model because it’s revenue are dependent on number of subscribers it has the duration of their contracts as the subscriptions opted the main source income for Netflix. Such companies include rental companies, newspaper, magazines, cell phones, etc.
The basic elements of a subscriber model in this case include:-subscription fees paid, expected DVD s to be rented, shipping and disc acquisition costs and other subscriber related cash flows. Company must also forecast the number of subscribers that will retain and new subscribers it will have.
Construct an annual subscriber model for Netflix that can be used to forecast the expected cash flows for a new subscriber over the next five years. What is the value of a new Netflix subscriber? Assume a discount rate of 20%. Should Netflix be acquiring new subscribers?
The value of Netflix subscriber is $41.84. Even though the company has high acquisition cost per subscriber it should continue acquiring new subscribers.
Assuming that Netflix does not change its current business model, what is the value of Netflix.com? What changes, if any, would you suggest be made to its existing business model? What are the value implications of these changes
Assuming that Netflix does not change its current business model the value of Netflix can be calculated as .
Begin with NPV of a new subscriber is $41.84.
In addition using historical data consider perpetuity growth rate, general and admin expenses and product development growth rate are a;; 3% , while the DVD growth rate is 50%
Value of a firm = Revenue – Cost.
A Revenue = No. of subscribers * $41.84+ Potential new subscriber*41.84+ current value of the firm. Discounting at 20% and 50% subscription growth rate,
PV = $305,283.24
Cost can be calculated by compounding growth rate at 3% which is $14,240 in the year 1999.
PV of cost = $79,578.39
Less PV of revenues
Pre tax EV = $225,704.75
Tax rate is 40%
After tax EV = $135,422.85
Existing business model does not require any modification. And even if changes are required discount rate, Gen and admin exp, perpetuity growth rate will change.
A rise in discount rate will lead to decrease in PV of revenue and cost and in case of fall in discount rate PV of revenue and cost will increase.
The changes in growth rate will have negative impact on the value of the firm.
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