finance
IPOs And Venture Capital
4. Based on past numbers, Netflix ships an average of 4.3 discs per month to current subscribers (after adjusting for the 4 new discs sent initially to new
subscribers). How much does this cost Netflix per month, per subscriber? How much does each subscriber pay per month?
[Before you go on to the next question, think about what else you should consider, to calculate the net value to Netflix per month of an existing customer. In a
subscriber model, we should include all marginal revenues and costs (i.e. any revenues or costs that depend on the number of subscribers) in our per-subscriber
valuation, with only general costs such as overhead, product development or administrative costs left out. In other words, are there any other costs for Netflix that
depend directly on the number of subscribers but are not included in your answer to #4)?]
5. The other main cost per subscriber is to expand the library, since Netflix cannot ship 4 DVDs to each new customer, plus maintain selection and customer
satisfaction for all customers, unless it expands its library as the number of subscribers expands. Based on information from the end of 1999, given in the case (p. 4
and Exhibit 5), one can estimate the approximate acquisition cost per disc. Assuming that this cost remains roughly constant, and assuming that Netflix adds 5.8 discs
per new subscriber (including both backfile and new releases) in order to maintain an adequate library per subscriber, how much would Netflix have to pay in disc
acquisition costs for each new subscriber?
[Note that the case now gives 5.6 rather than 5.8 as the discs per new subscriber. Use 5.8.]
6. In addition to the backfile, which is expanded for each new subscriber, Netflix must continually buy new releases, since its customers want to watch new movies.
The case tells us that new releases are about 20% of the library, and titles are considered new releases for 8 weeks. Thus, assume that Netflix adds 0.58 new release
discs each month, per existing subscriber (i.e. 10% of the library per subscriber, as of the end of 1999). Note that this will mean that the library expands over
time, even relative to the number of its subscribers, since Netflix keeps old discs (until they break, get lost or wear out). How much does it cost per month, per
subscriber, to continue to support each existing subscriber (not counting new subscribers)?
8. The main way that Netflix acquires customers is through the one-free-month offers inserted in new DVD players. Thus, what determines how many people receive these
offers? Use this information (given in the case) to forecast the new subscriber growth rates for the years 2001-2004. After 2004, assume that subsequent growth is
3% a year.
We’ll finish this case in Part II, using these calculations on value per subscriber to estimate the total value of Netflix.
