25624 Netflix Revenue Model Business Case Assessment

Netflix’s Latest Pivot 

Netflix success is largely attributed to the company’s ability to pivot their business model. The first  pivot was when the company shifted their DVD home delivery service to becoming the leading online  streaming platform. More recently, the second pivot was in response to the inherent risk of being a  content distribution platform: content producers could refuse to deliver their content via Netflix  (Disney, Paramount, etc.). Netflix response was to become a content creation business themselves1. Both pivots were successfully landed, providing Netflix with a sustained increase in subscriptions. The  company’s reflexes are now being put to the test once again, this time as a more mature business. 

In the first quarter of 2022, Netflix lost subscribers for the first time in 10 years. The drop came after  the growth experienced throughout the pandemic, gaining millions of users per quarter through 2021. 

The decline in number of subscribers adds to the trouble the company faces because of the large  number of households sharing their accounts with families and friends. In response, Netflix began  experimenting with a feature that monitors whether someone accesses an account from outside the  home and offers the ability to raise the price by adding 'sub-accounts' for other people. 

During the Q1 2022 earnings call, Netflix’s management unveiled that they were considering rolling  out an ad-supported tier to re-ignite subscription growth - especially in UCAN (USA and Canada). The  market feels much more penetrated given the COVID pulled-forward bump2. Instead of paying the full  subscription, Netflix will offer the possibility of paying less in exchange for watching ads, thus  

1 Misra, A. 2020. Netflix – Constantly Pivoting its Business Model to Success. Sep 13, 2020.  https://thestrategystory.com/2020/09/13/netflix-pivoting-business-model/ 

2 Wells Fargo, 2022. Equity research. NFLX: The AVOD Devil Is in the Detail. Jun 3, 2022.  https://wellsfargo.bluematrix.com/docs/pdf/d5ef4344-9429-4eb6-bdda-382f2a44ad57.pdf

eliminating one of the great advantages of the streaming service over traditional television. The  timeline to introduce this new subscription tier has been brought forward a couple of times. 

Netflix is the most expensive streaming service, compared to rivals from giants like Disney and  Amazon, especially if we want the full experience with the best video and sound quality. So-called  'sub-accounts' and new ad-supported subscriptions will become the cheapest way to use Netflix3. 

In addition to these measures, Netflix executives want to increase their presence in markets outside  the United States, where growth is stronger, producing more local content and improving the quality  of its series. 

The company faces several potential ways forward: 

• Remaining a pure Subscription video-on-demand (SVOD) player 
• Introducing a second subscription tier with the Advertising video-on-demand (AVOD) model
• Opening sub-accounts to monetise the large segment of password-sharing users 

In this context, it is worth evaluating the potential impacts each combination of products will have on  the company’s revenue stream. Please use the Excel workbook provided to do a quarterly revenue  

3 Translated by Content Engine LLC. (2022). Netflix loses users for the first time in a decade and plans to  introduce advertising. CE Noticias Financieras. 

https://www.proquest.com/docview/2653220902?parentSessionId=jwgbxZhsHdcKlLloJSTvkPJOu7bpZkXvzVVl WN5YZPk=&pq-origsite=primo&accountid=17095

forecast for Netflix from September 2022 to June 2025 under each scenario described in the  questions. 

In each scenario, you can search for data to support your assumptions. This Wells Fargo Equity  Research report could be of great use. 

Read the report 

Please make you to reference your sources and to form your own views and not to simply “copy and  paste” from reports. 

QUESTION 1. DISCUSSION ON FORECASTING TECHNICS 

Before you build your own Revenue forecasts, please watch these two videos created by a tutor who  used Netflix to teach forecasting using: 

• Holt’s Method https://youtu.be/55_vmSIba3A, and 
• Regression model https://youtu.be/089eZCuBhtg

In the written report, use bullet points to: 

• highlight the main limitations in using these technics 
• propose amendments to the methods to make them more appropriate to forecast Netflix’s  revenue 
• This question does not have a spreadsheet component. 

QUESTION 2. FORECAST REVENUE | PURE SVOD PLAYER

• Assuming Netflix decides to add maintain their current business model as is, please use the  “Question 2” section in the Revenue worksheet to do a quarterly revenue forecast for  Netflix from September 2022 to June 2025. 
• Include any inputs and assumptions in the Inputs worksheet 
• This question does not have a written report component.

QUESTION 3. FORECAST REVENUE | SVOD and AVOD 

• Assuming Netflix decides to add a second subscription tier with the Advertising video-on demand (AVOD) model, please use the “Question 3” section in the Revenue worksheet to do  a quarterly revenue forecast for Netflix from September 2022 to June 2025. 
• Include any inputs and assumptions in the Inputs worksheet. 
• Make sure you at least account for: 

o cannibalisation across products,  

o new potential customers and  

o different attrition rates by product 

o advertising revenue 

• This question does not have a written report component. 

QUESTION 4. FORECAST REVENUE | SVOD, AVOD AND SUB-ACCOUNTS 

• Assuming Netflix decides to: 

o add a second subscription tier with the Advertising video-on-demand (AVOD) model, o add sub-accounts for “sharing-password” customers 

please use the “Question 4” section in the Revenue worksheet to do a quarterly  revenue forecast for Netflix from September 2022 to June 2025. 

• Include any inputs and assumptions in the Inputs worksheet. 
• Make sure you at least account for: 

            o cannibalisation across products,  

            o new potential customers and  

            o different attrition rates by product 

            o advertising revenue 

• This question does not have a written report component. 

QUESTION 5. OUTPUTS

• In the Outputs worksheet, please use tables and charts to report the key results of your  analysis. 
• Please include any sensitivity analysis you judge relevant 
• This question does not have a written report component. 

QUESTION 6. DISCUSS YOUR FINDINGS .In the written report, use bullet points to: 

• Discuss your main findings 
• Propose a way forward to the Netflix management 

QUESTION 7. FINANCIAL MODELLING BEST PRACTICES [2 marks] 

The use of financial modeling best practices in the revenue model, inputs and outputs will be  marked in this question.