RESEARCH PROJECT – NETFLIX CASE

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of its own self-produced original content (feature films, multi-episode series, and documentaries). Netflix mem- bers, as well as households subscribing to rival content providers, could not only watch as much streamed con- tent as they wanted—anytime, anywhere, on nearly any Internet-connected screen—but they could also play, pause, and resume watching, all without commercials.

In its April 2019 report of Netflix’s financial and operating results for the first quarter of 2019, manage- ment said Netflix subscribers were watching more than 165 million hours of the company’s content offerings per day. In reporting the company’s quarterly performance during the remainder of 2019, Netflix management did not disclose the total viewership hours per day, saying only that daily viewership hours worldwide were grow- ing. The company tracked viewership of each title.

In the United States, Netflix still had 2.1 million members as of December 31, 2019 who, because of limited Internet service or just personal preference, continued to receive DVDs solely by mail (but the numbers of mail-only subscribers had been declining monthly as members transitioned to streaming).

Netflix’s swift growth to 61 million paid subscrib- ers in the United States and its promising potential for rapidly growing its base of international subscribers far past 100 million (some industry analysts believed Netflix had a clear path to 350 million subscribers worldwide by 2025) pushed the company’s stock price from $270 at the beginning of 2018 to $380 in

Netflix’s 2020 Strategy for Battling Rivals in the Global Market for Streamed Video Subscribers

Arthur A. Thompson The University of Alabama

Heading into 2020, Netflix was demonstrating significant competitive muscle in attracting millions of new subscribers across the world to its service for streamed internet content, despite the entry of formidable new competitors in 2019 and announcements of more to come in 2020. Netflix grew its paid membership base from 139.3 million at year-end 2018 to 167.1 million worldwide at year- end 2019; it expected to add another 7 million new paid subscribers in the first quarter of 2020. Netflix was addressing the growing competition in the global market for streamed entertainment content by increasing its releases of new original content and strengthening efforts to grow its user base in high- opportunity country markets.

Over the past nine years, the company had suc- cessfully transformed its business model from one where subscribers paid a monthly fee to receive an unlimited number of DVDs each month (delivered and returned by mail with one to three titles out at a time) to a model where subscribers paid a monthly fee to watch an unlimited number of movies and TV episodes streamed over the Internet. During the same time frame, Netflix had expanded its geographic cover- age to over 190 countries, making it the world’s lead- ing Internet television network. During the past five years, Netflix had made another adjustment in its busi- ness model, shifting from a content library consisting mainly of titles licensed from the movie studios, broad- cast TV networks, and other sources that produced them to a content library that increasingly consisted

CASE 11

Copyright ©2021 by Arthur A. Thompson. All rights reserved.

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and internal cash flows needed to finance an ever-larger annual stream of original content that would please subscribers and also (2) enable the company to be attractively profitable over the long-term.

Financial statement data for Netf lix for 2015 through 2019 are shown in Exhibits 1 and 2. Netf lix had never paid a dividend to its shareholders and the company had declared it had no pres- ent intention of paying any cash dividends in the foreseeable future.

the second week of February 2020. (Netflix’s all-time high stock price was $423 in July 2018). Already sol- idly entrenched as the global leader in paid member- ships for streamed content, the principal questions for Netflix in 2020 seemed to be:

• Whether the company had sufficient competi- tive and financial strength to combat the efforts of larger, resource-rich rivals looking to steal sub- scribers away from Netflix.

• Whether the company could grow its subscriber base fast enough to (1) produce the revenues

2015 2016 2017 2018 2019

Revenues $ 6,779.5 $ 8,830.7 $ 11,692.7 $ 15,794.3 $ 20,156.4

Cost of revenues (almost all of which relates to amortization of content assets) 4,591.5 6,257.5 7,659.7 9,967.5 12,440.2

Gross profit 2,188.0 2,800.8 4,033.0 5,826.8 7,716.2

Operating expenses

Technology and development 650.8 780.2 1,052.8 1,221.8 1,545.1

Marketing 824.1 1,097.5 1,278.0 2,369.5 2,652.5

General and administrative 407.3 315.7 863.6 630.3 914.4

Total operating expenses 1,882.2 2,421.0 3,194.4 4,221.6 5,112.0

Operating income 305.8 379.8 838.7 1,605.2 2,604.3

Interest and other income (expense) (163.9) 30.8 (591.5) (378.80) (542.0)

Income before income taxes 141.9 260.5 485.3 1,226.5 2,062.2

Provision for (benefit from) income taxes 19.2 73.8 (73.6) 15.2 195.3

Net income $ 122.6 $ 186.7 $ 558.9 $ 1,211.2 1,866.9

Net income per share:

Basic $ 0.29 $ 0.44 $ 1.29 $ 2.78 $ 4.26

Diluted 0.28 0.43 1.25 2.68 4.13

Weighted average common shares outstanding (in millions)

Basic 425.9 428.8 431.9 435.4 437.8

Diluted 436.5 438.7 446.8 451.2 451.8

EXHIBIT 1 Netflix’s Consolidated Statements of Operations, 2015–2019 (in millions, except per share data)

[(g) For tables, all underlines should be the length of the longest numerical entry in each column, which may sometimes vary from column to column; align vertically on $ and ones digits; set end parenthesis to the right of the ones digit and no underline; underlines should be continuous, no breaks for commas or parentheses]

Note 1: Some totals may not add due to rounding.

Source: Company 10-K reports for 2010, 2017, and 2019.

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source/website with streaming capability and content to stream. The upcoming introduction of 5G mobile phones was widely expected to dramatically increase the time consumers used their smart phones to watch streamed content, particularly broadcasts of live sporting events, breaking news, and assorted other programs of interest.

2. A fast-moving and likely permanent shift in consumer preferences worldwide for watching content streamed directly to whatever device they wanted to use at whatever times they wanted to watch, rather than being locked into watching their favorite programs at the time they were broadcast on TV channels. Cable and satellite firms were losing subscribers annually, partly because these subscribers were unhappy about having to pay what they considered an out- sized price for a multi-channel package con- taining more channels than they watched and partly because they could access their favorite programs from a growing number of streamed

THE FAST-CHANGING MARKET FOR STREAMED ENTERTAINMENT In 2020, the world market for streamed entertainment (movies, episodes of TV shows, and live-streamed events) was undergoing rapid and disruptive change. There were three big change drivers:

1. Increasingly pervasive consumer access to both wired and wireless high-speed Internet connec- tions. Worldwide rollout of 5G (fifth generation) wired and wireless digital networks promised to increase data connection speeds by 3 times those of the 3G and 4G digital networks currently serv- ing most households and individuals across the world. Wired and wireless high-speed data con- nections greatly increased the ease with which households and individuals could use a TV, desktop computer, portable computer, or smart- phone, coupled with a growing array of apps, to instantly connect to any Internet-accessible

2015 2016 2017 2018 2019

Selected Balance Sheet Data

Cash and cash equivalents $ 1,809.3 $ 1,467.6 $ 2,822.8 $ 3,794.5 $ 5,018.4

Current assets 5,431.8 5,720.3 7,670.0 9,694.1 6,178.5

Total current and non-current content assets 7,218.8 14,682.0 20,112.20 20,107.5 $ 24,504.5

Total assets 10,202.9 13,586.6 19,012.7 25,974.4 33,975.7

Current liabilities 3,529.6 4,586.7 5,466.3 6,487.3 6,855.7

Long-term debt* 2,371.4 3,364.3 6,499.4 10,360.1 14,759.3

Stockholders’ equity 2,223.4 2,679.8 3,582.0 5,238.8 7,582.2

Cash Flow Data

Net cash (used in) provided by operating activities $ (749.4) $ (1,474.0) $ (1,785.9) $ (2,680.5) $ (2,887.3)

Net cash provided by (used in) investing activities (179.2) 49.8 34.3 (339.1) (387.1)

Net cash provided by (used in) financing activities 1,640.3 1,091.3 3,077.0 4,048.5 4,505.7

EXHIBIT 2 Selected Balance Sheet and Cash Flow Data for Netflix, 2015–2019 (in millions)

*All of Netflix’s long-term debt consisted of senior unsecured notes that were issued at various points in time and had various maturity dates and various fixed rates of interest.

Sources: Company 10-K Reports 2011, 2015, 2017, and 2019.

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preferences worldwide for watching content streamed directly to whatever device they wanted to use at whatever times they wanted to watch it, and rapid entry of new streamed content provid- ers like AT&T’s HBO Max, Disney+, Comcast’s new Peacock offering, ViacomCBS, Apple TV+, and dozens of others in various geographic regions looking to compete with Netf lix and Amazon’s Prime Video had combined to unleash an increasingly intense competitive global battle among streaming providers to become serious contenders in the global market for subscriber- based streamed content—a market that was widely expected to be “the wave of the future,” include billions of individuals and households, and be highly disruptive to the businesses of traditional cable and satellite providers, whose subscriber counts had declined annually for several years. College graduates and many millennials typically avoided subscribing to cable providers because of the “high” monthly prices and the growing availability of cheaper substitutes for viewing the programs they really wanted to watch or were sat- isfied with watching.

In 2019, a study by the Motion Picture Association of America (MPAA) reported that the number of streamed video subscribers grew to 613 million in 2018 (an increase of 27 percent over 2017), while the number of cable subscriptions worldwide dropped 2 percent to 551 million.1 However, cable subscriptions generated the big- gest revenues ($118 billion), followed by satellite subscriptions and streaming video subscriptions. According to the MPAA study, in 2018 80 percent of people in the United States watched cable pro- grams, with 70 percent also watching streamed programs. The MPAA report further noted that the number of views/transactions of TV and film programs streamed from subscription-based pro- viders, pay-per-view sources, and ad-supported sources jumped from 76.4 billion in 2014 to 182.1 billion in 2018, a four-year increase of 238 percent. The increase was partly due to an increase in the number of scripted original dra- mas across all sources from 390 in 2014 to 496 in 2018.

Exhibit 3 shows the percentage of Internet users, by country, who watched online video content on any device as of January 2018.

sources (and also subscribe to one or more streamed content sources with sizable content libraries containing ongoing releases of new original content), thereby giving them an attrac- tively wide variety of content selections at a lower overall cost that could be watched when- ever they wished.

3. The mounting vigor with which well-known, resource-rich companies were launching strategic initiatives to (a) build bigger and more attractive content libraries—sometimes by merging with or acquiring the owners of attractive content librar- ies, sometimes by licensing a bigger assortment of attractive titles from various content owners, and sometimes by establishing in-house content development and production capabilities and (b) launching marketing campaigns to publicize and promote the content libraries they had assem- bled in an effort to secure a large enough base of paid streaming subscribers to cover the costs of their content libraries and streaming service and earn a profit.

During the past decade, the market for in- home entertainment other than broadcast and cable TV programs had evolved rapidly as households with high-speed Internet service and/or Internet- connected TVs or DVD players quickly shifted away from subscribing to Netflix’s DVDs-by-mail ser- vice or else renting or buying physical DVDs with the desired content to almost exclusively watching streamed movies, previously broadcast episodes of TV shows, YouTube videos, and titles in the original content libraries of paid-subscriber providers, and other types of streamed content. This was because streaming had the advantage of allowing household members to access and instantly watch the movies, TV episodes, and other available content they wanted to see, which was much more convenient and often cheaper than patronizing a nearby rent-or-purchase location getting DVDs by mail from Netflix. This shift had permanently undercut the once-thriving businesses of selling movie and music DVDs and/ or renting DVDs at local brick-and-mortar locations and standalone rental kiosks (like Redbox in the United States) or delivering/returning DVDs by mail (as at Netflix).

By 2020, faster internet speeds, the fast- growing and likely permanent shift in consumer

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capabilities of the chief rivals Netflix expected to battle in competing for streamed entertainment sub- scribers in countries across the world.

Amazon’s Prime Video Amazon competed directly with Netflix via its Amazon Prime membership service. In 2020, indi- viduals and households could become an Amazon Prime member for a fee of $119 per year or $12.99 per month (after a one-month free trial); there was a discounted price for students of $59 per year of $6.49 per month. Membership in just Prime Video was $8.99 per month. Going into 2020, Amazon announced that it had over 150 million Amazon Prime members globally.2 While Amazon had origin- ally created its Amazon Prime membership program as a means of providing unlimited two-day shipping (more recently, one-day shipping in many locations and two-hour grocery delivery in 2,000 cities) on Prime-eligible items to customers who ordered mer- chandise from Amazon and wanted to receive their orders quickly, in 2012 Amazon began including movie and music streaming as a standard benefit of Prime membership—Amazon’s video streaming service was called “Prime Video.” Amazon Prime members were not, however, eligible to view every title in the Prime Video library for free; titles that were not Prime-eligible could be watched on a pay- per-view basis or else purchased. Going into 2020, many Amazon Prime members did not utilize their Prime Video membership benefit (Amazon did not disclose the overall percentage). Another video bene- fit of Amazon Prime membership was the ability to subscribe to over 100 premium channels with Prime Video Channels subscriptions.

In 2010, Amazon established Amazon Studios to oversee the development and production of new in-house original movies and multi-episode series; approximately 200 new original titles were released during 2015–2018. A 2019 report by Streaming Observer, an independent news site covering streaming industry news and reviews of movies, said that Amazon’s Prime Video content library contained 17,461 titles versus 3,839 for Netf lix and 2,336 for Hulu.3 However, according to the same Streaming Observer report, Netf lix had 592 titles that were “Certified Fresh” by Rotten Tomatoes (the leading online aggregator of movie and TV show reviews) versus 232 such films on

A SAMPLING OF NETFLIX’S COMPETITORS IN THE GLOBAL MARKET FOR STREAMED VIDEO SUBSCRIBERS Going in 2020, Netflix’ principal direct competitors included Amazon’s Prime Video, AT&T (with its Warner Media and HBO Max subscription options), Disney+, Apple TV+, Comcast’s new Peacock offer- ing, and A new ViacomCBS streamin option, and AppleTV+, CBS All Access, all of whom had pro- fessed or exhibited a strategic intent to rank among the industry leaders—YouTube was not considered a direct competitor because its free and paid video con- tent was distinctly different from the titles offered by Netflix and its direct competitors. Following is a brief description of the media resources and competitive

Country

Percentage of Internet Users Watching Online Video Content on Any Device

Saudi Arabia 95%

China 92%

New Zealand 91%

Mexico 88%

Australia 88%

Spain 86%

India 85%

Brazil 85%

United States 85%

Canada 83%

France 81%

Germany 76%

South Korea 71%

Japan 69%

EXHIBIT 3 The Percentage of Internet Users in Selected Countries Who Watched Online Video Content on Any Device as of January 2018

Source: Statista, www.statista.com (accessed April 10, 2018).

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assorted online sites; merchandising licensing cover- ing a wide range of product categories and licens- ing of Disney’s wide-ranging intellectual property; motion picture production and distribution under the Walt Disney Pictures, Twentieth Century Fox, Marvel, Lucasfilm, Pixar, Fox Searchlight Pictures, and Blue Sky Studios banners; and direct-to- consumer stream- ing services which included Disney+, ESPN+, Hulu, and Hotstar.

Starting in 2018, Disney made a series of strategic moves to strengthen its capabilities to enter the video streaming market by acquiring 100 percent control of streaming provider Hulu, which at the time had about 25 million subscribers in the United States. At the time, Hulu was a joint venture co-owned by Walt Disney (30 percent), Fox (30 percent), Comcast (30 percent), and Time Warner (10 percent), but Disney put a deal in place in late 2018 to buy Fox’s 30 percent share of Hulu and then, months later, AT&T sold its 10 percent of Hulu to the Disney-Comcast owners of the Hulu joint venture for $1.43 billion. In May 2019, Comcast and Disney announced an agreement whereby Disney would have full 100-percent control of Hulu, starting immediately. The Disney-Comcast agreement speci- fied that Comcast would continue to allow Hulu to carry all NBCUniversal content as well as live-stream NBCUniversal channels for Hulu’s live TV service until late 2024 (Comcast was the 100- percent owner of NBCUniversal). The deal called for Comcast’s ownership stake in Hulu to be officially sold to Disney starting in January 2024.

Hulu’s strategy for attracting subscribers had been to attract subscribers by charging a subscrip- tion fee of $5.99 per month for regular stream- ing (interspersed with ads) and $11.99 per month for commercial-free streaming; new subscribers also got a one-month free trial. These two options entitled subscribers to watch current season epi- sodes of popular TV shows (the day after they aired on ABC, NBC, Fox, and a few cable channels—no CBS shows were included) plus an estimated 43,000 back-season episodes of 1,650 TV shows and 2,500 movies. In addition, Hulu offered plans that included not only its video streaming service, but also pack- ages that included 60+ live TV and cable channels (that included sports, news, and entertainment) for a monthly fee of $54.99 and options to add on HBO®, Showtime®, Starz®, and Cinemax®. In March 2020, Disney launched FX on Hulu” that featured every season of many originals that aired on FX over the

Prime Video and 223 on Hulu. Additionally, the report said almost 16 percent of all movies on Netf lix were “critically acclaimed” compared to just 1.3 percent on Prime Video.

But in 2017 and continuing forward, Amazon began a strategic initiative to upgrade its content library, with both higher caliber new original con- tent and licensed content. Amazon paid the National Football League $65 million a year for three seasons starting with 2017 season to live stream Thursday Night Football games globally to Prime Video mem- bers in 200 countries (these broadcasts attracted more than 18 million total viewers over 11 games in 2017). Amazon Studios spent a reported $250 million for licensing right to Lord of the Rings, with plans for spending up to $1 billion to produce 5 seasons of episodes. Amazon Studios spent an estimated $5–$6 billion on original content videos in 2019, releasing new titles monthly, including new seasons of Tom Clancy’s Jack Ryan, Emmy-winning The Marvelous Mrs. Maisel, Bosch, Sneaky Pete, Good Omens, Carnival Row, The Man in the High Castle, The Boys, Emmy-winning Fleabag, The Romanoffs, Patriot, American Gods, Preacher, and The Grand Tour. Prime members watched double the hours of original movies and TV shows on Prime Video in the fourth quarter of 2019 compared to the fourth quarter of 2018, and Amazon Originals received a record 88 nominations and 26 wins at the Oscar, Emmy, and Golden Globe awards shows.4

The Walt Disney Company, Disney+, Hulu, and ESPN+ The Walt Disney Company in 2020 was a leading diversified international family entertainment and media enterprise with businesses that included the ABC branded broadcasting network; multiple cable channels (the ESPN family of five domestic chan- nels and 15 international channels, three domes- tic Disney branded channels and approximately 100 Disney branded international channels, three FX channels, Freeform, National Geographic, and 50 percent ownership of A&E, which offered its own entertainment programming and operated four other cable channels); ABC Studios, Twentieth Century Fox Television, and Fox 21 Television which produced many of the company’s TV shows; theme parks and resorts; Disney Cruise Lines; the sale of Disney-related merchandise at The Disney Stores and

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past 17 years and that, going forward, would include new original scripted series by FX Productions shown exclusively to Hulu subscribers. In recent years, con- sumers disenchanted with the Further expansions are planned for Europe and Latin America in late 2020 through 2021, as Disney’s existing international streaming distribution deals with competing services expire. Reaming prices of cable subscriptions had come to consider Hulu as their “go-to” choice, and it was widely considered the best streaming provider for watching TV shows. Nonetheless, Hulu had been a money-losing operation every year since its stream- ing service began operations in March 2008.

Disney debuted its new Disney+ streaming ser- vice on November 12, 2019, in the United States, Canada, and The Netherlands at low introductory prices of $69.99 per year or $6.99 per month. A week later, Disney+ was made available in Australia. New Zealand, and Puerto Rico and then further expanded to select European countries in March 2020. Additional expansions were planned for Europe and Latin America in late 2020 through 2021, as Disney’s existing international streaming distribution licens- ing agreements with competing services expired.

Disney+ offerings centered on existing film and television content from Walt Disney Studios (includ- ing the Star Wars series), the three Disney TV chan- nels, Pixar, Marvel, National Geographic, and 20th Century Fox, plus forthcoming new original content from these same sources. Disney’s longstanding repu- tation for family entertainment attracted an unexpect- edly large rush of new subscribers in the first three months—50 million worldwide as of April 10, 2020. This big subscription gain was partly due to the fact that, due to a deal between Disney and Verizon, whereby certain Verizon subscribers could sign up for a free one-year subscription to Disney+ until June 1, 2020, if they agreed that when the free 12-month sub- scription expired their Disney+ subscription would auto-renew at $6.99 per month, and they would be charged monthly on their Verizon bill unless the sub- scription was cancelled with Verizon. The 50 million number also included 8 million subscribers in India who were able to access Disney+ through Hotstar, a streaming service owned by Disney.

Concurrent with the launch of Disney+ in November 2019, Disney began offering a bundle of Disney+, (ad supported) Hulu, and ESPN+ for $12.99 per month with no free trial included at both the Disney+ and Hulu websites in the United States.

ESPN+ was a conglomeration of live sports programs (select live MLB, NHL, NBA, MLS, and Canadian Football League games, as well as multiple college sports games, PGA golf events, Top Rank Boxing matches, Grand Slam tennis matches, United Soccer League games, cricket and rugby games, English Football League games, and UEFA Nations League games that were not broadcast live on any of ESPN’s family of channels (ESPN, ESPN2, ESPNU, ESPN Classic, ESPNews, ESPN Deportes, Longhorn Network, SEC Network, and ACC Network). ESPN+ was only available to viewers in the United States; the regular subscription fee for ESPN+ was $49.99 per year or $4.99 per month. ESPN+ had 7.6 million subscrib- ers in the United States as of February 2020, up from 3.5 million paying subscribers in November 2019—the big increase was mainly due to the bundling promotion.

Disney management expected to have between 60 and 90 million Disney+ subscribers worldwide by 2024—the same year it believed the service would become profitable. The majority of those subscribers were forecast to be outside the United States.

AT&T’s Two Video Streaming Subscription Options: Warner Media and HBO Max In June 2018, AT&T completed its $108.7 billion acquisition of Time Warner, whose businesses con- sisted of global media and entertainment leaders Warner Bros. and WarnerMedia Entertainment. Warner Bros. business assets included the film stu- dios and content libraries of Warner Bros. Pictures, New Line Cinema, Castle Rock Entertainment, and DC Films; a television production and syndication company; animation studios and their film libraries; and publishing company DC Comics. The WarnerMedia Communication Group included such assets as: the studios and film libraries of Home Box Office (HBO); broadcast and cable channels CNN, TBS, TNN, and TruTV; pay TV channels Cinemax, Cartoon Network, Boomerang, and Turner Classic Movies; and digital media company Otter Media. AT&T’s new HBO division had 140 million sub- scribers who had access to HBO network’s seven 24-hour multiplex channels through their cable or satellite provider (or as an add-on through Hulu); the add-on price paid to cable/satellite provider (or to Hulu) was $14.99 per month, cancellable at any time. All such HBO subscribers could download a free

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originals—the crown jewel of the originals was said to be House of the Dragon, a 10-episode story about the Targaryens centuries prior to the Game of Thrones.

Comcast’s New Peacock Streaming Service In January 2020, Comcast and its subsidiary NBCUniversal, jointly announced the launch of a new Peacock subscription video streaming service that would become available at no additional cost for Comcast’s more than 20 million Xfinity X1 and Flex cable subscribers on April 15 and then launch July 15 for everyone else. The free tier of Peacock (Peacock Free) contained more than 7,500 hours of ad- supported programming, including next-day access to first season TV shows broadcast on NBC, a collec- tion of Universal movies, and access to back seasons of such iconic NBC shows as Saturday Night Live, Family Movie Night, and Vault. However, Comcast subscribers and Cox cable subscriber could opt instead to subscribe to Peacock Premium, which included 15,000 hours of content, early access to NBC’s 2 late night shows, live NBC sports programming, and non-televised Premier League soccer games. There were two price tiers for Peacock Premium: a $4.99 per month version that included ads and a $9.99 version with no advertising.

Steven Burke, a Comcast Executive Vice President and Chairman of NBCUniversal believed NBCUniversal was uniquely positioned to create a streaming platform that would monetize its content library and enable NBCUniversal to play a leading role in the on-demand video streaming world:5

Comcast management decided to use NBC’s familiar peacock logo as the logo for the company’s new subscription-based streaming service to remind customers that NBC was a network with great program- ming and to drive interest back to NBC’s popular event- type TV programs (The Masked Singer, The Last Voice, America’s Got Talent) and NBC’s live sports program- ming, which included the 2020 Summer Olympics. Top management at Comcast and NBCUniversal believed that while streamed video might indeed be the future of watching TV and movies, the cable business would remain profitable for years to come (despite the likely permanent declines in the number of cable and satellite subscribers worldwide) and, further, that free ad- supported viewing was likely to remain far more preva- lent and popular with consumers than subscription- supported viewing. Comcast management believed

downloadable HBO GO app that could be used to access the HBO GO website; then, after entering their user name and password for their account at whatever provider to whom their HBO subscription fee was paid, the HBO subscriber could click on the desired HBO content and view it on mobile phones, laptops, and computers. AT&T/HBO had no inter- est in offering HBO GO access to people who were not already HBO subscribers because HBO’s princi- pal revenue source was a percentage of the monthly fees that its 140 million subscribers across the world paid their cable/satellite company (or Hulu) for access to HBO programming as part of their total subscription package.

AT&T executives believed Time Warner’s busi- nesses nicely complemented AT&T’s core businesses in mobile, broadband, cable and satellite TV, and tele- phone communications in the United States, mobile services in Mexico, and pay TV services in 11 coun- tries in South America and the Caribbean. AT&T’s cable and satellite TV operations lost a combined 4 million subscribers in 2019, bringing the number of total subscribers for AT&T’s various cable and satel- lite (DIRECTV) packages down to 19.7 million.

However, it was AT&T’s strategic plan in 2020 to achieve nationwide coverage of 5G by mid-year; launch its new HBO Max streaming video service in May 2020 with a goal of securing 50 million subscrib- ers in the United States and another 25 to 40 million international subscribers by 2025; and curtail the loss of subscribers to AT&T’s cable and satellite ser- vices via simplified product packages and bundling opportunities with such other AT&T communica- tion products as higher-speed broadband service, home security and monitoring packages, telephone services, and possibly discounted HBO Max subscrip- tions. The announced monthly price for the HBO Max streaming service was $14.99, the same price currently being paid by HBO Now’s roughly 5 million direct subscribers. Plans were for current HBO sub- scribers through cable/satellite providers and direct HBO Now subscribers to be provided bundled access to HBO Max for free. AT&T expected that HBO Now subscribers would quickly migrate over to HBO Max, which would help grow total HBO Max subscriptions to 36 million by the end of 2020.

HBO Max was expected to launch with roughly 10,000 titles from the WarnerMedia film libraries of its various movie studios, all of HBO’s content, a number of licensed shows, and 20+ fresh Max

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assets approaching $50 billion and 2019 revenues of $27.8 billion. The new company’s main assets included Paramount Pictures film studio and a library of 3,600 movies; the CBS broadcasting net- work and its library of 140,00 TV episodes, a stream- ing platform called CBS All Access that provided approximately 4.5 million subscribers in the United States, Canada, and Australia with access to current and back season CBS TV shows, CBS Sports (NFL, college football, and college basketball games), other recently-aired programs on CBS broadcast properties; a number of CBS-affiliated television stations; CBS Television Studios and CBS Studios International; cable television networks MTV, Nickelodeon (watched in 600 million households around the world), BET, Comedy Central, CMT (Country Music Television), Showtime, The Movie Channel, VH1, Flix, and TEN (a high profile chan- nel in Australia); free ad-supported video-on-demand platform Pluto TV with 100+ live TV channels and thousands of TV shows and movies; 50 percent co- ownership with AT&T’s WarnerMedia subsidiary of The CW Television Network (commonly referred to as just The CW); Nickelodeon Animation Studio; an assortment of international and regional networks and operations that provided the company with the capability to engage in video streaming in many coun- tries; and book publisher Simon & Schuster. CBS’s media properties alone made it a global media titan, with some 4.3 billion watchers of its broadcast and pay TV programs in 180 countries at year-end 2019.

In early 2019, before the merger, Viacom had purchased Pluto TV for $360 million and proceeded to expand its offering of 100 ad-supported channels by adding 43 channels in the fourth quarter of 2019, including 22 Spanish and Portuguese ones that were popular in Latin America and Brazil; Pluto’s sub- scriber base grew over 70 percent in 2019 to a total of over 20 million going into 2020. On December 20, 2019, ViacomCBS announced it was buying a 49 per- cent ownership stake in Miramax Pictures for an upfront payment of $150 million and an agreement to invest $225 million in Miramax for movie and television productions over the next five years. The deal also specified that ViacomCBS’s Paramount Pictures would become the exclusive distributor for the Miramax library of 700+ films and have a first- look at Miramax’s new content creation.

In February 2020, ViacomCBS executives were in the final stages of readying plans to launch a new

that bundling Peacock Free for customers with Comcast cable subscriptions would help reduce the number of customers dropping the company’s cable service and switching to a rival streaming provider. Hence, they saw no good business reason to create a streaming platform with strategy elements that would help undermine the profitability and longevity of company’s cable business.

During a Peacock Investor Day presentation on January 16, 2020, a NBCUniversal officer cited a survey where consumers were asked “Which new streaming service are you likely to try—one that is free with some ads or one that is paid with no ads?” Eighty percent responded “free with some ads,” and 20 percent responded “paid with no ads.” These results were a factor in convincing the Comcast-NBCUniversal man- agement team to position Peacock as an ad- supported streamer of premium content in what they viewed as a mostly vacant market niche (among rival video streaming providers, only Hulu offered consum- ers a low-priced, ad-supported streaming option). Moreover, the Peacock strategy was to help secure a competitive edge by having an industry-low aver- age of five minutes of ads per hour, which contrasted sharply with TV broadcasting where there were 16–20 minutes of ads per hour and premium video streaming where there was an average of eight minutes of ads per hour.6 And Peacock Free’s ad-supported streaming of premium content helped differentiate it from the three competitively strong subscription- based providers—Netflix, Amazon Prime Video, and HBO Max. Peacock management believed it would have little difficulty selling ads for Peacock’s content, given that NBC, ABC, CBS, FOX, and some 250 other channels had advertising-based business mod- els representing 92 percent of total viewership.7

NBCUniversal said it would invest $2 billion in Peacock over 2020 and 2021, with goals of reach- ing between 30 and 35 million active users in the United States by 2024, generating $2.5 billion in new revenues with average revenue per subscriber of $6–$7, and achieving break even on Peacock’s streaming ser- vice on an earnings before interest, taxes, depreciation, and amortization (EBITDA) basis.

ViacomCBS and CBS All Access Viacom and CBS completed their long-expected and often contentious merger in December 2019, creating a multinational media conglomerate with

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planning to spend about $4.2 billion on original pro- gramming by 2022.

While Apple had yet to disclose subscriber num- bers for its TV+ service, an analyst at Wall Street firm at Sanford C. Bernstein had estimated that, as of February 2020, fewer than 10 million of the eli- gible consumers purchasing a new Apple device had opted to sign up for a free 12-month trial of Apple TV+.9 It was speculated that Apple TV+’s failure to resonate with consumers was largely due to its unusually limited content offerings. In December 2019, one of the analysts participating on an expert panel hosted by UBS (a well-known global financial services firm) said that Apple TV+ “needs a mega- hit original series to ultimately retain subscribers,” adding that the company “may likely have to ultim- ately also acquire an asset with a big backlog of cat- alog content—most of which will be very expensive at this point.”10

YouTube TV In April 2020, Google’s YouTube subsidiary was offering a YouTube TV streamed entertainment ser- vice that included about 70 TV and movie channels for a fee of $50 per month. The service could be accessed on smart TVs, streaming boxes, computers, and mobile devices. As of early 2020, YouTube TV had over 2 million subscribers.

NETFLIX’S BUSINESS MODEL AND STRATEGY IN 2020 Since launching the company’s online movie rental service in 1999, Reed Hastings, founder and CEO of Netflix, had been the chief architect of Netflix’s subscription-based business model and strategy that had transformed Netflix into the world’s largest online entertainment subscription service. Hastings’s goals for Netflix were simple—build the world’s best Internet service for entertainment content, keep improving Netflix’s content offerings and services faster than rivals, attract growing numbers of sub- scribers every year, and grow long-term earnings per share. Hastings was a strong believer in mov- ing early and fast to initiate strategic changes that would help Netflix outcompete rivals, strengthen its brand image and reputation, and fortify its position as the industry leader.

video streaming service built around the CBS All Access streaming service, that would be expanded to include a broad pay “House of Brands” product offering comprised of a wide assortment of titles from Viacom’s multiple libraries and selected pop- ular shows on BET, Nickelodeon, MTV, Comedy Central, Showtime, and perhaps others. Further, the new streaming service would draw heavily upon the capabilities of Paramount’s and Miramax’s movie and television production studios, Nickelodeon’s Animation Studio, and perhaps other ViacomCBS operations to develop and produce new original con- tent. Going into 2020, ViacomCBS had global pro- duction studios that were currently turning out over 750 shows with 43,000 episodes.8

ViacomCBS said the base tier of the new stream- ing service would be ad-supported, but there would be two higher-end tiers: an ad-free version and a pre- mium version that included Showtime. It was specu- lated that ViacomCBS’s new streaming service could be the final significant streaming offering that hit the market as traditional media companies repositioned themselves and recast their strategies in preparing for a post-cable TV future.

AppleTV+ Apple launched its Apple TV+ video streaming ser- vice on November 1, 2019, in over 100 countries that could be accessed on smart TVs connected to an Apple TV box or on new TV models that had the Apple TV app already installed, or Apple devices with a downloaded Apple TV app. Pitched as Apple’s strategic means of competing directly with Netflix, Amazon Prime Video and Disney+, the new Apple TV+ service streamed Apple’s original programming only through Apple TV-capable devices. An Apple TV+ subscription could be shared with up to six family members. At $4.99 per month (or free for one year with the purchase of a new Apple device), the cost of Apple’s streaming service was lower than the monthly subscription service for most of its video streaming rivals.

At launch, there were just nine Apple Originals available to view; the number had increased to a total of 20 multi-episode shows and five films as of June 2020. However, Apple had committed to add- ing new originals every month and 26 new origi- nal series and seven films were in development for release later in 2020 and 2021. Apple was reportedly

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protect aspiring local providers of Internet-streamed content from foreign competition. Recognizing its dim entry prospects, in 2017 Netflix negotiated a licensing arrangement to exclusively provide some of its original content to a fast-growing Chinese company named iQiyi (pronounced Q wee), the leading pro- vider of online entertainment services in China with some 106 million subscribers (as of September 30, 2019) and a reported 500 million monthly active users watching an average of 12 hours each month on the company’s platforms.11 Use of a licensing strategy was attractive to Netflix because it provided a means of gaining content distribution in China and building some awareness of the Netflix brand and Netflix con- tent, but the licensing arrangement was expected to generate only small revenues for some years to come. The U.S. government had instituted restrictions pre- cluding all U.S.-based companies from having oper- ations in North Korea, Syria, and Crimea.

Netflix estimated that it usually took about two years after the initial launch in a new country or geographic region to attract sufficient subscribers to generate a positive “contribution profit”—Netflix defined “contribution profit (loss)” as revenues less cost of revenues (which consisted of amortization of content

A Quick Overview of the Evolutionary Changes in Netflix’s Subscription-Based Business Model and Strategy, 1999–2019 Netflix had employed a subscription-based business model throughout its history, with members having the option to choose from a variety of subscription plans whose prices and terms had varied over the years. Originally, all of the subscription plans were based on obtaining and returning DVDs by mail, with monthly prices dependent on the number of titles out at a time. But as more and more households began to have high-speed Internet connections, in 2007 Netflix began bundling unlimited streaming with each of its DVD-by-mail subscription options, with the long-term intent of encouraging subscrib- ers to switch to watching instantly streamed content rather than using DVD discs delivered and returned by mail. As increasing numbers of subscribers gained access high-speed Internet connections, most quickly switched over to unlimited streaming subscription plans, enabling Netflix to avoid incurring the order fulfillment costs and postage costs associated with servicing DVD-by-mail subscribers. About two-thirds of Netflix subscribers in the United States had transi- tioned to streaming-only plans by year-end 2011, and fewer than four percent of Netflix’s subscribers in the United States were on DVD-by-mail plans at the end of 2019.

A third major shift in Netflix’s strategy began in 2010 when Netflix started to expand its stream- ing service internationally, beginning with Canada. Entry into other countries followed quickly, as shown in Exhibit 4, and Netflix became a truly global com- pany in 2016. Despite dedicated efforts, going into 2020 Netflix had failed to surmount the barriers erected by the Chinese government that prevented its entry into the People’s Republic of China, the world’s most massive market for entertainment. For the past five years, the Chinese government had steadfastly refused to issue Netflix a license to operate in China, preferring instead to control the content its citizens were allowed to see—for example, government cen- sors required that an entire series of a multi-episode offering had to be approved before it could begin to be shown on an online platform. Aside from the cen- sorship issue, most observers believed the Chinese government was blocking Netflix’s entry in order to

EXHIBIT 4 Netflix’s Rapidly-Executed Entry into New Geographic Areas

Year Entry into New Geographical Areas

September 2010 Canada

September 2011 42 countries in Central America, South America, and the Caribbean

January 2012 United Kingdom, Ireland

October 2012 Denmark, Sweden, Norway, Finland

September 2013 Netherlands

September 2014 Austria, Belgium, France, Germany, Luxembourg, Switzerland

March 2015 Australia, New Zealand

September 2015 Japan

October 2015 Spain, Portugal, Italy

January 2016 Rest of the world—some 130 countries (but excluding the People’s Republic of China, North Korea, Syria, and Crimea)

Source: Company 2017 10-K Report, p. 21.

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supplement its internal efforts by entering into multi- year collaborative agreements with outside develop- ers and producers not owned by its rivals to license portions of their existing titles to Netflix and to pro- duce new original content that would be owned by Netflix or licensed to Netflix.

Netflix started streaming its first original content title, House of Cards, in February 2012; House of Cards, a political drama that ran six seasons, was a major hit with subscribers, garnered acclaim from critics and reviewers, and received 213 awards nomina- tions (Golden Globe, Primetime Emmys, Screen Actors Guild, and others) and 35 overall wins during 2013–2018. Netflix’s spending for new original con- tent mushroomed during the ensuing years, with total spending for new content of $12 billion in 2018 and $15 billion in 2019, of which roughly 85 percent was estimated to be for original content. Spending for 2020 was projected to be $17.3 billion on a cash basis, with 85 percent or more being allocated to original content.12 One Wall Street analyst projected that Netflix’s spend- ing for new content could rise to $26 billion by 2028.13

Netflix’s Strategy in 2020 While over 4.5 billion (57.7 percent) of the world’s population of 7.8 billion people used the Internet as of January 2020 (an increase of 298 million since January 2019)14, Netflix viewed the size of the near- term market potential for securing streaming sub- scribers worldwide (including China) as being the approximately 1.1 billion people/households cur- rently having high-speed wired and wireless internet service.15 Surveys conducted during 2019 indicated that the worldwide average amount of time indi- viduals spent using the internet on any device was 6 hours and 43 minutes, equal to more than 100 days of online time per year.16 The worldwide average fixed internet download speed in December 2019 was 73.6 million bits per second (mbps) and the world- wide average mobile internet download connection speed was 32.0 mbps.17 These speeds were expected to climb steadily toward 100 mbps (or more) by 2025, thereby making it feasible for hundreds of millions more households with fixed internet connections to watch streamed content and paving the way for a rap- idly rising percentage of people worldwide to access streamed content on their smartphones or other mobile devices—going into 2020 there were some 3.5 billion users of smartphones.

assets and expenses directly related to the acquisition, licensing, and production/delivery of such content) and marketing expenses associated with its domestic stream- ing and international streaming business segments (the company ceased all marketing activities related to its domestic DVD business prior to 2015).

A fourth important shift in Netflix’s business model and strategy began in 2011–2012. CEO Reed Hastings and other senior Netflix executives real- ized that there were low barriers to entry into the subscription-based video streaming business for movie producers and TV broadcasters that had over the years amassed big libraries of attractive content. Indeed, many of the titles that Netflix was streaming to subscribers were being licensed from these very same entities, and the license fees for these titles were rising rapidly, as content owners recognized that their title libraries had significant value to Netflix, Amazon, and others who were in the streamed enter- tainment business and that they commanded sig- nificant bargaining power to raise licensing fees as current licenses expired. Netflix executives further foresaw that the company was likely to be put at a significant competitive disadvantage when these con- tent owners came to the conclusion they could make bigger profits from their content libraries by starting up their own video streaming businesses to com- pete against Netflix for subscribers in many country markets rather than licensing titles to Netflix. Reed Hastings and his executive team believed that when content-rich rivals entered the streamed entertain- ment business (as they were certain to do at some point) and triggered a head-on competitive battle for subscribers that the winners would be those com- panies that potential subscribers viewed as having attractive and fresh content they were willing to pay monthly or annual fees to watch. Furthermore, they were certain that when these rivals emerged, they would discontinue renewing their licenses for popu- lar programs (especially TV shows) with Netflix, pre- ferring to use these titles to attract new subscribers to their own streamed entertainment services.

These realizations resulted in Netflix undertak- ing a long-term strategic initiative to change its port- folio of titles from mainly all licensed to a portfolio of titles that was increasing comprised of original content created, produced, and owned by Netflix. The company immediately moved to develop and continually strengthen its in-house content creation and production capabilities, but it also elected to

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As of September 2019, international pricing for the three plans ranged from approximately $3 for a mobile-only plan to $22 per month per U.S. dollar equivalent for a premium subscription plan in Switzerland; in many countries, the monthly prices of standard and premium plans were in the range of $9–$14 per U.S. dollar equivalent.19 Netflix execu- tives expected that the prices of the various subscrip- tion plans in each country would likely rise over time, thereby helping boost the global monthly average revenue the company received per paying subscriber above the 2019 average of $10.82.

Netflix began testing a cheaper mobile-only $3 per month plan in 2018 in India, one of its key developing markets because of the size of India’s population and heavy use of mobile devices for video streaming. The $3 mobile-only plan test in India was successful in boosting subscriber growth and in increasing member retention, prompting Netflix to expand its low-priced mobile offering to Malaysia and Indonesia in 2019; the test in these countries similarly impacted subscriber growth and member retention. In December 2019, Netflix began testing subscription discounts of up to 50 percent if new sub- scribers signed up for three-, six- and 12-month plans; the goal was to gauge the impact of both lower prices and multi-month plans on new signups and member retention and thereby learn more about which types of mobile-only subscription plans tended to produce the biggest gains in subscriber revenues. Netflix indicated that mobile-only plans were likely to be tested in additional countries in 2020, principally in large-population countries where wired high-speed Internet connections were not widely available and where mobile devices were frequently or exclusively used for video streaming.

In January 2020, Netflix CEO Reed Hastings indicated the company had no interest in adding an ad-supported subscription plan, largely because of the difficulties in convincing advertisers to shift some of their advertising dollars to Netflix’s stream- ing platform. In Reed Hastings view, Google, Facebook, and Amazon had tremendously powerful capabilities in online advertising because they gath- ered data about the browsing and purchasing habits of people while they were online (and their personal data as well) from many sources and provided it as service to their advertisers. The valuable user-related data advertisers got from Google, Facebook, and Amazon allowed them to effectively target their ads

Netflix’s strategy going into 2020 was focused squarely on:

• Growing the number of global streaming subscrib- ers, particularly in those countries/geographic regions with the biggest growth opportunities.

• Continuing to enhance the appeal of its library of streaming content, with growing emphasis on exclusive original movies and original series pro- duced in-house and in collaboration with selected outside movie and TV show producers.

• Increasing partnerships with movie and television producers in specific countries to produce original content for audiences in that country’s language.

• Focusing marketing and advertising on the par- ticular countries and geographic regions deemed to have the biggest subscriber growth potential.

• Continuing to introduce mobile-only subscription plans in countries where a big percentage of the population used mobile devices to watch stream- ing content.

Subscription Pricing Strategy Going into 2020, Netflix offered three types of streaming membership plans. Its basic plan, cur- rently priced at $8.99 per month in the United States, included access to standard definition quality streaming (640 × 480 pixels) on a single screen at a time. Its standard plan, currently priced at $12.99 per month and included access to high-definition quality streaming (1080 × 720 pixels) on two screens concur- rently. The company’s premium plan, currently priced at $15.99 per month, included access to 4K ultra-high definition quality (3,840 × 2,160 pixels) content on four screens concurrently. Netflix recommended three mbps of download speed for standard defini- tion streaming, five mbps for high definition and 25 mbps for 4K Ultra HD. During 2019, all three plans were attracting healthy numbers of new subscribers— none of the three clearly stood out as “most popu- lar” worldwide. Netflix management believed this indicated “we’re providing a range of options at a range of price points that allow consumers in the markets that we serve to sort of select into the right model.”18 However, over the past 5–8 years, there had been a very gradual shift towards the highest- priced premium plan, a trend likely being driven by more households purchasing big-screen ultra-high defini- tion TVs.

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watchlist, and then display those titles in each cluster in an order that started with the title that Netflix’s algorithms predicted the subscriber was most likely to enjoy down to the title the subscriber was predicted to least enjoy. In other words, the subscriber’s ratings of titles viewed, the titles on the subscriber’s watchlist, and the title ratings of all Netflix subscribers deter- mined the order in which the available titles in each cluster or genre were displayed to a subscriber—with one click, subscribers could see a brief profile of each title and Netflix’s predicted rating (from one to five stars) for the subscriber. When subscribers came upon a title they wanted to view, that title could be watch-listed for future viewing with a single click. A member’s complete watchlist of titles was immedi- ately viewable with one click whenever the member visited Netflix’s website. With one additional click, any title on a member’s watchlist could be activated for immediate viewing. Netflix management saw its title recommendation software as a quick and per- sonalized means of helping subscribers identify and then watch titles they were likely to enjoy. Netflix’s subscriber tracking data indicated that 80 percent of subscribers’ watch choices came from their personal recommendation engine.

Netflix invested in developing new software capabilities and refining existing capabilities every year. As of 2020, Netflix had data pertaining to:

• The titles each subscriber had viewed in the past several days, the past week, the past month, the cur- rent calendar year, the past calendar year, and the entire period the subscriber had been a member.

• The subscriber’s ratings of each title. • The titles on the subscriber’s watch list. • The number of times each title had been viewed

by all subscribers in both each country and world- wide the past several days, the past week, the past month, the current calendar year, the past calen- dar year, and the entire period that title had been on Netflix.

• The total number of hours subscribers spent watching Netflix titles for each month of each year in each country and worldwide.

Content Strategy Going into 2020, Netflix had bulked its original content offerings up to a total of 1,197 titles, but its streaming library still included 3,751 licensed movies

and realize a bigger return on their advertising expen- ditures. The detailed data that Netflix collected on every subscriber’s viewing history and title prefer- ences was of no value to advertisers and provided zero competitive benefit in taking advertising dollars away from “the big three.” So, for Netflix to attract $5 to $10 billion dollars in advertising to support an ad-based subscription plan posed formidable chal- lenges that Netflix executives firmly believed the company should not try to surmount.20

Netflix’s Strategy to Develop and Employ Viewership Tracking and Recommendation Software to Enhance Its Engagement with Subscribers For some time, Netflix had developed proprietary software technology that allowed members to easily scan a movie’s length, appropriateness for various types of audiences (G, PG, or R), primary cast mem- bers, genre, and an average of the ratings submitted by other subscribers (based on one to five stars). With one click, members could watch a trailer pre- viewing a movie or original series or TV show if they wished. Most importantly, perhaps, were algorithms that created a personalized “percentage match” for each title that was a composite of a subscribers’ own ratings of previously viewed titles, titles the member had placed on a “watchlist” for future viewing, and the overall or average rating of all subscribers (sev- eral billion ratings had been provided by subscribers over the years).

Subscribers often began their search for titles by viewing a list of personalized recommendations that Netflix’s software automatically generated for each member. Each member’s list of recommended titles was also partly the product of Netflix-created algo- rithms that organized the company’s entire content library into clusters of similar movies/TV shows and then sorted the titles in each cluster from most liked to least liked based on subscriber ratings. Those sub- scribers who favorably or unfavorably rated similar movies/TV shows in similar clusters were categorized as like-minded viewers. When a subscriber was online and browsing through the selections, the software was programmed to check the clusters the subscriber had previously viewed, determine which selections in each cluster the customer had yet to view or place on

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to guide decisions of which titles to stream to which countries and then to make changes in each coun- try’s title mix as shifts occurred in the viewing hours devoted to particular genres and the popularity of newly released titles.

However, to increase subscriber satisfaction with its streamed offering to each country, Netflix was continuing a long-term initiative to steam title offerings to more and more countries in their native languages so that subscribers could enjoy better enjoy Netflix’s programs. In the last quarter of 2019, Netflix localized the language of its streaming ser- vice to Vietnam, Hungary, and the Czech Republic (Czechia). Furthermore, Netflix was engaged in an ongoing effort to license content from local produ- cers of movies and TV shows and bundle them with the titles Netflix was streaming to that country from its own title collection. In late 2019, Netflix added new locally-bundled titles in partnership with Sky Italia, Canal+ in France, KDDI in Japan, and Izzi in Mexico.

A related shift underway in Netflix’s content strategy in 2020 was the increased emphasis being placed on growing the number of titles (1) produced in languages other than English, (2) filmed in a greater number of different locations, and (3) built around local country storylines. This shift was being driven not only by the positive local subscriber response to new films and series produced in local languages and containing locally-appealing con- tent but also by Netflix’s tracking data that showed many of these titles had gained popularity in other countries. A new 2017 Brazilian science-fiction show produced in Portuguese for Brazil, to the surprise of Netflix executives, had scored well with audiences around the world—this was Netflix’s first instance of a local-language program working well in loca- tions where other languages dominated. Local lan- guage films produced in India, South Korea, Japan, Turkey, Thailand, Sweden, and the United Kingdom were among the most popular 2019 titles. An origi- nal Spanish series titled La Casa de Papel, which was retitled Money Heist in English-speaking countries and was scheduled to begin its fourth season dur- ing 2020, had developed a wide audience, appear- ing on the top ten most watched titles in more than 70 countries. As of January 2020, Netflix had glob- ally released 100 seasons of local language, original scripted series from 17 countries and had plans for over 130 seasons of such programs in 2020.

and 1,569 television shows.21 New seasons of five original series and sequels to two original movies had already been announced for showing in the first quarter of 2020, following an unusually heavy slate of new originals released in the last two quarters of 2019. Reed Hastings said the company’s fourth quar- ter 2019 slate of releases “set a new bar for the variety and high quality of films we produce to appeal to our members’ many diverse tastes.”22

Three high-profile shows —Parks and Recreation (Peacock), Friends (HBO MAX), and The Office (Peacock)—were all set to leave Netflix and return to rivals during 2020 as current licenses expired. While the loss of these programs was a setback, Netflix management was not unduly disturbed; its chief con- tent officer explained:23

We’ve had, over the years, incredibly popular product come on and off the service . . . . . And typically, what happens is our members, through our incredible per- sonalization, deep library, and broad library, are able to find their next favorite show. And [what will] will happen with Friends fans, [is that] some of them will find it elsewhere, and some of them will find their next favorite show [on Netflix].

To help offset the losses of these popular shows, Netf lix had reportedly spent $100 million for a multi-year license to stream Seinfeld episodes to its subscribers.

Netflix streamed different sizes and combina- tions of portfolio titles to different countries. This was because its title tracking data revealed there were very big differences in the 20 to 30 most-watched titles from country to country. This was partly because of (1) the different languages spoken in dif- ferent countries and the varying percentages of sub- scribers that understood storylines produced in one language versus another and (2) varying subscriber preferences from country-to-country for some types/ genres of movies, series, and documentaries versus others. Netflix’s tracking of program viewership showed clearly that a strategy of streaming much the same number and combination of titles to all coun- tries was inferior compared to a strategy of custom- izing the types of titles streamed to each country to match up well with what its tracking data showed subscribers were watching and to discontinue stream- ing of titles not watched or watched very infrequently. As a consequence it had become standard practice at Netflix to use its title-viewing data for each country

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calculated to please subscribers, boost subscriber retention, and help drive subscriber growth. Netflix had further learned from its viewership tracking data and subscriber growth statistics that media reports of critically-acclaimed reviews of Netflix titles, cou- pled with media reports of Netflix titles receiving numerous nominations and awards, were important positive factors in steering existing subscribers to watch these titles and stimulating subscriber growth. Netflix’s original content programs in 2019 pulled in 24 nominations for the 2020 Academy Awards, more than any other studio. From 2013 through February 2020, Netflix original titles had received 296 nominations and 83 wins24—an indication of the progress the company had made in creating and producing top notch original series and films. As far as Netflix top executives were concerned, the more viewer hours spent watching Netflix originals, the more critically-acclaimed reviews of its original titles, the more award nominations, and the more award wins, the better. All contributed to improving subscribers’ experiences with Netflix, higher com- pany’s revenues and operating margins, bigger inter- nal cash flows from operations, and more funds available for creating more new original content going forward.

Content development projects announced for 2020 included a multiyear pact with Nickelodeon for animated originals; a multiyear film and TV deal with “Game of Thrones” creators David Benioff and Dan Weiss; and a three-year deal with a South Korean media conglomerate for originals and licensed titles and titles from another Korean film producer. Netflix announced in January 2020 that 30 employees in The Netherlands were being transferred to Rome, Italy, for the purpose of opening a new office to strengthen its local content creation partnerships in Italy and work on growing the number of new movies and ser- ies made in Italy.

Marketing and Advertising Strategy in 2019–2020 Netflix spent $2.65 billion on marketing and advertis- ing in 2019, up from $2.37 billion in 2018. Netflix used multiple marketing approaches to attract subscribers, but especially online advertising (paid search listings, banner ads on social media sites, and permission-based e-mails), and ads on regional and national television. Advertising campaigns of one type or another were

As a consequence, in 2020 Reed Hastings and Netflix’s other content programming executives were focused on creating a portfolio of forthcoming titles for every taste, every mood, and every region of the world. A conscious effort was being made to sched- ule releases of premium quality new original films and original series scattered fairly evenly across the year and across all genres so as to provide subscrib- ers in all parts of the world with an ongoing stream of fresh new titles that looked interesting to watch and proved very enjoyable after watching them.

Netflix began ramping up its capabilities to cre- ate new original animation films in 2017. Its first big new feature, Klaus, was released in late 2019, and was an instant audience pleaser in countries across the world and an Oscar nominee for Best Animated Feature. Two new big theatrical-scale animated fea- tures were on tap for release in 2020; Reed Hastings believed both would be competitive with any ani- mated films shown at movie box offices. Animated films traveled more predictably across countries than other types of titles.

Netflix management also relied heavily on its viewership tracking data for each title to guide decision- making on how to allocate upcoming expenditures for new original content. For example, if season one of a new original series was highly popular with subscribers, the series was renewed for a second season, and if a new series failed to spark widespread viewing and garnered only small audi- ences, with declining views of succeeding episodes, the series was canceled. If a new original series or film was viewed by 40 to 70 million subscribers in the first few weeks or months or if its viewership built significantly over a 4-to-12 month period, manage- ment was likely to invest in the development of a sec- ond season of the series and perhaps a new original series or movie in the same genre (action, suspense thriller, science fiction, or adult comedy) for release in the following year. Netflix released two romantic- comedy films in 2019 that proved quite popular with subscribers and quickly decided to follow-up with sequels to both titles in the first half of 2020. It had several action films scheduled for 2020 as follow-on releases for a much-viewed action film released in the last quarter of 2019.

Going into 2020, Netflix was continuing its efforts to upgrade the content and production qual- ity of all new originals—the objective was to present subscribers with premium entertainment content

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Business Segment Reporting— New Metrics for 2020 Until the fourth quarter of 2019 Netflix had reported its performance for three business segments: domestic streaming, international streaming, and domestic DVD. Management used this business segment classification for purposes of making operating decisions, assessing financial performance, and allocating resources. The company’s performance in each of these three business segments for 2015 through 2019 is shown in Exhibit 5.

However, beginning with the fourth quarter of 2019 and going forward, management decided the com- pany’s operations had evolved into a single business— global streaming operations—and revealed that top management, especially the CEO, had begun making operating decisions, assessing financial performance, and allocating resources based on the performance of its streaming operations in four geographic regions: the United States and Canada (UCAN), Europe, the Middle East, and Africa (EMEA), Latin America (LATAM), and the Asia-Pacific (APAC). The com- pany provided a breakdown of its performance in each of the four regions for 2019—see Exhibit 6.

Reed Hastings made special mention of the fact that while subscription prices were different in every country around the world and while management def- initely took note of the average monthly revenues per subscriber in each country and region, Netflix was not managing its business to boost average revenue per subscriber in each country. Rather, management was managing to maximize revenues worldwide. Hastings said:26

Obviously, as we have lower-priced mobile offers, that’s going to bring down a blended [average revenue per subscriber] in a country or in a market. But if we’re doing that in a revenue-accretive way, we think that’s great for our long-term business. We’re growing sub- scribers, and we’re growing revenue.

In the first quarter of 2020, as governments in many countries instituted home confinement orders to stem the spread of coronavirus (COVID-19), Netflix’s global streaming membership surged by a quarterly record 15.8 million to a total of 182.9 million paid subscribers. School-closings and work-from-home policies on the part of many organizations caused mushrooming demand for home entertainment and a jump in the average number of daily viewing hours of Netflix members. In March 2020, Internet usage became so great that a number of governments and

underway more or less continuously, with the lure of one-month free trials and announcements of new and forthcoming original titles usually being the promin- ent ad features. Netflix’s expenditures for digital and television advertising were unreported in 2019 but were $1.8 billion in 2018 and $1.09 billion in 2017. Other marketing costs in 2019 included:

• Costs pertaining to free trial subscriptions. • Payments to mobile operators across the world to

create quick and easy-to-use procedures for smart- phone users to access Netflix streamed or down- loadable programming. Netflix believed it was particularly important to make mobile streaming from Netflix instantly accessible to those people who basically only wanted to have their relation- ship with Netflix on a mobile device.

• Promotional campaigns for new original titles to generate more density of viewing and conversa- tion around each title. Such campaigns involved sending emails to subscribers at least weekly and often more frequently calling attention to titles highly matched to a title viewed the previous day, previous several days, or previous week. E-mails were also sent regularly to announce the avail- ability of new releases that matched well with the subscriber’s viewing history. When users were browsing various titles in various genres of inter- est, there was always a row of titles with the head- ing “Because you watched [title] just under rows of titles on the subscriber’s watch list.

On several occasions, Netflix CEO Reed Hastings called attention to the growing importance of marketing efforts calling a subscriber’s atten- tion to titles closely matched to recently viewed titles or to help make certain new titles a bigger hit in a particular nation or among a particular demo- graphic segment. These were deemed valuable con- tributors to heightening subscriber satisfaction with the entertainment value Netflix was providing and also aiding subscriber retention and the acquisi- tion of new subscribers. Further, because Netflix operated in so many countries, Hastings was a big fan of experimenting with different marketing approaches in different markets and thereby learn- ing more about what worked well in marketing Netflix’s original content and differentiating Netflix from rival streaming providers.25 Those approaches that were successful became candidates for use in other locations.

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CASE 11 Netflix’s 2020 Strategy for Battling Rivals in the Global Market for Streamed Video Subscribers C-157

Domestic Streaming Segment 2015 2016 2017 2018 2019

Paid memberships at year-end 43.4 47.9 52.8 58.5 61.0

Paid net membership additions 5.6 4.7 4.9 5.7 2.6

Average monthly revenue per paying membership $8.50 $9.21 $10.18 $11.40 $12.57*

Revenues $4,180.3 $5,077.3 $ 6,153.0 $ 7,646.6 $ 9,243.0

Cost of Revenues (Note 1) 2,487.2 2,855.8 3,319.2 4,038.4 4,867.3

Marketing costs 313.6 412.9 603.7 1,025.4 1,063.0

Contribution profit (Note 2) $1,375.5 $1,712.4 $ 2,078.5 $ 2,582.9 $ 3,312.6

Contribution margin 33% 34% 34% 34% 36%

International Streaming Segment

Paid memberships at year-end 27.4 41.2 57.8 80.8 106.1

Paid net membership additions 11.7 14.3 18.5 22.9 25.3

Average monthly revenue per paying membership $ 7.48 $ 7.81 $ 8.66 $ 9.43 Note 3

Revenues $1,953.4 $3,211.1 $ 5,089.2 $ 7,782.1 $10,616.2

Cost of Revenues (Note 1) 1,780.4 3,042.7 4,359.6 5,776.0 7,449.7

Marketing costs 506.4 684.6 832.5 1,344.1 1,589.4

Contribution profit (Note 2) $ (333.4) $ (516.2) $ (102.9) $ 662.0 $ 1,577.1

Contribution margin (17)% (16)% (2)% 9% 15%

Domestic DVD Segment

Paid memberships at year-end 4.8 4.0 3.3 2.7 2.2

Average monthly revenue per paying membership $ 10.30 $10.22 $10.17 $ 10.19 Note 3

Revenues $ 645.7 $ 542.3 $ 450.5 $ 365.6 $ 297.2

Cost of Revenues (Note 1) 323.9 262.7 202.5 153.1 123.2

Marketing costs — — — — —

Contribution profit (Note 2) $ 321.8 $ 279.5 $ 248.0 $ 212.5 $ 174.0

Contribution margin 50% 52% 55% 58% 59%

Global Totals

Paid memberships at year end 75.6 93.1 117.2 142.0 169.3

Global average monthly revenue per paying membership $ 8.15 $ 8.61 $ 9.43 $10.31 $10.82

Revenues $6,779.5 $8,830.7 $11,692.7 $15,794.3 $20,156.4

Operating income 305.8 379.8 838.7 1,605.2 2,604.2

Operating margin 5% 4% 7% 10% 13%

Net income $122.6 $186.7 $ 558.9 $1,221.2 $1,867.0

* Includes United States and Canada, due to a Q4 2019 change in Netflix’s reporting of its geographic business segments.

Note 1: Cost of revenues for the domestic and international streaming segments consist mainly of the amortization of streaming content assets, with the remainder relating to the expenses associated with the acquisition, licensing, and production of such content. Cost of rev- enues in the domestic DVD segment consist primarily of delivery expenses such as packaging and postage costs, content expenses, and other expenses associated with the company’s DVD processing and customer service centers.

Note 2: The company defined contribution margin as revenues less cost of revenues and marketing expenses incurred by segment.

Note 3: Netflix discontinued reporting this statistic due to a change in the definitions of its geographic business segments, effective with the fourth quarter of 2019.

Source: Company 2017 10-K Report, pp. 19–22 and pp. 59–61; Company 2018 10K Report, pp. 20–22 and pp. 60–62; and p. 15 of Reed Hastings’ “Letter to Shareholders,” included as part of the company’s Report of Fourth Quarter 2019 Earnings, January 21, 2020.

EXHIBIT 5 Netflix’s Performance by Business Segment, 2015–2019 (in millions, except for average monthly revenues per paying member and percentages)

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Three months ended

March 31, 2019

June 30, 2019

Sept. 30, 2019

Dec. 31, 2019

Full Year 2019

UCAN Streaming

Revenue $ 2,257 $ 2,501 $ 2,621 $ 2,672 $ 10,051.2

Paid Memberships 66.63 66.50 67.11 67.66 67.66

Paid Net Additions 1.88 −0.13 0.61 0.55 2.91

Average Monthly Revenue per Paid Subscriber $ 11.45 $ 12.52 $ 13.08 $ 13.22 $ 12.57

EMEA Streaming

Revenue $ 1,233 $ 1,319 $ 1,428 $ 1,563 $ 5,543.1

Paid Memberships 42.54 44.23 47.36 51.78 51.78

Paid Net Additions 4.72 1.69 3.13 4.42 13.96

Average Monthly Revenue per Paid Subscriber $ 10.23 $ 10.13 $ 10.40 $ 10.51 $ 10.33

LATAM Streaming

Revenue $ 630 $ 677 $ 741 $ 746 $ 2,795.4

Paid Memberships 27.55 27.89 29.38 31.42 31.42

Paid Net Additions 1.47 0.34 1.49 2.04 5.34

Average Monthly Revenue per Paid Subscriber $ 7.84 $ 8.14 $ 8.63 $ 8.18 $ 8.21

APAC Streaming

Revenue $ 320 $ 349 $ 382 $ 418 $ 1,469.5

Paid Memberships 12.14 12.94 14.49 16.23 16.23

Paid Net Additions 1.53 0.80 1.54 1.75 5.63

Average Monthly Revenue per Paid Subscriber $ 9.37 $ 9.29 $ 9.29 $ 9.07 $ 9.24

Total Streaming

Revenue $ 4,440.0 $ 4,846.0 $ 5,173.0 $ 5,399.0 $ 19.859.2

Paid Memberships 148,860 151,510 158,334 167,090 167,090

Paid Net Additions 9.60 3.43 6.77 8.76 27.83

Average Monthly Revenue per Paid Subscriber

Not reported

Not reported $ 11.13 $ 11.06 $ 10.82

Source: Company website, Excel spreadsheet regional information for 2019, posted in the Investor Relations section as part of the company’s report of Fourth Quarter 2019 Financial Results, www.netflix.com, accessed February 15, 2020.

EXHIBIT 6 Netflix’s Performance by Geographic Region, 2019 (in millions, except for average monthly revenues per paid subscriber)

internet service providers asked Netflix to temporarily reduce the network traffic of its members. According to CEO Reed Hastings,27

Using our Open Connect technology, our engineer- ing team was able to respond immediately, reducing network use by 25 percent virtually overnight in those countries, while also substantially maintaining the qual- ity of our service, including in higher definition. We’re now working with ISPs to help increase capacity so that we can lift these limitations as conditions improve.

Netflix executives expected as progress was made in containing the virus and reducing new

infections that membership growth and viewing hours would decline

The Financial Strain of Netflix’s Growing Expenditures for Original Content and Other Content Acquisitions The company’s heightened strategic emphasis on original content produced in-house had resulted in multi-billion-dollar annual increases in Netflix’s financial obligations to pay for streaming content

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CASE 11 Netflix’s 2020 Strategy for Battling Rivals in the Global Market for Streamed Video Subscribers C-159

would continue to experience negative, but progres- sively smaller, cash flow deficits, for several more years due to growing expenditures for original con- tent. However, executive management was confident that the company’s expected growth in subscribers, subscription revenues, and operating profit margins would in the near future result in positive and growing cash flows from operations, enabling the company

and sharply higher negative cash flows from opera- tions (see Exhibit 7). Netflix was covering these obli- gations with new issues of common stock and new issues of senior notes; details of Netflix’s outstanding senior notes are shown in Exhibit 8.

Netflix management forecasted that the com- pany would have a negative free cash flow deficit of about $2.5 billion in 2020 and that the company

2019 2018 2017 2016 2015

Streaming content obligations at year-end $ 19,490.1 $ 19,285.9 $ 17,694.6 $ 14,479.5 $ 10,902.2

Additions to streaming content assets 13,916.7 13,043.4 9,805.8 8,653.3 5,771.6

Additions to DVD content assets Note 1 38.6 53.7 77.2 78.0

Amortization of streaming content assets 9,216.2 7,532.1 6,197.8 4,788.5 3,405.4

Amortization of DVD content assets 2.7 41.2 60.7 79.0 79.4

Net cash used in operating activities (2,887.3) (2,680.5) (1,785.9) (1,474.0) (749.4)

Proceeds from issuance of debt 4,469.3 3,921.8 3,020.5 1,000.0 1,500.0

Proceeds from issuance of common stock 72.5 124.5 88.4 37.0 78.0

Outstanding senior notes 14,893.0 10,360.0 6,499.4 3,364.3 2,371.4

Note 1: This item was reclassified and merged into a different accounting category on the company’s Cash Flow Statement.

Source: Company 10-K Reports 2019, 2018, 2017, 2016, and 2015.

EXHIBIT 7 The Growing Financial Strain of Netflix’s Strategic Emphasis on Producing Original Content In-House, 2015–2019 (in millions of dollars)

Debt Issues Principal Amount

at Par Issue Date Maturity Date Interest Due Dates

4.875% Senior Notes $1.00 billion October 2019 June 2030 June 15 and December 15

3.625% Senior Notes $1.23 billion October 2019 June 2030 June 15 and December 15

5.375% Senior Notes $1.34 billion April 2019 November 2029 June 15 and December 15

3.875% Senior Notes $900 million April 2019 November 2029 June 15 and December 15

6.375% Senior Notes $800 million October 2018 May 2029 May 15 and November 15

4.625% Senior Notes $1,260 million October 2018 May 2029 May 15 and November 15

5.875% Senior Notes $1.9 billion April 2018 November 2028 April 15 and November 15

4.875% Senior Notes $1.6 billion October 2017 April 2028 April 15 and October 15

3.625% Senior Notes $1.561 billion May 2017 May 2027 May 15 and November 15

4.375% Senior Notes $1.0 billion October 2016 November 2026 May 15 and November 15

5.500% Senior Notes $700 million February 2015 February 2022 April 15 and October 15

5.875% Senior Notes $800 million February 2015 February 2025 April 15 and October 15

5.750% Senior Notes $400 million February 2014 March 2024 March 1 and September 1

5.50% Senior Notes $700 million February 2015 February 2022 April 1 and October 1

5.375% Senior Notes $500 million February 2013 February 2021 February 1 and August 1

Source: Company 2019 10-K Report, p. 55.

EXHIBIT 8 Netflix’s Outstanding Long-Term Debt as of December 31, 2019

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But there is also a very large market opportunity; today we believe we’re less than 10% of TV screen time in the U.S. (our most mature market) and much less than that in mobile screen time. Many [industry observers] are focused on the “streaming wars,” but we’ve been competing with streamers (Amazon, YouTube, Hulu) as well as linear TV for over a decade. The upcoming arrival of services like Disney+, Apple TV+, HBO Max, and Peacock is increased competition, but we are all small compared to linear TV. While the new competitors have some great titles (especially catalog titles), none have the variety, diversity, and quality of new original programming that we are producing around the world. The launch of these new services will be noisy. There may be some modest headwind to our near-term growth. . . In the long-term, though, we expect we’ll continue to grow nicely given the strength of our service and the large market opportunity. By way of example, our growth in Canada, where Hulu does not exist, is nearly identical to our growth in the U.S. (where Hulu is very successful at about 30 million paid memberships).

to reduce borrowing and begin to pay down its long- term debt. In April 2018, CEO Reed Hastings said:28

We will continue to raise debt as needed to fund our increase in original content. Our debt levels are quite modest as a percentage of our enterprise value, and we believe [issuing] debt is [a] lower cost of capital com- pared to equity.

Reed Hasting’s View of the Forthcoming Globally Competitive Battle for Streamed Entertainment Subscribers In Reed Hastings’ “Letter to Shareholders” in October 16, 2019, he talked about the upcoming streaming war with all the various new competitors:29

We compete broadly for entertainment time. There are many competitive activities to Netflix (from watch- ing linear TV to playing video games, for example).

ENDNOTES 11 Monthly active users and hours watched are based on information about iQiyi posted on Wikipedia (accessed January 27, 2020). 12 Todd Spangler, “Netflix Projected to Spend Over $17 Billion on Content in 2020,” Variety, January 16, 2020, posted at www.Variety.com (accessed February 11, 2020). 13 Ibid. 14 Digital 2020 Global Overview Report, posted at www.thenextweb.com on January 30, 2020 (accessed February 10, 2020). 15 Transcript of remarks by David Wells, Netflix’s Chief Financial Officer, at Morgan Stanley, Technology, Media & Telecom Conference, February 27, 2018, www.netflix.com (accessed April 5, 2018). 16 Digital 2020 Global Overview Report, posted at www.thenextweb.com on January 30, 2020 (accessed February 10, 2020). 17 According to the Speedtest Global Index, posted at www.speedtest.net (accessed February 10, 2020). 18 From p. 7 of Netflix’s 4th Quarter 2019 Earnings Call Transcript, January 21, 2020, posted in the Investor Relations section at www.netflix.com. 19 Rebecca Moody, “Which countries pay the most and least for Netflix?” posted September 3, 2019 at www.comparitech.com (accessed February 12, 2020). 20 For more details, see p.14 of Netflix’s 4th Quarter 2019 Earnings Call Transcript, January 21, 2020, posted in the Investor Relations section at www.netflix.com. 21 According to data from JustWatch.com, posted on January 17, 2020 and cited

1 As reported by Andrew Liptak, “The MPAA says streaming video has surpassed cable viewing worldwide,” posted at www.theverge .com, March 21, 2019 (accessed February 3, 2020). 2 Amazon press release announcing 4th Quarter 2019 financial results, January 30, 2020. 3 Savannah Marie, “Report: Amazon Prime Movie Library almost 5x the Size of Netflix and Nearly 7.5x the Size of Hulu,” Xanjero Media, January 29, 2019, posted at www.xanjero.com (accessed February 3, 2020). 4 Amazon press release announcing 4th Quarter 2019 financial results, January 30, 2020. 5 Transcript of Peacock’s Investor Day Presentation, January 16, 2020, posted in the Investor Relations section at www.cmcsa.com (accessed February 7, 2020). 6 Peacock Investor Day Presentation Slides, January 16, 2020, posted in the Investor Relations section at www.cmcsa.com (accessed February 7, 2020). 7 Transcript of Peacock’s Investor Day Presentation, January 16, 2020, posted in the Investor Relations section at www.cmcsa.com (accessed February 7, 2020). 8 ViaconCBS Factsheet, posted at www.viacbs. com (accessed February 13, 2020). 9 Ryan Vlastelica and Bloomberg, “Apple’s push in TV is ‘failing to resonate’, says analyst,” posted at www.fortune.com, February 3, 2020 (accessed February 9, 2020). 10 Ibid.

in Joe Supan, “Everything You Need to Know About Netflix,” Allconnect, posted at www.allconnect.com, January 17, 2020 (accessed February 11, 2020). 22 Reed Hastings, “Letter to Shareholders,” p. 3, included as part of Netflix’s announcement of fourth quarter 2019 earnings, January 21, 2020, posted in the Investor Relations section at www.netflix.com. 23 From p. 11 of Netflix’s 4th Quarter 2019 Earnings Call Transcript, January 21, 2020, posted in the Investor Relations section at www.netflix.com. 24 Wikipedia, https://en.wikipedia.org/ wiki/List_of_accolades_received_by_Netflix (accessed February 14, 2020). 25 Based on Reed Hastings’ comments during the company’s conference call announcing the company’s financial results in the first quarter of 2018, April 16, 2018. 26 Netflix’s 4th Quarter 2019 Earnings Call Transcript, January 21, 2020, posted in the Investor Relations section at www.netflix .com. 27 Reed Hastings, “Letter to Shareholders,” p. 2, included as part of Netflix’s announcement of first quarter 2020 earnings, April 21, 2020, posted in the Investor Relations section at www.netflix.com. 28 Company press release, April 16, 2018. 29 Reed Hastings, “Letter to Shareholders,” p. 5, included as part of Netflix’s announcement of third quarter 2019 earnings, October 16, 2019, posted in the Investor Relations section at www.netflix.com.

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