netflix1

UVA-M-0763 Rev. Sept. 19, 2011

This case was prepared by Research Assistant Giandomenico Sarolli under the supervision of Associate Professor Rajkumar Venkatesan. It was written from published sources as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  2008 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. ◊

NETFLIX INC.: DVD WARS Introduction

Though few would have guessed it at the time, 1997 proved to be a watershed year in the home video entertainment business. In that year, three events conspired to change home entertainment forever. Sumner Redstone, owner of Blockbuster Video, came up with a revolutionary pricing scheme for VHS videos that simultaneously poured profits into the coffers of the six large movie studios and consolidated the stranglehold that Blockbuster had on home rentals. Secondly, Sony and Time Warner were releasing the first set of films on an entirely new medium: DVD. Finally, a small video rental company, Netflix—which delivered videos directly to people’s doors—was founded, promising to eliminate the need to ever go to a video store again. It may turn out that 2007, the ten-year anniversary, proves to be fundamental in the survival of the two companies affected by the 1997 revolution. In fact, the future may show that 2007 was the beginning of a new revolution in home entertainment, just as great as the 1997 one.

Reed Hastings, the founder of Netflix, once termed his business a “goose bump delivery

service.”1 In that vein, he positioned his company to deliver as many goose bumps as possible, as quickly as possible. After going public in 2002, he began quickly approaching his goal of 10 million subscribers by 2012, with 7 million in 2007 (Table 1).

Yet, the subscription based rental model pioneered by Netflix was under threat from

multiple fronts. First, Blockbuster provided a multi-channel challenge to Netflix’s online only rental model. Second, the exclusive window for rental movies disappeared. This included national mass-merchandisers like Walmart and Best Buy as competitors because a movie was now available for sale the same day it was available for rent. Finally, other startups like Redbox (backed by McDonalds) were innovating on both the price per rental and the distribution strategy for DVDs. Hastings, bet all on only two internet based distribution options: mail-delivered films and digital video on demand (VOD). He was also hesitant to embrace selling of movie DVDs or including video games in his product portfolio. On the other hand, Jim Keyes, the new CEO of Blockbuster viewed selling DVDs and video games as a necessity rather than an option.

1 Economist, v371 i8375 (15 May 2004) 16.

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-2- UVA-M-0763

Table 1. Netflix subscriber growth.

Movie Night

A movie rental, though very simple in theory, represented a coming together of several distinct actions. The most popular movie-rental period was toward the end of the week. Customers typically drove a mile or two from their residence, perused the shelves of the video store, picked a movie that was popular or at least known to the patron, noted if the movie was in stock, and rented it. Movie rentals were therefore spontaneous decisions and required the customer to leave his or her home. New releases were more expensive than the old movies, therefore, the cost of a video rental ranged from $3 to $6, depending on how long the movie was kept. The movies, in general, were rented out for about a week, however, new releases had a shorter rental period of about three days. If the customer was late in returning the movie, there was an additional cost, per day of delay. According to Tara Lemmey in BusinessWeek, “the Blockbuster business model demanded that you be in town and on time. As if your life worked that way.”2

Growth for national chains like Blockbuster and Hollywood Video was primarily obtained by opening new stores. Blockbuster concentrated on opening stores in strategic

2 BusinessWeek on-line, (13 September 2005).

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-3- UVA-M-0763 locations or where the population density was high enough to be profitable. By 1990, Blockbuster claimed to have a store within a 10-minute drive of 70% of the U.S. population. Several “mom-and-pop” video stores also survived the Blockbuster expansion by opening stores where the national chains were not present.

The selection of films depended on the size of the retail outlets. Small mom-and-pop stores typically had collections of a few hundred to a thousand videos for rental, whereas Blockbuster had about 2,500 titles per store. Yet Blockbuster catered only to the average consumer. Any attempt to move to the fringe was not profitable, because a video needed to be rented 13 times to justify its purchase price and the exposure on the store shelves.

That limited selection led to a vicious circle of picking winners. About 70% of the films

rented at Blockbuster were new releases.3 This was clearly a situation where Pareto’s Principle applied: 20% of the films rented would generate 80% of the profit of the firm. As a result, most customers gravitated to the same subset of films. In many video stores, this resulted in a stock- out.

Late returns were also a thorny problem for rental stores. Any movie that was not back on

the shelf at a video store could not be rented, which could, in turn, deter future visits by some customers. In order to get movies returned on time, video stores charged late fees for films not returned by the due date (usually three to five days from being rented). This monetized the delay in restocking the film and encouraged the prompt return of movies. Nowhere was this policy more important than at Blockbuster, where removal of many forms of late fees caused a charge to revenue of $400 million.4 The prevalence of late fees led to the brick-and-mortar stores being compared to a library where tardiness was punished, and there was “the unspoken accusation you were irresponsible on top of everything else.”5

In many ways, this system of film consumption was prompted by the pricing structure of

the film industry and the seemingly ironclad-power laws of movie hits. Blockbuster was instrumental in changing the licensing fee structure of feature films. To combat the problem of stock-outs, Sumner Redstone (then chairman of Blockbuster) came up with an ingenious solution—licensed videos. He convinced studios of the benefits of a new pricing structure. Instead of an outright purchase, he would advance the studios $4 per film to cover manufacturing and would grant 40% of the revenue from rentals over a predetermined period. At the end of this period, the videos would be returned to the studio or sold as previously viewed copies. This allowed him to stock even hundreds of copies per store for less than the purchase price of the 20 films under the previous system. This revenue-sharing agreement had an extra benefit for Blockbuster. In order to monitor the partnership between the studios and Blockbuster, Redstone proposed hooking up the Blockbuster computers to Rentrak, Corp. This information technology

3 Timothy Mullaney, “Netflix: The Mail-Order Movie House that Clobbered Blockbuster,” BusinessWeek (25

May 2006). 4 Mullaney, also see Blockbuster financials where late fee is broken out. 5 Mullaney.

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-4- UVA-M-0763 (IT) investment was one that only large rental chains could permit themselves. Thus, Blockbuster jumped from under 40% market share of video rentals in 1997 to over 50% in 2002. “Late” Founding

In 1997, Reed Hastings founded Netflix in Los Gatos, California, after paying $40 in late fees to the local video store for Apollo 13.6 He saw the need to allow people to watch movies differently. He asked, “How come movie rentals don’t work like a health club, where, whether you use it a lot or a little, you get the same charge?”7 The key was to let people watch movies whenever they wanted. The Netflix model was simple. Movies that consumers ordered from Netflix’s Web site were shipped to their houses. Once consumers watched the movies, they returned them to Netflix in envelopes that were shipped along with the DVDs. Netflix claimed that it could ship videos to most customers in less than 24 hours.

Netflix’s first innovation was to eliminate late fees in December of 1999. Customers who

paid a fixed monthly fee of about $16, kept films as long as they wanted and rented as many as four movies in a single order. There were no late fees for movie returns in this model. In fact, technically, the longer consumers kept films, the lesser the shipping cost per movie rental for Netflix. Customer retention under this system, however, depended on customers renting more movies per month. As Hastings stated, “If they [the customers] rent just two movies a month, they may decide it is not worth it.”8

The other objective of Netflix was to increase customer profitability by improving the monthly orders per customer to the corporate average of five per month.9 Customer lifetime value therefore depended on Netflix’s ability to encourage customers to rent more, and in the process, exploit its large catalogue of movie titles. Netflix had special promotions that encouraged current customers to refer the service to their friends and family. All these efforts led to an upward trend in customer retention, as seen in Table 2. Further details on Netflix’s subscriber base and customer profitability are provided in the case dataset.

6 Chris Taylor, “The Movie Is in the Mail,” Time v159 i11 (18 March 2002): 67. 7 Chris Taylor. 8 Alan Cohen, PC Magazine (19 February 2003). 9 Alan Cohen.

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-5- UVA-M-0763

Table 2. Netflix customer retention and acquisition rates by quarter.

Data source: Company annual reports.

Community and Recommendations

In order to expand its customer base and reduce its need to rely only on the most popular films, Netflix spent much time and energy on mining the data it collected on movie rentals. By 2007, Netflix had close to 1 billion movie reviews, with customers reviewing an average of 200 movies each. Netflix developed a simple, but fairly effective, algorithm to recommend movies. The recommendations system compared each user’s purchases to those with similar tastes and then suggested an unseen and highly rated film (for examples of Netflix’s customer community and recommendations system interface, see their Web site at: http://www.netflix.com). These reviews and a large catalogue, with close to 85,000 titles, meant that new releases accounted for only 30% of Netflix’s rentals. Also, each quarter, 95% of Netflix’s titles were rented. In effect, Netflix was picking up revenue from the entire distribution of tastes, allowing it to pick up customers where a brick-and-mortar Blockbuster could not satisfy demand.

Even the recommendation system evolved at Netflix to take advantage of the large

catalogue that Netflix enjoyed. On January 25, 2000, Netflix introduced a new recommendation system called Cinematch. The system was set up to be as simple and as accurate as possible. Each customer was prompted to rate certain movie genres and specific movies on a one- to five- star scale. The program then used this information to compare it to its customer database and find others with similar taste in those titles. It then offered a predicted star value for each movie.

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-6- UVA-M-0763 As the customer rated more films, the accuracy of the data improved substantially.10 As Hastings stated, “Over 50% of our traffic comes via the recommendation system. It requires a lot of database work done in real time.”11

Logistics

The Netflix model entailed a fairly sophisticated logistics network that was comparable to methods used by the courier giants Federal Express and UPS. Each customer was assigned to a logistics center as their home base. This guaranteed that the DVDs were shipped from the closest point possible (thus, the quickest delivery). Each item in the queue was sent in the order listed. Therefore, each shipping query was matched against the library of titles at the closest distribution center. If the film was currently unavailable there, the next closest center was queried. If that choice was not found at any of the centers, the next movie on the cue was sent out, with a return label for the home queue.12 Windows on Film

Movie rentals depended on a multiphased movie distribution system that involved theaters, rentals, and retail. The rental phase of a movie lagged behind the theatrical release by about 16 to 24 weeks.13 In the rental phase, movies could be purchased for about $100 by anyone directly from the distributers (though video stores used wholesalers and brought the price down to $65) and then rented to others without any additional fees. Then movies were available for purchase for an average price of $20.7814 in retail stores like Best Buy, Circuit City, and Wal- Mart. This was the “sell-through” period, which lasted another 59 to 74 days.15 The final release was to the television market, where it was shown on pay-per-view, video-on-demand, premium television, basic cable, and network television. This data is depicted in Table 2.

The dot-com boom in the late 1990s also allowed for some first adopters to use the new medium then emerging: digital versatile disks (DVDs). Though DVD players were not yet mainstream, achieving 50% household penetration only in 2002, as seen in Table 3, this was the medium of the future.16

10 Corporate press release, 25 January 2000. 11 Alan Cohen. 12 Alan Cohen. 13 Charles Weinberg, “Profits out of the Picture,” in Concise Handbook of Movie Industry Economics, Charles

Moul (ed.) (C.U.P., 2005). 14 Weinberg, “Profits out of the Picture.” 15 Blockbuster Annual Report, 2006. 16 “DVD Penetration in U.S. TV Households,” quoted from MPA U.S. Entertainment Industry: 2006 Market

Statistics.

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-7- UVA-M-0763

Starting in 1997, movie distributers began using the pricing strategies pioneered by Redstone.17 Retailers paid an upfront fee of $3 to $8 per movie and retained about 45% of revenues.18 Furthermore, release dates for rental and retail coincided. This allowed many retailers and rental stores to stock up on many more titles without paying substantial overhead. This implied that while video rental stores could choose between a revenue-sharing model and a straight-purchase model, the competition increased to include all retailers as well. Blockbuster, for one, had to compete with Wal-Mart. Furthermore, stores like Wal-Mart used DVDs as loss leaders: “[They] often used DVD sales not as an end in themselves but a means to an end: building ‘traffic’ for other items in their stores.”19 The new lifecycle for movies is provided in Table 3.

Table 3. Movie life cycle and consumption channels.

Type of film release Window Cost to final user Theatrical release 0 to 3 months $10/person Rental/Sale window 3 months onward $3 to $6/DVD VOD or pay-per-view 6 to 9 months $5/film for 24 hours Subscription TV (e.g. HBO) 10 months to 2 years Included in monthly subscription Network television 2 years to 5 years No cost Non-subscription cable 5 years to 12 years No cost Local TV 12 years to 30 years No cost

In fact, retail channels had larger revenues on DVD sales than on DVD rentals. Table 4

compares the trend in rental units and retail units of DVDs and VHS tapes for four years from 2002 until 2006.

Table 4. Trend in rental and retail units.20

Year Units (in millions) Percent change vs.

Rental DVDs Sell-through DVDs Total DVDs Prev. period 2006 2006 184.5 1,140.2 1,324.7 2.5% 2005 178.4 1,114.5 1,292.9 6.6% 2.5% 2004 149.1 1,063.3 1,212.4 37.9% 9.3% 2003 110.9 768.3 879.2 42.0% 50.7% 2002 79.3 539.9 619.2 113.9%

17 Edward Epstein, The Big Picture (New York: Random House), 71. 18 Weinberg, “Profits Out of the Picture.” 19 Edward Epstein, 210. 20 Adams Media Research quoted in MPA U.S. Entertainment Industry, 2006 market statistics.

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-8- UVA-M-0763 Video Rental Industry in 2007

Rental industry revenue declined in real terms from $8.5 billion in 2004 to an estimated $8.1 billion in 2007. Furthermore, revenue shifted to subscription services, from about 6% of total revenue in 2004 to an estimated 29% in 2007.21 Video on demand (VOD), which obviated both the travel time to the store and the shipping time from on-line vendors, had about a 12% share. Market shares for various video rental distribution channels are provided in Table 5.

Table 5. Channel shift of video rental distribution, 2004 to 2007.

Data source: Blockbuster Analyst Day presentation, November 8, 2007.

Video on demand

With VOD, customers used high-speed Internet connections and downloaded movies for immediate viewing. Video on demand was an advanced pay-per-view programming service that enabled viewers to order and watch movies on demand and to pause, rewind, or fast-forward them.22 Though there was still an exclusive window for retail and rental of films, VOD was gaining ground. This provided interactive capabilities to the user that were similar to that of a traditional DVD, including stopping and rewinding. Both Blockbuster and Netflix had links with this medium, in particular through their association with TiVo, the TV digital recording service. Though the area of VOD was still small (Table 6), it was growing constantly and was expected

21 Average of Adams Media Research, 31 August 2007, and Kagan Research, 24 May 2007, quoted in

Blockbuster quarterly presentation 2007-III. 22 MPA definition.

Stores, 84.8%

Stores, 65.6%

By mail, 5.3%

By mail, 19.1%

View on demand, 9.9% View on

demand, 11.9%

Vending, 0.0% Vending, 3.4%

2004 2007E

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-9- UVA-M-0763 to be a bigger player for both Blockbuster and Netflix as bandwidth caught up with the demand for downloaded films.

Table 6. VOD household penetration.23

Year TV households

(in millions) VOD households

(in millions) VOD penetration rate (% of TV households)

2006 111.4 29.9 26.8% 2005 110.2 27.3 24.8% 2004 109.6 16.9 15.4% 2003 108.4 9.5 8.8% 2002 106.7 6.0 5.6% 2001 105.5 2.5 2.4%

2000 102.2 0.4 0.4%

Since 2005, Netflix had an agreement with TiVo to pipe films directly to customers’

televisions. The acquisition of Movielink from a consortium of movie studios allowed Blockbuster to increase their VOD capabilities and to compete against Netflix digital.

Competition

Market shares of the video rental firms are provided in Table 7.

Table 7. Share of video rental market in 2004 and 2007.24

23 “Video on Demand (VOD) Households,” MPA U.S. Entertainment Industry, 2006 market statistics. 24 Blockbuster estimates.

3.4% 9.9%

11.9% 6.2%

6.3%

35.4% 23.5%

11.6%

8.7%

31.6%

33.1%

5.3% 13.1%

2004 2007E

Netflix

Blockbuster

Hollywood

Independents

Movie Gallery

Video on demand

Vending machine

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-10- UVA-M-0763 The New Blockbuster

In November 2006, with Blockbuster introduced its Total Access program. The novelty and power of this system was that it allowed customers to rent DVDs by mail and then return them, free of charge, at participating stores (typically the corporate-owned stores, not the franchised ones). This was potentially a critical innovation, as it seemed to combine the two dominant forms of video rental into one: the convenience of brick-and-mortar stores and the selection of an on-line catalogue. The initial price for this program was set at $20 for three movies, in direct competition with Netflix.

This program had, however, lead to the subsidization of the on-line service by the video

stores. It was estimated to cost Blockbuster $2 per customer return, but also increased Blockbuster’s on-line base rapidly to 3 million (Table 8).25 Blockbuster estimated lost revenues of $50 million per year since the program started.

Table 8. By-mail channel paid-subscriber additions.26

Total Access directly competed with Netflix’s mail-order system, with the addition of utilizing the store as a time-saving device. To further differentiate Blockbuster from Netflix, Total Access made use of a different recommendation system—by some metrics, more accurate than the Cinematch used by Netflix. The Blockbuster system combined three recommendation methods: collaborative filtering, behavioral targeting, and attributized approach. Collaborative filtering recommended choices based on what other customers, with similar tastes to the subscriber’s, preferred. This was one of the main filters for Netflix. Behavioral targeting had been used by Amazon and simply looked at past purchases and recommended movies based on

25 Blockbuster Annual Report 2006. 26 Blockbuster quarterly investor presentation 2007-III.

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Netflix

BB

Launch of BLOCKBUSTER Total Access

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-11- UVA-M-0763 that. The attributized approach instead broke down a film into a set of characteristics and matched people based on films with those same characteristics. As the number of Internet users grew, better recommendation systems became more important.27

Partially in response to Netflix, the shifting landscape of the movie rental industry, and

the poor performance in 2007, Blockbuster’s Jim Keyes unveiled an entirely new strategy for Blockbuster. The new plan consisted of restoring Blockbuster’s core rental business and improving retail sales of DVDs. Keyes expected to improve the rental business by entering into new revenue-sharing agreements with studios on films, exclusivity deals with some studios, and leveraging the library that Blockbuster already owned through sequel and prequels for popular movies. The other aspect of Keyes’s strategy involved rebalancing the retail and rental weights of revenue from the current preponderance of rental revenue at Blockbuster to a more balanced mix. For example, Shrek 3 had industry shipments of 20% rental and 80% retail, Blockbuster, instead, had 70% rental and 30% retail. This paradigm expanded Blockbuster to include: in-store, mail, games, Movielink, Blockbuster Total Access, Blockbuster Movie Pass, and Blockbuster Rewards. New Startups

Competitors like VUDU, CinemaNow, and redbox also presented a threat to Netflix. Each of those companies provided another distribution channel for films. VUDU, founded in 2004, was a VOD service provider that used broadband to deliver films for rent or ownership directly to homeowners’ televisions. VUDU aimed to achieve critical mass by exploiting the growing penetration of broadband in residential areas. VUDU competed with both Netflix and Blockbuster’s new VOD services. While Blockbuster relied on its blockbuster.com site to induce film downloads, Netflix was banking on its TiVo venture to get access to television.

CinemaNow, instead, was a pure Web player for movie downloads that was founded in

1999. They allowed a range of options including: download to own, pay-per-view, and burn-to- DVD. In the download-to-own option, the customer downloaded the film for between $9.99 and $19.99, and played it an unlimited number of times on up to three portable digital media players, similar to iTunes. The pay-per-view method was priced between $2.99 and $3.99 and allowed playing of the film over a 24-hour window. The burn-to-DVD option was priced between $8.99 and $14.99 and allowed a full DVD to be burned and played on any DVD player.

The third competitor, redbox, used vending machines to deliver the rental DVDs. This

was a joint venture between McDonalds and Coinstar, which was founded in 2005. A customer rented a film from the vending machine and was charged $1 per DVD per day until the DVD was returned to any other vending machine. The redbox vending machines carried about 80 titles each of mostly new releases. Besides McDonalds, redbox was located in many supermarket chains like Giant and Albertson’s. Vending machines were directly mentioned as an expansion strategy by Jim Keyes and Blockbuster.

27 “We Know What You Ought to be Watching This Summer,” Wall Street Journal (31 July 2007): D1.

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-12- UVA-M-0763 Decisions

Netflix, in many ways, was a pioneer in the film-consumption market, and possibly was leading to its own demise as the industry moved full circle with a combination of brick-and- mortar and on-line catalogues—or as it moved away completely with the use of video on demand services. Thus, the question Hastings found himself asking was how influential was the digital revolution going to be. According to Ted Sarandos, chief content officer at Netflix, the answer was that it would be influential, but only after several years. If VOD and digital delivery spread like the DVD player, then it would be another five years before any significant penetration. He cited key statistics to point to Netflix’s strategy. First, the DVD player took five years to reach a 50% household penetration. Second, in the music business, despite the relevance of iTunes, 90% of sales dollars came from sales of CDs.28 Netflix solidified its business by going live with VOD in August 2006. Although the first quarter of 2007 was a watershed for Hastings, he faced several challenges going forward.

 Should Netflix fight Blockbuster? If so, how? Blockbuster’s Total Access program seemed to affect Netflix’s share prices (Exhibit 1). But was the street overreacting? Was Hastings observing the effect of Total Access on Netflix’s customer base? Blockbuster and Netflix competed intensely over the last decade (Exhibit 2 provides a timeline of the major events). Will the new strategy announced by Keyes affect the competition between Blockbuster and Netflix—and if so, how? Was Keyes’ strategy designed to compete with Wal-Mart more than Netflix?

 Should Netflix focus on the retail sales market? What was the relevance of customer retention and loyalty for retail sales of DVDs? Can Netflix leverage its recommendation systems for retail sales? How can Netflix maintain its current customer experience while also selling movies to its subscription customers?

 Should Netflix be concerned about small startups like VUDU, CinemaNow, and redbox? Netflix would have resembled these firms in 1997: In 2007, could Netflix ignore them? Would VOD be a big factor and will it diffuse faster than DVD players/DVDs? What are the options for Netflix in this new medium?

Above all, Hastings first needed to define the market served by Netflix: video-based

entertainment or movie rentals. Hastings also needed to understand the critical drivers of his customers’ lifetime value.

28 Netflix Web site Webcast of interview with Ted Sarandos, chief content officer.

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-13- UVA-M-0763

Exhibit 1

NETFLIX INC.: DVD WARS

Share Price History

Share prices since NTFX IPO

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BBI announces: Blockbuster Online

BBI announces: No Late Fees

BBI announces: Total Access

MOVI announces Filing for Ch. 11

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-14- UVA-M-0763

Exhibit 2

NETFLIX INC.: DVD WARS

Timeline of Significant Events for Netflix and Blockbuster1

Blockbuster (BB) Netflix (NFLX) 1997 Company founded

NFLX charged $4 per DVD plus $2 shipping.

1998–Apr. 14 Internet DVD store opens First Internet DVD store opens.

1999–Aug. 10 IPO announced 17% of BBI shares to be sold. 83% owned by Viacom.

1999–Dec. 16 No-late-fee model Viewers can keep movies for as long as they want. No late fees, no due dates.

2000–Jan 7 BB and TiVo agreement BB and TiVo announce plan to develop video on demand service through TiVo.

2000–Feb. 14 ALL YOU CAN WATCH NFLX announces rate plan with unlimited movie rentals.

2001–Oct. 15 Best Buy to co-market with NFLX 2002–May 22 IPO announced 2004–Aug. 11 Blockbuster On-line–

New on-line subscription service at 19.99 for 3 movies.

2004–Nov. 11 Interest in Hollywood (HLYW) BB announces expression of interest in acquiring HLYW for 11.50 per share.

1 Information from company press releases and publicly available data.

This document is authorized for use by Lea Wawina, from 8/26/2014 to 12/16/2014, in the course: MGMT 4219: Strategic Management - Ofem (Fall 2014), University of Missouri - St. Louis.

Any unauthorized use or reproduction of this document is strictly prohibited.

-15- UVA-M-0763

Exhibit 2 (continued)

2004–Dec. 14 NO LATE FEES Customers can keep movies rented from store for longer with no late fees. Sale or restocking fee applies. To begin Jan 1, 05

2004–Dec. 22 Lower on-line prices BB announces lower Blockbuster On-line prices. (e.g. 3 movie plan from 17.50 to 14.99)

2004–Dec. 28 Tender for HLYW Tender offer for shares of Hollywood Entertainment at $11.50 in cash to be completed in January. Rejected by HLYW.

2005–Jan. 8 PROFILES Each family member can have separate profile with separate recommendations under one plan.

2005–May 19 BB incentive for WAL-MART and NFLX customers Any Wal-Mart or NFLX customer who switches to BB gets two months free, free DVD, and same price as WAL-MART and NFLX for year.

WAL-MART–NFLX deal Companies announce joint marketing. WLMT for sales and NFLX for rentals. WLMT rental customers to pass over to NFLX.

2005–Aug. 9 BB raises prices BB raised all on-line subscription prices. (e.g., 3-movie option went from 14.99 to 17.99).

2005–Sept. 30 NFLX + TiVo joint agreement Joint agreement to acquire content and distribute movies.

2006–Apr. 6 NFLX lawsuit NFLX suing BB over blockbuster on-line program.

This document is authorized for use by Lea Wawina, from 8/26/2014 to 12/16/2014, in the course: MGMT 4219: Strategic Management - Ofem (Fall 2014), University of Missouri - St. Louis.

Any unauthorized use or reproduction of this document is strictly prohibited.

-16- UVA-M-0763

Exhibit 2 (continued)

2006–Aug. 31 PREVIEWS Customers can watch previews of movies recommended by NFLX

2006–Nov. 1 TOTAL ACCESS On-line subscribers can now return movies to stores and trade for rentals.

2007–Jan. 16 VOD– Customers can watch movies instantly at no extra cost, included in monthly fee.

2007–June 12 New Low Price Option On-line subscribers have option for lowest price plan: $4.99

2007–July Jim Keys new CEO 2007–July 26 Expanded on-line rentals

On-line subscribers have expanded options for subscription as well as possibility to exchange movies for games at stores.

2007–Aug. 8 BB acquires Movielink This gives BB rights to large VOD database and download site.

2007–Oct. 16 MOVI: Declares bankruptcy. This includes HLYW and MOVI.

This document is authorized for use by Lea Wawina, from 8/26/2014 to 12/16/2014, in the course: MGMT 4219: Strategic Management - Ofem (Fall 2014), University of Missouri - St. Louis.

Any unauthorized use or reproduction of this document is strictly prohibited.