In July 2000, Reed Hastings, chairman and CEO of NetFlix.com, Inc., faced a critical decision. Three months earlier, following one of the worst episodes on record for the NASDAQ market, NetFlix had submitted its S-1 filing for its initial public offering (IPO).1 As a result of the market downturn, many Internet companies had been forced to withdraw their IPOs. Investment bankers indicated to Hastings that NetFlix would need to show positive cash flows within a twelve-month horizon in order to have a successful offering. Hastings knew that NetFlix was at a crucial stage. With revenues doubling every six months, NetFlix was enjoying tremendous success. But continued success depended on the company’s ability to sustain …show more content…
Because of their small size, light weight, and durability, DVDs could be distributed to subscribers on a cost effective basis via regular U.S. mail. Including the costs associated with processing the order, McCarthy estimated the round-trip cost of shipping a DVD to a subscriber and back to NetFlix to be about $1.00. In order to promote sales of DVD players, manufacturers were willing to include NetFlix promotional offers with their packaging materials at essentially no cost, which allowed customer acquisition costs to be kept to a minimum. Management had negotiated agreements with most of the leading DVD manufacturers, including Sony, Toshiba, Panasonic, and RCA. These manufacturers accounted for over 90% of the DVD players sold in the United States in 1999. Management believed that early adopters of DVD technology were likely to have a computer with an already existing internet connection and were likely to be willing to conduct commerce over the internet.
2 Paul Kagan Associates, Inc., as cited in NetFlix S-1 filing.
Hastings viewed NetFlix as a combination of a traditional video store, such as Blockbuster or Hollywood Video, and a subscription cable TV service, such as HBO, Cinemax, or Showtime. By paying a single monthly subscription fee ranging from $15.95 to $19.95, a NetFlix subscriber could