Netflix (NFLX)

MII Presentation

September 10, 2002

Service

Maintain a list, 8 recommended

CinaMatch: Netflix will send the highest on your list when received

Average user has rated 145 titles

Maintains 25 title list

2-4 day first class delivery from 10 distribution centers

All DVDs come with a return envelope

One month free trial

$19.95 per month for 3 DVDs

Not late fees

Customers

Carol Duncan, a 57-year-old postal carrier who lives in rural Dillwyn, Va., 70 miles west of Richmond, said she has little use for the recommendations. She finds Netflixs long lists of "ancient movies" -- to her, anything that's not a new release -- especially annoying.

Duncan and her husband also wish Netflix would deliver movies faster. While the service can be speedy in urban areas (Netflix opened 10 regional distribution centers this movies faster. While the service can be speedy in urban areas (Netflix opened 10 regional distribution centers this year), Duncan says delivery to Dillwyn hasn't improved since the Gaithersburg facility opened. While she's entitled to three titles at once, often she has none or only one.

"I want to get my money's worth if I'm paying $20 a month," she said. "Otherwise my husband and I will just watch pay-per-view movies on our DirecTV system."

Customers

Martin Kane, a trade show manager in Bowie, said he and his wife generally get their replacements within two or three days of returning one. Occasionally they have to wait for their top choice. "We have been wait for their top choice. "We have been waiting for a while for 'All the President's Men,' " he said. "That apparently is a hot rental for older movies."

DVD Market

35M players sold to date penetrating 1/3 of US households

Rapid year-over-year growth

Prices from $200-500 have fallen to $100 level

Netflix still must change the way people rent movies. Rather than go to the video store on Friday night, they must build a library ahead of time and hope they have the right DVD on movie night.

Management

Reed Hastings

His epiphany came in 1997. He had just sold his software company, Pure Atria, to Rational Software, and after returning a late copy of "Apollo 13," he garnered a $40 fee. There had to be a better way. be a better way.

"We weren't particularly attracted by the dot-com phenomena but "We're certainly attracted by people that we trust-- like Reed." - Mike Schuh, General Partner with Foundation Capital.

President of California state board of education

Equity

Market Cap:

$285.4MLock-up Period:11/18/2002Short Interest:

46.7% Float: Float:

5.5MInstitutional:

10.27MOutstanding:

22MOptions:

11M

Competition

Retail

Mail

Online

Indirect Competition

Cable providers like AOL and Comcast

Direct broadcast satellite providers like DirectTV and EchoStar

HBO, Showtime, and other premium networksnetworks

VOD

5-15 years away from mass commercial use

There will be a little bit of "buffering" and then the movie begins playing.

Movies currently offered at 700k bit rate

Harry Potter $3.99

To download a feature length film, it will take anywhere from 1-4 hours with even the fastest Internet connection from 1-4 hours with even the fastest Internet connection 550MB

"From Microsoft's perspective, digital entertainment and digital media are important catalysts for driving the next big cycle of PC upgrades, and The challenge for Microsoft is to convince content creators their intellectual property won't be pirated - Directions on Microsoft analyst Matt Rosoff

Blockbuster

Cash: $230M

Market cap: $4.26B

Q2 Revenue: $1.27B

48-52M active accounts

8,000 stores

64% of US within 10 minutes of store

Co-branded DIRECTV pay-per-view

Rental Market

10% of Blockbusters revenues come from late fees

Peak time is 30-90 days after a release

Netflix still must change the way people rent movies. Rather than go to the rent movies. Rather than go to the video store on Friday night, they must build a library ahead of time and hope they have the right DVD on movie night.

Blockbusters Reply

"One of the things we are actually going to be testing in our stores in the not-too-distant future is a prepaid mailer," "We don't know whether there is going to be a huge demand for that product." - Blockbuster CEO John Antioco, July 2424

Blockbuster last week lengthened its standard rental window for all rentals except new releases by two days, to seven

DVD Freedom Pass

10 week rental card and free DVD for $24.99

Q2 Financials

Revenues: $35.6M

Gross profit: $18.3M

Operating loss: $(2.5)M

Stock-based compensation not included: $(2.7)M$(2.7)M

Net loss: $(5.2)M

Cash & short-term: $91.7M

Current assets current liabilities: $64.9

Financial Trends

High fixed-cost structure will increase DVDs, Infrastructure, up front fees for DVD licensing

Gross margins expected to fall 3%

Subscriber acquisition: $34 up from $25 Subscriber acquisition: $34 up from $25

10 new 3,000 square feet distribution centers will impact income

Q3 Revenue Guidance: $37-40

Q4 Revenue Guidance:$41-44

Concerns Churn: 6.7% declining

Churn calculation is misleading

Operating cash flow Does not include amortization of DVDs

Growing 12,000 DVD database Capitalized, cant sell, rental window is 30-90 days

DVD market is growing Increased availability will make it easier for consumers to rent/buy at retail locations

Longs agree that the current business model is not sustainable in the long-run

Q: What happens if a movie gets lost in the mail?A: There is no cost to you. Just report it as "lost" in the "Shipping Problems" section of the Your Account page.

If Netflix thinks having a Wal-Mart or Blockbuster in the industry will help them, they are nuts President of DVD rental company

Interviews with ReedCNBC: May 23, 2002

MACCALLUM: When do you expect to be profitable, Mr. Hastings?

HASTINGS: We don't have any projections on that.

MACCALLUM: All right. I'm sorry. Can you tell me that again? I didn't hear your answer.

HASTINGS: We don't have any projections on profitability.

MACCALLUM: All right, no projections. MACCALLUM: All right, no projections.

Thank you very much and good of you to spend sometime with us. Appreciate it.

HASTINGS: Thank you very much.

Biz Buzz: January 25, 2001

PILGRIM: All this seed money, how many subscriptions do you need to break even? You're not breaking even quite yet, are you?

HASTINGS: No, it's true. Like many Internet businesses, we're not yet profitable, but we have acquired over 300,000 subscribers that are active subscribers today. And we break even at 500,000. So, you know, we're not there yet but we're over halfway there.

Churn

The key thing with the service is, as you said, you get to try it. It sounds great, but it also sounds kind of strange, I mean, to rent the movies by mail. And, what we encourage people to do is try NetFlixfor free. Anyone can go to the web site and try it for free. Get a bunch of movies on us. And, what we've found, nine out of ten people stay a paying subscriber. Reed Hastings Money & markets June 24, 2002

(603,000 +236,000 670,000)/(603,000 + 236,000)/3 = 6.7% per month Q2 Financialsmonth Q2 Financials OR 20.1% per quarter, 24% assuming 9/10 stay Q2 Trial subscribers down 24%

The business is dependant on having more than a quarter of the current subscriber base as trial members in order to replace lost ones on a continual basis

90-95% of customers who leave will not come back again

Negative Trends

Targeted areas away from retail locations are less likely to have Internet and DVD and will have to wait longer for delivery Growing customers increases number of hit titles necessary to maintain customer service Saturation: Most likely consumers were targeted in initial marketing wavestargeted in initial marketing waves NetFlixs success speeds up their competitors interest in their model Net distribution centers will generate more fulfillment expenses, geographic issues, high expectations, and more rentals per month DVD sales provide cheap used DVDs currently around $9.99 including shipping

Conclusion

Business model is not sustainable

Competitive threats

Pressure on VOD technology developers

Increased costs to sustaining growth will impact this years financialsimpact this years financials

DVD presence is increasing at retail locations

A large amount of shares will hit the market after the lockup period from employees and investors

Risks

Best Buy is helping acquire subscribers

Revenue and subscribers are growing

Potential acquisition candidate

Forecasting profitability before stock based compensation expense in 2003based compensation expense in 2003

Service works

Some advertising is linked to performance

High capital need to grow verses competitors

Penetration of 3.2% in local area

Questions?

End of Show