The Netflix case offers an opportunity to develop a detailed cash flow model on an up-and-coming startup. Put yourself in the shoes of Barry McCarthy, Netflix's CFO. Imagine that your long-anticipated IPO may need to be put on hold due to the collapse of the NASDAQ stock market in 2000. You need to reevaluate the company's projected cash flow, and you'll need to balance between making near-term cash flow commitments versus helping Netflix achieve its long-term objectives.
Here are some key considerations for the Netflix case:
1. What is Netflix's long-run objective? How does Netflix plan to achieve its long-run objective? How would you assess Netflix's business model
2. Why does McCarthy use a subscriber model to forecast Netflix's future cash flow requirements? What are the basic elements of a subscriber model?
3. Construct an annual subscriber model for Netflix that can be used to forecast the expected cash flows for a new subscriber over the next five years. What is the value of a new Netflix subscriber? Assume a discount rate of 20%. Should Netflix be acquiring new subscribers?
4. Assuming that Netflix does not change its current business model, what is the value of Netflix.com? What changes, if any, would you suggest be made to its existing business model? What are the value implications of these changes?