ACQUIRING NETFLIX: SYNERGY MAKES THE WORLD GO ROUND

Heather Curler, Zachary Ford, Jordan Jones, Elizabeth Likins, Dan Oliver, Jonathan Sawyer

Ladies and gentlemen of the board, thank you for letting us come here and pitch to you

why acquiring Netflix is a prudent thing to do for Google.

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+ =

Googles Brand Power and Worldwide Reach Prefigure its ability to leverage its greatest asset advertising expertise for Netflix

controls 78% U.S. search market, 80% online pay-per-click advertising market online display-ads on YouTube and thousands of other sites -- $25B market worldwide

currently, and poised to become a $200B market currently, Google controls 9.3% of display-ad market, it is companys 2nd largest revenue

generator competitive advantage in this realm Netflix would be a valuable, strategic avenue for expanding display-ads

Acquisition of Netflix Consistent with Googles Strategy of Ubiquity/Everything: business model involves winning loyalty across every facet of the internet SOE enormous product range, services continues to seek new avenues for growth and expansion of brand 108 acquisitions to date 70 made in 2011 Strategic move for Google: keeps Amazon at bay Netflix can use Google data storage rather than Amazons Cloud Diversified monetization strategies (membership model) Growing demand for streaming/online video

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Potential other acquirers Microsoft, Apple, and Amazon the only true competitors with the capacity to be able to

purchase Netflix

Microsoft: Microsoft is a very large and established technology firm with a lot of cash. Microsoft is not in the streaming movie space, as it would probably like to. It reformatted its existing search engine capabilities with Bing in 2009 and has $51.74B in cash-on-hand (YCharts, 2012).

Apple: Apple has generally followed a technology centric acquisition strategy, thus a Netflix acquisition would be out of character especially considering the have an existing rental platform in iTunes. Cash is king, however, and Apple has $97.6B in cash-on-hand (Emerson & Smith, 2012).

Amazon: Amazon Prime Streaming is the largest and most direct competitor to Netflix. Google cannot afford to have Amazon dominate the streaming market place. Though cash is not a prerequisite for a deal, it does make it easier. Amazon has approximately $6.33B in cash-on-hand per its Q3 SEC filings (YCharts, 2012).

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= $10.4 B

Google with Peabody Financial Services (PFS) has value NFLX at $10.4B using a DCF +

Terminal Value method (date: 1/23/11).

The DCF method is an industry accepted and thorough method based on projections of

future company cash flows (Alexander, 2007). In projecting future cash flows, the

financial analysts at Google and PFS used Netflixs Earnings Before Interest, Taxes,

Depreciation, and Amortization (EBITDA). This was used to give the board a quick, yet

accurate estimate of Netflixs Free Cash Flow (FCF).

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$144 millionSubscription

Revenue

$420 millionTotal

Revenue=

$276 millionAdvertising Revenue

Freemium Ad Potential

-

1.5 million

subscribers

(100%) (34%) (66%)

Hulu has employed a freemium model

Paying subscribers get access to more content

1.5 million subscribers to HuluPlus

They bring in $144 million in revenue ($8 per/mo.)

Hulu total revenue is $420 million

Other $276 million is advertising revenue

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$2.06 billionsubscription

revenue

=$3.96 billionUntapped

Advertising Revenue Potential

Freemium Ad Potential

21.5 million

subscribers

-(100%) (34%) (66%)

Freemium model employed by Hulu could be adopted by Google to use with Netflix

21.5 million subscribers to Netflix ($8 per/mo.)

$2.06B in subscription revenue

Potential for Google to add $3.96B in advertising revenue

Later you will see that we approach this advertising potential very conservatively

(25%)

REVENUE Sensitivity Analysis

Best Case: $1.978B (50% effectiveness)

Base Case: $989M (25% effectiveness)

Worst Case: $395M (10% effectiveness)

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1 BillionMonthly UniqueVisitors

.5%Convert to Purchasers

$3.49Retail Cost of

Streaming New Release

Movie

=$209M

la Carte Movie Rentals

A la carte ( individual on demand) movie rentals are available from potential

competitors in movie streaming: Blockbuster and Amazon and Apple

Google would look to add this type of rental model to Netflix

Google receives 1 billion unique users every month

.5% of those people click on ads and become purchasers

$3.49 is the retail cost of streaming a new release movie

Price to be offered by Google undercuts both Blockbuster and Amazon

They offer new release movies for $3.99

Google has the potential to bring in $209M in on demand movie rentals

REVENUE Sensitivity Analysis

Best Case: $230M (+10% in conversion performance)

Base Case: $209M (standard conversion performance)

Worst Case: $167.5M (-20% in conversion performance)

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21.5 millionstreaming customers

(Netflix)

2.15 millionof those who do not have a

Google Account

$18.44Amount Google

receives per unique visitor on average

= 39.6M

Google Account/Google +

Google receives a mean of $18.44 per unique visitor each year.

Realistically, we believe that 1/10 of Netflix users who arent currently involved

in Google will become unique visitors as the creation of a Google account will

become mandatory for a Netflix account

Having a good account does not require having Gmail

Will give strategic opportunities for Netflix users to merge their co-existing

accounts with current Google accounts

Our financial rationale is as follows:

21.5 million subscribers x 1/10 = 2.15 million

x $18.44 (per unique visitor)

= $39.64 million in additional revenue

REVENUE Sensitivity Analysis

Best Case $79.29M (20% more unique visitors)

Base Case $39.64M (10% more)

Worst Case $19.82M 5% more

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90 millionGoogle+

Users

206,550# of Google+ users

who make purchases through social media

$100.16Google Average

Order Value of Purchases

=20.7M

Google Account/Google +

Google + (Appendix 1.8)

Key take-aways:

Social Network Conversion Rates:

While shoppers who come to retail sites from Facebook and Twitter are

less likely to make purchases (conversion rates of 1.2 percent and 0.5

percent respectively), they spend more per order than shoppers who

come through Google. In fact, shoppers from Twitter had the highest

average order value ($121.33) of all shoppers.

note: average b/t FB and Twitter is (.012+.005)/2 = .0085

Google Average Order Value = $100.16

Social Commerce:

Social commerce will reach $30B globally by 2015 ($14B in US)

"How ready are consumers to buy products through social media? A 2010

survey by Booz & Company of consumers who spend at least one hour a

month on social networking sites and who have bought at least one

product online in the last year provides some insight. Twenty seven

percent of respondents said they would be willing to purchase physical

goods through social networking sites. Moreover, 10 percent said their

buying through social networking sites will be incremental to other

buying they dothat is, they will end up buying more physical goods

overall. The 73 percent who said they would not purchase goods through

social networking sites largely cited concerns related to security and

privacy, two areas that many big social networking sites are already

working to improve.

"Hyves, the most popular social networking site in the Netherlands, has

developed a payment system that allows users to transfer as much as

150 (US$201) to other users to pay for goods available within the

Hyves payment system. The Hyves site, which has more than 10 million

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21.5 millionstreaming customers

(Netflix)$12.00

Average technology cost for Netflix to stream the 120

movies an average subscriber streams in

a year

129 millionApproximate Fees

Netflix pays to Amazon for Cloud Service per year

= 64.5M

Tech Savings

Netflix does not build or rent out data centers to house their data that is leveraged for their streaming service

decided to put its infrastructure on Amazons cloud services. Netflixs Vice President of Personalization Technology, John Ciancutti, describes it this

way: We could have chosen to build out new data centers, build our own redundancy and fail-over, data synchronization systems, etc. Or, we could opt to write a check to someone else to do that instead.

That someone is Amazon, the leader in enterprise cloud services (with Netflix being their highest paying customer in this arena).

Netflix does not own content, nor does it own much infrastructure. Netflixs greatest asset is its brand and subscription base With an acquisition by Google, we purport that a synergy of transitioning this data from

Amazons cloud service to Googles self-operated data centers would be a net gain of $64.5 million (which is the operating expense to Amazon and is a transferrable price for Google)

We believe this continuous cost savings will have a tremendous impact on value by affecting operating margins for