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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+ =

• Google’s 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 company’s 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 Google’s 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 Amazon’s 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 Netflix’s Earnings Before Interest, Taxes,

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

accurate estimate of Netflix’s 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

Á 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 aren’t 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 do—that 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 Amazon’s cloud services. • Netflix’s 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. • Netflix’s greatest asset is its brand and subscription base• With an acquisition by Google, we purport that a synergy of transitioning this data from

Amazon’s cloud service to Google’s 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 Netflix (and income) over the long term

• The value will increase by the present value of the resulting higher income (and cash flows) over time

• Further explanation of our synergy value:• Netflix had 23.8 million total U.S. subscribers as of Sept. 30. Around 21.5 million customers had

streaming subscriptions• 5 cents per streaming movie (Approx- just in Cloud expenses, not content costs) – Average of 10

per month per account = $.50 x 21.5 million subscribers = 10.75 million x 12 months = 129 million• 50% profit margin for Amazon’s cloud service- Google could do use own data centers for $64.5

million.

REVENUE Sensitivity AnalysisBest Case $60.63M We can do it for 6% cheaper than AmazonExpected $64.5M We can do it for the same price as AmazonWorst Case $68.37M We will do it for 6% more than Amazon

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Projected Synergies - EBITDA

$5,187.38

(In Millions)

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Sources of Value

(In Billions)

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Culture

� Accuracy with enjoyment

� Green initiative

� Small company feel

� Personalized offices

� On-site amenities and perks

� “Freedom and Responsibility”

� “Culture of fear”and high turnover

� Clean and professional looking

� Repetition for warehouse employees

� Accuracy and efficiency

Google Netflix

• Google

• Employees “share a commitment to creating search perfection while having a

great time doing it.”

• “Local expressions” at each location

• Major involvement in green initiative

• Strive for small company feel

• Fun, personalized offices

• On-site amenities and perks

• Netflix

• Based on motto of “Freedom and Responsibility

• Known for their “culture of fear” and high turnover

• Physical office space at headquarters is simple, clean, and professional looking

• Distribution centers have employees doing repetitive tasks at rows of tables in a

warehouse

• Want work done correctly and efficiently

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Avoiding Culture Clash

� 70%

failure

rate � Human Due

Diligence

� Research

� Analyze

� Communicate

• 70 percent of all mergers fail• There are a variety of factors

• Proximity• Size difference• Culture

• Culture is especially important• Need to account for it• Need strategies to deal with differences

• Achieved through human due diligence• Researching various aspects of company to be acquired including:

• Employees• Structure• Decision making • Strategies• Job descriptions• Assets and capabilities• Culture through observation

• Analyze information obtained• Find similarities and differences• Pinpoint conflict areas and come up with strategies to overcome them• Figure out overlap and redundancy

• Communicate• Use Netflix management team to figure out where inaccuracies lie within

information gathered• Explain findings from observation and information gathering to Netflix

management• Lay out individual plans of action to each employee

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$12.5 B

• $12.5B price Google has offered Motorola

• Although there are some skeptics, it will prove to be very synergistic and productive, as

the Android and iOS mobile phone platforms are competing neck-and-neck domestically

(Brodie, 2012, Marsal, 2012).

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$17.9 B

• $17.9B price Google is willing to pay to acquire Netflix

• Based on analysis of synergies and their value

• Best case scenario price

Justification:

• Best Case – $17.9 Billion (Appendix 1.9 Report)

• Base Case - $15.7 Billion (Appendix 1.9 Report)

• Worst Base - $13.6 Billion (Appendix 1.9 Report)

• Going with Best Case Scenario is a 14% premium (based on comparing Best vs

Base Case scenario)

• See the Sensitivity Analysis on page 4 of your handout.

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ACQUIRING NETFLIX: SYNERGY MAKES THE WORLD GO ‘ROUND

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

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