ACQUIRING NETFLIX: SYNERGY MAKES THE WORLD GO 'ROUND
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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.
1+ =
• 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
2• 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).
3= $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).
4Freemium Ad Potential
n
m illio r s
1.5 cribe
s
sub
$420 million $144 million $276 million
Total
Revenue
- Subscription
Revenue
= Advertising
Revenue
(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
5Freemium Ad Potential
n
m illio r s
5 e
21. scrib
sub
$3.96
= billion
$2.06 billion Untapped
- subscription
revenue
Advertising
Revenue Potential
(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)
6Á la Carte Movie Rentals
= $209M
1 Billion
Monthly $3.49
Unique Retail Cost of
Visitors Streaming
New Release
.5% Movie
Convert to
Purchasers
• 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)
7Google Account/Google +
21.5 million
$18.44
Amount
= 39.6M
streaming Google
customers receives per
(Netflix) unique visitor
on average
2.15 million
of those who
do not have a
Google
Account
• 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
8Google Account/Google +
90 million
Google+ $100.16
= 20.7M
Google
Users
Average
Order Value
of Purchases
206,550
# of Google+ users
who make purchases
through social media
• 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 9
Hyves payment system. The Hyves site, which has more than 10 millionTech Savings
129 million
Approximate Fees
Netflix pays to
21.5 million Amazon for Cloud
streaming Service per year
customers $12.00
(Netflix) Average technology
cost for Netflix to
stream the 120
movies an average
subscriber streams in
a year
= 64.5M
• 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 Analysis
Best Case $60.63M We can do it for 6% cheaper than Amazon
Expected $64.5M We can do it for the same price as Amazon
Worst Case $68.37M We will do it for 6% more than Amazon
10Projected Synergies - EBITDA
(In Millions)
$5,187.38
11Sources of Value
(In Billions)
12Culture
Google Netflix
Accuracy with “Freedom and
enjoyment Responsibility”
Green initiative “Culture of fear”
and high turnover
Small company Clean and
feel professional
looking
Personalized
Repetition for
offices warehouse
On-site amenities employees
and perks Accuracy and
efficiency
• 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
13Avoiding Culture Clash
70%
failure
Human Due
rate
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
14$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).
15$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.
16ACQUIRING NETFLIX:
SYNERGY MAKES THE
WORLD GO ‘ROUND
Heather Curler, Zachary Ford, Jordan Jones,
Elizabeth Likins, Dan Oliver, Jonathan Sawyer
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