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 comehere 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 2 nd 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 basedon 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). 4
Freemium Ad Potential 1.5 million subscribers $420 million Total Revenue - $144 million Subscription Revenue = $276 million 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 5
Freemium Ad Potential 21.5 million subscribers - $2.06 billion subscription revenue = $3.96 billion Untapped 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) 6
Á la Carte Movie Rentals 1 Billion Monthly Unique Visitors.5% Convert to Purchasers $3.49 Retail Cost of Streaming New Release Movie =$209M 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) 7
Google Account/Google + 21.5 million streaming customers (Netflix) 2.15 million of those who do not have a Google Account $18.44 Amount Google receives per unique visitor on average = 39.6M 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 8
Google Account/Google + 90 million Google+ Users 206,550 # of Google+ users who make purchases through social media $100.16 Google Average Order Value of Purchases = 20.7M 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? A2010 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 saidtheir 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 muchas 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 9
Tech Savings 21.5 million streaming customers (Netflix) $12.00 Average technology cost for Netflix to stream the 120 movies an average subscriber streams in a year 129 million Approximate Fees Netflix pays to Amazon for Cloud Service per 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 millioncustomers 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 10
Projected Synergies - EBITDA (In Millions) $5,187.38 11
Sources of Value (In Billions) 12
Culture Google Accuracy with enjoyment Green initiative Small company feel Personalized offices On-site amenities and perks Netflix Freedom and Responsibility Culture of fear and high turnover Clean and professional looking Repetition for warehouse employees 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 13
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 liewithin 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. 16
ACQUIRING NETFLIX: SYNERGY MAKES THE WORLD GO ROUND Heather Curler, Zachary Ford, Jordan Jones, Elizabeth Likins, Dan Oliver, Jonathan Sawyer 17