The impact of 2008 financial crisis on the digital entertainment

sector (Netflix)

intro
Entertainment has long been a household budget staple. Consumer Expenditure Survey
(CE) data from 1934–1936 show that, even during the Great Depression, spending on
entertainment accounted for 5.4 percent of the household budget. In 2008, during the
last recession, entertainment spending had reached an average of 5.6 percent of total
household expenditures.
But the real key player during the recession was the digital entertainment, not only it
showed stable revenues but also significant results compared to other sorts of industries.

Impact on digital entertainment

Kevin Westcott, leader of Deloitte's technology, media, and telecommunications group in
the United States, thinks streaming is a relatively affordable entertainment alternative.
"Consumers might spend less on going out, such as to dinner or the movies. The number
of streaming minutes watched will undoubtedly increase, which raises the value of the
adverts on those providers.
When it comes to economic downturns, the theatrical film industry has long
demonstrated an uncommon level of resilience. In fact, throughout the eight most recent
recessions, box office revenue climbed six times, and admissions increased by five.
Patrick Corcoran, vice president and chief communications officer at the National
Association of Theatre Owners, asserts that "people don't quit doing things even in
difficult circumstances." "They only seek out cheaper options”.
Most businesses encountered substantial challenges as a result of the financial crisis
during the recession of 2008–2009. Netflix, meanwhile, grew almost unabatedly. The
number of Netflix subscribers grew quickly from the year prior, by 26% to 9.3 million in
2008, then by 31% to 12.3 million in 2009.
NETFLIX, INC.
Vertical analysis of income statement

2009 2008 2007 2006 2005

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of revenues:
Subscription . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54.4 55.8 55.1 53.4 57.7
Fulfillment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 10.9 10.1 9.5 10.6
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64.6 66.7 65.2 62.9 68.3
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.4 33.3 34.8 37.1 31.7
Operating expenses:
Technology and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 6.6 5.9 4.9 5.2
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2 14.6 18.1 22.6 21.2
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 3.6 4.3 3.6 5.2
Gain on disposal of DVDs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.3) (0.4) (0.5) (0.5) (0.3)
Gain on legal settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 (0.6) 0 0
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.9 24.4 27.2 30.6 31.3
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 8.9 7.6 6.5 0.4
Other income (expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.4) (0.2) (0.1) 1.6 0.9
Interest and other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 0.9 1.7 0 (0.1)
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 9.6 9.2 8.1 1.2
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 3.5 3.7 3.2 (5.0)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9% 6.1% 5.5% 4.9% 6.2%
NETFLIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (per thousands)

2009 2008 2007 2006

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,670,269 $1,364,661 $1,205,340 $996,660
Cost of revenues:
Subscription . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 909,461 761,133 664,407 532,621
Fulfillment expenses* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169,810 149,101 121,761 94,364
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,079,271 910,234 786,168 626,985
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 590,998 454,427 419,172 369,675
Operating expenses:
Technology and development* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,542 89,873 70,979 48,379
Marketing* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,744 199,713 218,212 225,524
General and administrative* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,333 49,662 52,404 36,155
Gain on disposal of DVDs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,560) (6,327) (7,196) (4,797)
Gain on legal settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (7,000) 0
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399,059 332,921 327,399 305,261
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,939 121,506 91,773 64414
Other income (expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,475) (2,458) (1,188) 15904
Interest and other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . 6,728 12,452 20,340 0
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,192 131,500 110,925 80318
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,332 48,474 44,317 31,236
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 115,860 $ 83,026 $ 66,608 $ 49,082
 CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

2009 2008
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $134,224 $ 139,881
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186,018 157,390
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,491 8,122
Prepaid revenue sharing expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,133 18,417
Current content library, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,329 18,691
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,818 16,424
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411,013 358,925
Content library, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,810 98,547
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,653 124,948
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,958 22,409
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,300 10,595
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $679,734 $ 615,424
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 91,475 $ 100,344
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,387 31,394
Current portion of lease financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,410 1,152
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,097 83,127
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226,369 216,017
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 —
Lease financing obligations, excluding current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,572 37,988
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,650 14,264
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480,591 268,269
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized at December 31,
2009 and 2008; no shares issued and outstanding at December 31, 2009 and
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —
Common stock, $0.001 par value; 160,000,000 shares authorized at December 31,
2009 and 2008; 53,440,073 and 58,862,478 issued and outstanding at
December 31, 2009 and 2008, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 62
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 338,577
Treasury stock at cost (3,491,084 shares at December 31, 2008) . . . . . . . . . . . . . . . . — (100,020)
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 84
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,817 108,452
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199,143 347,155
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $679,734 $ 615,424