Aswath Damodaran Session 17 (Undergraduate): The Netflix Studio – Case Discussion

Published on Mar 31, 2016

The bulk of today’s class was spent on the Netflix Studio case. While the case itself will soon be forgotten (as it should), This case covers a gamut of issues that arise in almost any investment analysis from sunk costs to what to do about allocations to the essence of incremental cash flows.
Case: http://www.stern.nyu.edu/~adamodar/pd…
Presentation: http://www.stern.nyu.edu/~adamodar/pd…
Excel spreadsheet with analysis: http://www.stern.nyu.edu/~adamodar/pd…
Slides (For last part of class): http://www.stern.nyu.edu/~adamodar/po…

Netflix Studio

Netflix’s Content Play

The Setting

Netflix has disrupted the entertainment business, offering its paying subscribers access to movies and TV shows, originally as rental DVDs, but increasingly as streaming content. Under Reed Hastings, its founder and CEO, the company has grown in leaps and bounds, albeit with a few hiccups along the way. The company’s growth in operations is captured in its income statements in exhibit 1 and its stock price (and market capitalization) movements are in exhibit 2.

In exhibit 3, you can see the evolution of Netflix’s balance sheet over the last two years. While Netflix historically has depended on content produced by others, it is facing the consequences of its own success. As movie studios and TV show producers raise the price that Netflix has to pay to acquire the rights to their content, Netflix has started developing its own content, with The House of Cards and Orange is the New Black as standout examples. As Netflix also attempts to attract more international subscribers, the company is looking for a faster path to creating content, especially aimed at its overseas audience.

The Proposal

Netflix is considering developing its own movie and TV studio, located in Mumbai, India.

This studio, if developed, will produce TV shows of varying lengths and movies, that will be offered outside the US. The content will be offered to both regular overseas subscribers and to a new class of studio subscribers, who will pay lower fees to access just studio content. You have been asked to collect the data to make the assessment and have come back with the following information:

1. R&D Expenses: Netflix has already spent (and expensed) $ 150 million on research on the content business. None of that money can be recouped at this stage, if Netflix decides not to go ahead with the content investment. 2. Introductory Costs; If Netflix decides to go ahead with the studio investment, it will have to spend $1 billion up front (right now) in infrastructure. The cost is depreciable over the next 10 years, down to a salvage value of $ 200 million, and Netflix expects to use straight-line depreciation.

Netflix Studio -
Netflix Studio –