Financial and Strategy Analysis

2011Blockbuster and Netflix

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I. Industry economic characteristics and company strategies

Companies selected: Blockbuster and Netflix

1. Introduction Blockbuster, Inc. and Netflix, Inc. are the two companies that are selected for the review

purpose and these two companies are in the same field of business.

Blockbuster, Inc. is a global leading name of provider of movies on rental and retail basis. It

offers both on-demand video streaming over the internet, and flat rate online video rental (rental-

by-mail) of DVD-Video. Further, Blockbuster, Inc. is providing game entertainment as well. The

company provides its customer’s access to media entertainment via stores, mails, vending Kiosks

or digitally to their homes and mobile devices. The company’s digital library contains more than

125,000 movies and owns 6,500 stores in the United States, its territories and seventeen other

countries as of January 3, 2010. Majority of the share of the company are owned by Viacom and

together both the companies operate stores around the world in twenty-five countries

Netflix, Inc. is a name of online media entertainment provider and more than 12 million

subscribers are enjoying the media entertainment through it.The company was founded by Reed

Hastings and Marc Randolph in the year 1997 in the state of California where its headquarters

are situated. It is the world’s largest subscription service streaming movies and TV episodes via

internet or by mail.

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2. Industry economic characteristics

Value chain analysis

Netflix is the world’s largest subscription based service streaming movies and

television episodes over the Internet and DVDs by mail with 16.9 million subscribers

at the end of September 2010. They offer a variety of attractive subscription plans

that have no due dates, no late fees, no shipping fees and no pay-per-view fees.

Approximately 2 million DVDs are shipped daily and during the last trimester of

2010 more than 66% of subscribers instantly watched more than 15 minutes of

streaming content. The company operates through 55 distribution centers throughout

US delivering, to its members, DVDs free of cost through first class mail, with a

postage-paid return envelope.

Netflix currently has roughly 40 distribution centers; however, the delivery time

of their product when compared to Blockbuster is not significantly better or worse.

Customers of each service report higher or lower delivery times, depending on their

location. Because of this, it seems that the outbound logistics activities utilized by

Blockbuster are roughly equal in value compared to their competitors.

Blockbuster purchases their movie rental inventory for US company-operated

stores directly from the studios by two methods, the first being a title-by-title basis

through purchase orders, and second through various “revenue-sharing”

arrangements. Blockbuster also acquires retail movie and game inventory through

various trading programs.

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Operational actives are used to convert inputs provided by inbound logistics into

the final product form. Blockbuster uses Management Information Systems to

accurately and efficiently manage their purchasing, inventory, and sales records.

Blockbuster’s operational activities are neither inferior nor superior, but basically

equal in value, to those used by their competitors.

Blockbuster uses a network of third-party delivery agents for delivery of products

to US stores. The use of third-party distributors allows Blockbuster to process and

distribute a greater quantity of products.

Blockbuster designs their marketing and advertising campaigns to best maximize

opportunities in the market place, and thereby increase the return on their marketing

and advertising expenditures.

The following is a list of services offered by Blockbuster: Online Subscription

Service: launched in mid-2004; No Late Fees; Guaranteed in Stock; Blockbuster

Movie Pass and Blockbuster Game Pass.

Technological development activities are used to improve a firm’s product and

theprocesses used to produce it.

Blockbuster’s biggest use of technology to improve their product would be their

onlineDVD rental program, especially when combined with their in-store rental

option. Blockbuster’s technological development activities are superior to all of their

competitors except for Netflix.

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Blockbuster has experienced a high rate of turnover in high-level corporate

positions. This is very indicative of serious internal issues and a weakness in the

value chain for Blockbuster asfar as Human Resource Management activities goes,

making Blockbuster clearly inferior to their competitors in this activity.

The general management aspect of Blockbuster is very weak, but ideally going

through drastic improvements. The firm infrastructure was successful in indentifying

the possibility of accessing the online renter market, previously held by Netflix.

Porter’s five forces

1. Rivalry among Existing Firms: I can say it seems not high due the fact

that renting videos and DVDs has become easier. The way the company has branded

itself in the U.S market is actually the core barrier to entry that keeps competitors

away. Logistic services are the same; the products are more or less.

2. Threat of New Entrants: Economy of scale and distribution systems place

a high barrier for new entries to this market. I’m confident that the right answer is

very low because there are no entry barriers and any investor can enter the market.

New entries to online rental movies would face high costs and other technology

issues.

3. Threat of Substitutes: I can consider that as a very low because customer

can rent the same DVD from any supplier.One of the threats that the company has

from the external environment is the advantage of a one stop shop for the consumer.

The customer would like to see both the facilities at the same place. This shows how

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competitors are coming up with products by renting other products online as well in

order to give a different experience to the consumer to switch their existing brands.

4. Buyer Power: I will say very high due to the low price.The customer is

really powerful in this industry as he has a number of options available to try out new

services and brands. The subscriptions are sold to those who prefer online only

browsing and mailbox delivery.

5. Supply power: I think it’s very low because the costs of the primary

renting service are steady compared to another industry.Netflix acquires its content

from movie studios and movie distributors. Movie studios and movie distributors

make their revenue by selling its content to the largest number possible of viewers.

Economic Attributes Framework

Demand

In this industry customers are highly price-sensitive.The domain netflix.com attracted at least

194 million visitors annually by 2008, according to a Compete.com survey. This is about five

times the number of visitors to blockbuster.com. Blockbuster had more than 8900 stores inside

US. Regarding if the demand moves with economic cycle, I can say with confident that this

industry reflects the economic situation.

Supply

Customers have a number of options available to try out new services and brands.Netflix's

published subscriber count increased from one million in the fourth quarter of 2002 to around 5.6

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million at the end of the third quarter of 2006, to 14 million in March 2010. Netflix's growth has

been fueled by the fast spread of DVD players in households.

Blockbuster Inc. has worked hard to keep pace with changes in the business. To keep distribution

costs down, Blockbuster divided the U.S. and its surrounding territories into 50 regions, or pool

points. The D.C. keeps a close watch on pickup schedules, so that it can expedite shipments if a

movie is in danger of missing an in-store date. All of these measures have helped Blockbuster to

stay competitive in an industry that is roiled by constant change, with an ever-growing number of

options for consumers.

Manufacturing

We cannot talk about a manufacturing process here as the two companies provide services

(renting DVD).

Marketing

Netflix has improved their movie database and continues to add titles several times per week.

Netflix markets and promotes its service through various marketing programs, including

television, radio advertising, online promotions, package inserts, direct mail and other

promotions with third parties. The company sells its merchandise through website and mail order

Blockbuster used pre-installed software in marketing agreements with smartphone service

providers that cannot be removed without rooting the phone and voiding its warranty.

Investing & Financing

The assets of firms in the industry are long term assets for the buildings, machines, and

inventory. Currently, this industry is in high risk due to the fact the companies are losing the

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customers. Today, Blockbuster is near bankruptcy. This is due to challenging losses, $900

million in debt, and strong competition from Netflix, Redbox, and video on-demand services.

Last five years companies in this industry are suffering from losing the revenues year after years.

Framework for Strategy Analysis

Nature of product or service

Netflix, Inc. (Netflix) offers more than 10,000 DVDs and titles to its subscribers. Netflix also

operates a separate library of over 12,000 titles of movies that can be watched instantly on

subscriber’s TV through a Netflix ready device or on their computers.

Blockbuster has been the leading global provider of movie and game entertainment with stores

throughout America, Asia, Europe and Austria. It has operated in a high competitive market

offering a variety of movies, television shows, and video games for various consoles.

Integration in Value Chain

Netflix Inc. serves around 8 million subscribers by providing access to more than 1,000,000

DVD titles and more than 12,000 choices that can be watched directly on subscribers' TVs and

PCs. The titles include movies, television and other filmed entertainment.

Blockbuster uses the United States Postal Service to deliver their online product DVD orders to

customers. The closer a customer is to a distribution center, the faster a customer will receive an

online rental product. Approximately 90% of Blockbuster’s online customers are reachable

within one business day from distribution centers due to the utilization of roughly 90 different

mail entry points. Also, store locations are used to fulfill a portion of online orders in order to

keep up with demand.

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Geographical diversification

The market coverage is limited to internet users. Netflix has operated in the large, stable $7

billion DVD-rental market and enjoys 75% share of the DVD-by-mail market. According to

internet world stats, the percentage of penetration of the internet in the North American

population in 2009 was 74.2%. This rate indicates that Netflix could reach 74.2% of the

American population, which adds market to Netflix’s list of key success factors.

Blockbuster has seen increasing the number of its retail locations as the key to its growth, either

by building new stores or acquiring competitors. Blockbuster's diversification has helped

increase its store's sales. After struggling with nearly $1 billion in debt and growing competition

from Redbox and Netflix, Blockbuster Inc. filed for Chapter 11 bankruptcy protection. The

recapitalized Blockbuster will probably move forward better able to leverage its strong strategic

position, including a well-established brand name, an exceptional library of more than 125,000

titles, and our position as the only operator that provides access across multiple delivery channels

-stores, kiosks, by-mail and digital.

Industry diversification

The dilemma which Netflix currently faces is to develop a strategy which will allow them to

survive in this competitive industry. Industry diversification includes a plan which allows them

to achieve sustainable growth and protect their position in the DVD rental industry.

The Blockbuster business model provides an advantage over other large home video chains and

significant advantage over single store competitors. The key elements of this business model are

to: provide a large number of copies and broad selection of movie titles; operate conveniently

located and highly visible stores; offer superior and consistent customer service; optimize pricing

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to local market conditions; nationally advertise and market Blockbuster brand name; use

extensive customer transaction database to effectively operate and market the business; and

improve efficiency and lower costs through self-distribution.

II. Initial review of cash flows

Statement of cash flow for the two companies for the year ended 2009

(Amounts in millions)

2009 2009Blockbuster Netflix

Cash Flow from operating activities:Net income -558.20 116Total adjustments to reconcile net income to net cash provided by operating activities 587.50 209

Net cash flow provided by (used) in operating activities 29.30 325Cash flow from investing activities

Net cash provided by (used) in investing activities -74.90 -246Cash flow from financing activities

Net cash provided by (used) by financing activities 72.40 -85Effect of exchange rate changes on cash 7.00 0

Net increase (decrease) in cash equivalents 33.80 -6Cash and equivalents at beginning of year 154.90 140

Cash and equivalents at end of year 188.70 134

Analysis

Operating activities

The operating activities involve buying/receiving goods and providing services. Operating cash inflows

include cash receipts from the rental activity and other revenue transactions. Operating cash outflows

include payments related to accounts payable, services and supplies, interest and income taxes.

Blockbuster’s cash flow from operating activities was $29.3 million while for Netflix, it indicated $325

million. We can assume that this reflects greater operating earnings of rental service for Netflix.

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Investing activities

Investing activities include proceeds from maturities of the sales of short term-investments, purchase of

short-term investments, proceeds of sale of DVDs, purchase of property and equipments, and investments

in other assets. Cash used for investing activities totaled -$74.9 million for Blockbuster and -246 for

Netflix. The most cash outflows for Netflix were spent in purchase of short term-investment for 228

million and in acquisitions of content library for $193 million. Blockbuster cash outflows for investing

activities were mostly spent in Capital expenditures for $32.3 million and in change of restricted cash for

$58.5 million.

Financing activities

Financing activities involve obtaining resources, borrowing money from creditors and repaying the

amounts borrowed. Cash used for financing activities totaled -$85 million for Netflix while it showed

$72.4 million for Blockbuster. The most resources in financing activities for Netflix came from: the

proceeds from issuance of debt for $193 million, the proceeds from issuance of common stock for $35

million, excess tax benefits from stock-based compensation for $12 million, and borrowings on line of

credit for $19 million. Payments on line of credit for $20 million and repurchases of common stock for

$324 million were the significant cash outflows of financing activities for Netflix. Regarding Blockbuster,

the cash inflows were related to the proceeds from senior secured notes for $634 million and the proceeds

from credit agreements for $381 million. Repayments on credit agreements for $864 million are the most

important cash outflows for the period.

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NETFLIX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)

Source: annual report 10k for 2009

 

     Year Ended December 31,       2009     2008     2007  

Cash flows from operating activities:       

Net income    $ 115,860     $ 83,026     $ 66,608  Adjustments to reconcile net income to net cash provided by operating

activities:       

Depreciation of property, equipment and intangibles      38,044       32,454       22,219  Amortization of content library      219,490       209,757       203,415  Amortization of discounts and premiums on investments      607       625       24  Amortization of debt issuance costs      1,124       —         —    Stock-based compensation expense      12,618       12,264       11,976  Excess tax benefits from stock-based compensation      (12,683)     (5,220)     (26,248) Loss (gain) on disposal of property and equipment      254       101       142  Gain on sale of short-term investments      (1,509)     (3,130)     (687) Gain on disposal of DVDs      (7,637)     (13,350)     (14,637) Gain on sale of investment in business      (1,783)     —         —    Deferred taxes      6,328       (5,905)     (893) Changes in operating assets and liabilities:       

Prepaid expenses and other current assets      (11,001)     (4,181)     (3,893) Content library      (64,217)     (48,290)     (34,821) Accounts payable      (2,256)     7,111       16,555  Accrued expenses      13,169       (1,824)     32,809  Deferred revenue      16,970       11,462       1,987  Other assets and liabilities      1,685       9,137       2,868  

                        

Net cash provided by operating activities      325,063       284,037       277,424                          

Cash flows from investing activities:       

Purchases of short-term investments      (228,000)     (256,959)     (405,340) Proceeds from sale of short-term investments      166,706       304,163       200,832  Proceeds from maturities of short-term investments      35,673       3,170       —    Purchases of property and equipment      (45,932)     (43,790)     (44,256) Acquisition of intangible asset      (200)     (1,062)     (550) Acquisitions of content library      (193,044)     (162,849)     (208,647) Proceeds from sale of DVDs      11,164       18,368       21,640  Investment in business      —         (6,000)     —    Proceeds from sale of investment in business      7,483       —         —    Other assets      71       (1)     297  

                        

Net cash used in investing activities      (246,079)     (144,960)     (436,024)                         

Cash flows from financing activities:       

Principal payments of lease financing obligations      (1,158)     (823)     (390) Proceeds from issuance of common stock      35,274       18,872       9,609  Excess tax benefits from stock-based compensation      12,683       5,220       26,248  Borrowings on line of credit, net of issuance costs      18,978       —         —    Payments on line of credit      (20,000)     —         —    Proceeds from issuance of debt, net of issuance costs      193,917       —         —    Repurchases of common stock      (324,335)     (199,904)     (99,858) 

                        

Net cash used by financing activities      (84,641)     (176,635)     (64,391)                         

Net decrease in cash and cash equivalents      (5,657)     (37,558)     (222,991) Cash and cash equivalents, beginning of year      139,881       177,439       400,430  

                        

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Cash and cash equivalents, end of year    $ 134,224     $ 139,881     $ 177,439                          

Supplemental disclosure:       

Income taxes paid    $ 58,770     $ 40,494     $ 15,775  Interest paid      3,878       2,458       1,188  

BLOCKBUSTER INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)

Source: annual report 10k for 2009

 

 

   Fiscal Year Ended  

  January 3, 201

0    January 4, 200

9    January 6, 200

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Cash flows from operating activities:       

Net income (loss)    $ (558.2)   $ (374.1)   $ (73.8) Adjustments to reconcile net income (loss) to

net cash flow provided by (used in) operating activities:       

Depreciation and intangible amortization      147.1       152.2       185.7  Impairment of goodwill and other long-

lived assets      369.2       435.0       2.2  Rental library purchases      (500.2)     (610.5)     (709.3) Rental library amortization      519.8       681.8       740.5  Non-cash share-based compensation

expense      7.3       14.1       14.6  Loss (gain) on sale of store operations

(Note 10)      41.9       0.7       (89.9) Deferred income taxes, gain on sales of

assets and other      19.9       10.3       11.1  Loss on extinguishment of debt      29.9       —         —    

Change in operating assets and liabilities:       

Change in receivables      37.5       (10.2)     21.6  Change in merchandise inventories      120.7       (122.6)     (50.7) Change in prepaid and other assets      31.6       18.4       (3.1) Change in accounts payable      (124.6)     (29.4)     (32.6) Change in accrued expenses and other

liabilities      (112.6)     (114.7)     (72.5)                         

Net cash flow provided by (used in) operating activities      29.3       51.0       (56.2) 

                        

Cash flows from investing activities:       

Capital expenditures      (32.3)     (118.1)     (74.4) Change in restricted cash      (58.5)     —         —    Cash used for acquisitions, net      —         (2.4)     (12.0) Proceeds from sales of property and equipment      1.6       0.5       1.9  Proceeds from sales of store operations      13.2       4.6       21.0  Proceeds from sale of Gamestation      —         —         147.7  Acquisition of intangible assets      —         —         (7.4) Other investing activities      1.1       (1.1)     (0.1) 

                        

Net cash flow provided by (used in) investing activities      (74.9)     (116.5)     76.7  

                        

Cash flows from financing activities:       

Proceeds from senior secured notes      634.5       —         —    

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Proceeds from credit agreements      381.4       235.0       115.0  Repayments on credit agreements      (864.4)     (164.3)     (329.1) Cash dividends on preferred stock      (2.8)     (11.3)     (11.3) Debt financing costs      (65.7)     —         (4.0) Capital lease payments      (10.6)     (10.0)     (11.6) 

                        

Net cash flow provided by (used in) financing activities      72.4       49.4       (241.0) 

                        

Effect of exchange rate changes on cash      7.0       (13.6)     10.2                          

Net increase (decrease) in cash and cash equivalents      33.8       (29.7)     (210.3) Cash and cash equivalents at beginning of year      154.9       184.6       394.9  

                        

Cash and cash equivalents at end of year    $ 188.7     $ 154.9     $ 184.6                          

Supplemental cash flow information:       

Cash payments for interest    $ 68.4     $ 71.2     $ 77.4  Cash payments (refunds) for income taxes, net    $ 21.5     $ 26.6     $ 29.9  

III. Risk Analysis- Solvency/Liquidity risks

Short-term solvency and liquidity ratios (2009)Blockbuster Netflix

Current ratio 1.13 1.82

Quick ratio 0.45 0.82

Cash ratio 0.20 0.59

Net working capital to 0.08 0.27total assets

Long-term solvency ratios (2009)

Total debt ratio 1.20 0.71

Debt-equity ratio -5.90 2.42

Long-term debt ratio 1.52 0.56

Profitability ratios (2009)

Profit margin on sales -13.74% 6.95%

Return on asset (ROA) -36.28% 17.06%

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Return on equity (ROE) -177.54% 58.29%

Analysis

Short-term solvency and liquidity ratios

The current ratio measures the short-term debt-paying ability. Blockbuster had a current ratio of 1.13. This ratio was 1.82 for Netflix. We can say that Netflix had more short-term debt-paying ability than Blockbuster.

The quick ratio measures immediate short-term liquidity. This ratio was of 0.45 for Blockbuster. Netflix had approximately the double. So, Netflix owned more short-term liquidity than Blockbuster.

The cash ratio shows how quickly a company could liquidate its most immediate liabilities. With cash ratio of 0.59 Netflix can quickly liquidate its most liabilities than blockbuster.

Long-term solvency ratios

The total debt ratio measures the percentage of total assets provided by creditors. As Blockbuster had a debt ratio of 120% and Netflix showed a debt ratio of 71%, we can assume that assets provided by creditors for Netflix are less than those of Blockbuster.

The debt-equity ratio refers to the relationship between the total debt from creditors and the equity of shareholders. Blockbuster displayed a poor situation (ratio of -5.90) while Netflix had a ratio of 2.42.

Profitability ratios

The profit margin on sales measures net income earned on each dollar of sales. With a profit margin on sales of -13.74% we can say that Blockbuster provided -$13.74 of net income for $100 of sales. This implies a poor situation. Netflix had a great profit margin on sales. This was of 6.95% which means Netflix provided $6.95 of net income for $100 of sales.

The return on assets measures the overall profitability of assets. The overall profitability was -36.28% for Blockbuster while it was 17.06% for Netflix. Based on these numbers, we can assume that Netflix appeared more profitable and has more degree of success than Blockbuster.

The return on equity measures profitability of owners’ investment. Blockbuster experienced a degrading situation with a return on equity of -177.54%. The return on equity of 58.29% for Netflix looked much better.

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BALANCE SHEETS FOR THE YEAR ENDED 2009

(Amounts in millions)

Blockbuster Netflix

AssetsCurrent assets : Cash and equivalents 189 134 Short term investments 0 186 Receivables 79 0 Inventory 639 38 Deferred income tax 14 0 Other current assets 0 24 Prepaid expenses 139 29Total current assets 1,060 411Non-Current assets 478 269

Total assets 1,538 680

Liabilities and stockholder equityCurrent liabilities 935 226Non-current liabilities 917 255Stockholders' equity -314 199

Total liabilities and stockholder's equity 1,538 680

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IV. Quality of earnings review

EARNINGS REVIEW FOR THE YEAR ENDED 2009

(Amounts in millions)

Blockbuster Netflix

Total Revenue 4,062 1,670Cost of sales 1,884 1,079Gross Profit 2,178 591Operating expenses 2,533 399Operating income / Loss -352 192Income/Loss from continuing operations before income taxes -506 192Income/Loss from continuing operations -517 192Income / Loss from discontinued operations, net of tax -41 0Net income / Loss -558 116

Net income / Loss per common shareContinuing operations -2.72

Discontinuing operations -0.21Net income / Loss -2.93 1.00

Analysis

The earnings review of 2009 reflects a gross profit of 53.62% for Blockbuster while it shows 35.39% for

Netflix. The operating expenses for Blockbuster were greater than the gross profit; the result was an

operating loss of $352 million. Netflix had an operating income of $192 million. Blockbuster had a loss in

continuing operations of $517 million and a loss in discontinued operations of $41 million. No

discontinued operation was related to Netflix. Blockbuster ended up with a net loss of $558 million and

Netflix had a net income of $116 million.

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V. Proforma Financial Statements

Netflix Inc.Pro-forma Income statementFor the Year Ended December 31, 2009 ($ millions)

2010 2010 2009 2009 2008 2008

Revenue 100.00% 2,045 100.00% 1,670 100.00% 1,364Cost of revenue 65.66% 1,343 64.61% 1,079 66.72% 910Gross profit 702 35.39% 591 33.28% 454

Total Operating Expenses 24.15% 494 23.89% 399 24.41% 333Income from continuing operations 208 11.50% 192 8.87% 121

Total other income / Expenses 9 0.36% 6 0.88% 12EBIT 217 11.86% 198 9.75% 133

Interest Expense 4 0.36% 6 0.15% 2Earnings before Tax 213 11.50% 192 9.60% 131

Income Tax Expense 62 4.55% 76 3.52% 48Net income 151 6.95% 116 6.09% 83

Blockbuster Inc.Pro-forma Income statementFor the Year Ended December 31, 2009 ($ millions)

2010 2010 2009 2009 2008 2008

Revenue 100.00% 3,258 100.00% 4,062 100.00% 5,065Cost of revenue 47.23% 1,539 46.38% 1,884 48.08% 2,435Gross profit 1,719 53.62% 2,178 51.92% 2,630

Total Operating Expenses 60.15% 1,960 62.36% 2,533 57.95% 2,935Income from continuing operations -240 -8.74% -355 -6.02% -305

Total other income / Expenses 30 0.98% 40 0.38% 19EBIT -211 -9.72% -395 -5.65% -286

Interest Expense 92 2.73% 111 1.42% 72Earnings before Tax -302 -12.46% -506 -7.07% -358

Tax Expense 18 0.27% 11 0.47% 24Income/Loss from discontinued operations, net of tax -41 8Net income -320 -13.74% -558 -7.38% -374

For these pro-forma income statements, we apply the percentage of sale method. So for 2010,

Blockbuster earning is assumed to be -$320 million, a loss. This is due to the very low revenue expected

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in 2010, $3,258. Netflix earning is assumed to reflect a net income of $151 million. Once again Netflix

seems more profitable in earnings than Blockbuster.

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Netflix Inc.Pro-forma Balance sheetsFor the Year Ended December 31, 2009 ($ millions)

2010 2010 2009 2009 2008 2008Assets

Current assets : Cash and equivalents 137 21.24% 19.71% 134 22.76% 140 Short term investments 172 26.44% 27.35% 186 25.53% 157 Inventory 29 4.34% 5.59% 38 3.09% 19 Other current assets 20 3.07% 3.53% 24 2.60% 16 Prepaid expenses 28 4.25% 4.26% 29 4.23% 26Total current assets 385 411 358Non Current assets 263 269 257Total assets 648 680 615

Liabilities and stockholder equity

Current liabilities 221 34.18% 33.24% 226 35.12% 216Non current liabilities 154 22.98% 37.50% 255 8.46% 52Stockholders' equity 273 42.84% 29.26% 199 56.42% 347Total liabilities and stocholder's equity 648 680 615

Blockbuster Inc.Pro-forma Balance sheetsFor the Year Ended December 31, 2009 ($ millions)

2010 2010 2009 2009 2008 2008Assets

Current assets : Cash and equivalents 171 9.71% 12.27% 189 7.15% 154 Receivables 98 5.28% 5.14% 79 5.43% 117 Inventory 714 39.09% 41.56% 639 36.63% 789 Deferred income tax 14 0.76% 0.91% 14 0.60% 13 Prepaid expenses and Other current assets 162 8.81% 9.04% 139 8.59% 185Total current assets 1,159 63.66% 68.91% 1,060 58.40% 1,258Non Current assets 687 36.34% 31.09% 478 41.60% 896Total assets 1,846 1,538 2,154

Liabilities and stockholder equity

Current liabilities 1,094 59.48% 60.79% 935 58.17% 1253Non current liabilities 802 45.76% 59.62% 917 31.89% 687Stockholders' equity -50 -5.24% -20.42% -314 9.94% 214Total liabilities and stocholder's equity 1,846 1,538 2154

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For these pro-forma Balance sheets, the expected total assets for Blockbuster are $1,846 million. Netflix

is assumed to reflect a total in assets of of $648 million.

VI. Value of the firm

For the computation of the value of the firm, the following formula is applied:

Market Capitalization + Total Debt - Cash = Enterprise Value

Assuming a current share price of $5,

Number of outstanding shares for blockbuster: 72,000,000

Number of outstanding shares for Netflix: 58,862,478

(Amounts in millions)

Blockbuster Netflix

Market capitalisation ($5/share) 360 295Total debt 1,853 481Cash 189 134Value of the firm 2,024 642

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References

Brem, Lisa and Narayanan, V.G.; That’s a Wrap: The Dynamics of the Video Rental Industry;

Harvard Business School Case 9-102-051; May 20, 2002

Hoovers Online; Blockbuster Inc – History; Date Unknown

http://premium.hoovers.com/subscribe/co/history.xhtml?COID=10218

Lieberman, David. “Blockbuster jabs back at rivals”. USA Today – June 22, 2004. Reuters Via

Hollywood Reporter.com

NETFLIX Entering the Video on Demand Industry through ProvidingStreaming Movies

Rico Chiu Sherwin Doroudi Travis Haussler Aditya Khosla Sean Mattingly March 7, 2007

http://www.stanford.edu/~aditya86/Netflix.pdf

Netflix, Inc. - Financial and Strategic Analysis Review

http://www.pr-inside.com/netflix-inc-financial-and-strategic-r1077851.htm

A Strategic Analysis for theTroubled Movie Rental House (Internal Analysis) Erin M. Clark

December 4, 2007

http://www.plu.edu/~clarkem/doc/strategic-analysis.pdf

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