Fact findings & Strategic Options
on Netflix relationship
- follow up on the breakfast meeting
on December 16th in New York
Discussion Document
April 6th, 2011
Group Strategy
Corporate Planning Division
Executive Summary
• Netflix is gaining power acquiring approximately 20 million subscribers in US.
•We need to consider how Sony group as a whole should work with Netflix
Key Questions
Should SPE raise the cap on Starz’ internet distribution?
2 Should Qriocity Video Service compete head to head against Netflix?
3 Should HE/SCE put button or icon of Netflix on H/W products and UI?
4 How can / should Qriocity and SPE better collaborate?
1
Impact on Sony’s Businesses
HE
Without compatibility with Netflix , difficult to sell TV and BD Players in US.
TV, BDP, PS3 receive bounty fees 17 mil USD per year.
SPE
Netflix is currently one of SPE’s distribution channels. SPE may receive additional fees from
Starz by lifting the cap and enabling Starz to continue sublicensing SPE contents to Netflix.
SNE
Netflix is complementary to Qriocity, because Qriocity Video service focuses on early
window (4 months after theatrical release) while Netflix does 8-10 months.
Strategic Option Hypothesis
 Receive maximum license fee from Starz by lifting cap
 Use those fee for strategic focus:
- to acquire similar Starz sub-distribution rights for Qriocity / PSN with Netflix
- to further differentiate Qriocity Video with original contents by SPE to SNE
 Seek No.2 position in US market, but Aim to be No.1 in other regions
Business Strategy Department
Group
Strategy
Division
Group
Strategy
Division
| 2010 MRP
April 6, 2011
3
Aspiration of Netflix
• Netflix is gaining customer touch points in Living Room TV equal to “Pay TV”
Analyst Comments
• Netflix has 20 mil subscribers by the end of 2010.
- 2/3 of Netflix customers registered in online subscription service.
- 30% of newly registered customers subscribe online service only.
• Netflix is not far from surpassing Comcast subscriber base of 23 million
cable subscribers. This would make Netflix the US leader in “pay TV”,
ahead of players like Dish, Direc TV and Time Warner Cable.
Number of Subscriber [*4]
[Mil]
25
20
CAGR
20
42%
15
12
10
9
7
5
0
2007
2008
2009
20010
Aspiration of Netflix
• No ambition to create early release windows
[*1]
- New release window is not available for Netflix since
studios wish to preserve current sell-thru/ rental
- Avoid pay-per-view, ad-supported, sports, news, adult, UGC
• Intend to introduce lower price from $7.99/mth to $4.99 [*2]
- Will continue to increase the amount of content and reduce the price.
- Cost of content is fixed, so the more subscribers they have, the lower
they can price the service.
• Aim to take current business model global [*3]
- launched in Canada in fall 2010,
- Will launch in Latin region in fall 2011 and Europe in 2012
[Mil$]
Revenue
and Profit [*4]
Number
of Subscriber
2,500
1,500
2,163
CAGR
22% 1,670
2,000
1,205
Revene
1,365
Profit %
1,000
500
8%
92
9%
122
11%
192
2007
2008
2009
13%
284
O. Income
0
20010
Global Expansion Plan
In 2010 Fall
in 2012
in 2010 Fall
*1: Source from Netflix Strategy Deck, May 2010. *2: At 1/8/11 dinner, Netflix VP of Business Development told D. Benefield (SNEI) and N. Colsey (HEoA)
*3: At 1/8/11 meeting, Netflix CEO told Bob Ishida and Tim Schaaff *4: Source from Netflix IR Report.
Business Strategy Department
Group
Strategy
Division | 2010 MRP
April 6, 2011
Group
Strategy
Division
4
Key Implications & KSF
Key Implications
• In short term, potential revenue from Starz for sublicensing SPE contents to
Netflix is attractive. However, unlimited expansion of Netflix to take price
control power is unfavorable to our businesses in the long run.
Business Area
Content
Network Service
H/W Products
Potential Threats
Decrease of revenue and profit from content
Lose presence in on-line video service
Lose differentiation through Qriocity video service
• Qriocity video service alone is unlikely to compete head-to-head against Netflix
in terms of scale given Netflix’s first mover advantage, brand recognition and
required investment.
• To slow-down the growth of Netflix, need to further clarify unique value
proposition of Qriocity video service and employ cross-business collective
measures.
Key Success Factor
• Create unique value proposition of Qriocity video service.
• Best utilize negotiation leverage between SPE and Starz
- to maximize license fees from Starz
- to acquire similar content licenses for Qriocity/PSN with minimum investment
Business Strategy Department
Group
Strategy
Division
Group
Strategy
Division
| 2010 MRP
April 6, 2011
5
Recommended Strategic Options
Strategic Options
Q-Video End State
1
Compete against Netflix with
subscription service in the U.S.
Beat Netflix and become No.1 online
video service players globally.
2
Do not compete or rely on Netflix,
Survive independently.
Seek No.2 position in US market, but
Aim to be No.1 in other regions.
3
Take advantage of Netflix to grow
Qriocity Video Service.
Do not seek a dominant position.
Leverage Netflix to grow our businesses.
Set of actions
Responsible
Entities
Approach
to Starz
If Starz is interested and needs cap lifted, allow Starz to offer SPE contents to Netflix
and acquire similar content license from Starz on Qriocity/PSN to match with Netflix.
SPE
UI, Icon
& Button
Improve ease of use by single sign-on and common UI among multiple devices
Original
Contents
Create original contents for Qriocity and PSN
SPE
SNE
Bundle Qriocity video service with other competing services under “Q+” scheme
SNE
Cable Lite
Provide best channel at lower cost with better UX (Cable Lite)
SNE
Global Play
Enhance PS+ with 30+ new movie titles refreshed monthly
SNE
Q+ Partner
Business Strategy Department
Group
Strategy
Division
Group
Strategy
Division
| 2010 MRP
SNE
SCE, HE
April 6, 2011
6
Next Steps & Notable Read-out Meetings
Alternative to next page
Next Steps
• SPE continues to lead negotiations with Starz
– If Starz is interested and needs cap lifted, seek to maximize fees to SPE
– Once fee is negotiated, seek to negotiate similar Starz sub-distribution rights for
Qriocity/PSN as a reduction to that fee
• Original content for Qriocity / PSN
– Determine if a more robust original content budget is necessary to drive adoption of
Network Services and sales of H/W products
– Estimate required budget and associated ROI
• Continue current SNEI initiatives
– Create unique UX, Launch Cable Lite, Q+, etc.
Notable Read-out Meetings
• May 26 – Management Conference
• June 2 – US Board Meeting
• July 20-22 – Strategy Roundtable #2
Business Strategy Department
Group
Strategy
Division
Group
Strategy
Division
| 2010 MRP
April 6, 2011
7
Next Step & Timeline
April
Today
4th
W1
11th
W2
17th
W3
May
24th
W4
2nd
W5
9th
W6
June
16th
W7
23st
W8
1st
W9
6th
W10
13th
W11
July
20st
W12
27th
W13
4st
W14
11th
W15
18th
W16
25st
W17
Continue negotiation with Starz
• Seek to maximize license fee from Startz
Start 2nd round negotiation
• Negotiate right price to secure
sublicense contents to Qriocity/PSN
Invest on original content for Qriocity/PSN
• Study what original content can drive
sales of network service and H/W products
• Estimate required budget to create these contents
Continue current SNE’s initiatives
• Create unique UX, Launch Cable Lite, Q+, etc
Reporting
• Set strategic direction and investment focus
Feasibility Study, ROI simulation
Reporting
• Go/ No go decision
April 5-6th (JPN)
Strategy Roundtable #1
Business Strategy Department
Group
Strategy
Division
Group
Strategy
Division
May 26th (JPN)
Management Conference
| 2010 MRP
June 2nd (NY)
US Board Meeting
July 20-22nd (JPN)
Strategy Roundtable #2
April 6, 2011
8