NETFLIX IN 2011 Harvard Case Solution & Analysis

Question 1
Based solely on data provided in the case, build a model to forecast Netflix's revenue growth over the next five years.
a. What were the assumptions and limitations of your model? How does it impact your calculations?
b. How would you assess the performance of your forecast?
c. What additional data would you need and why?
d. Conduct a sensitivity analysis on your model.
Based on data provided in the case, I have used 5 yearmoving average model to find the revenue growth rate over next five years.In the 5 year moving average model, I have taken the average of 5 years revenue growth of Netflix from 2001to 2005, and the followings are the revenue of next five years. (See Appendix, Table 1)
The Moving average model works under the assumption that past movements will continue and affect the revenues of Netflix.The moving average formula is based on the assumption of theconstant model, the model assumes that whatever the past trends that include the inflation rate, or less demand of theproduct in some specific year will affect the revenues in the future.
Moving average draw trends from past information, it doesn’t pay attention to the future factors that may affect the financialperformanceofthe company, such as market competitors, change in the demand for the product either increase or decrease or changes in the capital structure or managerial structure of thecompany.
NETFLIX IN 2011 Harvard Case Solution & Analysis

Moving average does not model seasonality and can be spread out over any time period, though that can be problematic because thegeneral trend can change dramatically depending on the number of years has been used in the model, as I have used 5 years moving average.Many analysts argued that past should not be anindicator of future because it does not necessary that past same past events occur in the future and affect the revenues of thecompany.
Impact on results
These limitations can impact the future forecasted revenues, as moving average does not consider the competition, and as competition can affect the price of services provided by the Netflix, same happened in October 2004, when Netflix reduced its price to $19.99 from $21.99 because of anticipation of market entry by Amazon. Blockbuster was also giving tough competition to the Netflix and it can impact the forecasted future revenues.
Assess the performance
In moving average, we assess the performance based on its past trends. Moreover, firstI have the found the growth rate of revenues from 2005 to 2010 and after that i have taken the average of that growth rate and based on those growth rates I have the found the revenue of 2010 and that is $2734 million. To find the revenue of 2012, I have applied the same procedure, but this time I have found the growth rate of revenues from 2006 to 2010.However, this same method applied while finding the revenues of other years.(See Appendix, Table 1)
2010 2011 2012 2013 2014 2015
2162.6 M 2734 M 3349 M 4112 M 5129 M 6420 M...............

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