These next steps will guide you through a calculation of the expected net present value (NPV) of each new subscriber to Netflix. The case gives the benefits per subscriber (the fees per month) and forecasts of subscriber retention rates.

 

In addition to the backfile, which is expanded for each new subscriber, Netflix must continually buy new releases, since its customers want to watch new movies. The case tells us that new releases are about 20% of the library, and titles are considered new releases for 8 weeks. Thus, assume that Netflix adds 0.58 new release discs each month, per existing subscriber (i.e. 10% of the library per subscriber, as of the end of 1999). Note that this will mean that the library expands over time, even relative to the number of its subscribers, since Netflix keeps old discs (until they break, get lost or wear out).

 How much does it cost per month, per subscriber, to continue to support each existing subscriber (not counting new subscribers)?