Netflix Inc. EPIX Deal Highlights Growth Strategy; Adjusting Estimates

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1 NORTH AMERICA Morgan Stanley & Co. Incorporated Scott Devitt +1 (1) Colter J. Van Domelen +1 (1) Stock Rating Overweight Industry View Attractive EPIX Deal Highlights Growth Strategy; Adjusting Estimates EPIX content deal delivers top-line catalyst: We view Netflix s multi-year online distribution agreement with EPIX as a significant catalyst that could drive higher-than-expected subscriber / revenue growth in the near- and long-term (we estimate 18.6MM ending subscribers / $2.16B in revenue for C2010E vs. guidance range of MM / $ B). Netflix s online distribution deals with EPIX and Starz (who have exclusive rights to ~40% of studio output during the premium TV window), the exclusive output deal with Relativity Media, and a growing TV / back-catalog film library give Netflix the strongest content offering / value proposition in the digital video space, in our view. Adjusting estimates on higher content costs near-term + top-line strength / fixed-cost leverage long-term: We estimate Netflix will pay ~$180MM per year in fees to EPIX as part of the content deal, which will likely pressure gross margin in the near-term. As a result, we are bringing our above-consensus C2010E / C2011E EPS estimates down to $2.75 / $3.63 from $3.02 / $4.27. Longer-term, earnings estimates go up as: 1) subscriber / revenue growth is higher than previously estimated owing to improved value proposition; 2) the fixed-cost nature of Netflix s long-term digital content deals create leverage as cost per subscriber declines in the back-end of these agreements; and 3) postage / fulfillment / DVD content acquisition costs decline as Netflix subscribers continue to adopt digital streaming faster than we anticipated. Key Ratios and Statistics Reuters: NFLX.O Bloomberg: NFLX US Internet & Consumer Software / United States of America Shr price, close (Aug 16, 2010) $ Mkt cap, curr (mm) $7, Week Range $ Fiscal Year ending 12/09 12/10e 12/11e 12/12e ModelWare EPS ($) Prior ModelWare EPS ($) EPS ($)** Prior EPS ($)** Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare framework (please see explanation later in this note). ** = Based on consensus methodology e = Morgan Stanley Research estimates Our Revised Estimates vs. Prior C2010E C2011E C2012E C2013E C2014E C2015E Our Estimate 18,556 25,163 30,836 35,636 40,338 44,899 Subscribers (000s) Prior Estimate 18,481 23,255 27,980 32,685 37,409 42,111 % Change 0% 8% 10% 9% 8% 7% Our Estimate $2,164 $2,872 $3,593 $4,187 $4,761 $5,329 Revenue ($MM) Prior Estimate $2,163 $2,747 $3,293 $3,828 $4,401 $4,980 % Change 0% 5% 9% 9% 8% 7% Our Estimate 37.6% 36.1% 35.4% 37.4% 38.8% 40.3% Gross Margin Prior Estimate 38.4% 38.4% 38.4% 38.4% 38.4% 38.4% Ppts Change -1% -2% -3% -1% 0% 2% Our Estimate 12.4% 12.5% 13.7% 16.9% 19.1% 21.4% Operating Margin Prior Estimate 13.5% 15.3% 16.4% 17.3% 18.3% 19.4% Ppts Change -1% -3% -3% 0% 1% 2% Our Estimate $2.75 $3.63 $4.94 $7.07 $8.96 $11.12 GAAP EPS Prior Estimate $3.02 $4.27 $5.44 $6.61 $7.94 $9.37 % Change -9% -15% -9% 7% 13% 19% Source: Morgan Stanley Research Implications for Starz deal renewal: In our view, Netflix s current content agreement with Starz is limited to primarily back-catalog content (~75% of Starz Play content) and gives Netflix narrow access to Disney content (less than 100 films in total, only ~15 that are still in the premium TV window). We believe Netflix will renew the Starz content deal in CQ4:11E at a higher price than the current agreement (we expect ~$235MM per year vs. ~$20-30MM per year for current agreement) but will require broader access to Starz content. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.

2 Netflix (NFLX, $137, Overweight) Risk-Reward View: Sustained Subscriber and Earnings Growth Why Overweight? $ $ $180 (+31%) $145 (+6%) $85 (-38%) 0 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Base Case (Aug-11) Historical Stock Performance Current Stock Price Source: FactSet, Morgan Stanley Research Fair Value $145 Bull Case $180 Base Case $145 Bear Case $85 19x Upside Case C11e EV / EBITDA 18x Base Case C11e EV / EBITDA 15x Downside Case C11e EV / EBITDA Fair value of $145 is based on our DCF model WARNINGDONOTEDIT_RRS4RL~NFLX.O~ Accelerated share gains as Netflix keeps digital competitors at bay; material international contribution. Continued lead in digital video monetization. 5-year revenue CAGR of 21% (C2010E-C2015E), operating margin of 23% by 2015E. Subscriber growth continues to accelerate, margins improve long-term on fixed-cost leverage. Subscriber growth accelerates to +50% / +51% Y/Y, while streaming content costs increase to nearly 20% of revenue by CQ4E. 5-year revenue CAGR of 20% (C2010E-C2015E), operating margin of 21% by 2015E. Strong competition from kiosks and digital, margins pressured from costs of digital streaming content. Competition from kiosks / VOD pressure share gains. 5-year revenue CAGR of 17% (C2010E-C2015E), operating margin of 17% by 2015E. Investment in digital has significantly increased Netflix s consumer value proposition. Addressable market expands well beyond DVD rental As more business shifts to digital, there is an opportunity to expand margins while continuing to improve content. Netflix op. margin of 12.4% in C2010E, vs. premium TV of 35%+ Netflix has created a scale-based competitive advantage around user experience and monetization of content that otherwise has limited value in the supply chain. Key Value Drivers Strong growth in ending subscribers (+42% Y/Y in CQ2) Expanding operating margin (14.9% in CQ2 vs. 12.9% in CQ2:09) Declining subscriber acquisition cost (SAC), we estimate $22.30 per gross subscriber add in C2010E (-12% Y/Y) Netflix streaming device / content deals improve value proposition Potential Catalysts Uptake of digital offering on Nintendo Wii / ipad which launched in CQ2 Licensing deals with studios that increase streaming content library Blockbuster share decline SWOT Analysis Netflix Strengths 1. Market / brand leadership in subscription-based online streaming and DVD-by-mail 2. Strong value proposition with all-you-can-eat subscription plans and hybrid distribution 3. Broadest digital device penetration among streaming providers Opportunities 1. Continued subscriber growth acceleration due to success with digital streaming product 2. Operating margin expansion as model shifts to digital 3. International expansion Source: Morgan Stanley Research, Framework based on Michael Porter s Competitive Strategy Weaknesses 1. Delivery by mail does not offer instant gratification 2. Some competitors offer new releases to customers 28-days earlier than Netflix Threats 1. Competitive threat from the kiosk business model 2. Long term risk from consumer shift to digital streaming including competing offers, such as cable + satellite VOD / Amazon VOD / Apple itunes / Hulu Plus / Wal-Mart + Vudu / Best Buy CinemaNow Key Questions How will the shift to digital streaming impact Netflix? Specifically, what impact will the EPIX deal have on gross margin? Will studios become more receptive of Netflix as a revenue stream? Key Risks Competitive threat from the kiosk business model / increasing competition in digital video Rising digital content licensing costs 2

3 What the EPIX deal means for Netflix Expanded Digital Content Library The online distribution deal with EPIX will allow Netflix subscribers to stream a selection of EPIX content from Paramount, Lions Gate and MGM starting September 1 st. This deal changes the content investment landscape for Netflix by opening up a major channel for acquiring film content in the premium TV window. Between the distribution agreements with EPIX and Starz (who control ~40% of studio film output during the premium TV window based on C2009 box office results), Netflix s recent exclusive output deal with Relativity Media, and its growing TV / back-catalog film libraries, the Netflix content offering is becoming very compelling to consumers and should continue to represent one of Netflix s most significant customer acquisition tools going forward. Exhibit 1 EPIX + Starz Have Exclusive Rights to ~40% of Studio Output During Pay TV Window Percent of 2009 Box Office 60% 50% 40% 30% 20% 10% 0% 53% EPIX + Starz Have Access to ~40% of Studio Output 28% 11% HBO Starz EPIX Showtime WB Fox Universal DreamWorks SKG Dreamworks Animation Sony Disney Overture Paramount LGF MGM Summit The Weinstein Brothers Source: BoxOfficeMojo.com, Morgan Stanley Research Netflix s deal with EPIX will introduce more films from Paramount, Lionsgate and MGM to the constantly improving digital library. The current content selection has only a small slate of back-catalog Paramount titles just over 100 titles by our estimates (Paramount produces and distributes films per year and has the largest share of total box office of the three EPIX content partners) a decent-sized collection of Lions Gate films and few MGM titles. Broader access to films from these three studios should make the service more compelling for mainstream consumers and may help drive subscriber growth acceleration over the next two quarters (we estimate +50% / +51% Y/Y growth in CQ3E / CQ4E vs. +42% Y/Y in CQ2) and potentially into C2011E. 6% Exhibit 2 Netflix s Current Content Library is Under- Penetrated by Films from EPIX s Content Partners Starz Play Titles Television Titles Warner Titles Sony Pictures Titles Lionsgate Titles Universal Studios Titles Fox Titles Paramount Titles Buena Vista Titles Miramax Titles ,000 1,200 # of Titles in Streaming Library Lionsgate + Paramount Titles Expected to Increase with Epix Deal Note: Starz Play titles overlap with some Sony Pictures / Buena Vista / Miramax Titles. Source: Company data, Morgan Stanley Research EPIX Deal by the Numbers We estimate the EPIX deal will cost Netflix ~$180MM per year over the next five years (with ~$15MM / ~$45MM expensed in CQ3E / CQ4E). Ben Swinburne, the Morgan Stanley Media Analyst, estimates that Netflix paid market rates for the EPIX deal on a per film basis (~$8-10MM per film), but below historical premium TV pricing on a per subscriber basis (we estimate Netflix will pay ~$0.98 / ~$0.88 per average paying subscriber per month in CQ3E / CQ4E, vs. industry average for MSOs of ~$4-6). While this deal comes at a higher cost per subscriber than Netflix s agreement with Starz (details on the economics of the Starz deal below), we believe Netflix will gain deeper access to EPIX content than it receives under the current Starz Play agreement. Exhibit 3 Estimated EPIX Deal Terms CQ3:10E CQ4:10E C2011E C2012E C2013E C2014E C2015E EPIX Deal Cost ($000s) $15,000 $45,000 $180,000 $180,000 $180,000 $180,000 $120,000 Average Paying Subscribers (000s) 15,360 17,071 21,329 27,501 32,704 37,379 41,937 Monthly Cost per Avg. Paying Subscriber $0.98 $0.88 $0.70 $0.55 $0.46 $0.40 $0.32 Source: Morgan Stanley Research It is also worth noting that the fixed-cost nature of Netflix s streaming content distribution agreements, such as the Starz / EPIX deals, translate into higher costs per subscriber at the 3

4 outset of the contract, but declining cost per subscriber over time as long as Netflix continues to expand the subscriber base. Exhibit 4 Economics of EPIX Deal Improve Substantially if Subscriber Base Continues to Expand EPIX Deal Monthly Cost per Avg. Paying Sub $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 $0.98 $0.88 $0.71 $0.56 $0.47 $0.41 $0.32 CQ3:10E CQ4:10E C2011E C2012E C2013E C2014E C2015E EPIX Deal Monthly Cost per Avg. Paying Subscriber Source: Company data, Morgan Stanley Research 45MM 40MM 35MM 30MM 25MM 20MM 15MM 10MM 5MM MM Average Paying Subscribers (MM) Average Paying Subscribers (MM) Implications for the Starz Deal Renewal Starz was the first premium TV network to team up with Netflix and give the online streaming service access to exclusive pay TV content. Starz first began offering content from its two exclusive content providers (Disney and Sony) and from its collection of library films to Netflix in C2008, after Vongo, Starz s in-house, over-the-top video effort, saw little consumer adoption / financial success. The current online distribution deal with Starz (which was announced on 10/1/2008 and we believe will be up for renewal in the fall of C2011) gives Netflix the ability to stream Starz Play content for ~$26MM per year, by our estimates. While the substantial disparity between the Starz and EPIX deal rates (we estimate the Starz deal will cost Netflix ~$0.13 per average paying subscriber per month in CQ4E vs. ~$0.88 for the EPIX deal in CQ4, the first full quarter of the agreement) suggests that Netflix will have to pay a much higher price for Starz content if and when that agreement is renewed, we believe the renewal will include much broader access to Starz content than Netflix enjoys today. In our view, Netflix pays such a low rate for Starz Play content today primarily because the current deal with Starz offers only a limited selection of content: 1) Starz Play is primarily back-catalog content (we estimate ~75% of Starz Play titles were released before 2005), and 2) the agreement offers very few Disney titles even though the studio has consistently generated 10-20% of the total box office over the past five years (we estimate less than 100 Disney films are currently in the Netflix streaming library, and only ~15 of these are still in the premium TV window). As a result, we believe a Starz Play renewal at a higher price would be contingent on Netflix being able to access more exclusive Starz content that is still in the premium TV window. We estimate a Starz deal renewal would likely cost Netflix ~$235MM per year. Starz has access to roughly twice as many big new release box office titles per year as EPIX (but less library content), which we believe justifies a higher price tag for Netflix than the EPIX deal. That said, our estimate translates into ~$0.73 per average paying subscriber per month in C2012E (the first full year of the expected contract renewal), roughly consistent with the EPIX deal terms on a per subscriber basis. Exhibit 5 Estimated Starz Deal / Renewal Terms CQ3:10E CQ4:10E C2011E C2012E C2013E C2014E C2015E Starz Deal Cost ($000s) $6,500 $6,500 $68,333 $235,000 $235,000 $235,000 $235,000 Average Paying Subscribers (000s) 15,360 17,071 21,329 27,501 32,704 37,379 41,937 Starz Deal Monthly Cost per Avg. Paying Su $0.14 $0.13 $0.27 $0.71 $0.60 $0.52 $0.47 Note: We expect Netflix to renew the Starz deal in CQ4:11E. Source: Company data, Morgan Stanley Research Exhibit 6 We Expect a Starz Deal Renewal in CQ4:11E at Rates Similar to EPIX Deal Starz Deal Monthly Cost per Avg. Paying Sub $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 $0.14 $0.13 Starz Deal Renewal Estimated in CQ4:11E $0.27 $0.71 $0.60 $0.52 $0.47 CQ3:10E CQ4:10E C2011E C2012E C2013E C2014E C2015E Starz Deal Monthly Cost per Avg. Paying Subscriber Source: Company data, Morgan Stanley Research 45MM 40MM 35MM 30MM 25MM 20MM 15MM 10MM 5MM MM Average Paying Subscribers (MM) Average Paying Subscribers (MM) Changing Estimates We are adjusting our estimates to reflect the increased digital content costs associated with the EPIX agreement, along with higher subscriber and revenue numbers in C2011E and beyond as the Netflix streaming value proposition dramatically 4

5 improves with the addition of more video content from Paramount, Lions Gate and MGM, in our view. Exhibit 7 Our Revised Estimates vs. Prior C2010E C2011E C2012E C2013E C2014E C2015E Our Estimate 18,556 25,163 30,836 35,636 40,338 44,899 Subscribers (000s) Prior Estimate 18,481 23,255 27,980 32,685 37,409 42,111 % Change 0% 8% 10% 9% 8% 7% Our Estimate $2,164 $2,872 $3,593 $4,187 $4,761 $5,329 Revenue ($MM) Prior Estimate $2,163 $2,747 $3,293 $3,828 $4,401 $4,980 % Change 0% 5% 9% 9% 8% 7% Our Estimate 37.6% 36.1% 35.4% 37.4% 38.8% 40.3% Gross Margin Prior Estimate 38.4% 38.4% 38.4% 38.4% 38.4% 38.4% Ppts Change -1% -2% -3% -1% 0% 2% Our Estimate 12.4% 12.5% 13.7% 16.9% 19.1% 21.4% Operating Margin Prior Estimate 13.5% 15.3% 16.4% 17.3% 18.3% 19.4% Ppts Change -1% -3% -3% 0% 1% 2% Our Estimate $2.75 $3.63 $4.94 $7.07 $8.96 $11.12 GAAP EPS Prior Estimate $3.02 $4.27 $5.44 $6.61 $7.94 $9.37 % Change -9% -15% -9% 7% 13% 19% Source: Company data, Morgan Stanley Research Subscribers: Our ending subscriber estimate stays relatively unchanged for C2010E, as the EPIX deal was likely factored into management s C2010E guidance issued alongside CQ2 earnings results, in our view. For C2011E-C2015E, we are taking our ending subscriber numbers up ~8-10% due to the improvement in the content library, combined with Netflix s stronger competitive standing in the premium TV market (given Netflix now has deals with EPIX and Starz, who control access to ~40% of studio output during the premium TV window). Revenue Revenue estimates increase ~5-9% for C2011E-C2015E, as stronger-than-expected subscriber growth is offset slightly by declining ARPU as a large portion of new subscribers choose the $8.99 / month plan. Gross Margin Our gross margin estimates for C2010E-C2012E decline ~1-4 percentage points to reflect the increased content spending associated with the EPIX agreement and Starz deal renewal (which we expect to happen in CQ4:11E). For C2013E-C2015E we expect gross margin to remain flat to up +1 percentage point from prior estimates as Netflix benefits from an accelerated shift to streaming (as the improved content offering encourages subscribers to stream more and ship fewer DVDs, driving postage cost down further than we previously anticipated) and the fixed cost nature of its streaming content distribution agreements (which lead to declining content costs per subscriber later in the life of the deal as long as the subscriber base continues to expand). Exhibit 8 Increase in Digital Content Acquisition Expense Offset by Declining Postage as a Percent of Revenue C2009A C2010E C2011E C2012E C2013E C2014E C2015E Subscription Expense $909.5 $1,144.8 $1,578.7 $2,008.9 $2,268.7 $2,529.1 $2,764.8 Y/Y Growth 19% 26% 38% 27% 13% 11% 9% % of Revenue 54% 53% 55% 56% 54% 53% 52% Digital Content Acquisition $90.7 $261.4 $708.5 $1,048.0 $1,242.7 $1,403.1 $1,590.2 Y/Y Growth 95% 188% 171% 48% 19% 13% 13% % of Revenue 5% 12% 25% 29% 30% 29% 30% DVD Content Acquisition $333.4 $310.9 $221.6 $243.8 $231.0 $248.3 $203.6 Y/Y Growth 1% -7% -29% 10% -5% 7% -18% % of Revenue 20% 14% 8% 7% 6% 5% 4% Postage Expense $473.6 $553.1 $613.8 $668.1 $727.1 $783.2 $842.0 Y/Y Growth 24% 17% 11% 9% 9% 8% 8% % of Revenue 28% 26% 21% 19% 17% 16% 16% Digital Delivery Expense $11.7 $19.4 $34.7 $48.9 $67.9 $94.5 $129.0 Y/Y Growth 146% 66% 79% 41% 39% 39% 37% % of Revenue 1% 1% 1% 1% 2% 2% 2% Source: Company data, Morgan Stanley Research Operating Margins Our operating margin estimates adjust primarily as a result of shifting gross margins, but also reflect our expectation for even lower subscriber acquisition costs going forward. We expect SAC to continue to decline as marketing initiatives around digital content and distribution deals are more effective and word of mouth advertising from the growing subscriber base continues to attract new subscribers, which should benefit profitability over time. EPS We are taking our C2010E EPS estimate down to $2.75 from $3.02 (compared to consensus at $2.81 and management s guidance range of $2.58 to $2.86) to reflect the impact from increased content spend on the gross and operating margins. Our C2011E-C2012E EPS estimates also come down to reflect the cost of the EPIX and Starz agreements. However, from C2013E-C2015E, EPS estimates increase materially as margins improve and revenue growth flows through to the bottom line. Reiterate Overweight Rating We reiterate our Overweight rating on Netflix shares as the EPIX content agreement should act as a subscriber / revenue growth catalyst in the near- and long-term. The deal also partially mitigates one of the risks to sustained subscriber growth that we previously identified, in which exclusivity agreements between film studios and premium TV networks would restrict Netflix s access to digital content despite the company s financial ability and strategic desire to acquire digital content more aggressively. 5

6 While the margin expansion that we previously had estimated will likely be subdued by higher content acquisition expense in the near-term, we believe Netflix s strategy of investing in content and technology will benefit the company competitively and financially in the mid- to long-term. Morgan Stanley is currently acting as financial advisor to Lions Gate Entertainment Corp. ("Lions Gate") with respect to the unsolicited tender offer by certain entities affiliated with Carl Icahn (collectively, the "Icahn Group") to acquire up to 13,164,420 of the outstanding shares of common stock of Lionsgate, as announced on February 16, Together with the common stock of Lions Gate already held by the Icahn Group, the tender offer could result in the Icahn Group owning approximately 29.9% of the outstanding common shares of Lions Gate. The tender offer is subject to the condition that Lions Gate not enter into any material transaction outside of the ordinary course of business and other customary conditions. This report and the information provided herein is also not intended to (i) provide advice with respect to the tender offer, (ii) serve as an endorsement of the tender offer, or (iii) result in the procurement, withholding or revocation of a tender in the tender offer or any other action by a security holder. Lions Gate has agreed to pay fees to Morgan Stanley for its financial services. Please refer to the notes at the end of the report. 6

7 Exhibit Index Exhibit 9 NFLX Quarterly Income Statement Exhibit 10 NFLX Annual Income Statement Exhibit 11 NFLX Quarterly Revenue Breakdown Exhibit 12 NFLX Annual Revenue Breakdown Exhibit 13 NFLX Quarterly Historical Balance Sheet Exhibit 14 NFLX Quarterly Historical Cash Flow Statement Exhibit 15 NFLX Discounted Cash Flow Valuation 7

8 Exhibit 9 Netflix NFLX Quarterly Income Statement (US$ in Thousands, Except per Share Data) C2008A C2009A C2010E 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 9/10E 12/10E Reported Gross Revenue $326,183 $337,614 $341,269 $359,595 $394,098 $408,509 $423,120 $444,542 $493,665 $519,819 $553,075 $597,688 Company revenue guidance $ MM $ MM $ MM $ MM $ MM $ MM Subscription 187, , , , , , , , , , , ,294 Content Delivery 93,538 93,551 98, , , , , , , , , ,405 Postage 92,697 92,570 96,901 98, , , , , , , , ,272 Digital Delivery ,236 1,704 2,405 2,541 2,951 3,816 3,733 4,447 5,095 6,132 Content Acquisition 93, ,218 88,435 92, , , , , , , , ,890 Streaming Content Expense 7,993 9,348 10,427 18,675 20,679 21,351 23,205 25,513 33,953 45,247 70, ,446 DVD Content Expense 85,624 90,870 78,008 74,294 80,543 87,343 85,577 79,967 86,053 79,800 74,636 70,444 Fulfillment 35,543 36,210 37,797 39,085 41,692 41,825 42,084 43,829 47,426 49,240 51,989 56,183 Cost of Goods Sold 222, , , , , , , , , , , ,477 Gross Profit $103,484 $107,635 $116,899 $126,875 $134,950 $139,368 $147,945 $169,115 $186,679 $205,192 $207,479 $215,211 Technology and Development 19,271 21,337 22,418 22,957 23,129 25,929 28,845 32,186 35,530 35,487 38,715 41,838 Marketing 54,386 39,529 48,757 55,155 61,799 45,773 58,104 70,282 74,576 73,777 83,256 89,449 General And Administrative 12,220 11,926 10,243 9,251 11,516 11,724 10,031 12,063 14,379 13,630 14,380 15,540 Loss / (Gain) on disposal of DVDs (833) (2,263) (1,628) (1,603) (1,097) (118) (1,604) (1,741) (1,653) (1,972) (1,659) (1,793) Stock Compensation Expense 3,130 2,905 3,035 3,194 3,132 3,278 3,232 2,976 5,502 6,928 5,254 5,678 Total Operating Expenses (Incl. Stock Comp) $88,174 $73,434 $82,825 $88,954 $98,479 $86,586 $98,608 $115,766 $128,334 $127,850 $139,946 $150,712 Total Operating Expenses (Excl. Stock Comp) 85,044 70,529 79,790 85,760 95,347 83,308 95, , , , , ,034 Depreciation and Amortization 63,929 65,200 56,239 56,720 58,479 62,248 66,308 70,499 73,151 74,452 82,270 89,981 Operating Income (Incl. Stock Comp) $15,310 $34,201 $34,074 $37,921 $36,471 $52,782 $49,337 $53,349 $58,345 $77,342 $67,533 $64,499 Operating Income (Excl. Stock Comp) $18,440 $37,106 $37,109 $41,115 $39,603 $56,060 $52,569 $56,325 $63,847 $84,270 $72,787 $70,177 EBITDA 21,792 42,389 42,717 47,062 45,646 61,795 58,955 63,587 69,204 86,651 77,017 74,725 EBITDA (Excl. Stock Comp) 24,922 45,294 45,752 50,256 48,778 65,073 62,187 66,563 74,706 93,579 82,271 80,403 Interest Expense ,457 4,959 4,893 5,040 5,040 Interest and other (Income) / Expense (7,660) (2,404) (1,536) (852) (1,610) (866) (1,808) (2,444) (972) (921) (1,395) (1,393) Net Interest (Income) and Other (Income) (7,237) (1,723) (859) (175) (940) (192) (1,134) 2,013 3,987 3,972 3,644 3,646 Pre-Tax Income - Incl. Stock Comp $22,547 $35,924 $34,933 $38,096 $37,411 $52,974 $50,471 $51,336 $54,358 $73,370 $63,889 $60,852 Pre-Tax Income - Excl. Stock Comp $25,677 $38,829 $37,968 $41,290 $40,543 $56,252 $53,703 $54,312 $59,860 $80,298 $69,143 $66,530 Income Tax Expense 9,203 9,345 14,562 15,364 15,048 20,531 20,330 20,423 22,086 29,851 25,994 24,758 Tax Effects on Stock Compensation Expense 1, ,266 1,287 1,259 1,272 1,302 1,184 2,234 2,820 2,138 2,310 Minority Interest and Other Operating Net Income (incl. Stock Comp.) $13,344 $26,579 $20,371 $22,732 $22,363 $32,443 $30,141 $30,913 $32,272 $43,519 $37,895 $36,094 Operating Net Income (excl. Stock Comp.) $15,197 $28,729 $22,140 $24,639 $24,236 $34,449 $32,071 $32,705 $35,540 $47,627 $41,012 $39,462 Cumulative Effect of Change in Accounting Extraordinary (Loss)/Gain - pre-tax Tax Effect of Extraordinary Item Reported Net Income $13,344 $26,579 $20,371 $22,732 $22,363 $32,443 $30,141 $30,913 $32,272 $43,519 $37,895 $36,094 Adjustment to Net Income for Dilutive Items Weighted Average Fully Diluted Shares Outstanding 64,840 63,857 62,272 60,311 60,709 59,660 57,938 55,479 54,775 54,324 54,378 54,433 Operating EPS (excl. Stock Comp.) $0.23 $0.45 $0.36 $0.41 $0.40 $0.58 $0.55 $0.59 $0.65 $0.88 $0.75 $0.72 Operating EPS (incl. Stock Comp.) $0.21 $0.42 $0.33 $0.38 $0.37 $0.54 $0.52 $0.56 $0.59 $0.80 $0.70 $0.66 Reported EPS (incl. Stock Comp.) $0.21 $0.42 $0.33 $0.38 $0.37 $0.54 $0.52 $0.56 $0.59 $0.80 $0.70 $0.66 Company GAAP EPS guidance $ $ $ $ $ $ Key Metrics ($0.08) ($0.19) Growth Rate Revenue (Y/Y) 6.8% 11.2% 16.1% 18.9% 20.8% 21.0% 24.0% 23.6% 25.3% 27.2% 30.7% 34.5% Revenue (Q/Q) 7.9% 3.5% 1.1% 5.4% 9.6% 3.7% 3.6% 5.1% 11.1% 5.3% 6.4% 8.1% Cost of Revenue (Y/Y) 14.3% 17.0% 15.4% 16.4% 16.4% 17.0% 22.6% 18.4% 18.5% 16.9% 25.6% 38.9% Cost of Revenue (Q/Q) 11.4% 3.3% (2.4%) 3.7% 11.4% 3.9% 2.2% 0.1% 11.5% 2.5% 9.8% 10.7% Operating Expenses excl. Stock Comp. (Y/Y) (11.8%) (3.4%) 6.7% 8.7% 12.1% 18.1% 19.5% 31.5% 28.8% 45.2% 41.2% 28.6% Operating Expenses excl. Stock Comp. (Q/Q) 7.8% (17.1%) 13.1% 7.5% 11.2% (12.6%) 14.5% 18.3% 8.9% (1.6%) 11.4% 7.7% Operating Income excl. Stock Comp. (Y/Y) 31.5% 8.8% 49.5% 74.8% 114.8% 51.1% 41.7% 37.0% 61.2% 50.3% 38.5% 24.6% Operating Income excl. Stock Comp (Q/Q) (21.6%) 101.2% 0.0% 10.8% (3.7%) 41.6% (6.2%) 7.1% 13.4% 32.0% (13.6%) (3.6%) EBITDA (Y/Y) 36.1% 15.8% 54.5% 78.0% 109.5% 45.8% 38.0% 35.1% 51.6% 40.2% 30.6% 17.5% EBITDA (Q/Q) (17.6%) 94.5% 0.8% 10.2% (3.0%) 35.4% (4.6%) 7.9% 8.8% 25.2% (11.1%) (3.0%) Recurring Net Income (Y/Y) 35.3% 24.3% 30.2% 44.9% 67.6% 22.1% 48.0% 36.0% 44.3% 34.1% 25.7% 16.8% Recurring Net Income (Q/Q) (15.0%) 99.2% (23.4%) 11.6% (1.6%) 45.1% (7.1%) 2.6% 4.4% 34.9% (12.9%) (4.8%) Margins as % of Revenue Gross Margin 31.7% 31.9% 34.3% 35.3% 34.2% 34.1% 35.0% 38.0% 37.8% 39.5% 37.5% 36.0% Operating Margin (incl. Stock Comp.) 4.7% 10.1% 10.0% 10.5% 9.3% 12.9% 11.7% 12.0% 11.8% 14.9% 12.2% 10.8% Operating Margin (excl. Stock Comp.) 5.7% 11.0% 10.9% 11.4% 10.0% 13.7% 12.4% 12.7% 12.9% 16.2% 13.2% 11.7% EBITDA Margin 6.7% 12.6% 12.5% 13.1% 11.6% 15.1% 13.9% 14.3% 14.0% 16.7% 13.9% 12.5% Adj. EBITDA margin 7.6% 13.4% 13.4% 14.0% 12.4% 15.9% 14.7% 15.0% 15.1% 18.0% 14.9% 13.5% Pre-Tax Margin 6.9% 10.6% 10.2% 10.6% 9.5% 13.0% 11.9% 11.5% 11.0% 14.1% 11.6% 10.2% Recurring Net Income 4.1% 7.9% 6.0% 6.3% 5.7% 7.9% 7.1% 7.0% 6.5% 8.4% 6.9% 6.0% Expense Analysis (as % of Revenue) Cost of Goods Sold 68.3% 68.1% 65.7% 64.7% 65.8% 65.9% 65.0% 62.0% 62.2% 60.5% 62.5% 64.0% Subscription COGS 57.4% 57.4% 54.7% 53.8% 55.2% 55.6% 55.1% 52.1% 52.6% 51.1% 53.1% 54.6% Fulfillment COGS 10.9% 10.7% 11.1% 10.9% 10.6% 10.2% 9.9% 9.9% 9.6% 9.5% 9.4% 9.4% General and Administrative 3.7% 3.5% 3.0% 2.6% 2.9% 2.9% 2.4% 2.7% 2.9% 2.6% 2.6% 2.6% Marketing 16.7% 11.7% 14.3% 15.3% 15.7% 11.2% 13.7% 15.8% 15.1% 14.2% 15.1% 15.0% Research and Development 5.9% 6.3% 6.6% 6.4% 5.9% 6.3% 6.8% 7.2% 7.2% 6.8% 7.0% 7.0% Loss / (Gain) on disposal of DVDs (0.3%) (0.7%) (0.5%) (0.4%) (0.3%) (0.0%) (0.4%) (0.4%) (0.3%) (0.4%) (0.3%) (0.3%) Stock Compensation Expense 1.0% 0.9% 0.9% 0.9% 0.8% 0.8% 0.8% 0.7% 1.1% 1.3% 1.0% 1.0% Effective Tax Rate 40.8% 26.0% 41.7% 40.3% 40.2% 38.8% 40.3% 39.8% 40.6% 40.7% 40.7% 40.7% Cost of borrow ing 4.6% 6.8% 6.8% 6.9% 6.8% 6.9% 7.0% 46.6% 8.3% 8.2% 8.5% 8.5% Footnotes Fiscal year ends in December. E = Morgan Stanley Research Estimates. Source: Morgan Stanley Research 8

9 Exhibit 10 Netflix NFLX Annual Income Statement (US$ in Thousands, Except per Share Data) C2005A C2006A C2007A C2008A C2009A C2010E C2011E Reported Gross Revenue $682,213 $996,660 $1,205,340 $1,364,661 $1,670,269 $2,164,247 $2,872,496 Company revenue guidance $ B $ B Subscription 393, , , , ,461 1,144,849 1,578,700 Content Delivery 159, , , , , , ,576 Postage 159, , , , , , ,845 Digital Delivery 0 0 1,504 4,762 11,714 19,408 34,731 Content Acquisition 234, , , , , , ,124 Streaming Content Expense 0 0 9,475 46,443 90, , ,492 DVD Content Expense 234, , , , , , ,632 Fulfillment 70,762 93, , , , , ,508 Cost of Goods Sold 464, , , ,768 1,078,891 1,349,686 1,836,208 Gross Profit $217,663 $370,600 $419,599 $454,893 $591,378 $814,561 $1,036,288 Technology and Development 30,942 44,771 67,492 85, , , ,383 Marketing 141, , , , , , ,050 General And Administrative 29,395 30,130 46,774 43,640 45,334 57,929 90,340 Loss / (Gain) on disposal of DVDs (1,987) (4,797) (7,196) (6,327) (4,560) (7,077) (14,362) Stock Compensation Expense 14,327 12,696 11,976 12,264 12,618 23,362 35,906 Total Operating Expenses (Incl. Stock Comp) $214,674 $306,186 $335,132 $333,387 $399,439 $546,842 $676,317 Total Operating Expenses (Excl. Stock Comp) 200, , , , , , ,411 Depreciation and Amortization 106, , , , , , ,744 Operating Income (Incl. Stock Comp) $2,989 $64,414 $84,467 $121,506 $191,939 $267,718 $359,971 Operating Income (Excl. Stock Comp) $17,316 $77,110 $96,443 $133,770 $204,557 $291,081 $395,877 EBITDA 12,123 80, , , , , ,680 EBITDA (Excl. Stock Comp) 26,450 93, , , , , ,587 Interest Expense ,458 6,475 19,931 19,862 Interest and other (Income) / Expense (5,753) (15,904) (20,340) (12,452) (6,728) (4,682) (1,770) Net Interest (Income) and Other (Income) (5,346) (15,904) (19,749) (9,994) (253) 15,250 18,092 Pre-Tax Income - Incl. Stock Comp $8,335 $80,318 $104,216 $131,500 $192,192 $252,469 $341,879 Pre-Tax Income - Excl. Stock Comp $22,662 $93,014 $116,192 $143,764 $204,810 $275,831 $377,785 Income Tax Expense (3,492) 31,236 41,628 48,474 76, , ,170 Tax Effects on Stock Compensation Expense 0 4,950 4,760 4,585 5,017 9,502 14,722 Minority Interest and Other Operating Net Income (incl. Stock Comp.) $11,827 $49,082 $62,588 $83,026 $115,860 $149,780 $201,709 Operating Net Income (excl. Stock Comp.) $26,154 $56,828 $69,804 $90,705 $123,461 $163,641 $222,893 Cumulative Effect of Change in Accounting Extraordinary (Loss)/Gain - pre-tax 30, , Tax Effect of Extraordinary Item 0 0 (2,806) Reported Net Income $42,027 $49,082 $66,782 $83,026 $115,860 $149,780 $201,709 Adjustment to Net Income for Dilutive Items Weighted Average Fully Diluted Shares Outstanding 65,518 69,075 68,902 62,836 58,447 54,478 55,567 Operating EPS (excl. Stock Comp.) $0.40 $0.82 $1.01 $1.44 $2.11 $3.00 $4.01 Operating EPS (incl. Stock Comp.) $0.18 $0.71 $0.91 $1.32 $1.98 $2.75 $3.63 Reported EPS (incl. Stock Comp.) $0.64 $0.71 $0.97 $1.32 $1.98 $2.75 $3.63 Company GAAP EPS guidance $ $ Ke y Me trics ($0.27) ($0.64) Growth Rate Revenue (Y/Y) 36.3% 46.1% 20.9% 13.2% 22.4% 29.6% 32.7% Revenue (Q/Q) Cost of Revenue (Y/Y) 40.8% 34.8% 25.5% 15.8% 18.6% 25.1% 36.0% Cost of Revenue (Q/Q) Operating Expenses excl. Stock Comp. (Y/Y) 46.0% 46.5% 10.1% (0.6%) 20.5% 35.3% 22.3% Operating Expenses excl. Stock Comp. (Q/Q) Operating Income excl. Stock Comp. (Y/Y) (48.1%) 345.3% 25.1% 38.7% 52.9% 42.3% 36.0% Operating Income excl. Stock Comp (Q/Q) EBITDA (Y/Y) (88.5%) 562.5% 32.8% 44.3% 49.4% 33.7% 31.6% EBITDA (Q/Q) Recurring Net Income (Y/Y) (45.2%) 315.0% 27.5% 32.7% 39.5% 29.3% 34.7% Recurring Net Income (Q/Q) Margins as % of Revenue Gross Margin 31.9% 37.2% 34.8% 33.3% 35.4% 37.6% 36.1% Operating Margin (incl. Stock Comp.) 0.4% 6.5% 7.0% 8.9% 11.5% 12.4% 12.5% Operating Margin (excl. Stock Comp.) 2.5% 7.7% 8.0% 9.8% 12.2% 13.4% 13.8% EBITDA Margin 1.8% 8.1% 8.9% 11.3% 13.8% 14.2% 14.1% Adj. EBITDA margin 3.9% 9.3% 9.8% 12.2% 14.5% 15.3% 15.3% Pre-Tax Margin 1.2% 8.1% 8.6% 9.6% 11.5% 11.7% 11.9% Recurring Net Income 1.7% 4.9% 5.2% 6.1% 6.9% 6.9% 7.0% Expense Analysis (as % of Revenue) Cost of Goods Sold 68.1% 62.8% 65.2% 66.7% 64.6% 62.4% 63.9% Subscription COGS 57.7% 53.4% 55.1% 55.8% 54.4% 52.9% 55.0% Fulfillment COGS 10.4% 9.4% 10.1% 10.9% 10.1% 9.5% 9.0% General and Administrative 4.3% 3.0% 3.9% 3.2% 2.7% 2.7% 3.1% Marketing 20.8% 22.4% 17.9% 14.5% 14.1% 14.8% 12.5% Research and Development 4.5% 4.5% 5.6% 6.3% 6.6% 7.0% 7.2% Loss / (Gain) on disposal of DVDs (0.3%) (0.5%) (0.6%) (0.5%) (0.3%) (0.3%) (0.5%) Stock Compensation Expense 2.1% 1.3% 1.0% 0.9% 0.8% 1.1% 1.3% Effective Tax Rate (41.9%) 38.9% 39.9% 36.9% 39.7% 40.7% 41.0% Cost of borrow ing 598.5% 0.0% 0.0% 6.7% 16.5% 8.4% 8.4% Footnotes Fiscal year ends in December. E = Morgan Stanley Research Estimates. Source: Morgan Stanley Research 9

10 Exhibit 11 Netflix NFLX Quarterly Revenue Breakdown (US$ in Thousands, Except per subscriber data) Revenue Breakdown C2008A C2009A C2010E 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 9/10E 12/10E Reported Gross Revenue $326,183 $337,614 $341,269 $359,595 $394,098 $408,509 $423,120 $444,542 $493,665 $519,819 $553,075 $597,688 Y/Y Growth 7% 11% 16% 19% 21% 21% 24% 24% 25% 27% 31% 34% Q/Q Growth Company revenue guidance $ MM $ MM $ MM $ MM $ MM $ MM Revenue Per Paid Subscriber $42.28 $41.33 $40.81 $40.74 $40.88 $39.87 $39.90 $39.12 $38.70 $36.87 $36.01 $35.01 Y/Y Growth (11%) (10%) (7%) (5%) (3%) (4%) (2%) (4%) (5%) (8%) (10%) (11%) Q/Q Growth (1) (2) (1) (0) 0 (2) 0 (2) (1) (5) (2) (3) Beginning Subscribers 7,479 8,243 8,411 8,672 9,390 10,310 10,599 11,109 12,268 13,967 15,001 16,642 Y/Y Growth 18% 21% 25% 23% 26% 25% 26% 28% 31% 35% 42% 50% Q/Q Growth Net Subscriber Additions ,159 1,699 1,034 1,641 1,914 Y/Y Growth 59% (405%) (9%) 59% 20% 72% 95% 61% 85% 258% 222% 65% Q/Q Growth 69 (78) (69) (39) % of Beginning Subscribers Ending Subscribers 8,243 8,411 8,672 9,390 10,310 10,599 11,109 12,268 13,967 15,001 16,642 18,556 Y/Y Growth 21% 25% 23% 26% 25% 26% 28% 31% 35% 42% 50% 51% Q/Q Growth Paid Subscribers 8,102 8,235 8,490 9,164 10,116 10,375 10,835 11,892 13,622 14,577 16,142 17,999 Y/Y Growth 21% 25% 24% 25% 25% 26% 28% 30% 35% 41% 49% 51% Q/Q Growth % of Endings Subscribers Streaming Subscribers 1,154 1,514 1,908 2,629 3,712 3,922 4,555 5,889 7,682 9,151 10,484 12,618 Y/Y Growth 466% 274% 202% 220% 222% 159% 139% 124% 107% 133% 130% 114% Q/Q Growth % of Endings Subscribers Churn Y/Y Growth (11%) (9%) 1% 4% 8% 6% 3% (7%) (10%) (12%) (14%) (9%) Q/Q Growth (4) 7 1 (0) (0) 6 (3) (10) (4) 5 (5) (4) Subscriber Acquisition Cost, Per Sub. $29.48 $28.89 $32.21 $26.67 $25.79 $23.88 $26.86 $25.23 $21.54 $24.37 $22.20 $21.50 Y/Y Growth (38%) (34%) (15%) (23%) (13%) (17%) (17%) (5%) (16%) 2% (17%) (15%) Q/Q Growth (15) (2) 11 (17) (3) (7) 12 (6) (15) 13 (9) (3) Subscriber Acquisition Cost,Total $54,892 $39,984 $49,217 $55,607 $62,231 $46,232 $58,555 $70,720 $75,218 $74,548 $83,256 $89,449 Y/Y Growth (24%) (12%) 0% 8% 13% 16% 19% 27% 21% 61% 42% 26% Q/Q Growth 6 (27) (26) (1) 12 7 % of Total Net Revenue Footnotes Fiscal year ends in December. E = Morgan Stanley Research Estimates. Source: Morgan Stanley Research. 10

11 Exhibit 12 Netflix NFLX Annual Revenue Breakdown (US$ in Thousands, Except per subscriber data) Revenue Breakdown C2005A C2006A C2007A C2008A C2009A C2010E C2011E Reported Gross Revenue $682,213 $996,660 $1,205,340 $1,364,661 $1,670,269 $2,164,247 $2,872,496 Y/Y Growth 36% 46% 21% 13% 22% 30% 33% Company revenue guidance $ B $ B Revenue Per Paid Subscriber $ $ $ $ $ $ $ Y/Y Growth (18%) (7%) (9%) (7%) (4%) (9%) (7%) Beginning Subscribers 2,610 4,179 6,316 7,479 9,390 12,268 18,556 Y/Y Growth 76% 60% 51% 18% 26% 31% 51% Net Subscriber Additions 1,569 2,137 1,163 1,911 2,878 6,288 6,608 Y/Y Growth 40% 36% (46%) 64% 51% 118% 5% % of Beginning Subscribers Ending Subscribers 4,179 6,316 7,479 9,390 12,268 18,556 25,163 Y/Y Growth 60% 51% 18% 26% 31% 51% 36% Paid Subscribers 4,026 6,154 7,326 9,164 11,892 17,999 24,660 Y/Y Growth 62% 53% 19% 25% 30% 51% 37% % of Endings Subscribers Streaming Subscribers ,629 5,889 12,618 17,866 Y/Y Growth % 124% 114% 42% % of Endings Subscribers Churn Y/Y Growth 41% (7%) 5% (4%) 2% (11%) (2%) Subscriber Acquisition Cost, Per Sub. $38.80 $42.96 $40.87 $29.11 $25.48 $22.30 $21.50 Y/Y Growth 5% 11% (5%) (29%) (13%) (12%) (4%) Subscriber Acquisition Cost,Total $144,682 $225,527 $218,222 $199,699 $237,737 $322,470 $359,050 Y/Y Growth 44% 56% (3%) (8%) 19% 36% 11% % of Total Net Revenue Footnotes Fiscal year ends in December. E = Morgan Stanley Research Estimates. Source: Morgan Stanley Research 11

12 Exhibit 13 Netflix NFLX Quarterly Historical Balance Sheet (US$ in Thousands, Except per Share Data) 1 C2007A C2008A C2009A C20 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 Assets: Cash & Equivalents $218,458 $184,182 $179,804 $177,439 $168,989 $144,289 $111,524 $139,881 $115,131 $87,471 $55,717 $134,224 $79,861 $107,327 Short-Term Investments 169, , , , , , , , , ,498 99, , , ,758 Current Content Library, Net 3,842 6,118 7,899 16,301 28,194 24,008 26,510 18,691 33,299 33,519 32,937 37,329 55,566 93,123 Prepaid Content 17,042 10,430 9,292 7,640 8,410 22,213 24,757 21,098 17,000 18,613 18,506 26,741 31,704 33,837 Content Library, Net 109, , , , ,702 99,106 85,011 98, , , , , ,431 94,666 Net PP&E 91,533 95, , , , , , , , , , , , ,292 Goodwill and Goodwill-like Intangibles Deferred Tax Assets 16,269 16,844 17,078 16,865 17,413 19,621 19,831 22,409 23,107 17,225 17,244 15,958 18,791 21,951 Other Assets 24,963 25,715 24,924 27,805 32,050 33,934 42,984 32,460 37,804 44,710 38,973 39,001 39,306 48,018 Total Assets $651,277 $637,664 $653,169 $678,998 $623,374 $641,899 $578,462 $615,424 $626,877 $589,698 $489,780 $679,734 $648,293 $693,972 Liabilities & Equity: Accounts Payable $92,595 $67,048 $86,549 $99,951 $112,505 $104,876 $104,742 $100,344 $112,767 $101,634 $93,451 $91,475 $102,703 $120,031 Accrued Expenses 33,528 35,754 42,017 36,466 44,021 27,462 31,625 31,394 30,722 26,596 28,997 33,387 38,718 34,746 Income Taxes Payable Deferred Revenue 64,234 60,522 56,321 71,665 68,375 67,886 65,895 83,127 80,623 80,495 79, , , ,419 Deferred Taxes Total Debt 27,498 29,053 31,909 36,475 39,841 39,611 39,377 39,140 38,871 38,576 38, , , ,156 Minority Interest Other Liabilities 1,899 1,973 2,787 4,629 4,170 12,602 11,990 14,264 17,582 18,026 17,725 17,650 22,407 23,980 Total Liabilities $219,754 $194,350 $219,583 $249,186 $268,912 $252,437 $253,629 $268,269 $280,565 $265,327 $257,578 $480,591 $501,558 $517,332 Preferred Stock Retained Earnings (31,406) (5,912) 9,735 25,426 38,770 65,349 85, , , , , , , ,786 Common Stock and APIC 462, , , , , , , , , , , Treasury Stock (90,028) (100,020) (142,739) (215,250) (340,362) Other Equity Items 484 (521) 737 1, (814) (2,410) 84 (447) Total Shareholders Equity $431,523 $443,314 $433,586 $429,812 $354,462 $389,462 $324,833 $347,155 $346,312 $324,371 $232,202 $199,143 $146,735 $176,640 Total Liabilities & Stockholder's Equity $651,277 $637,664 $653,169 $678,998 $623,374 $641,899 $578,462 $615,424 $626,877 $589,698 $489,780 $679,734 $648,293 $693,972 Balance Sheet Metrics Cash Balance Grow th Rate (45.4%) (15.7%) (2.4%) (1.3%) (4.8%) (14.6%) (22.7%) 25.4% (17.7%) (24.0%) (36.3%) 140.9% (40.5%) 34.4% Short-Term Investments - % of sales 13.9% 16.0% 17.6% 17.2% 9.7% 12.5% 10.2% 10.9% 10.9% 10.3% 5.9% 10.5% 9.4% 8.3% Prepaid Expenses - % of sales 1.4% 0.9% 0.8% 0.6% 0.6% 1.6% 1.8% 1.5% 1.1% 1.1% 1.1% 1.5% 1.6% 1.6% Deferred Taxes Assets- % of income tax expense 60.7% 28.3% 39.3% 45.7% 47.3% 52.5% 34.0% 36.5% 38.4% 21.0% 21.2% 19.5% 21.3% 18.4% Other Assets Grow th Rate 203.6% 100.4% 90.3% 85.6% 28.4% 32.0% 72.5% 16.7% 18.0% 31.8% (9.3%) 20.2% 4.0% 7.4% Days Payable Other Accrued Expenses - % of operating expenses 2.8% 3.3% 3.8% 3.2% 3.5% 2.2% 2.6% 2.4% 2.1% 1.9% 1.9% 2.1% 2.2% 2.0% Other Liabilities Grow th Rate 108.2% 91.4% 151.3% 312.9% 119.6% 538.7% 330.2% 208.1% 321.6% 43.0% 47.8% 23.7% 27.4% 33.0% Deferred Revenue - % of Sales 5.3% 5.0% 4.8% 5.9% 5.2% 5.0% 4.8% 5.8% 5.1% 4.9% 4.7% 5.6% 5.1% 4.9% Footnotes Fiscal year ends in December. E = Morgan Stanley Research Estimates. Source: Morgan Stanley Research 12

13 Exhibit 14 Netflix NFLX Quarterly Historical Cash Flow Statement (US$ in Thousands, Except per Share Data) C2007A C2008A C2009A C2010E 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 Net Income $9,864 $25,580 $15,647 $15,691 $13,344 $26,579 $20,371 $22,732 $22,363 $32,443 $30,141 $30,913 $32,272 $43,519 Acquisition of Streaming Content Library (8,630) (4,249) (6,594) (15,348) (23,412) (7,982) (5,773) (11,123) (22,091) (9,343) (9,998) (22,785) (50,475) (66,157) Amortization of Content Library 49,442 50,985 48,237 54,751 57,570 57,012 47,596 47,579 49,304 53,235 56,690 60,261 62,292 65,143 Depreciation 4,793 5,319 5,945 6,162 6,482 8,188 8,643 9,141 9,175 9,013 9,618 10,238 10,859 9,309 Change in Prepaid Content (6,115) 6,612 1,138 1,652 (770) (13,803) (2,544) 3,659 4,098 (1,613) 107 (8,235) (4,963) (2,133) Change in Accounts Payable 13,185 (17,718) 5,997 15,091 8,680 7,092 (744) (7,917) 8,572 (6,549) (13,173) 8,894 16,878 19,263 Change in Accrued Expenses 7,699 14,244 11,433 (567) 7,826 (14,551) 4, ,945 (34) 2,752 7,506 13,746 7,917 Change in Deferred Revenue (5,444) (3,712) (4,201) 15,344 (3,292) (489) (1,989) 17,232 (2,504) (128) (1,372) 20, ,310 Change in Other Assets and Liabilities ,842 (669) 8,433 (775) 2,148 2, (2,240) 1,177 3,879 1,840 Other Operating Cash Flow (7,938) (16,138) (6,590) (7,011) (1,697) (3,099) (9,020) 8,478 (8,652) (2,047) 5,786 (3,126) (7,295) (19,759) Cash Flow from Operations $56,994 $60,997 $71,826 $87,607 $64,062 $67,380 $60,495 $92,100 $65,633 $75,302 $78,311 $105,817 $77,205 $60,252 Capital Expenditures ($18,013) ($8,968) ($7,412) ($9,863) ($12,431) ($14,662) ($9,226) ($7,471) ($6,572) ($6,933) ($9,994) ($22,433) ($6,393) ($5,671) Acquisition of Content Library (62,411) (53,116) (33,615) (59,505) (51,316) (44,410) (28,828) (38,295) (46,499) (43,224) (46,273) (57,048) (36,902) (24,191) Change in ST Investments (168,812) (25,213) (10,708) ,365 (44,255) 27,659 (16,395) (14,121) 5,238 68,378 (85,116) (1,212) 14,570 Other Investing Cash Flow 5,523 7,637 5,375 2,852 (1,485) 4,399 3,728 4,663 2,524 1,170 3,479 11,345 3,682 3,825 Net Cash Used in Investing Activities ($243,713) ($79,660) ($46,360) ($66,291) $18,133 ($98,928) ($6,667) ($57,498) ($64,668) ($43,749) $15,590 ($153,252) ($40,825) ($11,467) Cash Dividends $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Change in Debt (95) (97) (98) (100) (122) (230) (234) (237) (269) (295) (294) 192,595 (361) (465) Net Share issuance/(repurchase) 766 (27,534) (34,916) (28,565) (91,343) 4,524 (87,452) (6,761) (29,130) (62,733) (126,961) (70,237) (97,806) (32,036) Change in Preferred Stock Other Financing Cash Flow 4,076 12,018 5,170 4, ,554 1, ,684 3,815 1,600 3,584 7,424 11,182 Net Cash Provided by Financing Activities $4,747 ($15,613) ($29,844) ($23,681) ($90,645) $6,848 ($86,593) ($6,245) ($25,715) ($59,213) ($125,655) $125,942 ($90,743) ($21,319) Other Cash Flow - Including Effect of Exchange Rate Beginning Cash and Cash Equivalents 400, , , , , , , , , ,131 87,471 55, ,224 79,861 Inc. (Dec.) in Cash and Cash Equivalents (181,972) (34,276) (4,378) (2,365) (8,450) (24,700) (32,765) 28,357 (24,750) (27,660) (31,754) 78,507 (54,363) 27,466 Ending Cash and Cash Equivalents 218, , , , , , , , ,131 87,471 55, ,224 79, ,327 Minimum Cash Balance 117,236 89,035 57,127 Footnotes Fiscal year ends in December. E = Morgan Stanley Research Estimates. Source: Morgan Stanley Research 13

14 Exhibit 15 Netflix NFLX Discounted Cash Flow Valuation (US$ in M illions, Except per Share Data) Actual Calendar Year ending December 31, Projected Calendar Year ending December 31, E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Net Revenue $997 $1,205 $1,365 $1,670 $2,164 $2,872 $3,593 $4,187 $4,761 $5,329 $5,892 $6,457 $7,004 $7,532 % Net Revenue Growth 46% 21% 13% 22% 30% 33% 25% 17% 14% 12% 11% 10% 8% 8% EBITDA (1) $234 $322 $376 $462 $611 $846 $1,121 $1,429 $1,709 $1,954 $2,094 $2,178 $2,437 $2,752 EBITDA as % of Net Revenue 23% 27% 28% 28% 28% 29% 31% 34% 36% 37% 36% 34% 35% 37% Cash Taxes from Operations ($36) ($46) ($53) ($81) ($112) ($155) ($213) ($306) ($393) ($494) ($527) ($550) ($645) ($769) Cash Taxes as % of EBITDA 15% 14% 14% 18% 18% 18% 19% 21% 23% 25% 25% 25% 26% 28% Capital Expenditures ($197) ($288) ($255) ($303) ($473) ($562) ($667) ($746) ($768) ($819) ($859) ($892) ($913) ($920) % Y/Y Capex Growth 42% 46% -11% 19% 56% 19% 19% 12% 3% 7% 5% 4% 2% 1% % of Net Revenue 20% 24% 19% 18% 22% 20% 19% 18% 16% 15% 15% 14% 13% 12% Change in Net Working Capital $35 $58 $12 $24 $82 $39 $34 ($2) ($10) ($86) $10 $23 ($11) ($18) Change in NWC as % of Net Revenue 4% 5% 1% 1% 4% 1% 1% (0%) (0%) (2%) 0% 0% (0%) (0%) Unlevered Free Cash Flow $36 $45 $80 $101 $108 $167 $275 $374 $539 $555 $718 $759 $868 $1,046 % of Net Revenue 4% 4% 6% 6% 5% 6% 8% 9% 11% 10% 12% 12% 12% 14% Perpetuity Grow th Rate / Terminal Value at 12.0% Hurdle Rate Hurdle 4.0% 4.3% 4.5% 4.8% 5.0% Rate Equity Value as of 6/30/10 Valuation Date $13,958 $14,443 $14,960 $15,513 $16, % $8,180 $8,376 $8,586 $8,811 $9, % $7,928 $8,111 $8,306 $8,515 $8,740 Terminal Value / Implied EBITDA Multiple 12.0% $7,574 $7,740 $7,916 $8,104 $8, x 5.2x 5.4x 5.6x 5.9x 12.2% $7,354 $7,508 $7,673 $7,849 $8,037 $13,958 $14,443 $14,960 $15,513 $16, % $7,043 $7,183 $7,333 $7,492 $7,661 DCF VALUATION FOR 6/30/10-10 YEAR CASH FLOW Net Present Value of Cash Flow s $2,779 Hurdle Plus: NPV of Terminal Value (4.5% Growth) 5,095 Rate Equity Value per Share as of 6/30/10 Valuation Date (2) Plus: Cash, Equivalents and Equity Investments % $149 $153 $157 $161 $165 Less: Debt and Minority Interest (237) 11.7% $145 $148 $152 $155 $160 Implied Equity Value $7, % $138 $141 $145 $148 $152 Fully Diluted Shares Outstanding (MM) % $134 $137 $140 $143 $147 Implied Equity Value per Share (1) $ % $129 $131 $134 $137 $140 Footnotes (1) EBITDA equal to operating income excluding stock compensation and extraordinary items plus depreciation and amortization. (2) Equity value per share based on treasury share method diluted share count as if implied valuation price w as used for calculation. Assumptions Revenue: DCF assumes a 16% C2009-C2019E revenue CAGR. EBITDA: Growth in research & development and sales & marketing expenses offset by D&A add-back from projected capital spending plan. Working Capital: Working Cap is relatively neutral to valuation. Capital Expenditures: Capex grow s w ith free cash flow as company reinvests heavily over next ten years. Hurdle Rate: Note that w e use a Hurdle Rate rather than the Weighted Average Cost of Capital (WACC) as the discount rate for our DCF analysis. We believe that a Hurdle Rate is more appropriate because it more accurately reflects w hat w e view as company-specific risks. Methodology: In determining cash flow s, w e forecast out revenue, EBITDA, cash taxes, w orking capital changes, and capex through C2018E. Free cash flow in a year is equal to operating income plus depreciation & amortization plus stock compensation minus cash taxes from operations minus working capital uses minus capex. We then use the hurdle rate to calculate the present value of each year's free cash flow. The terminal value is the C2018E terminal adjusted free cash flow multiplied by the future grow th rate and divided by the difference betw een the hurdle rate and the future grow th rate. The net present value is the sum of the present value of all the free cash flows. To determine equity value per share, we subtract debt and add cash to the net present value and then divide by shares outstanding. EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization; NPV = Net Present Value Source: Morgan Stanley Research. E= Morgan Stanley research Estimates DCF Valuation is found using a 12.0% hurdle rate and 4.5% terminal growth rate 14