Risk Management Section of your Company’s

Read the Risk Management section of your company’s 10-K. Do not print the 10-K. In your own words, summarize the risk management strategy. Tie this into the Risk Factors that you wrote in Project 1.
Netflix’s risk management strategy includes the following:

Retaining and expanding its customer base: Subscription fees are the major revenue source for Netflix. Its ability to produce and acquire quality content depends directly on retaining its current customers and attracting new ones. If Netflix cannot satisfy its current customer base, it may not be able to appeal to potential members.

Their content and production costs are largely fixed and contracted over several years, which means it takes a long time and is nearly impossible to make immediate adjustments to their expenses. Consequently, retaining and growing the customer base is Netflix’s most significant business risk mitigation strategy.

Producing its own movies, shows, and other content: Another crucial risk for Netflix is its dependence on studios, content providers, and rights holders. If Netflix loses its ability to work with them on acceptable terms, it runs the risk of failing to offer content tailored to customer preferences. This could lead to customer dissatisfaction and attrition. Producing their own shows and acquiring original and exclusive content rights is their primary means of differentiating themselves from competitors.

Investments in technology: Providing a seamless and enjoyable viewer experience significantly contributes to customer satisfaction. Netflix has always been a pioneer in utilizing technology for its services. An example is the personalized suggestion algorithm that Netflix uses based on a user’s viewing habits and history.

Further, Netflix strives to provide a seamless and lag-free service without interruptions, considering the millions of viewers streaming the same content simultaneously from different parts of the world. They have invested millions of dollars in partnerships with numerous internet service providers to localize substantial amounts of traffic with embedded Open Connect Appliance deployments. They have also heavily invested in various streaming delivery technologies, application design for new devices, and other supporting infrastructures.

Market-specific offerings: Netflix’s business could be adversely affected if it cannot manage its growth and changes, particularly with the international scaling and growth it is experiencing. Content offerings should cater to market needs in each country, and the streaming service should be reliable.

Partnerships: Netflix has partnered with many electronic device manufacturers to make their services accessible on these devices. For example, their strategic partnerships include makers of smart TVs, internet-connected screens, mobile devices and carriers, as well as television set-top boxes, and DVD/Blu-ray players.

Strategic tie-up with Amazon Web Services: As AWS’s most well-known client, Netflix hosts all its content and applications through a single cloud provider–AWS. This is perhaps the most vital and strategic mutual partnership for both companies. It is noteworthy that Netflix services remained unaffected when most AWS customers suffered during the recent two-day crash of AWS data centers. As it turns out, Netflix fully leveraged Amazon Web Services’ redundant cloud architecture, which switches to another region when one is down.

Select four other companies that closely match the industry and business of your company. Use an internet search to find these companies in the industry. Amazon, Hulu, Disney, NBC, CBS, Fox, and ESPN are some of the significant players. However, currently, Netflix is far ahead of the competition in this industry and business segment. The competition is heating up and may become more intense in the future. Both Disney and Amazon are juggernauts in terms of capital and content. There are numerous mergers and new players emerging in this industry.

Obtain an appropriate beta and the debt ratios for each of these four companies. Document all numbers, as before. Discuss how your company is similar or different in their use of debt from the average debt level and average beta for these four companies.

Debt ratio and financial risks are directly proportional to a company’s leverage; a higher leverage means a higher debt ratio and a greater risk for the company. At the same time, leverage is an essential tool that many companies use to grow, as numerous businesses find sustainable uses for debt. Both Netflix and Charter Communications have high debt ratios. The industry average is only 0.63. Some aggressive companies effectively leverage debt to grow, often resulting in volatile earnings due to high interest expenses.

Netflix is a high-growth company that reinvests its earnings back into its operations. Its debt ratios have always been high and have consistently hovered around the 150% mark in recent years. This is because Netflix is investing heavily in TV and movie production to compete against its rivals. These assets may take a long time to materialize and yield results for the company.

Charter Communication’s high debt ratio indicates that the company holds a high level of debt relative to its net worth. In the event of financial turmoil, the company may struggle to meet interest and other debt obligations. Charter Communications’ presence in a saturated and competitive multi-channel U.S. video market is a concern.

Like other cable operators, the company continues to lose subscribers to online video streaming service providers such as Netflix, Hulu.com, YouTube, etc. due to their cheaper source of TV programming. Notably, in the third quarter of 2017, the company lost 104,000 video customers in the residential segment.

Comcast is aggressive with its bids to take over Sky and 21st Century Fox. It already has a high debt ratio, but if it wins the bidding war with Disney, the cable giant will take on as much as $85 billion of debt. Plus, another $27.5 billion of debt if it wins Sky.

Amazon.com Inc.’s debt-to-equity ratio improved from 2015 to 2016 but then significantly deteriorated from 2016 to 2017. The online retailing giant tapped into the debt markets as it pursued a myriad of disparate growth avenues. Amazon issued $16 billion of bonds recently to finance the Whole Foods acquisition, the largest bond deal in the company’s history.

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