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 in to 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 contents depends directly on retaining its current customers and adding new customers. If Netflix cannot satisfy its current customer base, it may not be able to attract new members as well.
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Their content and production costs are largely fixed and contracted over several years, means it takes long time and almost impossible to make immediate adjustments to their expenses. That makes retaining and growing customer base Netflix’s single most significant business risk mitigation strategy.
Produce its own movies, shows and other contents: Another significant risk for Netflix is its dependence on the studios, content providers and rights holders. If Netflix loses its ability to work with them on acceptable terms, they are at the risk of failing to offer contents of customer’s choice. This will result in customers dissatisfaction and attrition. Producing their own shows and obtain original and exclusively righted contents is the only way they can differentiate themselves from the competition.
Investments in technology: Providing a seamless and exciting experience to viewers will help with customer satisfaction. Netflix has always been a leader when it comes to leveraging technology for its services. One example is the personalized suggestion algorithm that Netflix uses based on the person’s viewing pattern and history.
Netflix also tries hard to provide a seamless and lag proof service without any interruptions as there could be millions of viewers streaming same contents at the same time from different part of the world. Netflix has invested millions of dollars in partnering with many internet service providers to localize substantial amounts of traffic with Open Connect Appliance embedded deployments. They have also heavily invested in various streaming delivery technologies, designing applications for new devices, and other supporting infrastructures.
Market specific offerings: Business can be adversely affected if Netflix cannot manage their growth and change, especially with the international scaling and growth they are going through. The content offering should be specific to market needs in each country and the streaming service should be reliable.
Partnerships: Netflix has partnered with many electronic device manufacturers to make the services available on these devices. For example, their strategic partnership with the makers of smart TVs, internet-connected screens, mobile devices and carriers, television set-top boxes, DVD/Blue ray players
Strategic tie up with Amazon Web Services: AWS’s most famous customer is Netflix and all of Netflix’s contents and applications are hosted by a single cloud provider – AWS. It’s perhaps the most important and strategic mutual partnership for both companies. It has to be noted that Netflix services were unaffected when most of AWS customers suffered during to the recent two day crash od AWS data centers. Netflix later clarified that they had taken full advantage of Amazon Web Services’ redundant cloud architecture, which switches to another region when one region is down.
Select 4 other companies that you feel closely match the industry and business of your company. Use an internet search to find other companies in the industry. Amazon, Hulu, Disney, NBC, CBS, Fox and ESPN are some of the other significant players. But currently Netflix is far ahead of the competition in this industry and business segment. Competition is heating up and can see fierce competition in the coming days. Disney and Amazon both are is juggernauts in terms of capital and content. There are many mergers and new players coming up in this industry.
Obtain an appropriate beta and the debt ratios for each of these 4 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 the four companies.
Debt ratio and financial risks are directly proportional to a company’s leverage, higher leverage means higher debt ratio and greater risk for the company. At the same time, Leverage is an important tool that lot of the companies use to grow as many businesses find sustainable uses for debt. Netflix and Charter Communications have high debt ratios. Industry average is only 0.63. There are aggressive companies that effectively leverage debt to grow, and this often results in volatile earnings for them because of the 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 constantly hovered around 150% mark in recent years, because Netflix is investing heavily on TV and movie production to take on its competitors. These assets may take long time to materialize and yield results for the company.
Charter Communication’s high debt ratio indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting 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. because of their cheap source of TV programming. Notably, in third-quarter 2017, the company lost 1,04,000 video customers in the residential segment.
Comcast is aggressive with their 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. And 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 deteriorated significantly from 2016 to 2017. The online retailing giant tapped the debt markets as it seeks continued investment into a myriad of disparate growth avenues. Amazon issued $16B of bonds recently to finance the Whole Foods acquisition, the largest bond deal in the company’s history.