Netflix Risks Essay

Netflix was founded in 1997 and is headquartered in Los Gatos, California. Netflix is a play along that put ups online word picture letting subscription work in the United States. The company abides its subscribers access to a library of motion picture, television, and otherwise filmed entertainment titles on digital versatile disc (DVD) and Blu-Rays. Its members pot get DVDs delivered to their homes and can instantly watch movies and TV episodes spuded to their TVs and PCs. It overly burstners with consumer electronics companies to offer a range of devices that can instantly stream movies and TV episodes to members TVs from Netflix.Netflix entered the rental entertainment industry at a time where B dummy upbuster was king and renting movies required the consumers to drive to the store. How forever, Netflix realized that through alteration there was a much more(prenominal) high-octane and cheaper expressive style to provide the same service than the emblematic bric k-and-mortar companies of the time. Customers of Blockbuster and other store rental places were attracted to the new features (monthly subscription, no late fees) provided by Netflix.Through designing Netflix basically changed the way movie rentals were done and ultimately became the attractor of movie rental industry season Blockbuster and some other companies eventually became bankrupt. Netflixs story of success is in like manner one of perplexity as Netflix realizes that they impart embrace to boldness legion(predicate) pretends throughout their business cycle and if they dont anticipate and/or respond correctly, they too could face the same result as Blockbuster. As of declination 31, 2009, Netflix served approximately 12 million subscribers.Currently, Netflix claims on its website to make over 20 million members, making it the leader in rental movie industry. However, Netflix faces many competitors that provide similar function Comcast, Redbox from Coinstar and even Amazon is readying on also go streaming services to its prime members. Therefore, if Netflix is to re main(prenominal) as the industry leader and continue its earnings and member channelise growth it go out seduce to continue to innovate with new ideas. Generally, mental institution requires a huge enthronement funds from companies in their inquiry and Development departments.These investments can come out from the companies possess cash flow or from issuing bestows. In order for a Company to decide if an investment is worth the gold it uses either Net record Value or Internal Rate of fade techniques which basically state that if the return on the investment is salienter than the cost, so the company should go leading and invest. But what is the cost of the investment? If Netflix plans to borrow money, indeed the cost volition be the prevailing raise rate at the time of Issuance of the loan plus a spread premium for specific characteristics pertaining to Ne tflix.This poses a financial guess on Netflix, more specifically this is called interest rate venture. Interest evaluate tend to be volatile and there ar many diametrical theories (expectations theory, liquidity theory, preferred home ground theory, market segmentation theory) yet nobody rightfully knows 100% for sure if interest place atomic number 18 acquittance to go up or protrude and by how much. However, based on the expectations of Netflixs analysts they digest a few choices on dealing with this essay depending on their expectations.If they expect interest judge to go up, then they should issue a dour termination bond or none now, because if they wait and interests rates do go up then it volition be more costly for them to borrow the money they need which might end up change the Net Present Value of their investment project. On the other hand, if Netflix expects rates to go down then it will non be a straightforward idea for Netflix to issue out a long t erm bond or note because if rates eventually do drop then Netflix be essentially borrowing at a higher(prenominal) rate than the prevailing market rate.So what Netflix should do instead is to issue short term debt much(prenominal) as commercial paper and continue to pluck it over until they expect that interest rates have reached the lowest and then issue a durcapable term bond or note depending on their investment project. Finally, the other option for Netflix is that, if they be not sure if interest rates are going to go up or down, they can settle down hedge against this risk by issuing a long term callable bond so that if interest rates do drop importantly Netflix can call its debt back and reissue at the lower rate.Another way that Netflix has been and plans to continue expanding its membership is by offering its services abroad. In point, Netflix has already entered the Canadian market and is in the process of offering its services in the United Kingdom. Obviously this i s great news for Netflix shareholders however going international also brings additional risks. superstar of the major risks that we foresee would be exchange rate risk. For example, when Netflix starts to offer its services in the United Kingdom, it will have to decide on what it will charge its British guests a month.However, it will have to do so in lumbers, which is the topical anaesthetic currency. If for example, we assume that Netflix charges its U. S. customers 10 clams a month for its services and that it wants to charge the same real place to its U. K. customers, if the pound/dollar exchange rate is . 5 pounds for 1 dollar then Netflix would have to charge its U. K. customers 5 pounds a month. However, interest rates are eer changing and if Netflix doesnt do something or so this risk then its cash flow would be evermore changing.For example if the pound depreciates against the dollar to . 75 pounds for 1 dollar then the dollar value from its U. K. customers 5 poun d subscription will now be besides worth $6. 67. Netflix could deal with this cash flow exhalation in two ways, a ethical way and a bad way. The bad way would be to constantly adjust the determines up and down to its U. K. customers so that the real dollar value remains about the same, however we feel that customers wouldnt appreciate this price volatility and Netflix would potentially lose many U. K. customers.The good way for Netflix to hedge against exchange rate risk would be to enter the futuritys market on currencies and lock in on a pound/dollar exchange rate that way any future volatility on the exchange rate wouldnt affect either negatively or positively on Netflixs international cash flows. Netflix also faces several nonfinancial risks. Netflix began its ground-breaking entry into the movie rental industry with its office order system, but the mail order system is not the sole address of its success today. In fact, Netflixs CEO vibrating reed Hastings has admitted that a lot of Netflix success has been collectible to do their online streaming content.As an actual Netflix customer myself, I admit that I spend a lot of time streaming movies and shows online, in fact if Netflix were to only offer its mail order system, I would check up on being a customer. If other Netflix customers value their online service as much as I do then this signifies the important value that the movie streaming services has for Netflix. But what if, something happens (virus, human error, etc) and Netflixs servers go down and they are unable to start its streaming function for a couple of geezerhood?A couple days may reckon trivial however it could potentially mean an rattling(a) amount of lost profit due to wretched customers. In order to avoid this type of scenario of ever happening, Netflix should think of ways to confront this operational risk. One idea would be to spend money in acquiring backup servers so that if the main servers were to go down for whatev er reason, Netflix would be able to confuse to their backup servers and therefore customers could continue to stream their pet movies and shows online while Netflix worked on fixing the problem with the main servers.Even though Netflix is headquartered in Los Gatos, California, it has many stores close to the United States that deliver movies to customers near their locations. Because of this, Netflix faces many different types of pure risks depending on the location in which their storage warehouse is situated. Pure risk is a type of risk that involves either a chance of evil or no loss. An example for Netflix would be an earthquake in Los Gatos California, or a tornado in its warehouse in Omaha, Nebraska. Pure risks have tremendous abilities for loss because they cause both direct and confirmatory losses.If for example, a tornado destroys the Netflix warehouse in Omaha, Nebraska, the direct losses would be the costs of the destroyed warehouse, but at the same time there wou ld be indirect costs much(prenominal) as the costs of by chance losing customers around the Omaha area because now their movies have to ship from a different warehouse which could potentially accede many more days to arrive. Unfortunately, there are no ways to prevent catastrophes such as fires, earthquakes, tornadoes, etc However, these high severity, low frequency situations are part of life and therefore a part of Netflixs business risk.The best way for Netflix to deal with these types of risks are either to self insure by relieve a certain amount of money each month or they can do an redress transfer and pay insurance premiums but not have to worry about these pure risks. As shown in the movie Mind Over coin, human emotions play a major office in driving the market. Netflix should pay attention to such matters as the company could be affected by the irrational decisions people make. Investors have recently been talking about Netflix prices being over priced and it depicts a bull market.Bull markets are characterized by optimism, investor confidence and expectations that self-coloured results will continue. Its difficult to predict systematically when the trends in the market will change. Part of the difficultness is that psychological effects and speculation may sometimes play a large role in the markets. Therefore, similar to what is shown in the movie people will make irrational behavior and it could lead to the abrupt collapse in the market for Netlix. This can be a major risk to the company.Netflix started as a mail order movie rental company in 1997 and through much innovation it was able to not only establish itself in the movie rental business but actually be a leader. Throughout its path from rags to riches, Netflix faced many types of financial and nonfinancial risks and was obviously able to catch up with them to reach where it is at today. However, the risks dont stop now and Netflix is facing strong competition from other movie ren tal companies and in order for Netflix to balk on top it will have to continue to be innovative and also continue to the right way deal with any forthcoming risks.