Netflix Risks Essay

Netflix was founded in 1997 and is headquartered in Los Gatos, California. Netflix is a company that forgets online video letting subscription serve in the unify States. The company offers its subscribers access to a program library of movie, television, and other filmed entertainment titles on digital versatile dish aerial (DVD) and Blu-Rays. Its members can get DVDs demonstrateed to their homes and can instantly watch movies and TV episodes streamed to their TVs and PCs. It in any case partners 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 renting entertainment constancy at a time where megahit was king and renting movies required the consumers to drive to the store. However, Netflix realized that through pattern there was a much much efficient and cheaper government agency to provide the compar adequate to(p) service than the typical brick-and-mortar co mpanies of the time. Customers of Blockbuster and other store renting places were attracted to the new features (monthly subscription, no late fees) provided by Netflix.Through innovation Netflix basically changed the way movie rentals were take upe and eventually became the attraction of movie rental industry while Blockbuster and some(prenominal) other companies eventually became bankrupt. Netflixs story of success is also one of caution as Netflix realizes that they entrust retain to face many risks throughout their work cycle and if they dont anticipate and/or respond correctly, they too could face the aforesaid(prenominal) result as Blockbuster. As of December 31, 2009, Netflix served approximately 12 gazillion subscribers.Currently, Netflix claims on its website to have over 20 million members, making it the be givener in rental movie industry. However, Netflix faces many competitors that provide similar serve Comcast, Redbox from Coinstar and even Amazon is planni ng on also oblation stream service to its prime members. Therefore, if Netflix is to re main(prenominal) as the industry leader and occur its earnings and member place growth it depart have to continue to acquaint with new ideas. Generally, innovation requires a huge investment from companies in their question and Development departments.These investments can come out from the companies own bullion hang up or from issuing loans. In order for a Company to specify if an investment is worth the money it uses any Net Present jimmy or Internal Rate of Return techniques which basically state that if the recurrence on the investment is greater than the cost, wherefore the company should go in front and invest. But what is the cost of the investment? If Netflix plans to borrow money, consequently the cost depart be the prevailing interest deem at the time of issuance of the loan plus a spread premium for specific characteristics pertaining to Netflix.This poses a financ ial risk on Netflix, more specifically this is called interest rate risk. Interest place tend to be volatile and there argon many different theories ( inquireations theory, liquidity theory, preferred habitat theory, mart partition theory) yet nobody really knows 100% for sure if interest range are going to go up or mound and by how much. However, based on the expectations of Netflixs analysts they have a few choices on dealing with this risk depending on their expectations.If they expect interest rates to go up, consequently they should come out a long endpoint bond or point out now, because if they wait and interests rates do go up then it leave be more costly for them to borrow the money they consume which might end up affecting the Net Present grade of their investment project. On the other hand, if Netflix expects rates to go down then it will not be a good idea for Netflix to issue out a long term bond or note because if rates eventually do debark then Netflix be f undamentally borrowing at a higher 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 roll it over until they expect that interest rates have conked the lowest and then issue a longer term bond or note depending on their investment project. Finally, the other option for Netflix is that, if they are not sure if interest rates are going to go up or down, they can unchanging hedge against this risk by issuing a long term callable bond so that if interest rates do drop significantly Netflix can call its debt back and reissue at the let down rate.Another way that Netflix has been and plans to continue expanding its membership is by offering its services abroad. In fact, Netflix has already entered the Canadian market and is in the process of offering its services in the United Kingdom. Obviously this is great news for Netflix shareholders just now going international also brings a dditional risks. One of the major risks that we see 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 customers a month.However, it will have to do so in pounds, which is the local anaesthetic currency. If for example, we assume that Netflix charges its U. S. customers 10 dollars a month for its services and that it wants to charge the homogeneous real value 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 about this risk then its cash flow would be constantly 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 pound subscription will now be still worth $6. 67. Netflix could deal with this cash f low loss in two ways, a good way and a ruinous way. The bad way would be to constantly adjust the prices up and down to its U. K. customers so that the real dollar value remains about the same, however we intuitive feeling 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 future tenses market on currencies and lock in on a pound/dollar exchange rate that way any future volatility on the exchange rate wouldnt affect every 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 mail order system, but the mail order system is not the sole source of its success today. In fact, Netflixs CEO beating-reed instrument Hastings has admitted that a lot of Netflix success has been due to do their online streaming co ntent.As an actual Netflix customer myself, I admit that I go across a lot of time streaming movies and shows online, in fact if Netflix were to only offer its mail order system, I would stop 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 futile to operate its streaming function for a couple of days?A couple days may seem trivial however it could potentially mean an enormous amount of lost profit due to sorrowful 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 whatever reason, Netflix would be able to switch to their backup servers and therefore customers could continue to stream their favorite 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 around 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 warehouse is situated. Pure risk is a type of risk that involves either a chance of loss 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 two position and indirect 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 would be indirect costs such as the costs of perhaps losing customers around the Omaha area because now their mov ies have to ship from a different warehouse which could potentially take 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 action 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 thriftiness a certain amount of money each month or they can do an insurance transfer and pay insurance premiums but not have to worry about these pure risks. As shown in the movie Mind Over Money, human emotions play a major role in driving the market. Netflix should pay attention to such matters as the company could be affected by the irrational decisions nation 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 sound results will co ntinue. Its difficult to predict consistently when the trends in the market will change. Part of the difficulty 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 sudden 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 confront many types of financial and nonfinancial risks and was obviously able to overcome them to reach where it is at today. However, the risks dont stop now and Netflix is facing strong competition from other movie rental companies and in order for Netflix to term of enlistment on top it will have to continue to be modern and also continue to properly deal with any forthcoming risks.