Netflix Corp. is currently transitioning from a DVD delivery operation to an online streaming operation (where it is customary to pay a set fee for licensing to at studio -- up front -- rather than a per viewing fee). How will this transition influence Netflix's capital projects, working capital needs, and operational risk?
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This shift into online streaming will affect capital projects in that the company will need to invest in its technological assets - both hardware and softwar - to support this new focus. Its hardware and software including online resources must be top-of-the-line such that movies are streamed at the speed the customers want them. Moreover, the company will need large amount of capital invested in paying the set fee for the movies it will stream with tje cash flows for these movies spread for several years.
On the other hand, the company may expect a sudden decrease in their working capital with less current assets as the customers shift from DVD subscription to online streaming subscription. Not all DVD subscribers may shift to online, hence effectively decreasing the companies cash flows from customers.
Finally, it is clear that the company will be increasing its operational risks. The company's business model has changed from paying a set fee up front rather than per view. The risk that the company will not recover the set fee from the number of customers who stream that movie is high. Moreover, the recovery of this amount will be spread over time.
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Sep 9th, 2015
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