Netflix Bankruptcy: An Economic and Financial Analysis

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ECONOMIC AND FINANCIAL MANAGEMENT

Table of contents
Introduction................................................................................................................................3
Impact of economy on the organization.....................................................................................4
Impact of micro and macro economic factors on the business..................................................4
Impact of Brexit on the business................................................................................................5
Liquidity issues..........................................................................................................................6
Conclusion..................................................................................................................................7
Reference list..............................................................................................................................8
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Introduction
Success and failure of an organization depends not only on the decisions that management
makes, but also depends on different other factors in the micro and macro environments of
the business. For achieving better sustainability in the market, the companies need to evaluate
all these factors and based on that decisions are required to be made. Inappropriate analysis of
the macro and microenvironment can results to the failure of the business. This study will
focus on such an organization, which is very popular but at the same time failure in achieving
sustainability in the business. The organization is Netflix, which is a very popular brand in
the world of Entertainment. However, in this study the bankruptcy of Netflix will be
evaluated from an economic as well as financial perspective.
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Impact of economy on the organization
The financial downturn of Netflix started from 2015. During that time, the management of
Netflix decided to invest a huge amount of debt funds in its “original series”. The company
invested $20 billion in this purpose and maximum portion of the amount was debt fund. If the
situation is analyzed from an economic perspective, it will be observed that during 2015 the
economic condition in the United States was at the strongest level since 2005. The economy
of the country grew by 2.9% in 2015 (Larcker and Tayan, 2018). Due to this situation raising
debt funds from the external sources was easier for Netflix; but at the same time, it is also
observable that the US economy was highly volatile at that time, which affected the financial
decision and position of Netflix. In this context, it is important to remember that the rate of
interest in the United States increased in 2015, which caused high interest burden on Netflix
due to huge amount of debt capital. Volatile market situation enhanced the risk level of the
capital structure of this firm (Burroughs, 2018). At the same time, as the higher authority of
the firm decided to raise the price level of subscription, the demand suddenly decreased in
international market, which also impacted the income level of Netflix and pushed it towards
bankruptcy.
Hence, the discussion is showing that the economic fluctuations were the biggest reason
behind the bankruptcy of Netflix; however, it is also true that the management of that firm
failed to understand the organization’s debt management capacity during the year 2015.
Impact of micro and macro economic factors on the business
If the bankruptcy of Netflix is analyzed from the micro and macroeconomic perspectives, it
can be mentioned that there were several factors, which have influenced the bankruptcy of
Netflix. These factors are discussed below:
Micro economic factors:
Managerial decision – One of the biggest reasons behind the bankruptcy of Netflix is the
wrong decision made by the higher authority of the company. The decision of investing a
huge amount of debt funds for business development and expansion was highly ineffective at
that time (Lobato, 2019). The management of Netflix failed to understand the economic
difficulties in an efficient manner.
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Customers – After investing in the “original series”, Netflix increased the price for
subscription, which affected decisions of the customers. Many customers stopped subscribing
Netflix because of their budget limitation and at the same time, the company also lost new
customers. In the other words, it can be stated that the company lost customers’ confidence
(Ciejka, 2018).
Poor quality – As per the feedback of many customers, the quality of Netflix’ “Original
Series” is very poor. The stories are not good and at the same time, the quality of the series is
not good. This affected the demand for Netflix’s service.
Macro economic factors:
Fluctuations in the economy – During the time when Netflix got bankrupted the rate of
fluctuations in the economy was very high. Due to this, the inflation rate was also fluctuating,
which affected the performance standard of the company. At the same time, it also affected
the demand for the services of Netflix (Fikset al., 2018).
High competition – Though the business idea of Netflix was innovative and the company
achieved high level of success in the beginning, the company faced huge competition in the
market. During the end of 2015 the company could not meet the expectations of the
customers properly, which affected its competitive position in the market (Orvos, 2019). At
the same time, YouTube was one of the major market holders, which was also creating
problem for the company.
Therefore, from the above discussion, it must be mentioned that there were several factors in
the macro and microenvironments of the business, which affected or influenced the
bankruptcy of Netflix.
Impact of Brexit on the business
Vote for Brexit, which was one of the biggest factors that negatively affected the
performance of Netflix in the United Kingdom and in the EU countries. During the mid of
2016, when the incident of vote for Brexit took place the UK government imposed strict rules
for the companies operating businesses in the EU countries and also for the companies which
belonged from the foreign countries (Larcker and Tayan, 2018). Due to this, it was difficult
for the management of Netflix to operate business and enhance profitability in the UK market
during that situation. It negatively affected the financial health of the business. Due to
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Instability in the political environment, the company was facing tremendous competition in
the market of United Kingdom (Ciejka, 2018). It was because the government was
emphasizing on the domestic companies and influencing the people to subscribe the domestic
entertainment channels.
In this context, it is important to be mentioned that after the vote for Brexit, the UK
government was imposing several rules and restrictions, which were indicating that the
companies like, Netflix will lose their market in UK (Orvos, 2019). Considering the
situations that the company faced during 2016, when vote for Brexit took place, it can be
mentioned that in 2019, when the actual Brexit will happen the company will again face
difficulties. The debt level of Netflix is already very high and it has increased the risks level
of the business to the higher level. Considering the situation, it can be mentioned that the
company may lose a large portion of its customers in the United Kingdom after Brexit.
However, in order to safeguard the business, the company needs to emphasize on developing
special strategies for the UK market (Larcker and Tayan, 2018). There is one strategy that the
company may apply and that is corporate tie-up. The company may tie-up with a large
domestic entertainment channel in the United Kingdom to safeguard its business in UK.
Liquidity issues
As the company has faced the situation like, bankruptcy, it can be understood that it had lack
of liquidity during that time. The huge burden of debt capital caused shortage of liquid cash
in the business. The amount of current assets of the business was comparatively lower than
the current liabilities. The company lost its capacity to payback its liabilities on time
(Burroughs, 2018). At the same time, the company also failed to manage its working capital.
These liquidity issues created difficulties for the company to run its everyday’s business
operations. The higher management of Netflix tried to manage the liquidity position by
availing short-term debt from the market; however, this strategy of the company way failure
because the company did not have the capacity to pay interest on the short-term debt (Fikset
al., 2018). Moreover, due to the increased level of inflation, the rate of interest also increased
during this time. Hence, from the entire discussion, it can be stated that the company faced
higher level of liquidity issues during the time of bankruptcy.
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Conclusion
The discussion and evaluation in this study have indicated the fact that one of the most
popular entertainment channel in the current scenario that is Netflix was bankrupted during
2015 because of several reasons. The economic condition in the United Stated during that
time was fluctuation, which affected the financial performance of the company. At the same
time, the higher authority of the company also made several wrong decisions and availing a
huge amount of debt capital was one of those wrong decisions. The debt level of the company
was much high, which the company failed to handle properly. On the other hand, the quality
of the original series was also not up to the market. The company failed to satisfy its
customers in terms of price also. The company increased the price level to the higher extent,
which caused dissatisfaction among the customers. On the other hand, the incident of vote for
Brexit also hampered the business of Netflix in the market of United Kingdom.
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Reference list
Burroughs, B., 2018. House of Netflix: Streaming media and digital lore. Popular
Communication, pp.1-17.
Ciejka, D., 2018. Worth Watching?: Assessing the Financial and Operational Health of
Netflix.
Fiks, A.G., Friesen, R. and Biggs, L., 2018. Consumerism, Innovation, and the Future of
Pediatric Primary Care. JAMA pediatrics, 172(9), pp.797-798.
Larcker, D.F. and Tayan, B., 2018. Netflix Approach to Governance: Genuine Transparency
with the Board.
Lobato, R., 2019. Netflix Nations: The Geography of Digital Distribution. NYU Press.
Orvos, J., 2019. Sound the Alarm. In Achieving Business Agility (pp. 3-21). Apress, Berkeley,
CA.
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