QUESTION (****) The emergence of global capital markets has created the demand for harmonization of financial reporting standards. In the space below, explain the difference between “adoption” and “convergence.” And, explain why it is highly unlikely from a political perspective that the United States will “adopt” International Financial Reporting Standards. 200 words Part 5: A Tale of Two Companies (****** part D) The two companies in this case study are Netflix and Outerwall Inc. (Redbox). While these two companies are sometimes considered to be competitors, they appear to have very different market positions and strategic visions. In this assignment, we will explore the relationship between strategic vision and financial metrics. Part A: Start by gaining a familiarity with the two companies – a quick Internet search, perhaps a glance at the Wikipedia entry, or a scan some recent press releases should be adequate. Part B: Review the SWOT analyses presented below. SWOT is a familiar acronym that stands for Strengths, Weaknesses, Opportunities, and Threats. Strengths and Weaknesses are intended to describe conditions internal to the organizations. Opportunities and Threats are terms used to describe the external environment within which the organizations operate. SWOT analyses are so familiar that a simple Internet search will again point to SWOT analyses prepared for public distribution by companies such as Value Line. A SWOT Analysis for Netflix Strength Brand recognition 2 Accessibility Original Content Weakness Cost of content DVD subscribers declining Raising subscription prices Opportunity International expansion Original In-House programming Word-of- mouth campaigns Threats ISPs: Netflix accounts for about 30% of daily internet traffic. With net neutrality laws struck down, Netflix may have to assume more debt or cut content. Competition (Amazon Prime, YouTube) Content price increases Sources: https://netflixreport.wordpress.com/2014/02/10/swot-analysis/ A SWOT Analysis for Outerwall Inc. (Redbox) Strength Lower costs than its competitors No monthly membership fee Kiosks have user-friendly interface Online movie reservation Smartphone app Wide selection of locations Flexibility in return process Constant addition of new release DVDs Convenient locations Open 24 hours a day Large newly released movie selection Weakness Limited amount of DVD selections Limited machine capacity 3 Maintains DVDs in stock High cost of contracts with production studios Must destroy DVDs as stated in contracts with production studios Can only use Credit/Debit card to pay Opportunity Expand to the video game industry Expand to PC game rental Video streaming to customers Permanent downloading over Internet Opportunity to sell music Expand to the international market Threats Netflix high market share in the online streaming industry DVD lifespan – a technological shift from physical DVD’s to digital streaming Increased digital streaming (Amazon.com, Hulu) Online piracy Licensing contracts can discontinue or increases prices Sources: http://www.nilsacampos.com/2013/10/29/redboxs-swot- reveals-attractiveness- and- provides-promise- for-the- future-2/ Part C: Some Observations. The strategy at Netflix appears to be growth oriented. Netflix appears to believe that by building up their content warehouse (which includes TV shows, movies, and original content) they are investing in a strength. While content may be an intangible legal right of use, rather than a physical asset such as a DVD, there is an obvious parallel with the idea of “inventory.” During the period we are considering in this case, Netflix’s spending for content has grown every year. Outerwall Inc. (Redbox) was once a strong player in this industry. But, Outerwall Inc. (Redbox) appears to have focused on the profit opportunities presented by a mature market rather than focusing on the marketplace of tomorrow. Part D: Questions. Comparative financial statements for Netflix and Outerwall Inc. (Redbox) are provided at the bottom of this document. Use the information in these statements to respond to the numerical questions below. You are free to access information using the Internet and other sources. 1. (3 points) Compute the dollar amount of the change in the total holdings of “content” for Netflix and for Outerwall Inc. (Redbox) between 12/31/2013 and 12/13/2015. Answer: ___________________SHOW FORMULA USED____________________ 2. (3 points) Describe the risk associated with Netflix’s investment in content. 4 Answer: _______________________________________ 3. (3 points) Describe the risk associated with Outerwall Inc.’s (Redbox) investment in content. Answer: ________________________________________ 4. (4 points) What are the primary sources of financing that Netflix used to acquire the funds needed to implement a strategy that focused on growing their content holdings? (include in your answer specific numerical data taken from the financial statements provided) Answer: SHOW ALL WORK 5. (4 points) Compute the percent change in the total assets for Netflix and Outerwall Inc. (Redbox) between 12/31/2013 and 12/31/2015. How do these percentages align with the strategic visions of the two companies? Answer: SHOW ALL WORK AS NEEDED 6. (4 points) Outerwall Inc. (Redbox) reported substantial sums of cash from operations over the three year period ($326,085,000; $338,351; $327,834). What did they do with the cash they generated from operations? (include specific numerical data taken from the financial statements provided) And, how does the manner in which they used the cash generated from operations align with the strategic