Have financiers thinking about fundamentals been pushing regulators and companies for disclosure on the best kind of concerns?
New York City, NY – June 23, 2021: Looking down 125 St in the Manhattanville neighborhood of Manhattan … [+] NYC The Henry R. Kravis Building of the Columbia University Business Schools guarantee the Riverside Drive Viaduct, a raised highway built in 1901
I was immediately struck by how I would have a hard time to answer numerous of the fundamental questions raised in a high school economics textbook for a specific business, state Netflix.
This is due to the fact that financial reporting disclosures, encompassing the 10-K, 8-Ks, the proxy declaration, the sustainability report, four teleconference a year, lots of investor-road programs jointly produce numerous pages of material however do not provide straight answers to numerous of these concerns. I have actually compiled a list of some of these questions organized by the chapter of the high school economics textbook, used to Netflix to repair ideas in the readers mind:
1.0 Choices in production
· What is the production possibilities curve for Netflix? A production possibilities curve is a graphical representation of the alternate combinations of goods and services a firm can provide. What mix, for circumstances, of U.S. and local programs can Netflix produce in each of its big regional markets such as Europe, Asia and so on?.
· What is Netflixs relative benefit in producing content versus entering video games, its most current segment?
2.0 Demand and supply.
· How much do alternative items of Netflix sell for (we know that by looking at the prices at which Disney plus etc) and how do consumers trade off need for Netflix versus Disney Plus?
· What effect do supply shifters, particularly modifications in the rates of the factors of production such as expense of skill for example in Netflix, returns from alternative activities such as gaming, changes in technology (what would a metaverse do to programs and motion pictures that Netflix streams), natural occasions (Covid lockdowns extend longer) and the number of sellers in the space, have on the supply of items that Netflix puts out?
· Price elasticity of need describes how responsive is the amount of the item demanded to changes in the items price. What is the cost elasticity of demand for Netflixs items? In at least some of the big markets?
· How does the cost flexibility of Netflixs need get impacted by the accessibility and rates of substitute services (the so-called cross rate elasticity of demand), and when home incomes grow or diminish in various markets (the so-called earnings elasticity of demand, which might happen when the anticipated interest rate boost or existing inflation hurts disposable incomes)?
· What, if any, is the customer surplus or the distinction between what a consumer pays for Netflix, relative to what she is willing to pay? These concerns are increasingly ending up being important in measuring “stakeholder” worth.
· What, if any, is the producer surplus or the difference between overall revenues and overall expenses of Netflix (earnings declarations definitely help here)?
5.0 Consumer option.
· What is a common Netflix customers indifference curve related to taking in Netflix versus another great? What is the limited rate of substitution between these two products associate with the costs paid by the customer for these two goods?
6.0 Production and cost.
· What does the total product curve, which plots the relation in between the amount of product produced and factor of production utilized (talent, mainly in Netflix s case), look like for at least a certain class of programs or for acquired shows? When does reducing marginal returns embeded in, relative to element input? In the short run and the long run?
· What is the limited item (extra show made) for each factor of production utilized?
· What does the total cost curve, specified as total set expenses and total variable expenses, look like?.
· What is Netflixs average total cost, typical fixed cost and average variable expense? I can not calculate this now as I do not know the overall number of shows Netflix produces although that data can possibly be acquired. However, as discussed in earlier pieces, I do not know the fixed versus variable parts of Netflixs overall expenses.
· Specifically, what is the minimal earnings item of labor (or the additional income that Netflix can create for a system of labor)? Labor is explored later in higher detail.
· How does Netflix select its factor mix? That is, the combination of in-house labor versus external labor to produce its programs?
· What is Netflixs long term typical expense curve? Does it experience increasing, decreasing or continuous go back to scale?
7.0 Market structure.
· What sort of market structure (best competition, monopolistic competition, oligopoly) does Netflix face in its essential sub-markets such as North America, Europe, and Asia?
Are expenses increasing, reducing or constant in these sub-markets? Do output costs in these sub-markets alter in action to expense of production in these sub-markets?
· What does the entry and potential exit of Netflixs rivals appear like in these sub-markets?
· If Netflix has pricing power in these sub-markets what might be the source of such power be? Is it economies of scale, high sunk costs, expenses associated with entry, limited ownership of crucial inputs, federal government limitations, special franchises, licensing, certification requirements or patents?
· Is the source of pricing power either in inputs or outputs most likely to be subject to regulatory examination?
· In oligopolistic sub-markets, do we observe implicit or explicit collusion amongst sellers?
· How does the firm usage marketing to deal with competitors in sub-markets to create brand name loyalty and producing barriers to entry? Does that advertising influence rates or amounts of output sold?
· Does Netflix utilize price-discrimination in sub-markets (selling the service at $3 a month in India for example, relative to the $15 a month fee in the U.S.)? Is the strategy working by identifying customers whose cost flexibilities vary to prevent resale of service amongst consumers (password sharing in Netflix accounts is a concern)?
8.0 Wages and work.
· What is the limited income product curve for labor used by the company (or the additional earnings created per unit of labor)?
· What is the overall market for labor? In specific sub-markets?
· How does the limited income item curve for labor compare with the limited element expense paid for labor (or the extra labor cost incurred by the company per system of labor)? I have actually argued prior to that the marginal expense of labor for Netflix is much higher than what the financial declarations report.
· How much of the minimal product earnings included by labor is retained by labor? This concern is at the hard of settlement between labor and management in todays tight labor market and the call for greater disclosures about human capital of the firm.
· How have changes in innovation (say work from house), modifications in complementary inputs or a substitute input or a change in the variety of firms that employ labor (growing of numerous competing streaming services vying to employ Netflixs labor) affect the market demand for labor?
· How does Netflixs labor trade off cost of leisure with salaries? How does this trade off impact the supply of labor offered to Netflix?
· How much does Netflix invest in enhancing its labor human capital?
· Does the firm deal with labor monopsonists such as unions? Netflix has actually recently consented to be part of the SAG-AFTRA union for stars and support staff. How does such an arrangement impact demand and supply for such monopsonist labor?
· How does the firm deal with fairness concerns connected with labor: earnings inequality throughout the different sectors of labor in the firm, poverty, if any, it stumbles upon in its worlds of work and discrimination amongst its manpower?
9.0 Interest rates and market for capital.
· What is Netflixs need curve for capital? Netflix is pejoratively referred to as “Debt” flix for a factor. The on-balance sheet brought by Netflix since its 2021 annual report is around $23 billion. Off-balance commitments are almost as high at $22 billion.
· How will an increase in rate of interest impact Netflixs need for capital and its capability to sustain debt-funded material production?
10. Natural capital.
· How much of natural deposits, exhaustible or sustainable, does the firm use? Scope 1 and 2 emissions, if one were to focus just on carbon, are reasonably little for Netflix. We do not understand enough about their scope 3 emissions and the natural capital consumed by its production groups.
· What is the limited earnings item from intake of the natural deposit and the price paid for such usage by the firm?
11. Taxation and lobbying.
· What is Netflixs marginal tax rate for an extra dollar of earnings earned? Although tax disclosures are nontransparent, a persistent expert should have the ability to compute the marginal tax rate for Netflix. Computing this for foreign jurisdictions is important but almost impossible to do given the state of current disclosures.
· How much does the firm pay in regards to taxes based on ability to pay (earnings taxes, sales taxes, import tax taxes) or on the concept of advantages gotten for the payments made (real estate tax)? Ability-to-pay taxes need to ideally count for more in examining the companys contributions to society relative to taxes based upon the principle of advantages received.
· How much of these taxes are handed down to customers, workers, providers or by the shareholders of the firm?
· How much does the company invest in lobbying or affecting pollical process to record public surplus or prevent regulatory intervention?
By and big, its a difficult slog. I would have a really difficult time finding responses to the concerns I posture for a common business.
How much of an overlap do you find in between the primary questions presented in a high-school economics textbook with the disclosure related regulatory program of financial regulators? Are we, as investors interested in principles, getting lost in minutiae instead of discovering responses to essential but basic concerns that we teach our high school trainees in our entry level microeconomics books?
· What impact do demand shifters, namely customer choices, prices of associated items, customers disposable income, market modifications, and consumer expectations, have on the demand for Netflixs items?
I was immediately struck by how I would have a hard time to respond to many of the basic questions raised in a high school economics textbook for a specific company, say Netflix.
What is the rate flexibility of demand for Netflixs products? As pointed out in earlier pieces, I do not understand the repaired versus variable parts of Netflixs total costs.
· What is Netflixs demand curve for capital? Tax disclosures are nontransparent, a persistent expert needs to be able to compute the minimal tax rate for Netflix.
· What is the demand curve for Netflixs products?
· What does the supply curve for Netflixs products appear like?