3. Enterprise Risk Management
Definition:
“Enterprise risk management is a process, affected by an entity’s board of directors,
management and other personnel, applied in strategy setting and across the enterprise,
designed to identify potential events that may affect the entity and manage risks to be
within its risk appetite to provide reasonable assurance regarding the achievement of entity
objectives”.
Source: COSO Final Report (2004)
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5. About the Company
Background:
Netflix Inc. is the world’s leading internet
subscription-based entertainment service,
with over 130M paid memberships in over
190 countries.
Subscribers can instantly watch unlimited
television shows and movies streamed
over the internet from their televisions,
computers, and mobile devices.
In the U.S., subscribers can also receive
standard definition DVDs and Blu-Ray
Discs delivered to their homes.
Market Performance:
5
Market Cap: $124.81 Billion
6. Risk Sources: Financial
Taxation-Related Risks
Risk Exposure:
Many countries in the EU, as well as other
countries and organizations such as the
Organization for Economic Cooperation
and Development, are considering
changes to existing tax laws that, if
enacted, could increase tax obligations in
countries where they do business.
Both firm-specific and industry related
risks present, depending on jurisdiction.1
Risk Management:
Netflix uses a strategy of bolstering its
government relations team to ensure
sufficient communication of concerns with
lawmakers and regulators, led by a team
of seasoned policy makers, lobbyists and
heads of government relations.
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1
The Canadian Press. (2017, Dec 8). Netflix tax decision is up to Finance Minister Morneau, Heritage Minister Joly says. Toronto Star. Retrieved from: https://www.thestar.com/business/2017/12/08/netflix-tax-
decision-is-up-to-finance-minister-morneau-heritage-minister-joly-says.html
7. Risk Sources: Non-Financial
Reliance on Industry Partners
Risk Exposure:
Netflix’s heavy reliance on industry
partners to deliver its content exposes the
company to potential conflicts with
competitors.
Specifically, Netflix has built its software
and computing systems architecture for
data processing, storage, architecture
using Amazon Web Services’ (“AWS”)
cloud computing capability.
Risk Management:
Netflix does not believe that Amazon will
use AWS to gain a competitive advantage
for benefit to Amazon’s retail business
line.1
Netflix would be prudent to seek alternate
providers and to work on a back-up plan
in case its relations with AWS was
severed. Diplomatic communications with
Amazon is important to this business
relationship and should be prioritized.
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1
Netflix, Inc. (2018). 2017 10-K Form. Retrieved from: https://s22.q4cdn.com/959853165/files/doc_financials/annual_reports/0001065280-18-000069.pdf
8. Risk Sources: Firm Specific
Licensing Disputes
Risk Exposure:
If studios, content providers, or other right
holders refuse to license streaming
content or other rights, Netflix’s business
model could be adversely affected.
Risk Management:
To mitigate licensing dispute risk, Netflix
places a focus on securing certain
exclusive rights on programming, and as a
major differentiator in the video streaming
industry, it produces original content.1
However, specific risk still exists related
to licensing agreements involved in the
production of this original content (such
as with the studios).
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1
Lovely, Stephen. (2018, Nov 13). Netflix’s Original Content Strategy is Paying Off. Motley Fool. Retrieved from: https://www.fool.com/investing/2018/11/13/netflixs-original-content-strategy-is-paying-off.aspx
9. Risk Sources: Industry Specific
Competitive Offerings and Piracy
Risk Exposure:
If competitive content becomes available
without subscription or membership fees,
or if pirated content becomes more widely
available and adopted, it could have
significant revenue impact for
subscription-based streaming service
providers.
Risk Management:
To address any potential entrant of similar
and free content, the approach to
managing risk involves a stronger client
offering in terms of pricing, technology, or
overall user experience.
To combat pirated content, risk is
managed through managing relations with
telecommunication network partners and
appropriate authorities to ensuring steps
are taken to discourage and report
violations.1
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1
Harris, Sophia. (2017, Mar 28). Netflix’s anti-piracy team aims to make stealing content uncool. CBC News. Retrieved from: https://www.cbc.ca/news/business/netflix-piracy-content-downloading-copyright-1.4043163
11. About the Company
Background:
Spotify is the largest global music
streaming subscription service with over
228M subscribers, occupying
approximately 42% of the global
streaming market share in 2018.
● Two-sided service: listeners and
artists
○ Personalized and tailored experience
● Revenue Streams:
○ Premium subscribers
○ Ad-supported users
Market Performance:
11
Market Cap: $24.31 Billion
12. Risk Sources: Financial
Foreign Exchange Risk
Risk Exposure:
Fluctuations in exchange rates between
the Euro and other currencies may impact
expenses, revenue, and reported
operating results. This could have a
negative impact on reported operating
results.
Source: Spotify Prospectus, 2018
Risk Management:
● Mitigates currency exposure in USD
denominated Convertible Notes by
matching balance with USD
denominated cash and equivalents
and short term investments.
● Foreign exchange forward contracts
and options.
● Sensitivity analysis determined that
a 10% strengthening in the exchange
rate of the USD would have a
negative impact of €26 million as of
December 31, 2017.
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13. Risk Sources: Non-Financial
Cyber Attacks
Risk Exposure:
● Unauthorized personnel hacking data
and software pertaining to users,
business partners, and employees -
credit and debit card information and
personal data.
● Vulnerable to software bugs,
computer viruses, and other attacks
from third-party computer systems.
Risk Management:
● As stated in the Code of Conduct,
“Using technology properly and
keeping our information safe is
crucial to our success as a
company”.
● Spotify has engineers and security
teams are dedicated to keeping
systems secure.
● Also relies on each employee to do
their part, and be vigilant at all
times.
13
Source: Spotify Prospectus,
2018
14. Risk Sources: Firm Specific
Unauthorized Access of Service
Risk Exposure:
● Through manipulation of software,
and may lead to false key
performance indicators and
advertisers relations.
● Ex. Spotify detected instances of
approximately two million users as of
December 31, 2017, who have been
suppressing advertisements without
payment.
Source: Spotify Prospectus, 2018
Risk Management:
● Audit committee is in charge of the
review and evaluation of enterprise
risk Management;
● Spotify doesn’t directly disclose how
they manage such risk
● Continually enhance their Platform
through investment in R&D
14
15. Risk Sources: Industry Specific
Interest Rate Risk
Risk Exposure:
● Risk that changes in interest rates
will have a negative impact on the
Spotify’s earnings and cash flow,
primarily affecting fair value of
convertible notes and ability to
borrow money at an acceptable cost
of debt
● Exposure to interest rate risk is also
related to interest-bearing assets, as
fluctuations in impact the yield of the
investment.
Risk Management:
● Not entered into any hedging
arrangement to mitigate interest
rate fluctuations.
● Sensitivity analysis considered a
hypothetical 100 basis points
increase in interest rates would have
impacted interest income €8 million
in 2017.
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17. About the Company
Background:
Alphabet is a collection of businesses
offering internet products, the largest of
which is Google. The other companies are
startups like the Driverless Car Project.
The Alphabet structure aims to provide all
of these businesses with strong leadership
and freedom to pursue their goals.
Revenue Streams:
Performance Advertising, Brand
Advertising, Other Internet Solutions
(Startups).
Growth Rate:
21.50% YoY Revenue Growth (1)
Market Performance (2):
17
Market Cap: $740.73
Billion
18. Risk Sources: Financial
Foreign Exchange Risk
Risk Exposure:
Net receiver of foreign currencies:
Australian and Canadian Dollar, Euro,
Japanese Yen, British Pound. Benefit from
weakening of U.S. Dollar.
Source: Alphabet Inc., Form 10-K 2017
Risk Management:
Alphabet’s strategy consists of using
currency forward and option contracts to
hedge against foreign currency changes in
either direction.
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19. Risk Sources: Non-Financial
Technological Risk
Risk Exposure:
Internet technologies continue to evolve.
Alphabet faces the risk of manufacturers
discontinuing use of their search
technology, products and operating
systems. In addition, new and existing
technology that blocks ads can harm their
ad revenue.
Risk Management:
Alphabet devotes significant resources to
the creation, support, and maintenance of
products across multiple platforms and
devices while also building relationships
with alternative device manufacturers.
This allows them to mitigate both risks by
ensuring dependance on their technology
and arranging countermeasures to
adblockers to be built into the devices.
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20. Risk Sources: Firm Specific
Advertisements
Risk Exposure:
Effectively all of Alphabet’s revenues are
generated from advertising. Reduced
spending from advertisers for competitive
and macroeconomic reasons risks
harming their business. This includes
adblock
Source: Alphabet Inc., Form 10-K 2017
Risk Management:
Alphabet only states that they aim to
provide superior value and deliver
advertisements efficiently and
competitively. Their strategy is effectively
to maintain a leading position.
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21. Risk Sources: Industry Specific
Risk Exposure:
Personnel
Alphabet relies on highly skilled
personnel, leading to risks associated in
retaining and motivating personnel, or
maintaining corporate culture.
Net Neutrality
It also relies heavily on continued and
unimpeded access to the Internet by all
users. The Company faces risk associated
with the shift in the Internet environment
such as net neutrality.
Risk Management:
Personnel
Maintenance of competitive compensation
packages to retain and attract highly-
skilled personnel.
Net Neutrality
To maintain Internet access by its users
Alphabet lobbies against laws attempting
to eliminate net neutrality.
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23. About the Company
(1) CSIMarket (2018, November 16)
(2) The Monthly Fool (2018, November 16)
Background:
Amazon is the largest internet retailer in
the world. The company sells items such
as, books, video downloads/streaming,
MP3 downloads/streaming, food, toys, etc.
Revenue Streams:
Retail Products, Web Services, Prime,
Other Retail Subscriptions
Growth Rate (1):
YoY Revenue Growth 29.33%
Market Performance (2):
23
Market Cap: $776.97
Billion
24. Risk Sources: Financial
Foreign Exchange Risk
Risk Exposure:
As a global company, Amazon faces risk
of value loss due to the fluctuation in
exchange rate.
Source: Amazon Annual Report 2017
Risk Management:
Amazon does not have a clear plan to
solve this risk, but they believe that
evaluating the operating results and
growth rates before and after the effect of
currency changes benefits shareholders.
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25. Risk Sources: Non-Financial
Disaster
Risk Exposure:
Amazon experiences occasional system
interruption that can decrease the
efficiency of fulfilling orders and providing
services to clients. The risk can be caused
by earthquakes, fire, flood, etc.
Source: Amazon Annual Report 2017
Risk Management:
Amazon has established disaster recovery
plan and invested in some disaster
insurance.
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26. Risk Sources: Firm Specific
Expansion Risk
Risk Exposure:
Amazon is rapidly expanding its global
operations. This makes Amazon have to
compete with competitors from different
countries and industries, which makes
competition intensify.
Source: Amazon Annual Report 2017
Risk Management:
● Amazon seek to invest in several
areas of technology to enhance
customer experience and improve
their process efficiencies
● Amazon seek to reduce its variable
costs per unit to lower prices for
consumers.
26
27. Risk Sources: Industry Specific
Holiday Strain
Risk Exposure:
All retailers face with a massive influx of
orders during holidays, such as Christmas.
This can lead to supply shortfall, and then
leads to a lost of revenue.
Source: Amazon Annual Report 2017
Risk Management:
Amazon endeavor to accurately predict
the demand to avoid overstocking or
understocking products.
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29. About the Company
Background:
Designs, manufactures, and markets
mobile communication/media devices and
personal computers, and sells related
software, services, accessories and third-
party digital content and apps.
Growth Rate:
19.60% YoY Revenue Growth (1)
5% U.S. Monthly Growth Rate (2)
(1) Yahoo Finance (2018, November 17)
(2) The Wall Street Journal (2018, February 5)
(3) Google Finance (2018, November 17)
Market Performance (3):
$193.53 Stock Price
29
Market Cap: $918.38
Billion
30. Risk Sources: Financial
Interest Rate Risk
Risk Exposure:
Interest income and expense are most
sensitive to fluctuations in U.S. interest
rates; affecting interest earned on cash,
cash equivalents and marketable
securities and fair value of those
securities, as well as costs associated with
hedging and interest paid on the debt.
Source: Apple Inc., Form 10-K 2018
Risk Management:
Apple’s investment policy and strategy
are focused on preservation of capital and
supporting the company’s liquidity
requirements.
● Minimize potential risk of principal
loss;
● Sensitivity analysis for changing
interest rates - $4.9 billion
incremental decline in the fair
market value of the portfolio.
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31. Risk Sources: Non-Financial
Global Competition
Risk Exposure:
Success is highly dependent on ability to
ensure a continuing and timely
introduction of innovative products,
services and technologies to the market.
Source: Apple Inc., Form 10-K 2018
Risk Management:
Apple is unique in its design and
development of nearly the entire solution
for its products, including the hardware,
operating system, numerous software
applications and related services. As a
result, the Company must make
significant investments in R&D.
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32. Risk Sources: Firm Specific
Customer Interests & Demand
Risk Exposure:
To remain as the industry leader and
stimulate customer demand, Apple must
successfully manage frequent
introductions and transitions of products
and services.
Source: Apple Inc., Form 10-K 2018
Risk Management:
Continuous monitoring of: timely and
successful development, market
acceptance, management of new product
ramp-up, availability of application
software, management of purchase
commitments and inventory levels in line
with anticipated demand, product
quantity, and risk of deficiencies.
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33. Risk Sources: Industry Specific
Third-Party Content
Risk Exposure:
The digital content licensing
arrangements with third parties are for
relatively short terms and do not
guarantee continuation or renewal of
arrangements on reasonable terms. Some
providers may offer competing
products/services, and could make it more
difficult/impossible for Apple to license or
distribute content at reasonable prices, if
at all, in the future.
Source: Apple Inc., Form 10-K 2018
Risk Management:
Apple has digital rights management and
other security solutions with third-party
digital content providers.
● No assurance that Apple will be able
to develop or license solutions at a
reasonable cost and in a timely
manner.
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34. Comparison
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Apple
● Capable of handling high levels of risk in most aspects, as shown
in annual reports.
● Room for improvement in management of firm and industry specific
risk sources..
Amazon
● Lack of a clear plan to deal with foreign exchange risks.
● Have a good plan to solve operational risks, such as holiday strain.
Alphabet
● Large reserves of capital to help mitigate technological, financial and
firm-specific risks.
● Strategy focuses on maintaining position as a leader in the industry to
reduce the impact of risk sources.
Spotify
● Audit committee reviews and evaluates enterprise risk management.
● No direct disclosure of enterprise risk management procedures.
● Susceptible to high supplier power.
Netflix
● In contrast to industry:
○ Netflix addresses licensing risks by producing original content.
○ Potential increased risk by being singled-out by governments for
taxation.
● Relies on product competitor, Amazon, as a technology partner.
