Tag Archive for debt

Netflix – Debt and a Risky Business Model

Last week one of the internet’s darling companies Netflix suffered a huge drop in value. The precursor was a hugely disappointing earnings report by the media giant, much worse than expected with the companies attempt to focus on other key economic indicators being largely ignored.

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The success story of Netflix has been really driven by the growth of it’s subscriber growth now approximately 1.7 million a year across the world whereas the market had expected upwards of 2.5 million. It’s not known why these estimates where so wrong however it’s unlikely that subscriber churn is completely to blame.

The fundamental problem though wasn’t the number of subscribers which are still impressive, but more the huge levels of spending and debt being incurred by the company. As many internet darlings have discovered it’s not enough to just have users, a company needs to be profitable or at least have the expectation of profit. After all if you look at the total number of subscribers which is now not far off 80 million, the potential is massive. The problem is that although marketing expenses are relatively low for a media company – the costs for content are very large indeed.

All those films and movies don’t come cheap and remember since Netflix has expanded to a more global company covering around 190 countries, those costs will have spiraled upwards. Broadcasting rights and licenses are mostly agreed on a per country basis which is why Netflix’s content varies so much from region to region and why they have to artificially block access from different areas which users often do – see Netflix Blocked VPN and Proxies.  These deals have also to be over a long period which means that the content liability stretches out over years to come.

So how much is this liability and how much debt will be involved?  Well it’s estimated that Netflix’s streaming content obligations now total something like 13 billion dollars up over $3 billion from 12 months ago.  This means that it’s content liability has grown by over 31% compared whereas it’s subscriber base has grown around 27%.

This means that there is currently a pretty large difference between growth in earnings (via subscriber increase) and that of spending on content liability (remembering that these are not strictly capital assets although the value does depreciate over time).

The debt is going to keep rising for the near future and possibly beyond.

Further Reading:

The use of VPNs and proxies to watch Netflix is growing, in tis article – Residential VPN services, demonstrates how these Netflix VPN blocks are being fought.

 

Solving the Global Debt Problem

Debt is now a problem across the globe, despite the problems faced by most of the developed world over the last few years – it seems that nobody is actually learning the lesson.   Even the Governments that are being criticised for their debt reduction efforts like the UK are not actually reducing their debt burden merely slowing down it’s growth.

The Argentine president, Cristina Kirchner waved goodbye with a painful three hour ramble claiming that only Argentina had unlocked the secret to reducing national debt.  Although if the rest of the world followed her crackpot model of making up statistics and defaulting on loans we’d be in an even worse state than now.

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The worry is that debt is growing into a world wide epidemic, and it looks like default is going to be the only liable option for many sovereign states.   We have seen Greece’s efforts where ruthless austerity measure have brought the country to it’s knees, whilst falling output has meant  that their debt has actually grown.  What are their options? There seems to be a growing realisation that Greece will simply never be able to repay the debt they have already established – where is the sense in lending them more?

More and more countries are heading in Greece’s direction.  The factors vary, but the list is growing – the latest is Austria which looks in real trouble crippled by a catastrophic banking sector which is billions in debt.

Can you believe that global debt has risen by 17% since the crisis began?  It’s like we’ve all looked at the sorry state of our bank statements and gone on a spending spree to cheer ourselves up!  The reality is of course different, debt levels are in many cases not only unsustainable they are so large there is little real chance of them ever being paid off.  The word bankrupt is very relevant to more countries than you could imagine.

We often look to  the East for salvation, yet in Asia the problem is becoming arguably worse than the Western economies. China increasingly focuses on growth whilst ignoring the strict credit controls that it used to operate under.  China’s overall debt levels are now estimated $28 trillion, which is true is approaching 300% of GDP comparable to the USA when you account for relative output levels.  Don’t take our word for it though, there are articles and opinions on much of the worlds economic press if you look for it, worth investing in a US or UK VPN to get access to the best reporting though.

MAny economist are not actually that concerned, and in some senses as long as output, asset values and wealth are growing then this is probably right.  However this isn’t happening across the board where debt is still growing and growth has stalled.   The very definition of debt requires that it is at some point paid back but this is looking increasingly unlikely in more and more cases.  This credit cycle is something that the world has never seen before and nobody knows how it will come to an end.

Further Information

The European Deflation Trap

At first glance, deflation doesn’t sound that bad at least not compared with lots of other economic woes that have recently beset the various economies of Europe.  It’s a situation that Portugal, Spain and Greece now find themselves with a very real possibility of being joined by the Italians.

One of the main reasons it sounds good is that of course, deflation means falling prices and in Greece they fell by just over 0.8% in one month.  In Portugal that figure was 0.7% and 0.4% in Spain, the Italians have at the moment a 0% inflation rate.

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So why is deflation bad? Well there are two main reasons and they are both centered around economic growth.   The first one is fairly obvious, for an economy to grow it needs people to spend and buy products and services.   Ask yourself the question – if prices are falling every month – will you make that big purchase or wait until it becomes even cheaper.  That’s a big reality of deflation – it acts as a disincentive to buy.  For the consumer it’s good but for the economy in general it leads to falls in profit and revenue, lower wages and a rise in unemployment.  All factors feeding in to reduce the growth of an economy.

The other significant issue is that deflation actually makes debt payments more difficult to afford.  Lower revenues, falling sales and profits mean companies and countries are unable to services their debts which can cause significant issues especially in the debt ridden economies of Europe.

The danger leads to a spiral of deflationary pressure, falling levels of consumption in turn lead to falling investment.  Both of these will lead to further falls in prices, this isn’t just economic theory either – Japan fell into this trap and took decades or more to recover, in some senses it still hasn’t. When the costs of goods starts to fall, then the revenue and profits fall too – it sounds good for a consumer but ultimately it isn’t.  Stable economies which slowly grow are best and for this to happen you need companies to expand and their profits to grow.  People don’t tend to buy luxuries buy proxy servers and expensive cars when their livelihoods look under threat.

Joseph Clarke:

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Turkish Personal Debt Climbs Higher

Often the reality of an economy can be found not in the facts and figures of GDP and tax rates, but simply by looking around.  I spent some time earlier this year in Turkey in one of the countries biggest cities – Izmir.   I was there long enough to get a feel for the place, and it’s troubles.  On a global scale, Turkey seems to be doing well, many economic figures point to increasing prosperity, falling levels of Government debt and many other favorable economic indicators. Yet on a personal level, there are many issues and indeed similarities to European economies some years earlier.

The streets of Izmir are filled with expensive and new motor cars, Mercedes, Audi’s and BMWs are everywhere.  These are expensive cars, particularly in Turkey where they are often cost much more than in European countries.  The city is not unusual, and there is a huge impression of wealth and economic success on the streets of many big Turkish cities just like Izmir.

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So how are Turks able to afford these expensive cars?  If you check out the salaries on offer for jobs in local papers, you’ll become even more confused – these salaries are nowhere near the level to be able to afford these sorts of vehicles and lifestyles.  In 2013, over 850,000 cars were sold, compared to less than 100,000 in 2002 – the Turkish automotive sector is experience a huge surge in demand.  However here lies the clue, the vast majority of these cars are paid for using freely available personal credit.  It’s the same with technology. walk down the street and you’ll notice the Turkish youth have all the latest gadgets and phones.  They have the same appetite for technology that the youth have in other developed nations despite the efforts of the government at blocking and filtering internet access (details of workarounds here – www.dnsproxy.co.uk)

When I first visited Turkey in the 1990s it was very rare for a Turkish person to own even a single credit card, now most young Turkish people will have four or even five.  Bank loans, cheap credit and marketing campaigns promoting luxury items are everywhere, it certainly has the feel of the pre-recession days of the UK and Europe.  Personal debts levels in Turkey are growing at an alarming rate, the worry is that it is becoming unsustainable and outside money which helped to sustain this credit boom is becoming much more difficult to find.

It all sounds very familiar, and it is hoped that Turkey manages to control these level of debt without the huge problems the recession and austerity measures needed in most Western countries.  The threats are mounting though, the levels of credit look certain to cause wide spread defaults, repayment terms and lengths are becoming longer encouraging even more debt.  For many the lure of new technology and luxury items is too strong to resist especially among the young and aspirational.  Traditional boundaries and customs are being eroded as more Turkish people move from villages towards the towns and cities.  You would rarely find a computer in a Turkish household a decade ago, now they are as common place as Europe.  Turkish people use and shop on the internet all the time, often using a DNS service to access sites in other countries that may be blocked by the country’s growing list of internet blocks.

Is US Growth Going to Slowdown?

Well the IMF seems to think so, in it’s latest assessment of the US economy the International Monetary Fund reduced it’s growth forecast for the US by nearly a third.  They also suggested that perhaps there was still some need for the virtually nil interest rates to remain at that rate for the time being.

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The estimates of the US economy fell by .8% from the April estimation, to an expected growth rate of 2% in 2014.   Why the turnaround? Well the first quarter results were weak although this was very probably due to the very severe winter impacting on all areas of the economy from employment, housing through to retail sales.

It’s not all bad news, it seems that the IMF considered this to be just something of a blip in the recovery – maintaining the 3% growth estimate for 2015.  The caveat for this though is to increase the minimum wage and keep investing heavily in it’s infrastructure which could be difficult in the political climate.

This reduction in estimates wasn’t entirely unexpected as the IMF had already hinted that this would happen in relation to the poorer growth results in many of the other major economies across the world.  The Ukraine crisis is also having an impact on economic growth particularly if sanctions on Russia are increased.

It’s going to mean that there’s some impact on the markets, employment goals are not going to be reached until 2017, and it’s expected this will be in an environment of low inflation.  It’s one of the reasons that  the IMF is urging the US to keep it’s interest rates low, the markets were expecting a rise after mid-2015 but that could be later now if the advice is heeded.

The US equity market like that of most of Europe is experiencing rises virtually across the board.  This is of course partly due to the low interest rates making investment cheaper and of course a stream of positive indicators.   The pressure will be upwards on shares the longer the interest rates stay low.  There are worries of a market correction within the equity market with many experts hedging fund with safer investments like telcos and utility companies.

You can check the latest share prices and get some excellent investment advice on some of the US media and equity research funds.  Beware though due to the sometimes complicated state tax and federal laws, these are often limited to US only customers, unless you buy VPN services and use them remotely of course.

Richard Hargreaves II

Technical Source: – hide IP software

Czech Economic Programme produces Growth

Many have claimed these are long overdue, but the Czech Government currently working as a coalition have released it’s predictions for the period up to 2017. Overall it’s a fairly optimistic outlook, with public spending recovering without any increase in debt levels.  It is expected that this increase in public spending will largely be covered by higher growth levels.  There was some expectation about information on various efficiency drives and cost cutting initiatives promised by the coalition – unfortunately there was little about these.

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For anyone who follows Czech economics and politics there will be little surprise that one of the hot topics is that of the level of Value Added Tax (VAT) being set.  This has been a major source of disagreement between the parties who make up this coalition.  It is thought that there will  be some sort of agreement with a plan to introduce a lower level of VAT in the near future.  In the interim period is it expected that the current rates will drop a single point to 14 and 20% respectively.  Many want these drops to be much higher as well as simplifying the current rates into a single VAT and removing the lower and higher rate levels.

Growth figures look encouraging yet unspectacular, it is hoped that the Czech economy will grow by 2.0 % in the 2015 period.  This is up a few ticks from the current growth rate of 1.7%, public deficit figure currently are running at 18 and look set to rise over the next year before falling back to a manageable 1.7% of GDP in 2017.

There are specific reasons that public spending has jumped over the last 12 months.  One of the major reasons is the end of certain measures in the country’s austerity programme.  This year sees the end of a public sector pay freeze, and increased wage settlements will pay a large part in the increase in the levels of the public deficit rise.  There are also several large infrastructure projects being initiated over the next few years, some of these supported by EU grants and loans.  Some of the most important are directed at increasing the country’s telephone and broadband infrastructure.  This is especially important as there is a growing need to support the digital marketplaces and economy – there are many encouraging start ups which could end up being the next Facebook or Twitter!

Henry Cavanagh

 

Portugal Economic Recovery Still on Track

There is a feeling that the economic prospects for Portugal are at last showing some sign of recovery.    This month (May 2014) the bailout organised by the international community and the IMF is nearing it’s end.  The last review of the bailout was perhaps the first one with a slightly optimistic short term outlook.

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The IMF though did stress that there should be no let up on the economic reforms, the growth of debt is still concerning and without these reforms could easily spiral out of control very quickly.  Unemployment is probably the most worrying aspect of the recovery, it is obviously the one with the highest social cost.  At over 15% it is still among the highest in Europe and like other countries the worse affected sector are the countries young people.  However economic activity is improving all the time so it is hoped that this will filter through to the employment figures very shortly.

The reduction of GDP budget deficit is of course the core goal of the IMF bailout targets, Portugal has so far achieved or in some instances beaten it’s agreed levels.  Although the official bailout is finished this month, there will be a continuation of some payments whilst the deficit is still being tackled.

Furthermore the country has the option to request a standby loan, mainly to support the substantial shortfall that is still in existence for the 2015 economic year.  Access to the financial markets is still limited and until Portugal has full access to the credit markets then it is likely it still will need some financial assistance to stay in the Euro and maintain it’s austerity programme.

The full economic figures and economic indicators can be obtained from a variety of financial data sites.  If you want background stories and information on the European economies then check out the financial pages of the BBC website, all data should be available but you may need to use a VPN to access some of the transmitted broadcasts – here’s a guide.

James Goldwing writes on several technology and economic websites and blogs.

 

EU Concerns Over Greek Repayment

It seems quite a long time since the doomsayers of the Euro Zone where out in force.   The speculation then was not ‘if’ a country would default and crash out of the currency union, but rather ‘when’ and ‘who’.  There were predictions that Greece, Ireland, Spain and Portugal where likely candidates but at the moment those predictions look misplaced.

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However throughout the hysteria and doom laded forecasts, the fundamental economic data hasn’t really changed.  There are still too many European countries literally swamped in debt with little expectation of that changing soon.  The problems have moved off the front pages of the financial press but they’re still very much with us.

The European Commission has last week urged Greece to step up it’s efforts to reduce national debt quicker than is currently happening.   It is worried that agreed targets for reduction look unlikely to be met despite some swinging austerity measures.   There has been an increase in confidence that the worse was over in countries like Greece, yet EU officials don’t all share this optimism.

Figures like debt being more than 170% of the overall economic output of a country, are truly staggering.  With this sort of burden on an economy, it’s difficult to see where any increase in prosperity can come from.

These economic targets were strictly linked to the bailout of the Greek economy, one of the conditions for example was that debt should be decreased to 124% of GDP by the year 2020.   Latest EU estimates suggest that this target will not be met, in addition further long term goals will also be missed.

However there is hope, and it is expected that both the EU nations and the IMF would react to these problems rather than let Greece stagger towards other defaults and failures which will almost certainly effect growth prospects and confidence.  It was agreed that if these targets were not met, then renewed efforts and help may be available.  It was a realization that these goals may not be realistically achievable in the current economic climate and that other measures may have to be deployed.   One of the important factors that is fundamental to the Greek recovery is the level of interest it pays on it’s debts, lowering this could make a huge impact on the economy in the short term.

The Greek economy will certainly need some more help, it lacks the monetary tools to make significant changes on it’s own.  The UK economy is leading the way of recovery but of course it’s not part of the Eurozone currently.  There is much talk and several decent documentaries available on UK TV documenting this recovery.  To access these you’ll have to be in the UK or have access to a UK IP proxy, try this one.

To end some good news though for the Greek economy.  At the beginning of the month, it was able to return to the Bond market. This enabled the country to at least raise finance from private investors after being absent from this sector for nearly five years.