Case Exercises
Netflix and Redbox Compete for Movie Rentals
Charging $17.99 a month for an unlimited number of movie rentals (three at one time), Netflix revolutionized the movie rental business with a one-day mailing service for DVDs and acquired 12 million subscribers and $1.5 billion in revenue. However, Blockbuster, the video rental giant from the earlier $5.5 billion bricks-and-mortar movie rental business, decided to enter the mail-in delivery and online-DVD rental businesses. Blockbuster (now a division of Dish Network) drove prices down to $14.99, attracting 2 million subscribers. Netflix responded with a cut-rate service of one movie at a time for $9.99 per month, which drove the net profit right out of the business.
Movie studios like Viacom and Time Warner also entered the market with direct-to-the-customer video on demand delivered over the broadband web. Following two months of theatre-only releases, the studios asked $20 to $25 per showing. This fee is five times what it costs to rent a second-run or classic movie from the cable companies and 10 times Netflix’s or Redbox’s SI.99 or SI fees for overnight rentals. At such exorbitant prices, the studios earn a 70 percent margin, but the –16.0 price elasticity of home entertainment suggests an eight-fold increase in volume for half-price promotions. On-demand broadband movies and Blu-ray are the only two growing segments of consumer demand for video (see
Figure 10.12
).
Figure 10.12Consumer Spending on Video
Source: IHS Screen Digest, Wall Street Journal (February 9, 2011, p. B14).
Use Porter’s Five Forces model to answer the following questions:
Questions
1. What disruptive technology has threatened the bricks-and-mortar and mail-in movie rental business?
2. Does easy access to distribution channels at grocery stores for Redbox’s 22,000 vending machines indicate a high- or low-entry threat in the movie rental business? Why? Why might McDonald’s be an even better distribution channel than grocery stores?
3. Are there any economies of scale in the on-demand video rental business to serve as a barrier to the entry of Amazon?
4. Who are Netflix’s and Redbox’s suppliers? Are they in a position to appropriate much of the value in the value chain? Why or why not?
5. What factors determine the intensity of rivalry in any industry? Is the intensity of rivalry in the video rental industry high or low? Why?
Saudi Arabia
International Finance
.
Quick Facts (2019)
Size:
Population – 34.14 million people
Area – 830.0 mi²
GDP: $779.29 billion (18th largest economy in the world) G20
GDP growth: 0.5% between 2018 to 2019
PPP: $56,879 (12th in the world)
Unemployment: 12.3% (3.5% in US)
Inflation (CPI) : 2.44% (2.28% in US)
Foreign Direct Investments: $12,471,990,00 ($ 12.5 B )
Public Debt: 30% of GDP (78% of GDP in US)
SAR to USD Exchange chart
1 US dollar = 3.75 SR
Advantages of Flexible Exchange Rate:
Country is independent to choose its monetary policy rather than depending on other countries.
Acts as a shock absorber and protects the domestic economy from external disturbances.
Promotes economic development and helps achieve planned objectives of the country.
Promotes international trade with as less restrictions as possible.
Disadvantages of Flexible Exchange Rate:
Low Import and Export elasticities result in unstable market conditions.
Inflation leads to further depreciation of currency value ultimately having adverse effects on the economy.
Exports from Saudi Arabia:
Mineral fuels including oil: US$231.6 billion (78.6% of total exports)
Plastics, plastic articles: $20.9 billion (7.1%)
Organic chemicals: $14.3 billion (4.9%)
Ships, boats: $2.6 billion (0.9%)
Inorganic chemicals: $2.29 billion (0.8%)
Aluminum: $2.26 billion (0.8%)
Machinery including computers: $1.9 billion (0.7%)
Iron, steel: $1.4 billion (0.5%)
Vehicles: $1.29 billion (0.4%)
Fertilizers: $1.26 billion (0.4%)
Export: $182 billion (25th largest in the world)
$ 1.784 B Saudi Aramco
on price of Feb 11 /2020
33.45 SR and 200B Stocks
imports into Saudi Arabia:
Machinery including computers: US$12 billion (11.8% of total imports)
Vehicles: $11.3 billion (11.2%)
Electrical machinery, equipment: $9.2 billion (9%)
Cereals: $4.3 billion (4.3%)
Pharmaceuticals: $4.3 billion (4.3%)
Aircraft, spacecraft: $4 billion (4%)
Mineral fuels including oil: $3.5 billion (3.4%)
Optical, technical, medical apparatus: $3.3 billion (3.2%)
Articles of iron or steel: $2.6 billion (2.5%)
Furniture, bedding, lighting, signs, prefab buildings: $2.5 billion (2.4%)
Imports: $167 billion (28th largest in the world)
Foreign Investments Incentives
Oil is the biggest source of Saudi Arabia’s foreign exchange, followed by, Aluminum and Diamonds for exports’ and Gold, Wheat, Rice and Barley for imports.
Complete ownership of companies and land plots
Capital deportation allowed
No levy of income tax; corporate tax 20% of annual profit
Carry forward of deferred losses until the existence of the company
Financial support from AFESD, Arab Monetary Fund, Arab Trade Financing Program, Arab Investment Guarantee Corp, Islamic Development Bank, or any other local or international institution of choice
Support from HRDF for rehabilitation, training and employment of labor force
Customs exemption on raw materials, machinery, tools and equipment and their spare parts
Competitive prices
Financial grants for R&D in KAUST and KACST
FDI Tax Incentives
On 24th November, 2008, the Council of Ministers had issued its decision No. 359 to grant conditional 10-year tax incentives commencing from the date on which the project enjoys the tax credit in few of its cities.
Tax credit granted to foreign investors:
50% of annual cost for training of Saudi employees
50% of annual salaries paid to Saudi employees
Additionally, the tax credit for 10 years will be equal to 15% of paid up capital of all their industrial projects; in cash, in kind, or as an increase in the capital of the company.
References:
Burton, E. (2016). Business and Entrepreneurship in Saudi Arabia: Opportunities for Partnering and Investing in Emerging Businesses. John Wiley & Sons.
https://books.google.co.in/books?hl=en&lr=&id=7_joDAAAQBAJ&oi=fnd&pg=PR9&dq=business+opportunities+in+saudi+arabia&ots=TECrjefDLY&sig=T9o_60TUFjOb2MlSqAcWNzA46Qo&redir_esc=y#v=onepage&q=business%20opportunities%20in%20saudi%20arabia&f=false
Barguellil, A., Ben-Salha, O., & Zmami, M. (2018). Exchange rate volatility and economic growth. Journal of Economic Integration, 33(2), 1302-1336.
https://www.jstor.org/stable/26431809
Park, Y. E., Allui, A., & AlSelaimi, R. (2019). Determinants of entry modes choice for MNEs: Exploring major challenges and implications for Saudi Arabia. In Creative Business and Social Innovations for a Sustainable Future (pp. 107-115). Springer, Cham.
https://link.springer.com/chapter/10.1007/978-3-030-01662-3_12
http://www.liveexchanges.com/
Saudi Customs https://www.customs.gov.sa/
King Abdulaziz City for Science and Technology https://www.kacst.edu.sa/
IHS Markit https://ihsmarkit.com/index.html
Tadawul https://www.tadawul.com.sa/
https://en.wikipedia.org/wiki/List_of_public_corporations_by_market_capitalization#2019
BBC
United Kingdom
Emily Sim
Location
Located off the Northwestern coast of Europe
Contains England, Scotland, wales & Northern Ireland
Capital: London
facts:
93,628 Miles squared with a population of 66.4 million
GDP: 2.8 Trillion USD- 6th largest economy in the world
GDP growth: 0.3% (2019) Compared to 1.1% in 2018
PPP: 43,160 per capita (2017) US: 60,200 USD
Unemployment: 3.8% (2019)
Inflation rate: 1.8%
FDI:
Public Debt: 87% of GDP (U.S 106%)
U.K. Pound to USD
Current Rate: 1.30 To USD
Exports
Imports
Machinery including computers: US$85.9 billion (12.8% of total imports)
Vehicles: $74.7 billion (11.2%)
Mineral fuels including oil: $66.9 billion (10%)
Electrical machinery, equipment: $63.5 billion (9.5%)
Gems, precious metals: $40.1 billion (6%)
Pharmaceuticals: $30.3 billion (4.5%)
Plastics, plastic articles: $19.4 billion (2.9%)
Optical, technical, medical apparatus: $18.7 billion (2.8%)
Knit or crochet clothing, accessories: $13 billion (1.9%)
Articles of iron or steel: $12.1 billion (1.8%)
Foreign Investment/ Incentives
The U.K. offers attractive venture capital schemes to help small and medium enterprises expand
The Enterprise investment scheme and venture capital trusts offer tax relief for individuals interested in investing in U.K. small businesses
There are generous incentives for companies investing in research and development in the U.K. to promote fast-growing, innovative services and products, such as R&D expenditure tax credit
The Patent box offers a 10% corporation tax (compared to the usual 19%) on profits from investments patented in the U.K.
Brexit’s impact on Financial performance
Europe is Britain’s most important export market and its biggest source of foreign investment, while membership in the bloc has helped London cement its position as a global financial center.
Major businesses have announced that they are leaving Britain because of Brexit; for example AirBus, which employs 14,000 people and supports more than 100,000 other jobs
The government has projected that in 15 years, the country’s economy will 4 to 9% smaller if Britain left the EU
The U.K. officially left the EU on January 31st 2020, and has entered a 11 month transition period, where the U.K. will continue to follow all of the EU’s rules and regulations, and its trading relationship will remain the same until an agreement is negotiated
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Advantages of fixed exchange rate:
‐ Stability => encourages FDI
‐ No currency fluctuations => encourages international trade
‐ No devaluations
‐ Incentive to keep inflation low
Disadvantages:
‐ Less flexibility
‐ May require higher interest rates
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The Fiscal Incentives Act of 19
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4 provides for tax holidays up to 10 years for
investment in manufacturing, plus a schedule of rebates on income tax is available
for any manufacturing company deriving profits from exports. There is full
exemption from all income and withholding taxes for investors in some offshore
industries (captive insurance, foreign sales corporations), while most International
Business Corporations (IBCs), provided they export 100% of their manufactured
output, pay 1–2.5% corporate tax rate, can import production equipment duty free,
and are free of exchange controls.
Pros:
‐ Tax avoidance
‐ Asset Protection
‐ Privacy
Cons:
‐ Increased Regulatory Scrutiny
‐ Cost
How big? There are an estimated 47 offshore banks , as well as hundreds of other
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insurance and investment companies, all catering to overseas clients. Figures are hard
to track, but it is estimated that these financial activities earned BDS$150 million in
foreign earnings in 1995.
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