Opportunity Cost

This phenomenon goes by the name of ‘opportunity cost,’ since by not investing in more equipment and a more rigid production flow, the company is forgoing the opportunity to earn increased profits. These costs are every bite as real as the payment of dollars out-of-pocket.

This notion _______ opportunity cost can be reinforced _________a famous saying ______ Benjamin Franklin, no slouch himself _________ operations management. To make the point, however, we must make a brief excursion into logic. One truth of logic is the validity of the so-called contrapositive, which says simply that if the statement “If A, then B” is true, then it is also true that “If not B, then not A.” That is, of every time A occurs B follows, then we can be sure that if B does not occur, then A did not occur as well. Enough logic then, and back to Ben Franklin.

One of his Poor Richard sayings is that “A penny saved is a penny earned.” We have all recognized the truth of that since childhood, but I assert that by this saying Ben showed us he knows everything about opportunity cost. After all, what is the contrapositive of “A penny not earned is a penny not saved (i.e., a penny sent). All we are saying by this notion of opportunity cost is that “a penny not earned (an opportunity forgone) is a penny spent.” We shall often have occasion to consider opportunity costs, in analyzing and deciding various operations issues.

SCHMENNER, Roger W. Production/Operations Management. 5th Edition. Prentice-Hall, 1993.

Read Text | and answer questions 05 to 13.

Netflix is trying to prove to the world that it's all grown up

Netflix is trying to persuade Wall Street that it is now all grown up. After squeezing out millions of additional subscribers via its password sharing crackdown and through the introduction of cheaper advertiser-supported plans, the streamer knows that its growth spurts are coming to an end — and now it wants investors to stop obsessing over those pesky membership numbers and instead focus on other metrics.

"In our early days, when we had little revenue or profit, membership growth was a strong indicator of our future potential. But now we're generating very substantial profit and free cash flow. We are also developing new revenue streams like advertising and our extra member feature, so memberships are just one component of our growth", Netflix told shareholders as it reported quarterly earnings.

To that end, Netflix said that it will no longer report quarterly subscriber numbers, starting in 2025. Alas, the metric that Wall Street has forever judged Netflix on — the metric that prompted legacy media companies to burn endless piles of cash in their bids to compete with the streamer — will be retired. The decision to shut off transparency on the metric represents a significant turning point in the streaming revolution. For years, Netflix has prided itself on being extraordinarily transparent. Now it is aiming to hold its cards closer to its chest. And given that streaming giant is the trendsetter in the space, one could expect that other media companies will be inspired by the company's move and also opt to cease reporting such data.

To be fair, what Netflix is saying isn't necessarily off base either. As the company shifts its business model away from subscriptions and toward advertising and other revenue streams, it makes sense to consider how much time users are spending on the service. The more content a user consumes on Netflix, the more likely they are to continue paying for the service, and the more money Netflix then makes from that single subscriber. "We're focused on revenue and operating margin as our primary financial metrics — and engagement (i.e. time spent) as our best proxy for customer satisfaction,” Netflix underscored in its letter to shareholders.

Regardless, less transparency in an already opaque industry is not ideal. The walled garden of streaming already lacks the same detailed viewership data that Nielsen collects on linear television broadcasters. Now, visibility into the streaming world will get even dimmer.

The announcement from Netflix managed to overshadow its otherwise stellar quarter. The company handily beat expectations and added a staggering 9.3 million subscribers, meaning it now boasts nearly 270 million in total. Netflix also beat analyst expectations on both earnings and revenue. However, it wasn't all good news. Netflix forecasted its subscriber growth to be lower in quarter two, chalking it up to “typical seasonality.” That led the stock to slide nearly 5% in after-hours trading.

Whether "typical seasonality” is solely to blame, or whether the streamer is simply starting to hit a ceiling, is hard to tell. Perhaps it is a mix of both. Whatever the cause, the stock sliding on the less-than-ideal outlook is a prime example of why Netflix wants Wall Street to stop focusing on its subscriber numbers. And, in one year's time, investors won't have a choice.

Adapted from: https://edition.cnn.com/2024/04/19/media/netflix-subscription-numbers/index.html