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How come Netflix so successful that it has billions of dollars worth of debt?

Netflix reached 104 million subscribers, 25% more than last year. However, experts say they will need luck not to drown in debt if the pace of growth is not maintained.

Despite its success, Netflix has multi-million dollar debt Why is Netflix so successful that it has billions of dollars worth of debt?

With over 100 million subscribers out and with its stock market constantly rising, everything seems to smile at Netflix.

The online content distribution platform, which in its origins was limited to sending DVD by mail to its customers, became in a few years an almost indispensable option for fans of movies and television series.
The figures speak for themselves:

By the middle of last July, Netflix reached 104 million subscribers, 25% more than last year and almost quadruple five years ago. Almost half of them are outside the United States.

Best Netflix series and movies account for more than a third of the world’s top-rated Internet downloads.

Its more than 50 original series got 91 nominations for the television Emmy Awards this year, just behind the HBO cable chain.

The Netflix series “For 13 reasons” generated much interest and some controversy after its premiere on Netflix last April.

But not all numbers are so positive.

The Los Angeles Times published an investigation this week that said the company amassed about $ 20.54 billion in long-term debt and payment obligations for content distribution rights.

Netflix reaction

Netflix does not agree with the vision presented by the US newspaper.

In a statement sent to BBC, the platform denies having a debt of $ 20 billion:

“The Los Angeles Times note incorrectly calculates our debt in accounting for our disclosure obligations (for example, content contracts with studies) Like $ 15.7 billion of debt but it is not.

“The correct figure is a total debt of US $ 4.8 billion (our market value is the US $ 75 billion).

” The US $ 15.7 billion are expenses for future content that appear on the statement. Each cable network and broadcast platform with distribution rights agreements use the same structure.

For Ted Sarandos, head of Netflix content, the important thing is to reach as many niche markets as possible.

Big Spending

Beyond the differences on how to count those millions of dollars, what is clear is that Netflix is ​​investing money at a fast pace.

It’s net spending this year is expected to be $ 2.5 billion from $ 1.7 billion last year.

I think Netflix Shows 2018 will need some luck not to drown in debt in case the growth rate slows. ” Mike Vorhaus, Magid Advisors

It recently moved its headquarters to southern California to a 14-story building in Hollywood, Los Angeles.

The fact that its shares continue to rise indicates that, for the moment, investors do not think this pattern of spending is wrong.

For them, the logic is that “you have to spend money to make money.”

Netflix shares have risen significantly in the last year.

But some industry experts warn of the danger of creating a bubble that can explode if Netflix fails to produce enough successes to attract new subscribers.

“No one is ever the dominant player forever,” Mike Vorhaus, president of Magid Advisors, a media consultant, told The Los Angeles Times.

“I think they will need some luck not to drown in debt in case of slowing growth.”

Not so “Netflix Originals”

As the company itself acknowledges, a large portion of Netflix’s expenses go towards the rights to distribute content from television series, animation programs, and movies.

Many of Netflix’s most popular and acclaimed products are acquisitions of other studios despite being broadcast as “Netflix Originals.”

In fact, many of Netflix’s best-known programs are not made by Netflix.

The Orange Is the New Black’s series a production of Lionsgate, while House of Cards comes from Media Rights Capital, an independent film and television studio.

The Crown is a production of Sony Pictures Television, while Iron Fist is a creation of Marvel.

Netflix pays an undisclosed amount in exclusive rights licenses to broadcast these series.

Favoring own production

The company wants to change this trend and, according to the directors, the goal is to increase the production of own content by 50%.

“There’s a lot of capital up front, and you get a payout over several years,” director Reed Hastings said in a recent call with investors.

“The irony is that the faster we grow and the faster we grow our production, the more we will be tied to the cash flow available.”

As a result, Netflix acknowledges that it expects to “have a negative cash flow for several years,” which means that debt will continue to grow, at least in the short term.

The company’s strategy is to invest more and more in self-produced series such as the hit Stranger Things and A Series of Unfortunate Events.

Creating new content is also essential for competing with rivals like Amazon, YouTube, Hulu and television networks.

However, for Hastings, this competition is not the main concern.

“The fact that each service produces original and exclusive content means that we are not substitutes between us but complementary,” he says.

International Expansion

For Wall Street, subscriber growth is the key indicator of Netflix’s health status.

As the US market becomes saturated, managers will have more pressure to seek new users beyond their borders.

Productions such as the South Korean film Okja and the “3%” series in Brazil are designed to appeal to both local audiences and viewers around the world.

“House of Cards”, which is broadcast on Netflix, is a production of Media Rights Capital

The company can not enter China due to regulatory obstacles but has its eyes set on Asia.

“We are expanding in India, Japan, and we are looking at it from market to market,” Hastings told investors.

Netflix has chosen debt as its preferred method also to finance these global ambitions.

Time will tell if the commitment to indebtedness to a future of international expansion and greater own production yields the fruits that Netflix seeks or if, as the most pessimistic, we are facing a bubble that will eventually explode.

Netflix’s series has had a varying reception: “Stranger Things” soon became a hit with critics and audiences, but shows such as “Santa Clarita Diet” and “The Ranch” did not spark so much interest.

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