Netflix Is Burning Cash in Its Shift to Originals

June 12, 2017 | | Comments 0

Netflix got major attention in 2016 declaring its intent to spend $6 billion on content in 2017. But that’s not a true reflection of the cash they’re shelling out.

Through about 2011, the money Netflix spent on content each year was roughly equal to the amount the company expenses each quarter in its profit-and-loss statement. However, that changed starting in late 2012 with Netflix’s spending on original content, which is very different from the way it pays for licensed content.

With licensed content, the streaming company has generally been able to arrange to pay in a manner that aligns with the way it accounts for content costs in its P&L statement — a little bit at a time over the life of the content. But with original content, Netflix has to fund the whole expense out of pocket from day one, meaning that almost all of the cash cost is incurred before the content is even available.

The rapid shift from licensed to original content is the single biggest difference between Netflix and, say, HBO, whose spending on originals has remained constant over the past five years. Even Amazon isn’t spending at nearly the same levels as Netflix, and it has a massive e-commerce business to generate cash.

Netflix has publicly anticipated “many years” of negative free cash flow and doesn’t forecast turning that around until it has reached a much larger revenue base. That means the strategy is entirely dependent on the company’s continued ability to grow rapidly and expand its margins. But if its growth trajectory slows or its cost of content increases faster than anticipated, Netflix will find its current ability to keep raising more debt seriously compromised.

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