Archive for July 21, 2016

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.

netflix-proxy

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.