Wars are expensive.
The internet is aflutter with the “news” that Netflix has $20 billion of debt, leading to a sudden rush to question whether the company is doomed or about to collapse or cancel its big shows.
First off, Netflix doesn’t have $20 billion in debt. Netflix has $4.8 billion in debt, and then deals with content partners for $15.7 billion. Notable difference, but, yes, Netflix is going to need to pay out that money.
That said, this isn’t some sudden surprise. Netflix’s finances have been closely examined by a small army of analysts and financial journalists. Some think the company’s spending too much, other think they’re right on track for global domination.
Owing money, whether in the form or debt or deals with other content companies, is just part of the plan.
In less than a decade, Netflix has changed the entertainment business, as well as how people think about the future of media. Now, it’s on the cusp of becoming the first truly global media network. You don’t do that without spending a lot of cash.
And you don’t get a lot of cash without taking on some debt.
That money is being plowed into two main areas: expansion and content. Netflix has been expanding aggressively into foreign markets and has mostly been successful. The company now has more non-U.S. subscribers than U.S. subscribers. Meanwhile, it’s spending big on making new shows, bringing in comedy specials, and experimenting with big names like Chelsea Handler.
To do that, Netflix has been borrowing a lot of money that will need to be paid back. And it’s spending that money faster than it’s making money right now.
Can Netflix go on like this forever? Nope, but that’s not the plan.
Every company has debt
You know who else has debt? Apple! $100 billion of it, to be somewhat exact.
So does every other major company. Does Netflix have more than others? Not really. Netflix has claimed it has far less debt compared to other companies its size, but that’s also a little misleading. It really has about the same amount of debt as other comparable media companies.
This is not to excuse the risk that Netflix faces, but rather to point out that the company has a very definite reason for this debtgrowth.
Netflix is spending aggressively to attract new subscribers and expand into new regions (so it can get even more subscribers).
It’s easy to forget that Netflix has only been making its own shows for about four years, with the launch of House of Cards. It’s still a new entrant to the content world, and it’s spending to figure it out.
It’s also begun making content for non-U.S. regions, something most of its competitors can’t do. Expansion outside of the U.S. is a key part of Netflix’s plan, and a major reason why investors have big up the company’s stock to more than $180.
That stock price is part of the problem. Netflix is still very much a bet on the future, and the company’s plan is still years from completion. That hasn’t stopped investors from valuing it like an already-mature media company.
Rating agencies all over this S&P, Moody’s have them well into junk (B+, B1). Net debt detractor from enterprise value. Stock absurd.
Brian Nelson, CFA (@ValuentumBrian) August 1, 2017
They’re not alone
Netflix isn’t plowing tons of cash into new shows because it just loves to watch TV. It’s because it’s facing a growing group of competitors that are also writing big checks.
“Amazon, us, Hulu, and a lot of international players, Sky and Gleam and others, are investing in original content. People want on demand,” Netflix CEO Reed Hastings told CNBC. “It is competition that hurts and on the other hand, it is getting internet viewing more popular with everyone.”
Even more competitors are just getting started, and they’ve got even bigger pockets. Apple is just starting to make its own original content, and there’s plenty of belief in the entertainment world that it’s going to eventually make a very big splash. Facebook is also starting to put money into Netflix-style content.
With those competitors looming, it’s even more important for Netflix to grow quickly and establish its place in as many homes as possible.
The price of doing business
Netflix would love to stop borrowing money, stop spending money on original content, and keep raking in cash and new subscribers. Sadly, it just doesn’t work like that.
Netflix’s future rests on building out a big enough network and eventually optimizing its operation. That could (and probably will) mean spending less on content. It could (and almost definitely will) mean raising its prices. It’s a balancing act that every company tries to do.
Netflix’s pitch is that it’s in the best position to do so. It has the widest reach, rich data from its customers, and a growing understanding of how to make good shows. Once it reaches this point, it will still have debtbut it will pale in comparison to how much money its making.
That’s how it expects to win the warand it wouldn’t happen without debt.
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