Net­flix pil­ing up view­ers and big bills

But the pro­gram­ming that is win­ning awards costs more than what sub­scribers are pay­ing for it.

The Denver Post - - BUSINESS - By Michael Liedtke

SAN FRAN­CISCO» Net­flix is pulling in new view­ers and award nom­i­na­tions in droves, but the on­line video ser­vice still faces a long-term prob­lem: Its ac­claimed pro­gram­ming lineup is cost­ing far more money than what sub­scribers pay for it.

That hasn’t been a big is­sue so far, thanks to in­vestors’ will­ing­ness to ac­cept scant prof­its in ex­change for ro­bust sub­scriber growth.

Net­flix de­liv­ered on that front again Mon­day, an­nounc­ing that it added 5.2 mil­lion sub­scribers in the sec­ond quar­ter cover­ing April to June. That’s the largest in­crease ever dur­ing the pe­riod, which has al­ways been the com­pany’s slow­est time of year.

Wall Street re­warded Net­flix by driv­ing up its stock by more than 10 per­cent to $178.30 in ex­tended trad­ing, putting the shares on track to hit a new high in Tues­day’s reg­u­lar trad­ing.

The Los Gatos, Calif., com­pany now has 104 mil­lion sub­scribers world­wide. For the first time in its his­tory, most of those sub­scribers (slightly more than 52 mil­lion) are out­side the U.S.

That mile­stone could fur­ther com­pli­cate Net­flix’s cost is­sues, since the com­pany will need to keep cre­at­ing more shows that ap­peal to the unique in­ter­ests of view­ers in coun­tries such as Ja­pan, In­dia and In­done­sia.

“It is go­ing to be im­per­a­tive for them to have more lo­cally pro­duced con­tent,” says CFRA Re­search an­a­lyst Tuna Amobi.

“They can’t af­ford to pur­sue a ‘one-size-fits-all’ strat­egy.”

As part of its ef­forts to boost its prof­its, Net­flix is be­com­ing more ag­gres­sive about dump­ing shows that aren’t draw­ing enough view­ers to jus­tify their costs. In the sec­ond quar­ter, Net­flix jet­ti­soned the high-con­cept science fic­tion show “Sense 8” and the mu­si­cal drama “The Get Down.”

In a Mon­day let­ter to share­hold­ers, Net­flix CEO Reed Hast­ings made it clear that the com­pany plans to ex­ert more dis­ci­pline in the fu­ture. So far, Net­flix has re­newed 93 per­cent of its orig­i­nal se­ries, much higher than the his­tor­i­cal rate of tra­di­tional TV net­works.

“They are be­com­ing more like any other Hol­ly­wood stu­dio and pay­ing more at­ten­tion to the eco­nomics of their shows,” Amobi said.

Two of its long­est run­ning shows — “House of Cards” and “Orange Is The New Black” — re­cently launched their lat­est sea­sons.

Those two se­ries, along with new hits like “Master of None” and “13 Rea­sons Why,” helped Net­flix eas­ily sur­pass the av­er­age 1.8 mil­lion sub­scribers it has added in the sec­ond quar­ter over the past five years.

This fall, new sea­sons of two other hits, “Stranger Things” and “The Crown,” are due. Those two se­ries ac­counted for about a third of the 91 Emmy nom­i­na­tions that 27 dif­fer­ent Net­flix pro­grams re­ceived.

But the suc­cess hasn’t come cheaply.

Net­flix is locked into con­tracts re­quir­ing it to pay more than $13 bil­lion for pro­gram­ming dur­ing the next three years, a bur­den that has forced the com­pany to bor­row to pay its bills.

Af­ter burn­ing through $1.7 bil­lion in cash last year, Net­flix ex­pects that fig­ure to rise to as much as $2.5 bil­lion this year.

Hast­ings de­scribed the neg­a­tive cash flow as “an in­di­ca­tion of tremen­dous suc­cess,” rea­son­ing that Net­flix wouldn’t be able to fi­nance new pro­gram­ming if it wasn’t at­tract­ing so many new sub­scribers.

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