Netflix piling up viewers and big bills
But the programming that is winning awards costs more than what subscribers are paying for it.
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.