Is Netflix a house of cards?
Behind the scenes, Netflix is burning money, writes Simon Duke.
If only building a profitable business were as straightforward as scooping industry gongs. Netflix cleaned up at the prestigious Emmy awards in Los Angeles on Monday. The internet streaming giant brought home 27 statuettes for dramas such as Ozark and Black Mirror. Only HBO, the revered production house behind Game of Thrones and Chernobyl, chalked up more Emmys than the intruder from Silicon Valley.
Since 2013, when it entered the production business in earnest with House of Cards, Netflix has set Tinseltown alight. It offers film-makers considerably more artistic freedom than they enjoy in the studio system, often commissioning a whole series without first seeing a pilot. For this reason, it has lured a panoply of star directing, acting and writing talent into its stable.
Baser motives have added further fuel to Netflix’s recruitment drive. Like a newly moneyed football club, the company is not afraid to brandish its chequebook when a star signing comes on the market. This year it is expected to splurge US$15 billion (NZ$23.7b) on films and TV series – which dwarfs the budget of another American media company that does not broadcast live sports. With 150 million paying customers worldwide, Netflix’s status as Hollywood’s main player appears assured.
That, however, is strictly the view from America’s west coast. From the vantage point of Wall Street, the picture has blurred. Since hitting a high in July, Netflix has lost a third of its value. Hollywood studios are preparing to launch competing services, and investors are looking anew at Netflix’s strained balance sheet. Its empire is founded on billions of dollars of junk bonds. To retain the confidence of creditors, the company must continue adding new subscribers at a furious clip.
Hollywood’s establishment is intent on puncturing the Netflix bubble. The entertainment industry is in the grip of unprecedented change. Buoyed up by recent mega-takeovers, Disney and the HBO owner Warner Media are poised to launch streaming offerings, selling programming to consumers for the first time ever. The pair are spending hundreds of millions of dollars apiece to tie in leading talent. This week Fleabag creator Phoebe Waller-Bridge signed a US$20 million-a-year deal with Amazon.
Apple, meanwhile, has committed US$6b to its own productions to bolster its own TV and movie service. The world’s second largest listed company has already hired Oprah Winfrey, Jennifer Aniston and Reece Witherspoon. The impending scrap over streaming subscribers has pushed up the price of back catalogues dramatically. The producers of evergreen series such as Seinfeld and Friends are reaping tens of millions a year from US online rights alone. Little wonder Reed Hastings, Netflix’s founder, last week admitted he was braced for a ‘‘whole new world of competition’’.
Streaming has become a much more expensive game. Making and acquiring content already eats up seven out of every ten dollars of Netflix’s revenues. If production costs rise more rapidly than subscription income, the company could find the high-yield bond market a much less forgiving place than in the past.
Its debt stood at US$14.8b at the end of December, and the company has a further US$19.3b in long-term obligations to
The Netflix empire is founded on billions of dollars of junk bonds.
producers and rights owners. To make good on these commitments, Netflix will need to borrow more. While the company is profitable on a headline basis, it continues to bleed cashflow, because of the investment in its library of original programming. Netflix is expected to burn through US$3.5b this year and is not forecast to turn cashflowpositive until 2023.
Attracting new subscribers is an imperative if it is to keep hungry creditors from its door. With Disney, Apple and HBO snapping at its heels, Netflix has its work cut out to stop its house of cards from toppling over.
(Simon Duke is Technology Business Editor of The Times)
The Times, London