Cash for pro­gram­ming fu­els Net­flix’s jour­ney to stream­ing dom­i­nance

The Charlotte Observer (Sunday) - - Business - BY ED­MUND LEE New York Times

Here are some no­table num­bers from Net­flix:

130 mil­lion pay­ing

cus­tomers as of Septem­ber.

$14.9 bil­lion in reve

nue in the last 12 months.

$1.3 bil­lion in profit

for the same pe­riod.

7.6 mil­lion more paid

sub­scribers ex­pected to be added in the last three months of 2018.

23 Emmy Awards this

year, the same as HBO.

Here’s an­other: $18.6 bil­lion.

That’s the amount Net­flix has com­mit­ted to spend­ing on con­tent, in­clud­ing many shows that won’t show up on the ser­vice for months or even more than a year, like new sea­sons of “The Crown” and “Stranger Things” and the much-an­tic­i­pated lineup from the su­per­pro­ducer Shonda Rhimes.

It’s also far more than what tra­di­tional play­ers like the Walt Dis­ney Co., HBO or NBCUniver­sal gen­er­ally spend on en­ter­tain­ment.

But that’s why in­vestors are mad for Net­flix. They’re bet­ting on its un­ortho­dox me­dia model: Spend big now and reap a mas­sive sub­scriber base (and big prof­its) later. Pos­si­bly much later. The ser­vice’s cur­rent tally of 130 mil­lion cus­tomers beat Wall Street es­ti­mates, but in­vestors are ul­ti­mately count­ing on 300 mil­lion, or more.

The size of that num­ber ex­plains why Net­flix is val­ued so highly rel­a­tive to other en­ter­tain­ment busi­nesses. The com­pany’s mar­ket cap­i­tal­iza­tion cur­rently stands at ap­prox­i­mately $156 bil­lion. Dis­ney, by com­par­i­son, is val­ued at about $174 bil­lion.

Those fig­ures look out of whack when com­par­ing the size of the com­pa­nies. Net­flix had $14.9 bil­lion in rev­enue and $1.3 bil­lion in profit for the last 12 months. Dis­ney gen­er­ated $58 bil­lion in rev­enue and $10.1 bil­lion in profit for the 12 months end­ing June 30. (Dis­ney won’t re­port re­sults for its most re­cent quar­ter un­til Nov. 8.)

In other words, Dis­ney made eight times more money than Net­flix, but it’s only worth about 12 per­cent more. An­other way to con­sider it: Net­flix in­vestors are pay­ing about $120 for ev­ery $1 of profit it gen­er­ates. For Dis­ney, in­vestors are pay­ing about $17.

Net­flix is the stream­ing pi­o­neer, but it’s about to get some se­ri­ous com­pe­ti­tion.

Dis­ney, led by Robert Iger, has al­ready in­tro­duced a stream­ing sports ser­vice, ESPN+, and will in­tro­duce an en­ter­tain­ment of­fer­ing next year. The com­pany also spent $71.3 bil­lion for most of Ru­pert Mur­doch’s me­dia em­pire, in­clud­ing the 20th Cen­tury Fox movie and tele­vi­sion stu­dios, a set of ca­ble net­works and – crit­i­cally – a con­trol­ling stake in the stream­ing ser­vice Hulu.

Dis­ney will soon be able to sell access to films such as “Black Pan­ther,” “Avatar” and the orig­i­nal “Star Wars” tril­ogy di­rectly to home view­ers with­out hav­ing to go through Net­flix.

Net­flix is also part of the rea­son AT&T spent $85.4 bil­lion for Time Warner – re­named Warn­erMe­dia – which will un­veil a new stream­ing ser­vice built around HBO by the end of next year.

Those as­tro­nom­i­cal deals put Net­flix’s $18.6 bil­lion con­tent spend in a slightly dif­fer­ent light.

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