Back in 2007 when Netflix first launched it’s streaming service, it was not as practical as it is today. Cell phones were just barely starting to become the single device to replace not only your house phone but your music device and your camera. Just think that in that same year Steve Jobs was launching the first iPhone. So one could say that Netflix’s launch was ambitious and ahead of it’s time but it made it the streaming powerhouse it is today.
Let’s look at some of the numbers. Thanks to the LA Times we have some figures to give us a better idea of how successful Netflix has become. They have about 104 million subscribers worldwide. This number is up 25% from last year and almost four times the subscribers as they have five years ago. It’s content accounts for over a third of all prime time download internet traffic in North America.
Thanks to maintaining that ambitious mentality Netflix has been able to stay ahead of the competition. They have done this by keeping a huge library of television shows and films that viewers love watching for that nostalgic feeling. As well as recently adding a huge variety of original and exclusive content. For example, they have original films like David Ayer’s Bright and their hit series Stranger Things that is aimed to bring in new subscribers. This year they had a big presence at Comic-Con inside and outside of the convention center and they have moved to a bigger facility in Hollywood. With all these positive moves what is the problem?
The problem is that all of these upgrades cost money. That ambitious attitude that we are talking about has them in the hole for a whopping $20.54 billion in long-term debt and obligations. This year alone Netflix is estimated to spend about $6 billion dollars in content. What do investors think of this? They approve, as they are gambling that spending a lot in the short term will result in big payouts later, the classic “you have to spend money to make money.”
Chief Executive for Netflix during a recent investor call that, “That’s a lot of capital up front, and then you get a payout over many years. The irony is the faster that we grow and the faster we grow the owned originals, the more drawn on free cash flow that we’ll be.”
Their goal according to their executives is to increase their original content to about 50% in order to own more of the shows on its platform in order to become less dependent on other studios. This is to decrease their expenses that go to licensing the shows and films that don’t belong to them. Especially as these fees are expected to increase in the next few years. It’s important to note that they still pay fees for their Marvel shows like Daredevil and Luke Cage as well as some of their other popular shows like Orange Is The New Black and House Of Cards which are produced by other studios.
It’s a risky move for the long time streaming service but it’s a necessary one in the long term. Amazon Prime also has significant debt but they have have a booming online retail operation that produces ample cash flow if necessary, while Netflix does not. Their sights are set on reducing how much they spend on fees and growing an audience not only in North America but globally. Netflix’s stock is up about 50% for the year and its net cash outflow is forecast to grow up to $2.5 billion, which is up from $1.7 billion from last year. So as long as they can continue this trend they will be fine, counting on them also decreasing their spending in the years to come.
It will be interesting to keep an eye on this, as Netflix has never faced as much competition as they have recently with Amazon Prime, Hulu and even other networks launching their own streaming services. Like for most people, Netflix is still my go to streaming service for most of my entertainment and that is unlikely to change. Do you agree with this investment strategy? What are your overall thoughts on Netflix? Chime in below!
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Source: LA Times