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Netflix To Raise $2 Billion In Debt To Fund More Original Content (techcrunch.com)
According to a press release posted today, Netflix is planning to raise $2 billion to help fund new content, including "content acquisitions, production and development, capital expenditures, investments, working capital and potential acquisitions and strategic transactions." TechCrunch reports: The funds will be raised in the form of senior unsecured notes, denominated in U.S. dollars and euros, it said. This debt offering is the sixth time in under four years that Netflix is raising $1 billion or more through bonds, noted Variety, which was among the first to report the news. As of September 30, Netflix's long-term debt had reached $8.34 billion, up 71% from $4.89 billion in the year ago quarter, it said during its last earnings, Variety's report also noted. Netflix recently explained during its Q3 2018 earnings that it needs to continue to invest in original programming in order to remain competitive. "Content companies such as WarnerMedia and Disney/Fox are moving to self-distribute their own content; tech firms like Apple, Amazon and others are investing in premium content to enhance their distribution platforms," the letter also stated. "Amid these massive competitors on both sides, plus traditional media firms, our job is to make Netflix stand out so that when consumers have free time, they choose to spend it with our service," it had said.
Is it a bad thing? It depends.
If I borrow and spend a billion dollars now, and get back $1.2 billion in a year from the things I spent the money on, the borrowing was a good thing: I made more money by borrowing the money and spending it than I would have had I not, and I'm in a position to pay back the debt if I want to. (Or maybe I can re-invest that money into other things and hope for more high returns.)
If I borrow and spend a billion dollars now, and get back just that one billion dollars over the course of five years, I've lost money: the interest cost of the borrowings is higher than the return.
Netflix is gambling that the content they'll spend the money on will bring in more revenue - courtesy of higher subscription numbers - than the cost of the borrowing to produce that content. They've probably done all sorts of projections and estimates to give them a reasonable degree of assurance in that gamble, but ultimately, it's a gamble. If the bet pays off, they'll get more subscribers, and the money to pay off those loans (and then some). If they don't, they're going to be in trouble - either they'll have to raise equity (offer new stock to bring in cash to pay off the loans, diluting existing shareholders), or they'll have to roll over the debt (finding some way to service that debt), or they go bankrupt.
Evaluating all of this is made harder because it depends on their cash flow in the future, not their cash flow right now. If they produce quality content that draws in the subscribers, it can turn around their cash flow from negative to positive (assuming that's the current situation; I'm not an investor in the company, so I'm not paying close attention to their cash flow.) If they don't, well...
But in any event, given that the days of cheap and easy content by licensing old content are gone, they don't have much choice. Either they produce their own content, or they go under - no content means no subscribers. If the content doesn't work, they'll go under, just a little bit slower than they otherwise would have.
The core problem is Netflix's original content costs grow without bounds the more successful it is. Netflix's subscriber count is asymptotic.
The more popular a Netflix series is, the more it costs to continue it for another "season". The same goes for the movies & sequels. Actors, writers, etc. tend to point to the success of a past project and demand a bigger paycheck to churn out another.
In the old model, success yields ticket sales, ad dollars, toy sales, etc. In Netflix's model, success yields nothing. The people who made it a success by watching it are already subscribed. You don't get more money for a second "season" or a sequel. Nor do you get more money by developing other content they might like, because their single subscription gives them everything. Nor do you get ad dollars since there are no ads.
Once you hit a certain point where everyone interested in Netflix has Netflix (or has a friend with Netflix), putting out MORE Netflix or BETTER Netflix doesn't generate more money.
In the long run, Netflix will have to run ads, charge a premium for certain content, stretch releases of "seasons" out over time (they're doing this with certain things already), keep increasing subscription costs, or some combination thereof.
Their content is great but their business model is beginning to look something like a Ponzi scheme. They have to borrow more and more in order to make more new content to both attract new subscribers and maintain their existing ones. However, at some point, they will no longer be able to increase their subscription base fast enough to cover their ever-increasing debt at which point things are going to get very bad very fast as they will haemorrhage subscribers like crazy.
They really need to find a way to pay for the new content from our subscriptions. I would much rather have a lower rate of quality shows over the next 30 years than a huge glut of new material for a few years followed by nothing because their business model has imploded.
I can see it working but it's a big gamble. In a nutshell there are a few categories of funds needed by a business: startup costs (building, enhancements, equipment, etc), fixed costs (your monthly bills including payroll, utilities, service contracts, etc.), and variable costs (depends on the interest, but here it would be the costs to make a film or series - the more films/series, the more it costs). The revenue then goes against these expenses, and there's a break even point where you make X number of widgets and take in enough revenue (from sales, licensing, etc.) to cover the costs.
You would think that Netflix has saturated the market by now, so how does throwing more money at content generate more revenue? Netflix has obviously done some thinking.
More original content would mean less licensing films and TV shows from other companies. And they need a bootstrap to produce enough to begin to be free of other studios and distributors. But then where do we go for all the shows that brought us to Netflix? Maybe it's Plan B.
br/> Original content is still key, but perhaps Netflix knows about other markets, like PPV. I don't have any idea how much people pay for films that were recently in theaters and are now in PPV. It could be that Netflix wants to do more films that are either screened broadly or maybe limited run and then charge a few more bucks to watch them.
Whatever they do it's a lot of money and a big risk. The markets are not looking favorably at tech right now, either. I'd be cautious.
My user name was a mistake. Input wasn't restricted, my bad.
HBO does fine with the model of subscription only.
They seem to be way better at picking winners than Netflix is, and they spend far less on content, but it's definitely a sustainable business model if run well.
It'll be interesting to see if Netflix's model of tons and tons of mediocre content works. I'm not sure it will, because the whole season release model means people aren't so much in sync and therefore shows are less discussed and less of a cultural phenomenon even when they are great (and sone are).
If GoT was on Netflix for example, everyone would be totally out of sync, and there'd be a lot less talking about it, which in turn makes it harder to turn a great show into subs.
Wow, sent an e-mail as suggested when clicking on "use classic" banner, and got a fast response that addressed my msg