Netflix Sinks Further in to Debt, Loses 130,000 US Subscribers, Erasing $22b in Market Value

Does this spell Doom for the largest Streaming Provider? Or is this just hype?

Netflix has borrowed heavily to produce original content, since 2014. And now, their total spend on original content matches their public debt.

Netflix spends $15 Billion per year on Original Content, and pays another $13 Billion each year to license content from other studios. Other expenditures include technology and marketing, each costing billions per year.

With revenues only recently reaching $16 billion, Netflix is forced to borrow heavily to produce original content, and maintain their dominant position in the US streaming market.

To date, they’ve accumulated $21.516 billion in debt and have $5.703 billion in shareholder liabilities on their balance sheet.

And to be clear, the accumulation of debt coincides with the company’s decision to begin production of original content in 2013. Their roughly $27b in debt is very close to the $28b spent on Original Content.

But what has changed is the amount Netflix borrows to fund the production of this content. In 2013, $2b per year was a pretty minor expenditure. But today, a $10b spend on original content is barely offset by current revenues on that content.

Up until now, Netflix has pointed to favorable subscriber numbers to justify their potential future value. Last year, Netflix projected they would add 300,000 new US subscribers in Q1 2019. But in reality, they lost 130,000 US subscribers (nearly half that amount).

Netflix/@SamRo Twitter feed

But is this really a problem for Netflix? CEO Reed Hastings has previously predicted subscription counts would peak near 60 million in the US. And at 60.1m current US subscribers, that’s pretty darn exact.

In fact, Netflix began this borrowing binge with a prediction, in 2013, with the release of House of Cards, that competition for licensing would only heat up. And this is a prediction which has proven correct. And if you look at long-term trends, they have met this challenge by reducing their dependence on licensed content from 100% in 2013 to about 45% in 2019.

How could it have gone differently?

In 2018, a median of 129m subscribers spent $15.8b on Netflix services, an average of $10.20 per month (explained by differences in pricing plans, international pricing, and customers who pause their subscriptions).

This left the company with a shortfall of about $7b. This means Netflix lost about $4.52 per subscriber every month, or $54.26 per subscriber per year.

This easily explains Netflix’s recent flurry of price increases. If the provider can figure out how to provide enough additional value to justify an average price increase of $3-$4 per month, while making a modest cut in spending on original content, perhaps break-even is within reach.

Has Netflix Peaked?

In the US, the answer is likely yes. Maybe everyone already has access to Netflix. But that’s not the whole story.

While the media likes to paint the “streaming wars” as a zero-sum game, with only one clear winner, that doesn’t reflect the reality of the streaming market.

2018, via cnbc.com

One study indicates that the average American subscriber watches 3.4 services (free and paid) and pays $29 per month total.

In number of minutes viewed, Netflix leads paid streaming services with 92 minutes per day per subscriber, but trails far behind competitor Youtube, whose previously-disclosed numbers were several times that.

So there is an opportunity for Netflix to increase its share of viewer consumption of streaming media, by increasing the amount of content each subscriber consumes.

Additionally, this shows that the emergence of another powerful streaming platform is unlikely to be a legitimate threat to Netflix. Hulu, for example, could build a sustainable business alongside Netflix, without impacting profitability or subscriber counts, as long as each subscriber continues to purchase multiple streaming services, in order to gain access to more digital content.

For Netflix, International Growth & Retention is Key

This means that at this point, Netflix needs to focus on two distinct problems to maintain market dominance: Viewer Retention and International Growth.

And in this area, Netflix is still moderately strong. Total International Subscriber counts grew by 2.8 million (although they had projected 4.8 million).

However, Netflix was right about one number (and perhaps the only number that matters right now): Revenue. With a prediction of $4.93 billion in revenue for Q1, and actual revenues reaching $4.92 billion, it’s hard to argue that Netflix is loosing their grasp on their own business metrics.

And for a business so keen on Data and Analytics, it would be silly to assume Netflix lacks the tools to understand the mechanics of their own streaming business.

Netflix has been been wrong before, but this is the first time they’ve actually lost subscribers in the US. An optimist might say, after so much success, perhaps a bit of public embarrassment is exactly what a company like Netflix needs to make the tough, controversial decisions that propel it forward into the next decade.

I think it’s too soon to write off Netflix. I don’t remember what I watched on Netflix in Q1, but in Q2 I fell in love with Tuca & Bertie, and finally got around to watching Stranger Things 3 (along with 40.7 million other households) in Q3. And now they’ve been nominated for 117 Emmys (second only to HBO).

With all the positive that’s happened so far in 2019, it’s hard to believe Netflix is really on its last legs. Let’s wait and see how Netflix adapts to recent changes in the streaming market before pronouncing it dead.