×
You will be redirected back to your article in seconds

How Binge-Viewing Could Rock Netflix Stock

Binge viewing of original series might end up accelerating expenditures

Binge-viewing may lead to binge-spending at Netflix, which could eventually see the impact in its stock price.

What went unmentioned among the myriad issues its top execs addressed when the streaming service announced its second quarter earnings last month was a potentially significant shift in accounting practices hinted at in the company’s 10-Q.

“We are in the early stages of original content, and continue to monitor whether the viewing pattern is higher than initially expected in the first few months to suggest that we amortize at a faster initial rate,” the disclosure read.

A Netflix spokesman said the company would have no further comment regarding the disclosure, so here’s a translation: Netflix may need to accelerate spending initially deferred a few years down the road for originals like “House of Cards.”

SEE ALSO: Netflix Inks Pact with The Weinstein Co. for Pay TV Window

While that wouldn’t represent an increase in the $150 million Netflix estimates it has spent to date on original series, an adjustment in its payment plan would lower its estimated earnings per share in the near term, according to Barton Crockett, an analyst with Lazard Capital Markets, and that metric has big implications on Wall Street.

“It would create potential for price swings, given that this is a volatile stock, and accounting for content costs is a hotbutton issue,” he noted, emphasizing that the possible swing would have no impact on Netflix’s cash flow or valuation.

Acknowledging “higher than initially expected” viewing in the disclosure is a vaguely euphemistic way of saying Netflix fears a zero-sum game may be at play; the elevated levels of viewing in the early going may be a sign that not as many will watch later in the window of availability.

Crockett theorized that Netflix may have been caught by surprise by how binge-viewing has shaped demand for its original programming. “Netflix might be accelerating front-end loaded viewing by debuting series all at once,” he added.

SEE ALSO: Netflix Flexes New Muscle with ‘Breaking Bad’ Ratings Boom

How’s that for irony: Netflix, which fancies itself a revolutionary in the TV business, may be forced to bring itself in line with traditional industry bean-counting precisely because of its boldest practice.

While studios typically pay the bulk of the license fee for a series over its first year on the air, Netflix adheres to “straight-line” accounting for its original programming expenses, prorating dollars over the life of the license fee. That strategy is related to the company’s rationale for why it doesn’t share audience data: Divulging how the series performs in its opening days is pointless, because unlike TV networks that monetize ratings in the premiere window, Netflix monetizes over the entire run of the series.

It doesn’t matter to Netflix whether a viewer watches “House of Cards” when first released or years later — and the payment plan reflects that.

But as Netflix now seems to be acknowledging, original series don’t perform fundamentally differently on its own platform than they might on a linear channel — which is what’s prompting the reconsideration of expenditures. Costs that might otherwise be smoothed out across four years get lumpy over the next two, though lower than expected in 2015 and 2016.

For example, Crockett estimates that “Orange Is the New Black” cost $52 million for its first season. What might otherwise amount to $5.2 million spent over the remaining quarters of 2013 would balloon to $13 million with accelerated amortization. Across Netflix’s entire original slate, an investment that would amount to spending $41 million in 2013 turns into $106 million.

As Crockett sees it, Netflix may have mistakenly thought consumption of its original programming would mimic that of its library content. “But we believe there’s a big difference between putting up a previous season of ‘The Walking Dead,’ and a new season of ‘House of Cards,’ ” he says.

More Biz

  • Katie Couric Sheryl Sandberg

    Katie Couric Steamrolls Sheryl Sandberg in Roving Vanity Fair Summit Interview

    Sending a jolt through a luxurious and excessively polite afternoon in Beverly Hills, veteran journalist Katie Couric delivered a relentless series of hardball questions to Facebook chief operating officer Sheryl Sandberg on Tuesday. Speaking in conversation at the sixth annual Vanity Fair New Establishment summit at the Wallis Annenberg Center for the Performing Arts, Couric’s [...]

  • Jussie Smollett

    Judge Refuses to Dismiss Chicago's Lawsuit Against Jussie Smollett

    A federal judge on Tuesday refused to dismiss a lawsuit filed by the City of Chicago, which is seeking to recoup investigative costs from former “Empire” actor Jussie Smollett. Judge Virginia M. Kendall rejected Smollett’s contention that he should not be made to pay $130,000 in police overtime costs, plus $260,000 in damages, because he [...]

  • It Is 'Unlikely’ That PledgeMusic Artists

    It Is 'Unlikely’ That PledgeMusic Artists and Creditors Will Be Paid, Receiver Says

    PledgeMusic, the direct-to-fan marketplace that went out of business earlier this year, was more than $7.4 million in debt when it entered liquidation, and its receiver says it is “unlikely” that artists and others owed money by the company will be paid, according to a report from the bank-appointed receiver. “I do not anticipate that [...]

  • Lori Loughlin

    Lori Loughlin Charged With Bribery in College Admissions Case

    Actress Lori Loughlin and her husband, designer Mossimo Giannulli, were indicted on a charge of conspiring to commit federal programs bribery on Tuesday, in connection with allegations that they paid $500,000 to get their daughters into the University of Southern California. Loughlin and Giannulli already faced charges of conspiring to commit mail fraud and money [...]

  • Gary Newman

    Fox TV Group Alum Gary Newman Joins Attention Capital as Executive Partner

    Former Fox TV Group chairman Gary Newman has joined Attention Capital, the startup venture launched earlier this year by another Fox alumnus, Joe Marchese. Newman and another media biz veteran, Lisa Gersh, were named Tuesday as executive partners of Attention Capital. Newman will focus on acquisition and investment opportunities. Marchese, who previously headed advertising sales [...]

  • Clio-Brand-Storytelling-Award

    Clio Awards, Brand Storytelling Team to Launch 'Storytelling for Good' Award

    Clio, the international advertising awards competition, announced Clio Brand Storytelling, a new program in partnership with Brand Storytelling, a media company exclusively built to support and inspire investment in the practice of brand-funded content. The inaugural Storytelling for Good Award will celebrate branded entertainment and content that promotes or creates awareness for a cause, foundation, [...]

  • Matt Lauer Kurt Sutter

    From Sutter to Lauer, Hollywood Sees a Flurry of Letters From the Edge (Column)

    Let’s talk about the whacked-out letters that hit the media sphere in the past eight days. One was that bizarre mea culpa dropped Oct. 17 by the no-holds-barred showrunner Kurt Sutter in response to getting canned from his series “Mayans MC.” No stranger to complaints of unprofessional behavior on his sets over the years, Sutter [...]

More From Our Brands

Access exclusive content