Netflix Is Burning Cash in Its Shift to Originals

Netflix got a lot of attention last year by declaring its intent to spend $6 billion on content in 2017. But that’s not a true reflection of the cash the company is actually shelling out.

Through about 2011, the money Netflix spent on content each year was roughly equal to the amount the company expenses each quarter in its profit-and-loss statement. However, that changed starting in late 2012 with Netflix’s spending on original content, which is very different from the way it pays for licensed content.

With licensed content, the streaming company has generally been able to arrange to pay in a manner that aligns with the way it accounts for content costs in its P&L statement — a little bit at a time over the life of the content. But with original content, Netflix has to fund the whole expense out of pocket from day one, meaning that almost all of the cash cost is incurred before the content is even available.

source: Company Reporting, jackdaw research Analysis and estimates

As a result, whereas Netflix’s cash outlay on content was once considerably less than its total cost of revenue specified in the company’s income statement, it is 25% to 30% higher as of the last few quarters.

If what Netflix spent on original content relative to its total content expenditure were to remain the same in the near future, that cost wouldn’t necessarily be an issue. But chief content officer Ted Sarandos has indicated he’s looking to raise the portion of original content on the company’s platform to half its total roster over the coming years. That means spending more and more cash up front.

Thus, while Netflix has been profitable at a net income level for a number of years, it’s now burning through cash at a tremendous rate. The company’s preferred metric in this area is free cash flow, and both the dollar amount of losses and the margins those imply have been worsening over time, with a brief blip in the first quarter of this year. Its total net outlay over the last four quarters was $1.8 billion.

source: Company Reporting, jackdaw research Analysis and estimates

This rapid shift from licensed to original content is the single biggest difference between Netflix and, say, HBO, whose spending on originals has remained constant in percentage terms over the past five years. Even Amazon isn’t spending at nearly the same levels as Netflix, and it has a massive e-commerce business to generate cash.

Netflix has publicly anticipated “many years” of negative free cash flow and doesn’t forecast turning that around until it has reached a much larger revenue base. That means the strategy is entirely dependent on the company’s continued ability to grow rapidly and expand its margins. But if its growth trajectory slows or its cost of content increases faster than anticipated, Netflix will find its current ability to keep raising more debt seriously compromised.

Jan Dawson is the founder and chief analyst at Jackdaw Research, an advisory firm for the consumer technology market.

Popular on Variety

More Voices

  • "The Stockholm Syndrome" - Pictured: Rajesh

    Emmys: Is It Time to Give Multicams Their Own Category? (Column)

    The question of whether multi-camera sitcoms are a dying breed isn’t a new one. The few remaining purveyors of the format, including “The Big Bang Theory” executive producer Chuck Lorre, have been asked that question for years. But even as Lorre ventures into the single-camera world with such shows as the Golden Globe-winning “The Kominsky [...]

  • Veep HBO

    Celebrating Julia Louis-Dreyfus, Emmy's Comedy Queen (Column)

    Let’s take a moment to give Julia Louis-Dreyfus some much-deserved praise. As HBO’s “Veep” ends its run — and aims to add a coda to its already amazing haul over the years at the Emmys — the actress is poised to make history one more time this September. All signs point to another win in [...]

  • Emma Watson MTV Movie Awards

    It's Time for the Emmys to Eliminate Gender-Specific Acting Categories (Column)

    As TV and storytelling continue to evolve, does it still make sense to silo male and female performers into separate Emmy categories? Splitting up “outstanding actor” and “outstanding actress” awards as if they’re different skill sets seems like an outdated practice — yet combining them, and eliminating half of the key acting Emmys in the [...]

  • The Good Place NBC

    Broadcasters Committed to Emmy Telecast Despite Cable, Streaming Dominance (Column)

    Here’s what you won’t see much of at the Primetime Emmy Awards on Fox: Fox.  It’s Fox’s turn to telecast the ceremony, yet it’s a somewhat bittersweet affair for the network, which only landed 18 nominations this year. That means few Fox stars will even be in attendance at the Microsoft Theater, let alone onstage, [...]

More From Our Brands

Access exclusive content