Is A Content Bubble Responsible For Netflix’s $20B In Debt?

You’ve got to spend money to make money. That appears to be the mantra over at Netflix, where the DVD-by-mail service turned mega-streaming outlet has racked up nearly $20 billion in debt expanding its platform to new areas, producing original content, and buying the rights to show other company’s movies and TV shows.

The Los Angeles Times recently took a look behind Netflix’s financial curtain, detailing how the streaming service has changed over the years and how its transformation has added to the company’s debt load.

From investing tens of millions of dollars in new original programing to spending billions of dollars to enter new markets in Asia, Netflix doesn’t appear to be worried about its spending habits.

The L.A. Times offers a more granular look at Netflix’s spending spree in recent years, but here are a few things we found interesting.

Growing Debt

Netflix’s subscriber base isn’t the only thing growing at a quick pace. While subscriptions for the streaming service has nearly quadrupled in five years to 104 million people, so has the company’s debt.

But to keep those subscription numbers up — and in turn make money — Netflix is spending more. The L.A. Times reports that Netflix has amassed $20.45 billion in long-term debt and obligations in recent years.

For instance, the company has $4.8 billion in long-term debt and $15.7 billion in other obligations as of 2017. Just four years ago, Netflix had just half a million dollars in long-term debt and a little more than $5 billion in other obligations.

Expanding Content

In order to continue bringing in new customers, the L.A. Times reports that Netflix is spending billions of dollars on new content.

This year alone, the company is expected to shell out nearly $6 billion in self-produced original series, including spending an estimated $100 million on a Martin Scorsese project and $90 million on a Will Smith movie.

By investing in these programs now, Netflix executives believe they will reap the benefits in the future.

“That’s a lot of capital up front, and then you get a payout over many years,” Chief Executive Reed Hastings said in a recent investor call, as reported by the L.A. Times. “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.”

Still, some of these “original” shows will cost the company even more. For instance, a large chunk of change goes toward licensing TV series and movies from other studios, including those that are considered to be “Netflix Originals,” such as Orange Is The New Black or House Of Cards.

But not all of these investments pay off. The L.A. Times reports that Netflix has recently canceled several original shows.

“Some of them work out great, some of them work out not so great, and we can learn from every single one of them,” said Ted Sarandos, chief content officer, in an investor call this month, as reported by the L.A. Times.

Global Spending

Another large portion of Netflix’s spending comes as the company continues to expand its reach outside of the U.S.

For instance, the L.A. Times reports that Netflix’s global long-term debt levels has doubled to $4.84 billion in the last year. Of that debt, $1.84 billion came by way of notes on the European market.

Still, the company isn’t able to branch out into one of the largest markets, China. Because of regulatory issues, Netflix is instead concentrating on places like Japan and India.

More Debt Coming

Netflix executives have said they want to create a platform with 50% of its offerings self-produced originals. To do this, the company will continue to spend. But that’s worrisome for some analysts, who believe a Netflix bubble could be brewing as the company continues spending to compete with rivals like Amazon.

Amazon’s spending appears to done a smaller scale, however, as Axios reports the company has shelled out $4.5 billion into content this year.

“Nobody is ever the dominant player forever,” Mike Vorhaus, president of Magid Advisors, a media and digital video consultancy, tells the L.A. Times. “I think they’re going to need some luck in not drowning in debt in the ultimate slowdown of growth.”

Another analyst tells the L.A. Times that the company’s spending will eventually catch up to it.

Despite this, Netflix contends that its debt is lower when compared to stockholder value when compare to rivals.