Subscription Video Trends and Challenges [Part Four]

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October 9, 2017

SVOD Trends and Challenges [Four]: Debt-Fueled Growth

Netflix shifts to a less-predictable and far less-profitable business model as they embark on becoming a content creator, rather than an aggregator.

Debt-Fueled Growth

Netflix is historically bad at making a profit. In 2016 for every $8 the company received each month per subscriber, only 17¢ translated into net income. Alternatively, Netflix collected on average $96 per subscriber in 2016, but less than $2 will convert into profits.

Tony Wible, an analyst with Drexel Hamilton, said, “The losses Netflix generates are its biggest competitive advantage. They make it incredibly difficult to compete.”

Netflix is on track in 2017 to improve their net income. However, they have doubled their long-term debt from second quarter 2016 to 2017.

Also, Netflix’s cost of revenue is set to increase another 23% from 2016 to 2017.

Netflix will spend $6 billion on original content production in 2017, up from $5 billion in 2016.

During an October 2016 press junket, Netflix announced that total content obligations in 2017 would reach $16 billion.


As you can see from the graph below, the spread between content costs and revenue is widening.

NFLX_Content_Costs


Irrational Exuberance

It is important to keep in mind that Netflix’s stock is still being traded at a new startup valuation even though the company launched in 1997.

Netflix’s current Price to Earnings Ratio (P/E) is 229. For those uninitiated, that means that the stock price trades at 229 times the amount the company earns in profit. To put this number into perspective, Disney, Time Warner, Comcast, Apple all trade around 17 (P/E).

SVOD Trends and Challenges [Three]: Fragmentation
As the streaming market fragments into dozens of streaming options will Netflix become the Friendster or Facebook of media viewing? (Read More)

On a recent call with analysts, Netflix executives said the company now expects higher free cash flow burn because producing original content consumes more upfront capital. Somewhere a studio executive smiles.

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