Netflix’s Growing Content Obligations
For every $8 per month, Netflix receives from its nearly 84 million global subscribers; over $6 is absorbed by content costs, either original or licensed.
Since Netflix and Hulu starting streaming content in 2007 and 2006, the programming paradigm has shifted dramatically. In the mail-order days, Netflix paid 100% of their content costs to the studios, but streaming is no longer just an extension of the home entertainment market.
Although Netflix has been funding original content for years, the company’s recent announcement to produce 50% original material may have crossed the line with the studios. An overwhelming majority of Netflix’s content is still licensed from the studios.
Netflix is not currently disclosing its content mix between original and licensed programming. In early 2015, original content costs were just under $2 of the $6 per month spent on programming per subscriber.
Cash Flow Burn
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 is laughing.
Overall net income and debt issues that worry some observers were not enough to convince ten brokerage houses to raise their price target after Netflix reported better than expected subscriber data. The stock soared 20% after the news.
Show Me the Money
Netflix is historically bad at making a profit. For the $8 they receive each month per subscriber, only 17¢ translates into net income. Alternatively, throughout 2016, Netflix will collect on average $96 per subscriber, but only $2 will translate into profits.
During Netflix’s October 2016 press junket, they announced that total content obligations in 2017 would reach $16 billion.