Perhaps the most interesting aspect of the ongoing original content wars is how upstart streaming providers like Netflix and Amazon will pay for all their new programming. Networks and cable outlets have corporate parents, ad revenue, product placement and product diversification to offset series costs. ABC can absorb a loss on Killer Women as long as Disney sells a few more Mickey dolls.
Netflix is in a different boat. They don’t make jet engines or operate measles-covered theme parks. Their content streams commercial-free. Subscriber fees are the lone revenue source, and no one quite knows how many people fork over money each month to enjoy Netflix’s services.
Whatever that number is, it’s apparently not large enough to fully fund their expansion plans as the company announced Monday that they’ll raise at least one billion dollars in debt for content development and acquisition.
“Over the next few years we expect to continue financing our original content expansion with long-term debt,” CEO Reed Hastings and CFO David Wells wrote in a letter to investors. “As long as the maturities are spread out, and the interest cost is built into our content budgets, we think long-term debt is the best way for Netflix to finance the production of content.”
With Netflix’s announcement, Standard & Poor’s reclassified the company’s credit rating from “BB-minus” to “B-plus,” which sounds like an improvement but is actually a downgrade.
“The downgrade and negative outlook reflects our expectation that Netflix will incur significant discretionary cash-flow deficits over the next several years and that debt leverage will be high during that time.” In layman’s terms, it means they’re borrowing more than they’re bringing in and thus can’t throw revenue around like they used to. What it might mean for Netflix subscribers is a price hike.
Even at $9.99 a month, Netflix remains one of the best deals in entertainment. The existing original series alone — House of Cards, Orange in the New Black, Arrested Development, BoJack Horseman, Marco PoLOL, the one with the guy from The Sopranos — justify the subscription cost. And that’s without factoring in the service’s streaming film library.
There comes a point, however, when investors expect returns. In order to fend off Amazon and become a full-fledged network/cable competitor — Netflix will air 320 hours of new and returning original series this year, as well as original movies (sigh…Adam Sandler), stand-up specials and docs — they’ll need to keep spending. Companies can only leverage so much.
unless that company is an investment bank. If investors get spooked — or the upcoming Nielsen ratings show that fewer people watch their content than estimated — upping the subscription price a buck or two might be a palatable problem solver.
This is all just conjecture for now. The good news is that Netflix will have the capital to continue creating original content for the foreseeable future. For once, the consumer still wins.