Can Netflix Manage Ballooning Content Costs Without Hurting Subscriber Growth?

Streaming behemoth Netflix (NASDAQ:NFLX) has changed the media landscape over the last few years, investing vast sums in producing and acquiring content. For instance, content spending over 2018 stood at about $12 billion. However, Netflix revenues and its closely-tracked subscriber metric have not been able to expand as fast as its ballooning content costs, and this has meant that the company is posting negative cash flows while taking on some debt to finance its content ambitions. Moreover, Netflix subscriber growth is also cooling. In this analysis, we break down Netflix content spending over the last few years, compare it with the company’s other key metrics, and its competitors’ content spending.

View our interactive dashboard analysis on Netflix Ballooning Content Costs Have Eclipsed Revenue And Subscriber Growth

Netflix’s Content Investments Have Grown From Under $1 Billion In 2011 To About $12 Billion In 2018

• Netflix’s cash spent on streaming content has grown from under $1 billion in 2011 to about $12 billion in 2018, as the company has doubled down on original programming.

• Note: We calculate the cash spent on streaming content as the difference between “Additions to streaming content assets” and “Change in streaming content liabilities” reported in NFLX cash flow statement.

Streaming Content Investments As % Revenue Has Soared From 27% In 2011 To Over 75% In 2018

• Content spending as % of revenue has also soared from 27% in 2011 to 75% in 2019.
• While content spending has grown at 46% CAGR, revenues have only grown at 26% during the period.

Content Spending Per Streaming Subscriber Has Grown From $36 In 2011 To $81 In 2018

• Netflix’s investments in content have also eclipsed its subscriber growth, with cash spending on content per subscriber more than doubling from $36 per year in 2011 to $81 in 2018.

Netflix Total-Content Assets And Content Amortization Costs Are Also Growing Fast

• Netflix’s total content assets have grown from just about $2 billion in 2011 to over $20 billion in $2018.

• While cash spent on content refers to the investment the company makes in content, it only amortizes (expenses) a portion of this each year in its income statement.
• Netflix typically amortizes 90% of the value of a show within 4 years of its debut.
• Amortization of streaming content as % revenue stood at 48% in 2018.

High Content Spending Responsible For Netflix Declining Cash Flows

• Netflix Free Cash Flows have declined from +$0.3 billion in 2011 to almost -$3 billion in 2018, driven by higher spending on content.
• However, the company has remained profitable, as it only amortizes a portion of these cash costs.

Netflix Content Spending As % Revenue Well Ahead of Disney And AT&T

• Netflix content spending is well ahead of Disney and AT&T’s Warner Media business.
• Warner Media could spend about 40% of its expected revenues on content this year, compared to about 49% for Disney.

Conclusion

• While Netflix’s rapid subscriber growth has partly justified its spending on content, we believe the company will have to be more circumspect about content spends going forward, considering that content costs per subscriber have also been mounting.
• That said, this could prove tricky, as subscriber growth could slow down if the company doesn’t keep updating its library at the same pace, given the mounting competition in the streaming space with the likes of Disney and Apple set to enter the fray.

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