Front and center in such an analysis is how much Netflix, with a market capitalization of almost $15 billion, spends on content. It pays about $500 million a quarter, while running a deficit in free cash flow in the past two quarters, company filings show.
It has $5.7 billion of binding contracts to pay for and license streaming content, of which about $2.4 billion is payable in less than a year, according to its first-quarter filing. Another $2.7 billion is due in one to three years.
In a December pact, Netflix probably agreed to pay more than $350 million a year for Walt Disney Co. movies, estimated Tony Wible, an analyst with Janney Montgomery Scott in Philadelphia. Netflix doesn’t disclose such details, spokesman Jonathan Friedland said.
Warner Bros. Television Group is another beneficiary of Netflix’s spending, providing such dramas as “Revolution.” Lionsgate Television produced one of Netflix’s original series, the prison comedy “Orange Is the New Black.” Netflix has a multiyear pact with Twentieth Century Fox Television to stream past seasons of “New Girl” and has agreed to buy shows from DreamWorks Animation SKG Inc. Netflix also offers HBO’s “Game of Thrones” on DVD.
First-quarter free cash flow was “negative $42 million” because of spending for such shows, Hastings’s April letter to shareholders said. Pachter, whose unit is part of the financial services and investment firm, Wedbush Inc., said Netflix made a conscious decision to spend aggressively to buy new content even if that meant running out of cash.
“They’re financially fragile by choice,” he said. His concern: “If their cash flow continues negative they could have a problem.”
Netflix itself says the same in its last annual report: “To the extent subscriber and/or revenue growth do not meet our expectations, our liquidity and results of operations could be adversely affected as a result of content licensing commitments and accelerated payment requirements of certain licenses.”
Netflix could handle content payments by raising prices to subscribers. Hastings has said he doesn’t favor that. No wonder. In 2011, Netflix announced it would separate its DVD-by-mail and streaming plans, with each available for $7.99 a month. Customers with joint streaming and DVDs plans saw bills jump to $15.99 from $9.99. After that 60% bump, about 800,000 subscribers canceled. The stock hit a low in November of that year of $63.86, down from a 2011 high of about $299. It’s still not back to that level.
If Hastings doesn’t budge on streaming prices, he might have to keep selling stock or debt. That wouldn’t be good for shareholders, Pachter said. In February, Netflix sold $500 million of junk bonds to help fund programming and retire debt.
Netflix also is adding business risks as it licenses more original series that don’t have a proven track record like the hit AMC “Mad Men” series it offers.
“There is always the chance any particular show could flop,” said an April report by New York-based Jefferies Group LLC, a securities and investment-banking firm. “Prior content deals offered a more predictable return profile.”