Netflix rules as S&P 500’s top stock spurring bubble talk

Footnote Disclosure

Netflix, which later removed payment holds from the count, promised to define total subscribers in future filings. It did so -- in footnotes. Its first-quarter report filed April 26 has such a footnote, which isn’t included in the shareholder letter announcing results.

Amazon, whose video service is a small part of the total company, doesn’t disclose subscriber numbers. It has fewer than 10 million U.S. customers, estimated Deana Myers, a senior analyst at SNL Kagan. Hulu, which isn’t publicly traded, disclosed more than 4 million paying U.S. subscribers in the first quarter, according to its website.

The SEC told Netflix in two letters last year that investors could benefit from knowing just how much the company was spending on content every quarter, considering “the magnitude of this cost component.” Netflix successfully resisted, arguing it wasn’t required by the rules to disclose and that investors would be hurt more than helped because competitors would benefit.

“A deeper understanding of our content acquisition costs would assist competitors in designing and implementing their content deals,” it wrote on Oct. 24, 2012.

Now, Netflix tells investors it spends $2 billion a year on content. SEC filings show it added $591.9 million to its content library in the first quarter, after spending $2.5 billion in 2012 and $2.3 billion in 2011.

Total Liabilities

Netflix’s total liabilities, recorded at $3.6 billion, would be at least $3.3 billion higher if all of its contractual obligations for content were on its balance sheet, based on data in its latest quarterly filing. Netflix said the $3.3 billion doesn’t have to be reflected on its balance sheet yet because it doesn’t meet criteria for asset recognition.

Disclosures by Netflix have sometimes confused analysts following the stock. Take “Netflix Originals,” a term the company uses for shows such as “House of Cards.” Though they premiere on Netflix, the company doesn’t own them and can’t make money from selling or licensing them to third parties.

Rival Amazon is now offering “House of Cards,” which is owned by Media Rights Capital, an independent film and television studio partly backed by Goldman Sachs Group Inc. It charges $1.99 an episode on its pay-per-view service. It also sells a DVD version.

Arms Race

Hastings, who told a 2011 UBS AG conference that he’s in an “arms race” with HBO to dominate Web-based TV viewing, is arguably running a different, less lucrative business from its designated rival’s pay-TV and production operation, which produced income of $1.6 billion last year. Netflix is technologically closer to Hulu LLC or Amazon’s online video service because it is accessed online on demand through computers or smartphones or by mail in DVD format.

Microsoft Corp., Google Inc., Apple Inc. or Comcast Corp. could start a successful competitor to Netflix, Bernstein analyst Kirjner said in his July 15 report.

“We believe the competitive threat is one of the greatest blind spots for Netflix investors,” he said.

One famous Netflix holder has had a happy experience with his investment. Sort of. Billionaire financier Carl Icahn made a $168.9 million bet on Netflix stock and options in October. His play: Microsoft, Amazon or Verizon Communications Inc. might be interested in buying Netflix amid a “great consolidation” coming to the business of streaming movies and TV shows.

Then he turned a little sour. He lambasted Netflix’s “poor governance” in November after it adopted a poison pill to deter such acquirers. He returned to the pro-Netflix camp after stock price increases this year produced a huge profit for him.

“When you make $600-$700 million, you don’t punch the CEO in the face,” Icahn, 77, told Bloomberg News in March.

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