Netflixonomics: Cash-Burning Machine Blows Billions On Content In 'Winner-Takes-Most' Race

When Netflix published its third-quarter earnings last October, Ted Sarandos, Netflix’s chief content officer forecasted it would spend roughly $7 billion to $8 billion on original content in 2018.

 The Economist, quoting a recent Goldman Sachs equity assessment, states that Netflix could spend $12 billion to $13 billion on original content, which is more than any studio or television network spends on films or shows that are not sports related.

According to the IndieWire, Netflix will roll out 82 feature films within the year, including Noah Baumbach’s “The Meyerowitz Stories” follow-up starring Scarlett Johansson and Adam Driver, and the Sandra Bullock thriller “Bird Box,” while Warner Bros. and Disney will respectively release 23 and ten films to cinemas.

The company is even producing or procuring more than 700 new or exclusively licensed television shows, including 100 scripted dramas and comedies, dozens of documentaries and children’s shows, stand-up comedy specials and unscripted reality and talk shows.

Moreover, its ambitions of global domination are now being realized, as current productions are underway in 21 countries, including Brazil, Germany, India, and South Korea.

In the first quarter of this year, Netflix had 125 million subscribers worldwide, 57 million of them in America. In 2016, the company’s global membership grew 48 percent; last year’s gain was 42 percent. With an average subscription of $10 a month, those customers represent some $14 billion in annual revenue which the company recycles the money back into programming, marketing, and technology—along with billions it must borrow to keep the scheme going.

Goldman analysts believe Netflix could spend an annual $22.5 billion on content by 2022. That would be collectively more than all entertainment spending by all U.S. networks and cable companies.

“We believe the growing content offering and expanding distribution ecosystem will continue to drive subscriber growth above consensus expectations. Based on the pace of both, we’re raising our revenue estimates and price target,” Goldman Sachs analyst Heath Terry wrote in a note to clients Wednesday.

“We believe Netflix’s ability to spend significantly more on customer acquisition while still producing ~4pps of operating margin expansion for the full year, on our estimates, will allow the company to drive additional subscriber growth, particularly in markets where the company’s brand presence isn’t as strong as it is in the U.S.,” he said.

The market values Netflix at $176 billion (as of July 06), which is more than CBS, Comcast, Disney, Twenty-First Century Fox, and Viacom. The Economist notes that some equity analysts recognize the high market capitalization as ridiculous because the company lacks profit, coupled with an enormous $8.5 billion debt load and limited media track record.

Netflix’s debt-fueled content spree has forced its competitors into a merger and acquisition bonanza. AT&T, a wireless giant, acquired Time Warner for $109 billion last month. Now Comcast, America’s largest broadband provider, has made a move to purchase Twenty-First Century Fox from the Murdoch family for more than $70 billion.

Even Amazon, Apple, Facebook, YouTube, and Instagram are all developing programming efforts on their streaming platforms. “The first thought on everyone’s mind is how do we compete with Netflix?” Chris Silbermann, managing director of ICM, an agency that represents some high-profile people who have signed exclusive deals with Netflix.

“Apple wouldn’t even be thinking about this business if it wasn’t for Netflix,” Silbermann told the Economist. “Neither would Fox be in play.”

The Economist pointed out that Rupert Murdoch chose to dissolve his media empire to get out of Netflix’s way. Jeff Bewkes, the former chief of Time Warner, acknowledged after he sold his company that Netflix’s direct connection to the consumer is superior.

According to Sandvine, a network-equipment firm, the explosion in Netflix video streams has gobbled up 20 percent of the world’s downstream bandwidth.

At the center of Netflixonomics, the science of getting people to subscribe to television on the internet, the company’s access to cheap debt has allowed it to deliver a mixture of breadth and depth, of content and distribution.

One of the reasons that Netflix is spending in such haste is that Netflixonomics is a winner-takes-most proposition. People can only spend so much time being entertained by television. If you can provide them with entertainment they genuinely enjoy for that length of time, they will have little reason to pay anyone else for further screen-based entertainment—though they may splash out more for sport, and put up with adverts for news, real or fake. Being big early thus constitutes a first-mover advantage. And the dash towards size has the helpful side-effect of driving up rivals’ production costs at the same time as it eats into their revenues,” said The Economist.

Netflix is “intentionally trying to destroy us, the existing ecosystem,” one Hollywood executive told The Economist.

Netflix has induced an entire generation of American households to cut the cord with cable. Millennials are watching less than half as much cable as in 2010, according to Nielsen data; those in the upper cohort of millennials (25-34) are watching 40 percent less.

Millennials are attracted to the premium content on the video streaming platform that is not offered on cable.

With expensive productions, Netflix has attracted the best writers and directors in the industry to expand its library of original content.

Netflix received 91 Emmy nominations in 2017 and eight Oscar nominations earlier this year. Despite its expanding domestic and international user base and vast amounts of premium content — not found on cable, The Economist notes the company is profitless with billions of dollars in debt.

As Netflix descends deeper into debt to fuel subscriber growth, the company is emblematic of everything wrong with the current debt-fueled Central Bank bubble economy. This is not sustainable...