Narrative: Netflix is Spending Too Much on Content
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Netflix Plans New Toys, Merchandise Based on Hit TV Shows – Bloomberg (Feb 7, 2017)
This is an interesting but totally logical move from Netflix – I just listened to Disney’s earnings call earlier this afternoon, and was reminded once again of how big a chunk of revenue the company derives from merchandising (not to mention theme parks and other businesses which piggyback off characters from its movies and TV shows). I’ve already seen smaller tie-ins like King Julien showing up on my kids’ yogurt, and it sounds like Netflix has done some more direct merchandising with Hot Topic already too. So this is a very natural evolution, but it’s interesting to see Netflix describe this as mostly about marketing rather than driving a big new revenue stream. In time, it could certainly achieve both, and that’s another helpful way to offset some of the big spending on original content.
via Bloomberg
Netflix reports $2.35B in Q4 revenue, up from $1.67B in Q4 2015 – Techmeme (Jan 18, 2017)
Normally I’d link to a company’s own report on its earnings, but since Netflix’s earnings material is all in non-web file formats like PDFs and Excel spreadsheets, I’m linking instead to the Techmeme cluster of articles on the earnings report. Broadly speaking, this is a great set of results for Netflix – subscriber growth both domestically and internationally was higher than it forecast, with domestic growth bouncing back nicely now after a couple of tough quarters in which price increases were a drag on net adds. The international business is nearing profitability, though Netflix will invest to keep it just in the red in 2017, and margins expanded nicely domestically thanks to those price increases. With short-term growth concerns somewhat alleviated, the main focus returns to Netflix’s content spending and whether it’s sustainable. It had a non-GAAP free cash flow loss of $639m in Q4 and $1.7bn in 2016 as a whole, both massively up from the year before as it invests in original content, which has to be paid for upfront. Over time, that much higher investment will flow through into the P&L too, and continued strong growth is critical for staying ahead of those costs.
via Techmeme
You may also be interested in the Netflix Q4 2016 deck in the Jackdaw Research Quarterly Decks Service.
Eyeballs Are No Longer Enough for Netflix – WSJ (Jan 17, 2017)
This piece is largely speculation – there’s no evidence presented that investors are impatient for Netflix to start churning out bigger profits or reducing its cash burn. Rather, those investors seem to understand that rapid international expansion at the expense of short-term profits is key to longer term success for Netflix, because it drives much faster overall growth and helps spread the cost of content over more users. Netflix’s domestic business is already very profitable on a contribution basis, while its international business is profitable on the same basis in some markets. Growing and getting past the early high investment in customer acquisition in other international markets should put Netflix in the black there too. Netflix definitely does need that growth – at the rate it’s increasing content spending, it has to grow revenues to stay ahead of costs – but on balance I’m fairly bullish about Netflix’s ability to make its strategy pay off.
via Eyeballs Are No Longer Enough for Netflix – WSJ
Netflix Wants the World to Binge-Watch – Bloomberg (Jan 12, 2017)
Though the headline is accurate, the whole point of this article is that Netflix isn’t taking a single global approach to expansion, but instead is focusing on creating localized content for various different markets, with the focus of this article its efforts in Brazil. One of the big challenges for Netflix as it expands is balancing the massive scale economies it gets by offering the same content in many markets against the need to provide culture- and market-specific content to differentiate in individual markets. The latter is of course potentially expensive, but it will be hoping that investing in one major market in a region helps attract customers in other markets in the same region, and Narcos is a great example of more regionally-oriented content. However it pans out, for now Netflix is streets ahead of any other video provider in providing locally relevant content in many markets around the world.
via Netflix Wants the World to Binge-Watch – Bloomberg
Netflix never slowed down in 2016 – Engadget (Dec 23, 2016)
This is a decent summary of Netflix in 2016 – a rapid international expansion coupled with a paring back of purchased content and a ramping up of original content, which is a pretty good summary of Netflix’s strategy at the moment too. The challenge continues to be finding growth domestically, where growth has slowed quite a bit, and driving profits overseas, where growth is strong but loss-making.
via Netflix never slowed down in 2016