According to a report from Redef.com, by Matthew Ball, Netflix’s ever-escalating, industry-leading content spend remains a point of fear and fascination in the media industry. Each year, Netflix’s subscriber base and revenues grow (an average of 29% and 35% over the past five years), but its content spend grows faster (39%).
And as the company has embraced its streaming business and washed its hands of its profitable DVD business, says the report, (which Netflix stopped marketing in 2013), cash losses have swelled:
CEO, Reed Hastings, has promised negative free cash flow will persist for “many years.” The company also reports more than $9.1B in debt payment obligations (up 93% year-over-year) and has $18B in content obligations (up 27%). As a result, Netflix bears, and competitors claim, the company’s content spend is reckless. Not only does it imperil the company and its stakeholders, they say, but the company’s largesse and imprudence has also destabilized the industry. There’s no way to disprove this allegation, of course, says the report, but it misses the point on what Hastings is trying to achieve.
Netflix’s goal is to have more subscribers than any other video service in the world, and to be the primary source of video content for each of these subscribers. The company doesn’t want to be a leader in video, or even the leader in video, it wants to monopolize the consumption of video; to become TV.This ambition has several important consequences, especially relating to the company’s spend.
#1: Content Ceilings
Netflix’s content ceiling (in terms of volume and spend) is its monetization ceiling. The more subscribers the company amasses and the higher it can push its pricing, the more content it can produce, which in turn drives more subscribers, more engagement and more pricing power. This flywheel is endemic to SVOD, but unique in the history of television. Linear television networks have always been bound by a finite number of primetime slots and the size of the total primetime audience, says the report.
#2: Monopolization Dynamics
Also unique to the SVOD era is the fact that, whether deliberate or not, a dominant market player will crowd competitors out of the market. While watching ABC at 9pm has historically meant missing whatever was airing on a competing network, no network could monopolize time or competition. In addition, the pay-TV bundle meant that most networks benefited from both guaranteed distribution and a substantial revenue floor (i.e. affiliate fees); failing out of the industry was essentially impossible.
Conversely, online distribution encourages audiences to concentrate their watching time and enables networks to monopolize their viewers’ attention. Much of this comes from the fact that unlike pay TV, most online video subscriptions are sold a la carte and on a month-to-month basis. This has four major implications.
On top of this, internet-enabled personalization and on-demand distribution allows a digital network to be all things to all people at all times. No longer are dozens of channels needed to satisfy the various interests of a single zip code. And finally, digital networks are free to air any content at any time, and as such, any consumption lubricates additional consumption and prevents consumption of a competitor.
For the complete industry report, please visit here.