Netflix's Content Budget Is Bigger Than It Seems (Netflix Misunderstandings, Pt. 1) (Apr 12, 2018)

• To point, Netflix’s 2018 spend is likely to be closer to $12B. Not only is this nearly 50% more than publicized, it means that Netflix will spend more on non-sports content than any of its traditional TV peers (e.g. Disney, Time Warner, NBCUniversal) – even when their many individual networks are consolidated on a corporate basis.
• What’s more, the disconnect between Netflix’s cash spend on content and amortization expense has grown substantially over time. In 2012, this ratio was 1.1x (cash spend 10% higher than amortization). In both 2016 and 2017, it was 44%.
• The cash-budget ratio reflects the degree to which a company is planning for and investing in a future that’s bigger than its present. As such, Netflix’s cash content spend (which funds content that will release over the next one to three years) tends to be substantially larger than the P&L content costs they recognize (per accounting principles) in that same year.
• As time passes, for example, it becomes easier for any company to estimate the “useful life” of an investment (such as a truck or movie). Netflix is doing the same – but as a result, the company has revised its amortization models several times over the past decade.
• And notably, the traditional media companies don’t suffer from these changes or scrutiny; they continue to deploy standard, stable and well understood amortization models/schedules. As a result, and P&L-based comparisons can be misleading.
• Netflix’s content costs are high in part because it now buys out all the rights (e.g. home video, syndication, EST) for its Originals on a global basis, while traditional networks (e.g. FX or ABC) will typically buy only select content rights and on a single market basis. Furthermore, buying out all rights means that the talent involved in a hit series (e.g. cast, writers, producers) don’t have access to any of the economic upside from participating in a hit series. As such, Netflix must also pay extra (and upfront) to compensate the talent responsible for their Originals for this lost income opportunity (albeit on a risk-adjusted basis).
• What’s more, Netflix CEO Reed Hastings has promised that negative free cash flow will continue for “many years” and the company continues to accumulate debt (raising annual interest expenses) and content liabilities (increasing the amount it’ll need to pay suppliers over time).