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We get it, Netflix. You're running on debt, bondholders will lose patience

Netflix added 8.3 million net subscribers in the fourth quarter - higher than estimates, and the most in the company's history

Megan McArdle Bloomberg 


The other night, I watched one of the worst movies I’ve ever seen. Normally at this point I would say “spoiler alert,” but this film can hardly be spoiled.

“Open House” is a horror movie that just went up on It involves a recent widow and her son who move to a relative’s mountain house (currently on the market, which is where the title comes from), in order to get back on their feet financially. The only requirement is that they allow the real-estate agent to hold open houses.

The standard horror movie hijinks ensue: strange noises, things that inexplicably move, a pilot light that keeps going out. These events are about as scary as your average episode of “This Old House.” But none of it goes anywhere: They are sad; there are noises; they are still sad; there are some more noises. There is no development of the parent-child relationship or the characters … no escalation of the suspense … the whole thing feels like a series of almost-unrelated events.

Then, suddenly and for no apparent reason, a villain appears. We don’t know what relation he bears to them, or why he might have become obsessed with the pilot light of their furnace. We don’t know who he is, or even what he looks like, because his face is always cut off by the frame, or blurred out in long shot.

The world’s scariest HVAC technician is certainly villainous enough; he spends the third act torturing Mom and kid. Eventually Mom dies. Eventually kid dies. The end.

The audience is left without any of its questions resolved: Who was that man? Why did he torture them? How did anyone agree to greenlight a movie that was totally without a narrative arc? Why did I just fritter away an hour and a half watching it?

And now you may have a question as well: Why would I torture you with details about this execrable film? Well, because released its earnings estimates this week. And this movie illustrates, I think, the challenge facing in its battle to dominate the future of streaming.

My colleague Joe Nocera recently outlined what that battle looks like — taking on lots of debt and effectively “betting the company” every year by binge-spending on content and hoping that that’s enough to drive subscriptions. Like my colleague, I think that’s a smart strategy. As long as it was dependent on leasing streaming rights from studios, was a victim of its own success: The bigger it got, the more content providers worried that the company would murder its rivals, leaving them the only game in town for studios looking to sell streaming rights. So studios made it very expensive for to acquire rights — which is why, for years, Netflix’s streaming movie inventory kept going down.

Owning content keeps in the game. And so far, at least, this strategy is paying off. added 8.3 million net subscribers in the fourth quarter — higher than estimates, and the most in the company’s history.

But as my colleague Shira Ovide notes, those subscribers come at a cost: specifically, the mountain of debt that is taking on in order to fund its content binge. Equity investors may be thrilled to see growing its subscriber base and consolidating its market position, but bond investors don’t really care about the stock price, and they don’t even care that much about the total number of subscribers. What they want to see is “free cash flow,” which is to say, they want to know that will have enough cash on hand to make its future bond payments.

At this point, however, is shoveling cash out the door as fast as it comes in, acquiring and creating content to add to its library. The company has said that it will spend up to $8 billion on content this year. Many commentators have asked whether this is too much for financial stability. But I think we may need to ask whether this is simply too much, period.

The iron law of economics is that almost everything, eventually, reaches the point of diminishing returns. The last French fry doesn’t taste as good as the first; Warren Buffett’s final $1 billion probably hasn’t brought him as much joy as his first million did. And eventually would-be content kings simply run out of good projects to make; after that, they must either stop spending or make some terrible stuff that no one in their right mind would want to watch.

This moment arrives even sooner because isn’t the only company on a buying binge. Everyone is hoping to build a streaming empire. And many of them, like Amazon and Disney, have deeper pockets buffered by other revenue streams.

© Bloomberg

First Published: Thu, January 25 2018. 21:15 IST