November 24, 2016
Analyst firm Ovum reckons Netflix’s spending on original content is unsustainable and something’s got to give.
Series such as House of Cards, Daredevil and The Crown reportedly cost hundreds of millions of dollars to produce and deliver no immediate return on investment, such as advertising and licensing deals. The only reason they’re produced is to drive up the number of Netflix subscribers, but Ovum reckons the cost is too high.
In a report entitled ‘Netflix’s Current Business Model is Not Sustainable’, Ovum says “Netflix is caught between a rock and a hard place, as it has to spend vastly increasing amounts of cash on producing original content amid a very competitive content production and licensing market, but is unable to raise prices sufficiently to make meaningful profits due to intensifying competition.”
It’s hard to argue with Netfix’s strategy, however. It seemed to have reached the limit of its licensing-driven business model a couple of years ago and moved into original content, which did have a positive effect on subscriber growth. Furthermore, as the Ovum report highlights, with competitors like Amazon also spending big on content Netflix probably can’t afford not to at least match them.
Ovum’s issue is with the numbers, which it says don’t add up. Essentially Netflix is making less money from new subscribers than it is spending on content, so it’s losing money. This is, of course, unsustainable in the long term but plenty of internet companies, including Amazon, have sacrificed profitability for growth and done alright, so the situation is far from black-and-white.
So it all comes down to the exit strategy. If Netflix wants to be a long-term viable business in its own right then this approach clearly is unsustainable. If, however, the plan is to fatten the company up with subscribers for eventual sale to a giant such as Disney, as has been extensively rumoured, then who cares about debt? That’s the next guy’s problem. And judging by the 10x growth in the Netfix share price over the past four years, investors aren’t that bothered either.
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