Netflix Has a Spending Problem, and It’s Not Going Away Anytime Soon


Watching movies and TV before Netflix was a real pain. If you wanted to see something specific, you had to schedule your life around when it aired on TV. If you had your mind set on a film, you would either order it through Pay-Per-View for ungodly sums of money or trek out to your local video store in the middle of the night. Talk about inconvenient!

Thanks to Netflix, the way we used to consume media seems positively ancient. What once took careful planning and inconvenient trips to Blockbuster is now reduced to turning on your TV or computer and pressing a button. Instead of high-priced cable packages with expensive premium channels and three-day rentals priced at $5-6 each, you simply pay $8 to 12 each month and you’re given access to thousands of shows and movies. Can you imagine ever going back to cable?

These days, the answer to that question has been a resounding “no.” Pretty much everyone has Netflix and can’t ever think of living without it. From a business standpoint, over 47 million people in the U.S. alone are paying an average of $10 a month, every month, for something they don’t plan on cancelling. That’s over $5.6 billion in revenue, which doesn’t factor in the remaining DVD subscribers or the 36 million people paying for Netflix overseas.

This might sound like Netflix is making a killing, but that’s not exactly true. Sure, they’re profitable and show no signs of slowing down, but there’s a few major roadblocks in their path to immense profitability, and they’re not going away anytime soon.

Netflix is one of the cheapest ways to replace cable, thanks to its relatively low subscription cost and giant streaming library.

Wikimedia Commons
Wikimedia Commons

Who buys cable anymore?

While the service might come cheap to consumers, getting the rights to all those movies and shows available is expensive for Netflix to maintain.

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Imgur

For instance, they paid ABC Television $45 million to get the streaming rights for Lost.

Every show that Netflix rents (or licenses) from other production companies and distributors can only be on the service for a set number of years.

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When those licensing deals expire, they have to be renegotiated for another large sum of money.

This is why Netflix produces their own exclusive shows.

Christian Bertrand / Shutterstock.com
Christian Bertrand / Shutterstock.com

They don’t have to renegotiate deals, and they can the shows/movies on Netflix forever.

Netflix recently announced that they want half of all content on their service to be original, exclusive content.

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Imgur

This would save them from having to make repeated licensing deals in the future and paying each time they renegotiate and renew them.

Unfortunately, the upfront cost of producing so many shows and movies is incredibly high.

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Sure, they won’t pay to relicense them in the future, but they’re paying a lot more to make several seasons or a full-length picture.

According to Netflix head Ted Sarandos, the company is spending $6 Billion on original and licensed content in 2016.

Wikimedia Commons
Wikimedia Commons

This also doesn’t factor in the cost of delivering the content to viewers through server farms and third party content delivery systems, which are also pretty pricey.

Still, with all of their spending, Netflix’s stock seems to be doing okay.

StockTwits
StockTwits

It’s not where it was earlier this year, but it’s up over half a percent as of this writing.


Netflix’s original content strategy will ultimately pay off in the future when they have less contracts they have to renew with outside content producers. While their expenses are fairly high, and don’t show any signs of slowing down, they still have to always have fresh, new content on demand. If they didn’t, what would your alternative be as a viewer? Going to a video store? I don’t think so.

Share this with your Netflix-loving friends…if you can pry them away from Narcos, that is.