
Netflix is $20B in debt. Can it keep borrowing its way to success? - JackPoach
http://www.latimes.com/business/hollywood/la-fi-ct-netflix-debt-spending-20170729-story.html
======
wweidendorf
Very misleading article - per the company's latest 10-Q, they only have $4.8
billion in debt. On a net leverage basis, they are currently around 3.2x net
debt / EBITDA which is down the fairway for most high yield public companies.

The remainder of their "debt" as the article lays it out is in Streaming
Content Obligations and is not debt as you and I would think about it. Yes, it
is contractually committed; however, unlike debt, they likely can default on
their obligations and the only recourse would be a lawsuit for either damages
or specific performance. (There is also no interest payment - as interest
expense on $15.7 billion would be significant relative to their current debt
burden.)

Compared to true debt instruments, which carry covenants that allow the
debtholders to push the company into bankruptcy, the streaming content
obligations very likely do not have any such ability to do so. (From what I
can tell, the cross-default clauses in their debt instruments do not trigger
in the event that they do not fulfill their streaming content obligations.)

~~~
monochromatic
Do the streaming content obligations explicitly say that the "creditor" can't
initiate bankrupt proceedings or something? This seems strange.

------
jondubois
I wonder where the $20B figure came from, Google finance says that they only
have about $3 billion in debt.
[https://www.google.com/finance?q=NASDAQ%3ANFLX&fstype=ii&ei=...](https://www.google.com/finance?q=NASDAQ%3ANFLX&fstype=ii&ei=r_R-
WciXGo6LUtqujcAD) $3B looks sustainable given their net annual income of $200
million but $20B does not - Especially with interest rates going up again.

Whenever I read about a software company needing that kind of money though, I
often wonder why... Especially when I also hear stories about companies like
Whatsapp and Instagram being able to scale their businesses to hundreds of
millions of users using very small engineering teams and advertising budgets.

I've had a recurring thoughts that maybe big tech companies are conspiring
together to hire as many software engineers as possible to make sure that
those engineers don't have any time to build competing products. Software
engineering talent is thus an artificially created scarcity. If that's the
case then I don't think that is sustainable.

~~~
Aeolun
If they have some 100M+ subscribers, wouldn't their net income be at least
600M * 12 = 7.2B? Given around $6 per subscriber per month?

~~~
wrren
That would be gross income, net income is income after all costs have been
deducted. That would indicate that their annual costs are ~$7B, most of which
probably goes towards producing new shows and licensing existing ones.

~~~
abhi3
Actually, 7.2 Billion is the revenue.

Gross Income is Revenue minus Direct Costs, while Net income is Revenue minus
All Costs

------
erikb
Having debt is not a big deal, it's not so different from having investors.

Investor gives you money for guaranteed say in your business strategy. He may
get some interest on his investment or not, no guarantee.

Banker gives debt for guaranteed interest and may get something to say in your
company but usually not.

~~~
loeber
Having debt is structurally completely different from having (equity)
investors. The entire financial incentive, risk, and payout structure behind
taking on debt is unlike that of selling off equity. In this case, Netflix is
_much worse off_ having taken on large amounts of debt. I hope this response
isn't too brusque, but I strongly suggest you read an introductory finance
textbook.

~~~
rayalez
Could you summarize what makes debt worse than having investors?

I'm curious, it seems counterintuitive, with debt you don't have to give up a
part of your company or lose any control.

~~~
continuations
Debt usually comes with strict repayment schedule. If you don't have enough
cash flow to meet the repayment schedule you go into default. The debt holders
force you into bankruptcy. You lose the entire company.

~~~
erikb
Well, does a creditor have to push you into bankruptcy? They seldomly do,
because then they can't squeeze more money or control out of you.

And at the same time an investor could also push you into bankruptcy by
suggesting, supporting or blocking certain decisions.

It's like knight and bishop in chess. True, they work differently, but they
are all just pieces on the same board, used in the same game to achieve the
same goal.

------
thinkMOAR
If Musk can keep living on credit based on 'his company status', i am quite
sure that netflix will be able too.

Though god knows where that 20 billion debt in the article actually comes
from...

~~~
erikpukinskis
Tesla's line of credit isn't due to "status" it's due to past performance.

They have consistently doubled sales and production every 18 months or so
since they began selling cars, and have orders on the books showing at least
as much growth for the next several years.

What "status" do you think Tesla has that makes them a target for creditors?
You think Deutsche Bank just thinks Elon Musk is cool and hip?

~~~
thinkMOAR
Performance/status is more then just black numbers down at the end of the
balance.

The status of super popular by huge volumes of people. So in essence yes
because he is so cool, hip, and also because he creates/thinks of things that
appeal to the mass, and people cannot stop talking about it on birthday
parties and events alike.

disclaimer, i drive a 20 yo toyota and own nothing of tesla.

------
verytrivial
So, assuming Netflix goes belly up at some point, I am MUCH happier they spent
$20B making shed-loads of new content (i.e. paying out to creative and
production people) that will live on than e.g. putting it in a pile and
burning it like the Facebook / Whatsapp $16B "valuation". That value just
disappears IMHO.

------
nstart
Off topic. Was browsing on mobile Firefox. I've revoked permissions to access
the camera. This site asked for permissions to access it. Not entirely sure
why but it might be useful for others to know

~~~
gcp
I didn't get this, but the site is pulling tons of ads from all kinds of
places, so god knows where that was coming from. Enable tracking protection or
use uBlock Origin.

Did you mean you revoked and it still asked, or it asked, and you revoked?

------
Fifer82
$20B looks so innocent, but that is a staggering amount of money. From merely
grazing NH, I feel like Netflix seems to "Secure 2 billion investment" every
couple of months.

I had the impression the company was essentially working as a street sweeper
with a 20 million pound credit card limit.

These documents
[https://ir.netflix.com/results.cfm](https://ir.netflix.com/results.cfm) show
it is picking up 2.5 billion a quarter.

I am pretty speechless.

~~~
rainbowmverse
They're trying to fill the vacuum left by shows they once licensed cheaply and
easily. It's all fanning out to other services on better terms. If they don't
do this, their library keeps shrinking and dropping in quality.

Enough people like Netflix's originals to keep them from losing paying
customers as licensed content flees, so it seems like a wise investment.

------
mnm1
Success is independent of the quality of the product, but if the quality of
the product is any indication, I'd say it's unlikely. After being a Netflix
subscriber for over a decade, I finally pulled the plug. Their "original"
series include some great shows but also include a lot of crap. Almost
everything else is garbage. They got rid of the star rating system which was
the only thing sort of making discovery of the few non-garbage items possible.
Even when they had the star rating system, you couldn't sort by stars because
they didn't want you to see all the garbage in the system. They cannot produce
or license, it seems, new shows fast enough to justify the $10 or so a month
anymore. Licenses expire and good content goes away. The list of problems is
almost never ending and instead of improving the platform, they're making it
worse. Even "House of Cards" was rather disappointing this season. I don't see
them turning this around with one or two good shows every year.

~~~
bshimmin
I will admit I found it hard not to read this comment and wonder about your
sense of entitlement in the face of the vastly privileged situation we live in
now in terms of media consumption. You pay _$10 per month_ to watch high
quality TV from the last few decades as much as you want, whenever you want
(and, goodness me, if you have children, Netflix is an absolute godsend - fire
up _Paw Patrol_ and off you go...); to watch a large and moderately decent
selection of films, often including relatively new releases, whenever you
want, as many as you want; and as if that weren't enough, they even produce
their own content, some of which is actually good.

I remember when, if you wanted to watch a film, you would drive to Blockbuster
and rent it, and you had a couple of nights to watch it or the fees would
start racking up - and their selection was never all that great, and the
availability was limited to how many DVDs or videos they physically had. If
you wanted to watch a TV series, you'd buy the boxset - and before DVDs,
_Friends_ took up about four feet of your bookshelf.

Sure, I've seen a bit of a movement lately from Netflix to Amazon Prime, but
seriously, what we have right now in 2017 is so miraculously much better than
what we had ten years ago (when I had a LoveFilm account and had to rely on
films being sent through _the post_ \- which seems oddly even more antiquated
now than Blockbuster does, frankly), that to describe it as "crap" and
"garbage" just seems crazy to me.

~~~
tanilama
This is typical HN:

Nothing can please me because I am intelligent advanced than the rest of the
crowd.

Instead acting like whiny baby. The suggestion that Netflix get rid of scale
rating is pure conspiracy, without any evidence to back it up.

Reminders:

1\. Youtube Red: 10 dollars

2\. HBO Now: 15 dollars

3\. Amazon Prime: 9 dollars

4\. Youtube TV: 35 dollars

5\. Watch a movie: 10 dollars on average.

Maybe the OP is suggesting piracy? That is the only way I could bring out of
my mind for cheaper price for any (relatively) well produced content.

~~~
Rjevski
Piracy is not a bad deal actually - currently if I want all the movies and
music I'd have to sign up for multiple streaming services, totalling about 50$
a month. And even then, there's no guarantee I will actually get _all_ the
music and movies I want - there's always that one artist/producer that doesn't
want their stuff on streaming services for some awful reason. Not to mention
region locking, etc.

I can't see myself giving up piracy just yet, but I would love it if streaming
services cut the crap and improve their service.

~~~
jamespo
So if Netflix increased their library, cut their prices and subsequently
increased their debt even more you'd consider them?

~~~
Rjevski
If Netflix could provide all my movie watching needs then yes I'll consider
them. As a consumer I couldn't care less about their debt, I just want a
solution that allows me watch movies without stealing them, but until then
I'll happily steal - it's a problem this industry created for themselves so
it's up to them to fix it.

~~~
jezclaremurugan
Crappy service doesn't give a license to steal. While the entertainment
industry has done a lot of harm like all the DRMs etc. the ethical way is to
boycott and not steal. For ex. if you believe in free software use GNU
software - don't steal closed source software.

~~~
Rjevski
Stealing might not have been the right word here. Stealing means you take
something away from someone and that someone no longer has the thing you took.
In this case however I'm not taking anything away, I am merely denying them of
revenue they wouldn't have had in the first place because I am not going to
pay 50$/month for streaming services.

------
lifeisstillgood
I have an odd thought - Netflix is going about its new commissioning process
all wrong. lokking at Netflix from the POV of "innovators dilemma" they are
the low end upstart coming to steal the studio / broadcasters lunch

But having the broadcasters lunch on its lips it is now trying to copy the
studios at their own game - creating high quality must watch content.

I think that's the wrong game.

One of my favourite discoveries on Netflix was "chaos on the bridge" where
Shatner narrated a documentary on the first few years of Star Trek NG. It was
fun, had almost zero cost apart from some talking heads and the researcher
time.

A similar one on Atari, and the rise of Compaq all made me think that
documentaries would be the new magazines - something for everyone's interest
and dirt cheap to make - and with not much skill will eat up 50 mins of my
time as easily as a GoT episode

Just wondering if they are not getting above themselves?

------
amelius
Because of progress of technology, in a few years everybody (with a few
millions to spare) can start a film-streaming business. And then there are the
big guys such as Amazon and Google.

~~~
cm2187
But do you expect end users to pay for a dozen streaming subscription every
month?

~~~
jug
This is what I find so heartbreaking with the surge of news site paywalls. I'm
all for paying journalists and understand the need for quality articles, but
lately I've seen subscriptions on the order of $40/month for a single tech
site! Good luck getting a nuanced, broad worldview covering all your interests
with that. :( I can't spend $100+/month for a few news sites that aren't even
distributed in print. The only way out of this for me is to simply keep using
the free news sites.

~~~
thebiglebrewski
I'm also depressed by this reality :/

------
saimiam
A product like Netflix cannot actually monopolise its marketplace because at
the end of the day, they are selling a very well understood, easily replicated
goods - namely content. Unless we went back to the big studio era when talent
was locked up with multi year contracts, nothing can stop a Hulu from poaching
a great show runner from NFLX.

Under such a scenario, I don't quite see why N belongs with the other big kids
of F-A-A-N-G.

Its long term success is suspect to me, debt or not.

~~~
aphexbr
"they are selling a very well understood, easily replicated goods - namely
content"

No, they're not. They're selling a service that allows you to rent content and
have it stream to you instantly. The content library is what attracts people,
of course, but their core business is selling the service.

"Unless we went back to the big studio era when talent was locked up with
multi year contracts"

Erm, they already produce Netflix Originals, which are exclusively locked up
on there (and their competitors all do the same thing). How does that differ
from your suggestion?

"nothing can stop a Hulu from poaching a great show runner from NFLX"

...and nothing can stop Netflix from getting the licence to a show that used
to be on Hulu. Also nothing to stop them both licencing the same show at the
same time.

"Its long term success is suspect to me, debt or not."

Just Netflix, or do you also think that Hulu, Mubi, Filmstruck, etc. are all
doomed as well? (I left Amazon out because obviously Prime streaming obviously
isn't their core market) If just Netflix, what differs in your view that makes
them more vulnerable to their competition?

~~~
saimiam
Apart from your point about Netflix selling access to content rather than
content itself (which I'll get to), I feel you are making exactly the same
point as I am without your realizing it.

Netflix is trafficking in a commodity over which it cannot have monopolistic
control. Take, for example, your own instance - licensing shows which used to
be on Hulu.

Producing originals isn't something only NFLX has the expertise to do. AMC was
home to some of the best shows of this century. No monopoly for NFLX there.

For NFLX to be spoken of at the same level as FB, Goog, and Amazon, I'd have
thought they had an insurmountable moat - Social in the case of FB, search
relevance for GOOG, and 2-day fulfillment for AMZN. When I don't see a
monopoly, I start to wonder why NFLX is so loved by Wall Street and not
treated as a commodity like any other content channel is.

I suspect NFLX will end up being just another dividend paying stock like a
utility. That's not a failure at all but it isn't ever going to justify being
gushed about along with the other companies in FAANG.

Back to your point about a service which lets me rent content - that would be
true if they were truly a content aggregator which lets anyone including Hulu
serve content to renters and kept a haircut for themselves. Amazon's
Marketplace is a great example of service which is designed purely to act as a
platform for 1st and 3rd party vendors. Obviously, right now, NFLX isn't
interested in this.

~~~
aphexbr
No, Netflix are interested in providing a streaming service where you rent
movies instantly from their catalogue for a fixed monthly fee. Nothing you
said changes this.

You also didn't answer my point - if Netflix's model is doomed, why only them?
You seem to avoid the idea that the entire sector runs on the same models, so
what is Netflix not doing to protect themselves that Hulu, etc. are doing?

I can't speak for Wall Street as I really don't care about that side of
things. You do seem to have a massive crush for them over their competitors,
though, I'm just curious why that is.

"Netflix is trafficking in a commodity over which it cannot have monopolistic
control"

So are a lot of businesses, online and offline. Especially service providers
that run using someone else's content/platform. So what?

~~~
saimiam
> Why only them?

I did initially question their path to success but I later made it clear that
I saw them becoming dividend paying, slow moving utility type companies. I
said that same thing in multiple ways in my reply to you.

The competitors like HBO or Hulu are privately held and are therefore less
susceptible to market sentiment turning against them.

(Also, I may be wrong about this but your tone sound antagonistic to me.
Please don't impute motives like "crush for them over their competitors." Not
only do I not know what you mean by it, I really don't feel like engaging with
anyone who talks like this.)

------
pgeorgep
Netflix can do whatever they want. They are growing at such a crazy rate, they
will Amazon their way to a profitable company (burn billions to make billions)

------
samfisher83
You can look at their latest balance sheet and you can tell all their
liabilities don't add up to 20 billion. Long Term debt is 4.3billion.

------
holydude
Does anyone know about Netflix's publishing of its own content outside of US ?
The trick for me is that at least this could be available to everyone..but for
some reason it was not so when I was looking at netflix few months ago.

~~~
evan_
Part of it is that a lot of Netflix's "original" content is actually just
Netflix acting as the US distributor for stuff someone else has produced-
other countries may get distributed through other platforms.

~~~
vertex-four
The same happens the other way round elsewhere. For example, Orphan Black is a
BBC America production, but is a Netflix Original in the UK and Ireland.
There's a bunch of anime that is branded a Netflix Original too, which just
feels weird.

~~~
dwighttk
huh... and it is on Amazon in the US

~~~
vertex-four
We've been getting episodes from season 5 every Tuesday - I assume you only
have up to season 4 there.

~~~
dwighttk
yeah, looks like it (I don't have prime)

------
gumboshoes
"$20B in debt" is not the same as "carrying $20 billion in debt." Those are
very different business traits!

------
greggman
maybe it's just me but I really hate being tracked by what TV shows and movies
I watch.

I also hate the suggestions and that I can't edit them and ban them. I don't
know why it bothers me less on the computer with say YouTube. possibly because
I can open YouTube links in an incognito window when I don't want it to be
part of my profile.

Let's say some show that stars some actor I detest for whatever reason , or
some show I detest because of what it's preaching. It will be the first thing
I see on my large TV every time I turn it on.

Imagine if every time you turned on your TV you were present with a picture of
your ex with whom you had a bad breakup and no way to take it off the TV
except to wait for Netflix to stop recommending it. I get that type feeling
from almost no where else.

Needless to say I canceled my account.

~~~
greggman
I see this was downvoted, not clear why.

Let me point out that a video store telling someone what videos you rented was
outlawed

[https://en.wikipedia.org/wiki/Video_Privacy_Protection_Act](https://en.wikipedia.org/wiki/Video_Privacy_Protection_Act)

In other words, I'm not the only person who thinks others shouldn't be able to
know your video watching history.

I'd personally like to see it outlawed that sharing a profile of your video
watching history also be outlawed. In other words, while the law above is
about the actual movies I don't want Netflix (or any other company) to be able
to share even the type of movie. It's one thing for Netflix to use that data
to recommend movies. It's another for Netflix to be able to sell a profile of
me (likes action movies) or likes (likes sexploitation movies) or (likes
movies with LGBT themes).

That last one I think really makes the point clear. Netflix should not be able
to out you to other companies and that means it should be illegal for them to
share your profile even if it doesn't include your actual watching history.

I'd argue the same should be true for Google. They should probably be allowed
to profile you and then let advertises say "I would like to target my ads to
people who fit profiles X, Y, and Z" but Google should not be allowed to share
that profile outside of Google.

------
jasonkostempski
Im sure most of the $9 a month I used to spend went to paying for licensed
content but I watched probably 80% original content. I left because of DRM. I
don't know if it would be a money making venture for them but, for $5 a month,
I would subscribe to a Netflix Original content only, DRM free service if they
offered it. Seems like it'd be easy for them to do a trial run of such a
thing.

~~~
aphexbr
You won't get DRM free, because Netflix don't sell you the content, they rent
it. Or, more specifically, they sell you access to the platform to stream the
rented content.

I'm all for DRM-free purchases, but you're never going to get DRM-free
rentals.

~~~
jasonkostempski
Their stuff, and everyone elses, is easily available for download, DRM free,
without a fee of any kind. DRM has never stopped that. Netflix knows that. I
have no doubt DRM is required for every contract they have with other studios,
but they could show they're not fools by allowing me to stream their original
content without having to allow closed, proprietary binaries to run on my
machine to do it. I have no interest in maintaining terabytes of video and
manually managing distribution to multiple device. I don't think many people
would. I'd rather pay the $5 a month. I won't enable DRM in my browser, ever.

