20 September 2019
Netflix chief executive Reed Hastings said the company had higher-than-expected subscriber and revenue growth in the third quarter. Photo: Reuters
Netflix chief executive Reed Hastings said the company had higher-than-expected subscriber and revenue growth in the third quarter. Photo: Reuters

Netflix plans to spend up to US$8 billion on content in 2018

Netflix’s wagers on original programming and international expansion are paying off as the video streaming service posted higher-than-expected subscriber and revenue growth in an increasingly competitive market.

In the past quarter, the company added 5.3 million net subscribers, beating analysts’ average estimate of 4.5 million. Netflix added 850,000 subscribers in the United States and picked up 4.45 million subscribers internationally. It now has about 109.3 million subscribers globally.

The company forecasts it will add 6.3 million subscribers in the fourth quarter, and its total subscribers will reach 115.6 million by the end of the year.

Netflix boosted its revenue 30 percent over the last quarter, bringing revenue to US$2.98 billion, slightly topping the average analyst estimate of US$2.97 billion. Net earnings jumped to US$130 million from US$52 million a year earlier.

In August Disney announced it would remove all of its theatrical releases from Netflix by 2019 and launch its own stand-alone streaming service. More companies such as Apple and HBO are entering the market and moving deeper into streaming.

Amid the stiffer competition in the content business, Netflix said in a letter to shareholders: “While we have multi-year deals in place, preventing any sudden reduction in content licensing, the long-term trends are clear: Our future largely lies in exclusive original content that drives both excitement around Netflix and enormous viewing satisfaction for our global membership and its wide variety of tastes.”

Netflix announced it will spend US$7-8 billion on content in 2018, up from an earlier estimate of US$7 billion – outstripping the investments expected from rivals Walt Disney’s ESPN (US$7 billion), (US$4.5 billion) and HBO (US$2.5 billion). That would also be an increase of more than 33 percent from US$6 billion in 2017.

The company now has US$17 billion in streaming-content obligations over the next several years, up from US$14.4 billion in the same quarter last year. Streaming-content obligations are current and future costs for content acquisition, licensing and production.

Netflix plans to produce 80 original films in 2018, a big jump for a company that said it produced eight movies in the just-completed quarter.

Its spending on original content comes at a large price. The company burns cash at a faster pace with a free cash flow loss of over US$1.5 billion in the first three quarters of 2017 versus a loss of over US$1 billion over the same period last year.

And it estimates the free cash flow to be negative US$2-2.5 billion for the full year, from negative US$1.7 billion in 2016.

When asked about potential content cost inflation, chief content officer Ted Sarandos made a comparison to professional sports: “It gets very competitive for a handful of folks, those big unicorn shows.”

As Netflix chief executive Reed Hastings explained in a previous interview, “when we produce an amazing show like Stranger Things, that’s a lot of capital up front, and then you get a payout over it over many years. And seeing the positive returns on that for the business as a whole is what makes us comfortable that we should continue to invest.”

But the company appears to have the money to burn. Earlier this month, Netflix raised its prices for some of its subscription plans in the United States and the United Kingdom. In the US, its most popular high-definition plan now charges US$1 more at US$10.99 monthly.

Next quarter the company will release the new seasons of Stranger Things and The Crown. It will also debut its second David Fincher series, Mindhunter. Fincher is an executive producer of House of Cards.

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EJ Insight writer