We might not recognize Netflix in the coming years. The entertainment company that streams popular movies and TV shows online wants to produce more original content, increase its global presence and enter the cable and movie theater industries. But its ambition to become a tech giant comes at a cost.
Most investors are optimistic about the future of Netflix, especially after the company reported an additional 3.2 million members abroad in its third quarter, exceeding its forecast of 2 million. The stock jumped 19 percent when this news was announced. A month later, Netflix remains 13 percent above its summer price.
The boost in subscribers abroad was welcome news after it only added 400,000 subscribers in the U.S. Netflix faces stagnant domestic growth while slowly ushering long-term members into a higher subscription price. Seventy-five percent of its legacy customers now pay $9.99 per month, up from $7.99 or $8.99. The company promises that all customers will be in the higher price bracket by year-end.
Netflix knows it has reached a plateau of subscribers in the U.S., which is why it is aggressively adding subscribers abroad.
Reed Hastings, president and CEO of Netflix, said the company aims to have 80 percent of its subscribers come from outside the U.S. in January when Netflix became available in 130 new countries.
Revenue for Netflix for nine months ending on Sept. 30 was $6.4 million. Its quarterly global streaming revenue was more than $2 billion for the first time, up 36 percent year-over-year.
Optimism for the company may be misguided. Netflix borrows quite a bit to fund the production or rights to original content. The company has roughly $12.4 billion in total liabilities and stockholders’ equity and $2.4 million in long-term debt, as of Sept. 30. It previously had $7 billion in total liabilities and stockholders’ equity and less than $900,000 in long-term debt at the end of 2014.
Despite mounting debt, the company shows no signs of slowing down its growth. Netflix plans on spending $6 billion in 2017 to produce more original content. This budget comes only second to ESPN, which is estimated to spend $7.3 billion next year. Amazon is expected to spend $3.2 billion after announcing its plans in July to double spending on video content and triple spending on originals in 2017.
David Wells, CFO of Netflix said the company aims for 50 percent of its content to be original at the Goldman Sachs’ Communacopia conference in September. No deadline for this goal was ever mentioned. In last month’s earnings call, Wells backtracked from that original comment.
He said, “My comment about 50 percent was more grounding people towards the earlier comments that we made about 20 percent or 30 percent.”
Perhaps Netflix doesn’t want to be underestimated. It recently expanded into the broadcast and movie theater businesses.
Netflix signed its first broadcast agreement in May with Univision, the largest broadcast media company for Hispanics in the U.S., to air Netflix original series “Narcos” and “Club de Cuervos.” The companies are also co-producing a new drama series called, “El Chapo.”
Netflix has a long-term deal with iPic allows Netflix to show 10 original movies on the big screen in New York and Los Angeles. There is also an option to screen movies in iPic’s 13 other locations.
While these two deals signify a strong desire to diversify, Netflix is still outspending its budget. To succeed, Netflix needs award-winning original content and the continued addition of global subscribers – if it expects to minimize its debt and beat competitors with deeper pockets.