Netflix Is Betting Big On Content. Memberships May Not Catch Up.

Convershaken Staff
April 25, 2017

Netflix is ploughing billions into producing and marketing original movies and TV shows, in order to attract more subscribers to its video-streaming platform. But strong international growth may not be enough to offset slowing domestic gains and rising costs.

Netflix spent $5bn on original content in 2016, plans to invest a further $6bn this year and recently announced a €1bn overseas debt offering. Its efforts have translated into an expanding library of exclusive shows and films for members, from premium dramas such as House of Cards and Stranger Things to endless Adam Sandler comedies. They've also fuelled impressive subscriber growth and financial gains: total paid memberships rose 21% year-on-year to 94.4m in the first three months of this year, driving streaming revenues up 39% to $2.52bn.

However, Netflix increasingly relies on overseas markets for growth - it entered 130 new countries at the start of 2016. International memberships grew 41% year-on-year to 47.9m in the first quarter, driving revenue from abroad up 60% to $1.05bn. In contrast, US memberships only grew 8% to 49.4m, although a price increase helped lift domestic revenue by 27% to $1.47bn.

Investors are often happy to overlook challenges to top-line growth if a company is producing big profits or generating tons of cash that can be used to finance dividends. But Netflix's bosses expect an operating margin of just 7% this year, and anticipate a free cash outflow of $2bn this year. Moreover, they've warned investors not to expect anything to change: they want operating margins "to grow slowly" so the company can spend heavily on production and marketing to fuel member growth, and they predict negative free cash flow "for many years".

Netflix's executives have tempered expectations as they realise the company's main challenge: retaining, let alone growing, its subscriber base will require a steady stream of new movies and TV shows on its platform. Driving international growth will require more investment in foreign-language entertainment and overseas marketing, and competition for content from Amazon and other media groups will only push prices higher. 

It's too soon to say whether Netflix can reach the tipping point where membership fees exceed its annual costs and investments. Modest domestic growth isn't a promising sign. Of course, if a rumoured buyout by Disney materialises, it would have near-endless financial resources, access to an unparalleled cast of characters and franchises, and protection from the scrutiny of analysts and pressure of investors. Either way, Netflix users can look forward to a plethora of entertainment as the platform continues to chase growth.