Should You Be Scared of Netflix's Content Liabilities?

Netflix (NASDAQ: NFLX  ) bears often point to the company's more than $5 billion in streaming content liabilities as a "ticking time bomb" that will eventually pose a severe threat to the company's health. Competitors such as Amazon.com (NASDAQ: AMZN  ) are entering the streaming video market, and the resulting bidding wars have driven up the price of content.

Furthermore, Netflix has recently been growing its library of original content, to differentiate itself from other streaming video services. For example, after Netflix lost the rights to a variety of children's shows from Viacom (NASDAQ: VIAB  ) , it struck back by signing a deal for several original children's series from DreamWorks Animation (NASDAQ: DWA  ) . However, these original series tend to be even more expensive than the content they replace.

The Motley Fool's consumer-goods bureau chief, Isaac Pino, recently sat down with Fool contributor Adam Levine-Weinberg to discuss Netflix's streaming content liabilities and whether they pose a threat to the company. In the following video, Adam explains why Netflix's content liabilities are so high, and what investors should look for going forward.

The rise of Internet TV has given Netflix and Amazon.com opportunities to become major players in the new television landscape. Netflix has been investing heavily in original programming in an attempt to disrupt traditional TV networks, while today's TV industry leaders are looking to bolster their positions. The Motley Fool's new free report "Who Will Own the Future of Television?" details the risks and opportunities for Netflix and its competitors in tomorrow's television market. Click here to read the full report!


Read/Post Comments (4) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 03, 2013, at 6:33 PM, ckgod wrote:

    No. Reed Hastings stated many times they only spend a fixed percentage of income from subscriber fee for content. There is not problem long as subscriber number does not decrease in the future. It's the competitors with less subscribers I'm worry about.

  • Report this Comment On July 03, 2013, at 10:27 PM, TMFGemHunter wrote:

    @ckgod: You are correct that Netflix aims to spend a fixed percentage of streaming revenue on content. However, the company has to make multiyear commitments for some content, which is based on assumptions of how fast revenue (i.e. the subscriber base) will grow.

    If membership growth misses internal estimates, the company's streaming segment margin would fall since the expenses are already locked in. Moreover, at some point competition for content could force Netflix to "overspend", for fear of losing out on long-term deals for important titles. For now, there's no reason to panic, but this is an important risk factor to be aware of.

    Hope that makes sense.

    Adam

  • Report this Comment On July 04, 2013, at 9:21 PM, markgrant1 wrote:

    Thanks Author - first short the stock and then write a negative article so people run for the exit and you can cash-in as they move out.

    Firstly, I'm an accountant as well so we are coming from the same/similar knowledge base.

    Secondly, most of these content provider who are signing long agreements with Netflix are likely doing significant due diligence on both financial and operational information on Netflix. Which as you know is very common when two companies ink a strategic partnership and/or long term supplier contracts.

    So you believe likes of The Walt Disney Company, Turner Broadcasting System, Warner Bros. Television and DreamWorks Classics to name of few of strong brand and well respected content providers got it wrong? I doubt these very popular brands want to be associated with a brand or a partner who is on shaky ground and who's future is uncertain. There is no lack of partners for such strong brands and their rich contents/IP they own, so they don't need to dilute their brand and content by choosing unstable partner.

    Honestly when these contents providers who are the best in the world sign deals with Netflix - I'm confident they are doing difficult task of fielding and understanding Netflix. More importantly whenever they sign the deal they are showing sign of confidence on Netflix and its business model.

    I'm not an expert on Netflix or it's busines model - but I don't need to be because these strategic partners who are signing these long contracts are doing all the hard work to ensure Netflix' model is strong and will not tarnish their brand in the long run.

    Time to go long?

  • Report this Comment On July 05, 2013, at 4:15 PM, AlanPithy wrote:

    In the last CC Reed Hastings also made a very important and not very widely reported comment. He said that NFLX is not going to chase content that is being sold to other providers. This is their answer to the common refrain "there are no barriers to entry" and "anyone can do what NFLX does" and "too much competition" etc.

    By telling the content owners they can choose NFLX or the competitors, NFLX is basically forcing an important distinction. NFLX will pay more, because it can. And the providers want more money, and they want more eyeballs to build their franchise brands especially TV shows and sequels.

    So the providers of the better content will naturally gravitate to NFLX. Those days where the same filmed entertainment could be found on NFLX and HULU and AMZN at the same time are over. This will give NFLX a big competitive advantage.

    At the same time it is a concession - NFLX knows there will be competition, so NFLX is in the powerful spot of being able to define its competitors. They will have the 2nd rate, 2nd tier content. There is a market for that stuff, but it ensures the competitors will remain a distant 2nd or 3rd behind NFLX for a long time to come. And a final note - NFLX had an issue with subscriber retention where some people would sign up for a few months, then drop it, then come back. NFLX strategy of rotating new content in every couple of months hopes to prevent this on/off of subscribers - and since the competitors will be the ones with the more stale, 2nd rate content (for the most part), Reed hopes they will inherit that headache. AMZN won't have money problems but if the plan works it means AMZN will have to burn money to keep Prime going - and Hulu will definitely need to find a financial model in the face of on/off/on/off subscribers.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2523160, ~/Articles/ArticleHandler.aspx, 12/20/2014 9:39:17 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement