Everybody knows Netflix (NASDAQ:NFLX) is producing a lot of content. It told investors in its fourth-quarter letter to shareholders that it expects content expenses to reach between $7.5 billion and $8 billion this year -- that's more than any television network.
At a recent investor conference, CFO David Wells said the company will release about 700 pieces of original content in 2018. That includes local language series, series with global appeal, films, documentaries, and stand-up comedy specials, and it likely means Netflix will release more hours of original content than a single person could ever watch within a year.
That's a feat that'd be hard to justify for a linearly programmed network like a traditional cable channel. In fact, most of cable fills its programming schedule with repeats -- which are still a key part of Netflix's value as well. But Netflix's scale and delivery method make it economically viable to produce more content than any one person can consume.
Being everything to everyone
Netflix has already made quite a dent in the market with almost 120 million subscribers. It's also been able to consistently raise its pricing without too much pushback (save one fiasco when it split up the DVD and streaming business). That's a testament to the value Netflix provides at scale.
Netflix's over-the-top model kind of necessitates the requirement to offer something for everyone. Cable networks can get by with niche appeal because they're part of a larger bundle of channels sold by distributors. Netflix is a stand-alone product, which means subscribers can cancel at any time.
But Netflix doesn't think it's done growing.
It's only just starting to move into the bottom end of the 60 million to 90 million total addressable market it sees in the United States. And Wells said there are 700 million and counting broadband households globally that are all potential Netflix subscribers.
The key to winning those new subscribers is to provide unparalleled value to the customer. And instead of offering lower prices like Amazon (NASDAQ:AMZN), for example, Netflix is planning to win more subscribers by investing in more content.
Going from premium product to a value product
If you think about it, there are some markets where Netflix is a premium product. Netflix tries to maintain price parity between regions to prevent customers from gaming the system. That makes the service relatively more expensive in some markets with significantly lower cost of living standards than the U.S.
With just a couple of years in some markets, the content libraries can be relatively slim compared to more established regions like North America. But the kind of content in the library -- high production value with global appeal -- is a premium product compared to common lower-budget television productions in some emerging markets.
In a market like India, for example, Wells noted there are only about 6 million to 8 million consumers that it's really targeting with its current product. By comparison, Amazon is attracting many more subscribers to Prime because it's reduced the price to just 999 Rs (about $16) for the full year, and includes free shipping and music streaming along with video. Amazon CFO Brian Olsavsky noted Prime membership in India grew faster in its first full year than in any other region.
India represents a massive opportunity for Netflix, but it needs to make the service much more valuable in order to attract tens of millions of subscribers in one of the largest internet markets in the world. The same is true for other emerging markets in Asia-Pacific and Africa. To that end, Wells noted the percentage of content libraries in those regions will tip more toward local-language originals than content with global appeal.
The impact is in the cash-flow statement
As Netflix steps up its original content spending, especially local-language originals, the impact is seen in the cash-flow statement. Netflix expects free cash flow to fall to negative $3 billion to negative $4 billion this year -- a significant jump from the $2 billion in negative free cash flow it posted in 2017. If the step-up in content spending pays of in expanding the appeal of Netflix in international markets, it'll be well worth it for investors.
Wells did note he sees the increase in cash burn moderating going forward. The increase in content spending will slow in the future on a percentage basis purely as a result of the law of large numbers. With the global expansion complete and well in the rearview mirror, there are no more completely unused content licenses sitting on the books.
While Wells was hesitant to say Netflix has reached peak cash burn, he doesn't think we'll see another huge step up in negative cash flow like this year.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.