Netflix (NFLX 9.29%) isn't afraid to spend cash now for benefits in the long term. It's producing more original series and films in house -- and burning a ton of cash to do so -- but it expects to benefit from its exclusive perpetual global license for that content.
So, why not apply the same philosophy to its marketing expenses? Netflix is reportedly in talks to acquire a small Los Angeles-based billboard company called Regency Outdoor Advertising for more than $300 million.
The move would give Netflix exclusive access to billboards on the Sunset Strip, outside of LAX airport, near the UCLA campus, outside the Los Angeles Angels stadium, and along the oft-congested Los Angeles freeways. But Netflix expects to ramp up its marketing spending starting this year, and acquisitions like this could enable it to get the most out of its spending in the long run.
Originals aren't any good if nobody knows about them
Netflix expects to increase its marketing spend from $1.3 billion in 2017 to $2 billion in 2018. Netflix's explanation for the huge increase in marketing -- "our testing results indicate this is wise" -- doesn't really provide much information.
The simple reason behind the big marketing push this year is that Netflix is trying to use its cash as efficiently as possible. At some point it becomes inefficient to use cash to create another original if nobody knows about the last one Netflix produced; that money would be better used marketing its original series or films. With 700 pieces of original content coming out in 2018, Netflix has a lot of marketing to do.
Netflix is primarily focused on advertising its original content in the United States, where it already has nearly 55 million streaming subscribers. That's greater than 50% penetration of U.S. households with broadband internet.
Most Americans at least know what Netflix is, but they might not have a good reason to subscribe. Getting the message out that Netflix has exclusive original content that caters to every interest is the key to getting the next rest of broadband households onboard.
Why rent when you can own?
Netflix decided to start producing its own original content because the long-term cost benefits outweighed the short-term pressure on its cash flow. In effect, it chose to buy instead of rent, which requires a big down payment up front, but saves money in the long run.
The buy-vs.-rent decision more clearly applies to Netflix's decision to make a bid for Regency Outdoor, where companies literally rent its billboards. Buying a billboard company means Netflix will have free access to its holdings to advertise its latest originals.
Just as importantly, it won't have to worry about competing companies bidding against it. With fewer people watching TV, ad dollars are flowing out of television and into digital and outdoor media. Global outdoor-media ad spending is expected to climb 8% between 2017 and 2020. Buying now can protect Netflix from increased pricing for billboards in the future, as more marketers bid on billboards in order to reach a broad audience.
Netflix takes the long-term approach to building its content library; it should take the same long-term approach to marketing that content. The company doesn't want to keep increasing its marketing spend every year, so finding opportunities to pay once and reap benefits for many years is a clever approach to its marketing challenge.