It's no surprise Netflix (NASDAQ:NFLX) will spend even more on content in 2020. The streaming leader is expected to spend $17.3 billion in cash on originals and licensed shows this year, according to an estimate from BMO Capital Markets analysts. For comparison, big new rivals like Disney (NYSE:DIS) and AT&T (NYSE:T) expect to spend around $2.5 billion and $4 billion, respectively.

But the competition isn't forcing Netflix to push the gas pedal on upping its content budget. In fact, the $2 billion increase in 2020 is smaller than the $3 billion in incremental spending investors saw last year. And while BMO analysts expect Netflix's budget to hit $26 billion by 2028, that represents a compound annual growth rate of just over 5% from this year.

There are a few reasons for the slowdown in content spending in 2020 and beyond, despite the increased pressure from rivals. And importantly, slowing content spend growth provides a path to positive cash flow.

Artwork for Stranger Things depicting boys on their bicycles staring into an ominous sunset.

Image source: Netflix.

Why Netflix's content spending won't grow as fast this decade

In 2014, Netflix spent about $3.2 billion on content. That budget looks minuscule today in comparison not only to Netflix's current content budget, but those of its rivals.

But Netflix has made considerable expansions since 2014. It's now available in nearly every country in the world. It's programming its content library for over 160 million subscribers, three times as many as it had at the end of 2014. And while Netflix could still double its subscriber count over the next five years, it's simply not growing as fast on a percentage basis as it did over the previous five years.

What's more, Netflix is focusing on incremental investments in markets where it has the most potential for growth -- emerging markets. And its focus on local programming in those markets enables it to stretch its content budget further. 

For example, CEO Reed Hastings recently committed to investing 30 billion rupees (about $420 million) in local Indian content over the next two years. That's an unprecedented content budget in India -- twice as much as Amazon's spending, and even more than Disney's HotStar. For reference, Netflix spent about $200 million on 20 episodes of Marco Polo.

While Amazon continues to plow cash into new originals all over the world, its licensed content library is shrinking. Disney, AT&T, and others are pulling back content for their own streaming services. Friends has already disappeared from the service, and The Office will leave next year along with several other popular titles.

As Netflix's library of licensed content shrinks over the next couple of years, it's not replacing most of that spending. It's selectively licensing expensive series, like Seinfeld, but it's more focused on new originals and exclusives. Netflix's most efficient content spending comes from the series and films it produces in-house.

Peak cash burn

Netflix's cash burn increased about $500 million in 2019 to $3.5 billion. But management expects 2019 to be the peak of its negative cash flow.

A $2 billion increase in content spending represents an increase of around 13% in Netflix's biggest expense. Meanwhile, analysts expect the company's revenue to improve over 20% this year, about $4 billion. Combined with continued operating leverage, Netflix should see a considerable reduction in its need to continually tap the debt markets over time.

While the new competition and a tepid response to its last price increase makes another price increase unlikely in 2020, it's also unlikely we've seen the last price increase from Netflix. HBO Max is notably more expensive than Netflix's most popular plan in the United States, and Disney+ seems priced artificially low in an effort to scale the service quickly. Another price increase could produce a 5% to 15% jump in revenue per user in developed markets, and even more in relatively low-priced emerging markets.

With the growth in content spending slowing over the next five years and a few levers for it to keep growing revenue, it might not be much longer before Netflix starts pumping out cash for its investors.