Netflix (NFLX 1.48%) has bought its way into a leadership position in the content space. Unlike key rival Walt Disney (DIS 0.19%), which has been amassing its content library since 1937 when it released "Snow White and the Seven Dwarves," the streaming leader has only been building its library for the past several years.

A streaming company needs programming that people want to watch to win and keep subscribers. Netflix started out by licensing that content, but it is being forced more and more to produce its own originals.

That's expensive, and an increasingly crowded marketplace where seemingly every entertainment company has launched (or plans to launch) a streaming service, hits are harder to come by. It's a reality that (along with international expansion) has pushed Netflix to spend more each year, arguably for diminishing returns.

A chart shows how much Netflix spends on cotent.

Image source: Statista.

How big is Netflix's spending problem?

It's hard to know what Netflix content has succeeded and what has failed. The company only releases vague data on viewership that doesn't necessarily translate to happy customers. As many as 100 million people may "watch" the new Adam Sandler movie, but when the company defines watching as two minutes of viewing, it's hard to know if the film was actually popular.

You can infer some meaningful viewership information based on what the company continues to spend its money on. For example, it keeps making Sandler movies, so those probably pay off. The same seems to be true of big-budget action movies.

The problem is that Netflix's content budget keeps going up, and it's spending nearly as much on content per year as it takes in in overall revenue. As you can see in the chart above, the streaming giant spent $14.61 billion on content in 2019. For fiscal 2019, the company reported roughly $19 billion in revenue and a record negative $3.3 billion in free cash flow (FCF).

Netflix does expect that number to improve. It gave some color on its cash picture in a fourth-quarter letter to shareholders from CEO Reed Hastings:

For 2020, we currently forecast FCF of approximately -$2.5 billion. Along the way, we'll continue to use the debt market to finance our investment needs as we did in Q4 '19, when we raised $1.0 billion 4.875% senior notes and €1.1 billion 3.625% senior notes, both due in 2030. With our FCF profile improving, this means that over time we'll be less reliant on public markets and will be able to fund more of our investment needs organically through our growing operating profits.

That sounds nice, but meeting those goals requires accelerating growth, raising subscription prices, or getting more efficient when it comes to spending. The first seems unlikely given the company's already significant growth -- and the second has proven to work, but there are significant limits to how much you can charge before subscribers leave.

The key for Netflix is getting better at producing content people care about. Tha's easier said than done when the company has to work without the intellectual property (IP) safety net that allows companies like Disney to launch shows it more or less knows will have an audience.

The Netflix home screen.

Netflix is spending tens of billions of dollars on content. Image source: Netflix.

What can Netflix do?

Netflix has taken a "more is more" approach to content. It releases a lot of shows and movies, and many of them seemingly disappear without making much of a mark.

Disney, on the other hand, has a fairly limited set of original titles planned for its streaming service. The difference is that when it launches an original show using characters from the Star Wars, Marvel, or Pixar universes, those programs have a built-in audience.

Nearly every Disney series planned is an event. That means the company can spend big money on a series and know it's getting a good return on its investment.

Netflix, on the other hand, has to take a lot of shots, and it's going to fail quite a bit. Those risks can be mitigated by working with major stars and brand-name directors and showrunners, but the reality is the company should focus more on promoting quality shows than simply producing a ton of programming.

If Netflix hopes to make money, it almost certainly needs to spend less money on content. It can do that if it puts more effort into developing home runs and not settling for singles and strikeouts. The company should also at least consider following Disney and releasing potential hit shows on a one-episode-a-week schedule.

Disney's "The Mandalorian" was a news story each week as episodes were released. Netflix hits like "Stranger Things" have a much shorter shelf life in the media, and that hurts the shows' chances of building a new audience. Netflix could spend less money on content and be more useful to its subscribers. It just has to choose to be more disciplined and work on having a better hit-to-bomb ratio.