Much has been made of the off-balance-sheet streaming obligations at Netflix (NASDAQ:NFLX). Many critics see this growing pile of future content costs as a Sword of Damocles, ready to fall at any time and kill Netflix's business model. The grand total is up to $6.4 billion now, for crying out loud! There's no way Netflix will be able to pay these bills!
Call me crazy, but I don't see it that way. Rather than an insurmountable heap of crushing costs, I see an earnest attempt to give investors some visibility into future plans. And I like what I see.
This is the chart that scares Netflix critics:
Yes, the top of these mountainous columns do overshadow the company's annual sales in recent quarters. But you know what? That's five years of future content arrangements we're looking at.
That includes the long-term blockbuster deal with Walt Disney (NYSE:DIS), which will give Netflix exclusive streaming rights to everything the House of Mouse produces. That includes the Star Wars franchise, the Marvel steamroller centered around the Avengers, anything Pixar touches, and, yes, Mickey Mouse, too. That deal kicks in by 2016, placing the obligations in the "1-3 years" category and beyond.
You should see the total column rising significantly in Q4 of 2012, as the Disney deal was announced during that quarter.
You'll also note that the short-term piece of the pie, where bills are due within one year, is staying far below annual revenues. And that's not even apples to apples -- it's trailing revenues vs. forward costs for a fast-growing company. A very conservative view, for sure.
How do these one-year obligations compare to actual costs and revenues one year later, then?
Here, you see that the forward cost projections only recently caught up to actual streaming costs. In the recently reported second quarter, trailing content costs were just 6% above the short-term obligations reported a year earlier.
To put this into perspective, the next-year obligations from the appropriate year-ago period accounted for just 35% of content costs just three quarters ago (analyzing the oldest available streaming costs information). Today, it's 94%.
That little line item has become a reliable proxy for coming content costs -- maybe not quarter by quarter but certainly year by year. Netflix is no longer flying by the seat of its pants but placing lots of firm orders with predictable price tags.
Looking ahead, you can see short-term costs on a fairly gently upward slope. If these numbers are any indication (and I think we just established that they are), then Netflix should spend about $1.1 billion on domestic and international content costs in the back half of 2013. Perhaps a little more if short-term opportunities pop up, but that doesn't seem to be the company's modus operandi anymore. It's all about the long term.