Netflix in Content Crosshairs

Lost in Netflix’s strong third-quarter subscriber growth numbers was the streaming media giant’s surprise revelation about the ownership status of its original content.

With Netflix spending upwards of $12 billion on original content in 2018 – underscored by $18 billion in third-party content obligations – the service said its alarming negative free cash flow is about to level off.

To assuage naysayers, Netflix (on page three of the shareholder newsletter), disclosed the ownership status of original programing – a dynamic that will continue to change as the Walt Disney Co. pulls original movies and related content from Netflix for its own pending over-the-top video platform.

Netflix says it has three major categories of content: licensed non-first-window content, such as “​Shameless​”; licensed original first-window content, such as ​“Orange Is the New Black”(​owned and developed by Lionsgate), “Ozark” (Sony Pictures Television) and “Insatiable” (CBS); and owned original first-window content from its own studio, such as ​“Stranger Things​.”

The latter category also includes “Big Mouth,” “The Ranch​,” “​Bright​,” “Godless,”​“The Kissing Booth​,” ​“3%,”​“​Dark,”​“​Sacred Games”​and “Nailed It​.”

Within those categories there are lots of subdivisions and per-territory treatments, but those are Netflix big three content buckets.

Netflix claims the classification of content will help reduce its reliance on outside studios, provide greater control over content it creates in-house (i.e., long-term global rights), increase brand/consumer product tie-ins, and lower costs (avoiding third-party studio mark-ups).

“To do this, we’ve had to develop new capabilities to manage the entire production process from creative support, production planning, crew and vendor management to visual effects, to name a few,” Netflix management wrote in the letter.

At the same time, Netflix is staking its future largely on proprietary content, whose popularity is at the whim of an increasingly fickle consumer.

Indeed, with the exception of Emmy-nominated “Stranger Things” and “Godless,” most of Netflix’s award-nominated original content is third-party sourced. The rest is a “hot mess,” according to Wedbush Securities media analyst Michael Pachter.

“We think it is downright quixotic of the company to presume that it can produce compelling content that will replace the licensed content it currently displays from major studios,” Pachter wrote in a note.

Pachter believes that should Netflix somehow default on its mushrooming debt, creditors would be hard pressed to convert any of the content into cash, particularly any of the capitalized content that is owned by others.

“It is simply impossible to comprehend how Netflix has been able to capitalize over $18 billion of its content spending with so few compelling owned original television series and films,” he wrote.

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