The Ugly Truth Behind Netflix’s Record Quarter
Will the coronavirus quarantine boost be a long-term boon for Netflix? Probably not.
From all outward appearances, things could not be better for Netflix. In the first quarter of 2020, its subscriber numbers grew faster than in any quarter, with nearly 16 million new subscribers, and viewing figures are way up as millions of people are locked in their homes with nothing to do but binge-watch TV or catch up on movies. The streaming service scored high ratings and massive social media attention with docuseries Tiger King (64 million household views) and Love Is Blind (30 million views). And to top it all off, this month the network’s stock reached an all-time high of $439 per share, making its valuation higher than Disney.
But things may not be as rosy for Netflix as it would appear.
(Over)spending on originals won’t pay off like it does for legacy media
Take a quick look at the company’s financials and you can see why. Subscriber growth is mostly coming from outside the United States — 85% of new subscribers were international (2.3 million new subscribers from U.S. and Canada; 13.5 million from overseas), where the company faces stiff competition from Amazon Prime and local, entrenched providers and where earnings are subject to the value of the dollar, which hurt revenue in Q1. U.S. subscriptions total around 60 million. Company executives believe they can get to 90 million, but that may be unrealistic. At its peak, cable subscriptions topped out at 68 million, which suggests the U.S. market is close to tapped.
Subscriptions account for the almost $20.15 billion in revenue for 2019, which sounds like a lot — and it is. However, the company is spending boatloads of cash on original programming. Last year, for example, the company spent $14.6 billion on original programming. This required taking on $2 billion in additional debt to help fund it, bringing the company’s long-term debt load to $12 billion.
Netflix used to calculate a “view” based on a member watching 70% of a program. Now, a view is anything over two minutes.