Day 6

Netflix or Debtflix? Why the popular streaming service is still in the red

This week, Netflix announced a new series with David Letterman. The company has more than $15 billion committed to new projects in the next five years — but it's currently $2.6 billion in debt. Shira Ovide explains how the revolutionary streaming service could fall into a potentially inescapable money pit.
Netflix is valued at $95 billion CAD but operates with a negative cash flow of $2.6 billion. (STEPHANE DE SAKUTIN/AFP/Getty Images)

Whether it's on TV, personal devices or the stock market, lately all eyes are on Netflix. The company is never short on announcements, and this week was no different.

On Tuesday, we learned the streaming service had lured former Tonight Show host David Letterman out of retirement. On Thursday, Netflix announced the dates for season two of The Crown, the most expensive television series ever made.

But the news wasn't all good. This week, Canadians found out the cost of their service is going up.

In addition, Disney announced its films won't be available to U.S. Netflix members after the end of 2019, though their availablity to Canadian subscribers will be unchanged.

Netflix's stock fell slightly after the Disney news, but as Bloomberg Gadfly technology columnist Shira Ovide tells Day 6 host Brent Bambury, it's unlikely to affect the company's larger plans.

"Disney and Pixar movies have been available on Netflix for only about a year," she says, pointing out that Netflix was wildly successful at attracting subscribers long before it had Disney titles available.

"So arguably it doesn't help but it's not a death blow by any means."

Disney plans to launch a Disney-branded streaming service in 2019. It hasn't said how much it will cost but it will feature entertainment brands under the company's umbrella, including Pixar and ESPN.

Pixar's Inside Out won't be available on Netflix starting early 2019. Disney announced this week that it will end its agreement with the streaming service in favour of creating its own. (Disney/Pixar)

Ovide says the bigger issue is what the move signals about the willingness of television and movie companies to keep selling products to Netflix.

"They now fear that they've created this beast that's killing Hollywood. And so they're going to be increasingly reluctant to sell their best TV shows and movies to any third party whether it's Netflix or Amazon or others going forward," Ovide says, adding that Fox is now choosier about the programs and movies it makes available.

Big gamble on big debt

Letterman's return to TV comes with a lot of fanfare and a built-in audience of millions. At first glance, it looks like a win for Netflix. But if you look from a different angle, you'll see another expensive commitment for a company that's going deeper and deeper into debt.

Former talk show host and comedian David Letterman plans to return to TV with a six-episode Netflix series in 2018. (Brian Snyder/Reuters)

The streaming service is valued at $95 billion (CAD) but it has a negative cash flow of $2.6 billion. Most telling of all is the nearly $20 billion Netflix has committed to projects over the next five years.

"The company bleeds money. It literally has less cash at the end of every quarter than it started with and that's not an ideal set-up for a financially healthy company in the long run," Ovide says.

Despite the cash fire, investors are still bullish on Netflix. It has more than 100 million subscribers worldwide and it will need that number to grow outside North America if it plans to fulfil its ambition to be the first global television network.

It doesn't help but it's not a death blow by any means.- Shira Ovide on Disney announcing an end to its Netflix agreement

"Netflix is available in almost every country in the world, apart from China and a handful of other places," Ovide says.

"It wants to be as successful in big markets like India in Indonesia and Brazil as it has been in North America."

Netflix acknowledges that it has to recreate content tailored to each region for its plan to work. It's a huge undertaking in an increasingly competitive landscape.

Boom or bust

Netflix has already reached iconic status for a media company. By allowing us to stream full seasons at a time, it created a whole new way of watching television. It gave us content without commercials and effectively invented binge-watching.

But with such grand ambitions, Ovide says Netflix faces a very difficult future.

"It's kind of a binary outcome for Netflix and I don't really know which one it's going to be,"she says. 

Reed Hastings, co-founder and CEO of Netflix delivers a keynote address at trade show in Las Vegas, Nevada. Hastings has ambitious, global plans for Netflix. (REUTERS/Steve Marcus)

In scenario A, it's a successful global television network that's as popular in Turkey and Nigeria as it is in the United States and Canada.

In scenario B, the company runs out of investor patience and loses so much programming that it's a shell of what it once was.

"Right now Netflix can pay top dollar to create exciting new programming because they have this long leash from investors to wait out losses," Ovide says. 

"The moment their patience wears thin, when Netflix can't borrow money as cheaply to continue its spending on programming, the moment that ends, the money spigot turns off."

To hear Brent Bambury's conversation with Shira Ovide, download our podcast or click the 'Listen' button at the top of this page.