Netflix’s Albatross of Content Costs
[Commentary] Excitement when Netflix opens its checkbook for original content is understandable, but investors must understand that those checks are mostly postdated. However good its third-quarter earnings, the future bill bears watching.
Netflix snagged content bargains in its early days as a streaming-video company but has had to pay much more recently. Its rights deals in Europe and Latin America are outstripping revenue, making its international expansion a money loser for the time being. But Netflix’s rapid expansion actually understates those costs. In June, it reported that its “cost of revenue” had risen 19% in the first six months of 2014, year over year, to $1.78 billion. It also had $3.25 billion in short- and long-term liabilities for future content. On top of that, though, it had an off-balance-sheet liability of $4.5 billion, also for content. Compared with a year earlier, its total streaming content liabilities rose 21%. As Netflix tries to entice foreign subscribers and enters bidding wars with the likes of Amazon domestically to keep those it already has, expect those liabilities to rise rapidly. Because of accounting policies, the share of its spending that goes to original content shows up even faster as “cost of content.”