ByMariza, writer at Creators.co
Travel, sushi, and superhero enthusiast. Future professional cat owner.
Mariza

Have you ever wondered how Netflix finances all of those great shows it delivers? The streaming service always seems to be in the spotlight these days, making headlines for original content that ranges from the hit show Stranger Things to Okja, which screened at this year's Cannes Film Festival. Having become a household name that many of us subscribe to, the streaming giant is now reportedly "bleeding cash" to the tune of $20 billion.

Go Big Or Go Home: Netflix's Financial And Creative Ambitions

Uproxx have recently stated that Netflix has $20.54 billion in long-term debt and obligations. The company has been rapidly producing original content in recent years, with a goal to reach an astounding 50% of original content on the platform in the near future. With this strategy, Netflix hopes to lure more subscribers for content that's not available anywhere else - but the plan, as excepted, takes a lot of financial investment. So far, this tactic has been successful in terms of popularity, boasting 104 million subscribers (a 25% increase from last year).

However, to reach their 50% original content target, their cash outflow has actually grown since last year. According to Business Insider,

"The company had said it would [reach] $2 billion, Netflix now says it will be $2 to $2.5 billion (versus $1.7 billion in 2016)

Over the years, the video streaming giant has stacked up $20.54 billion dollars in debt and other obligations, which has caused some economists to find this figure worrisome. They believe that if Netflix keeps investing at the same rate, their bubble is bound to burst.

So, Is The Increased Cash Outflow A Sign Of Success Or Failure?

'House of Cards' (Credit: Netflix)
'House of Cards' (Credit: Netflix)

Whether it's responsible or not, one thing is certain: If Netflix continues to produce shows focusing on long-term growth, expect them to keep spending money, which will increase their debt. Considering the success of shows like Stranger Things, CEO Reed Hastings believes that the up front capital is more than worth the investment.

"When we produce an amazing show like 'Stranger Things,' that's a lot of capital up front, and then you get a payout over it over many years. And seeing the positive returns on that for the business as a whole is what makes us comfortable that we should continue to invest."

Hastings also added that because of their continued success, Netflix will continue their strategy of investing in new content, especially for original series. With this as a key strategy, Hastings explained that they are fully aware of the negative free cash flow that they'll no doubt have for many years

What Is Free Cash Flow And Should Netflix Be Worried?

'Stranger Things' (Credit: Netflix)
'Stranger Things' (Credit: Netflix)

Free cash flow (FCF) basically refers to the money that a company is able to generate after it has spent what is required to maintain or expand its asset base. A positive FCF means that the company is making more than they're spending, whereas a negative FCF means that the company is spending more than they're making. However, it should be noted that a negative FCF isn't an inherently bad thing; it can simply show that a company has been making large investments that could later have a much larger payout.

In short, Netflix isn't worried because they expect their investment to have a payoff in the long run.

"The irony is the faster we grow, and the faster we grow owned originals, the more drawn on free cash flow that will be ... In some senses the negative free cash flow will be an indicator of enormous success."

Netflix's biggest problem isn't their spending on original content, but the fact that a lot of their headlining shows are not exclusively part of the Netflix family. Because of this, Netflix has to pay licensing rights for many of its staple names, like Orange Is The New Black, House Of Cards, The Crown, and all the Marvel projects.

It's also worth noting that licensing worldwide is, as you might expect, rather complicated. Netflix can't stream all the same shows and films in every country because, as they tweeted in 2016, they're "prisoners of territorial licensing."

Their goal to have 50% original content would mean that they'll have issues in delivering those shows in various countries, which is a great solution for the content disparities.

What About Netflix's Competitors?

Recently, Netflix's competitor Hulu acquired all the rights to ABC's classic TGIF lineup, (800 episodes of comedy), including Full House. Since Netflix revived the sitcom with Fuller House, it would have made sense for them to acquire licensing rights to the original. So, it's an unfortunate loss for Netflix that they aren't able to offer the show's original episodes.

Let's also not forget that Netflix has recently canceled a number of original shows like the fan favorite (albeit very expensive) Sense8, The Get Down, and Girlboss. Netflix has also been dropping Fox series, most notably Bob’s Burgers, American Dad, and Scrubs.

With all of this in mind, are Netflix in trouble? Well, not really. They've become immensely popular among subscribers and this will probably continue for the foreseeable future. In fact, the streaming giant's catalog accounts for more than a third of all prime-time download traffic in North America. And in terms of prestige, more than 50 original shows garnered 91 Emmy Award nominations this year, making them second only to HBO.

It's safe to say that as long as Netflix continues making high quality shows such as Stranger Things, Master of None, and A Series of Unfortunate Events, our binging futures are secure.

Which Netflix show can't you live without? Let me know by commenting below!

[Sources: Uproxx]

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