Nice try, Netflix

That headline isn't quite right.

Costs rising?

Netflix has been a cash incinerating machine the last several years. The company burned through more than $3 billion in borrowed money last year, at junk bond interest rates, to be a content creator on a large scale. It has plans to burn through that much or more this year, in an environment in which junk bond issuance has dried up, making it much harder to borrow heavily to the tune of billions of dollars the way Netflix has been able to for the last 3, 4 years.

When you have $9 billion in accumulated debt, and you have locked yourself into obligations to spend another $18 billion or so over the next five years, and you don't generate enough money to actually support that level of spending, your problem isn't that costs have gone up. It's that you were living in la la land all along. It's not a coincidence that "costs rising" only became a problem when the credit markets tightened and there was no market out there for more junk bond issuance.

 

All that money spent on creating content and I'm still more likely to just watch Cool Hand Luke or The Big Lebowski again.

 

Oh, I know. There's just so darned much of it, I'll spend 20 minutes filling my saved queue and then give up. I'd have to quit my job, quit sleeping and quit watching live sports just to make a dent. Plus it's so darned hard to find a show my wife and I agree on ... and right now that's "The Marvelous Mrs. Maisel," which isn't Netflix.

 

I'll guess that demand is more than a little elastic for a Netflix subscription. Maybe not to the point that you get massive numbers of people letting their subscriptions go for the extra buck or two at the current level. I will actually guess that a lot of people will give up a lot of other things before letting go of their Netflix subscription. They have people on the hook. But if they reach the point where they start to lose subscribers, let alone deliver on the subscriber growth that it really needs to justify its equity valuation, it's a serious problem for the company. Because built into that equity valuation is a heck of a lot of subscriber growth. The content creation strategy works when they can borrow billions upon billions of dollars at ultra low interest rates and there is a market for the debt because people are forced to reach for yield. When, as you started to see now, yields rise or high-yield debt credit spreads start to blow out, and there is no longer a market for that debt, Netflix can't borrow that way. The catch-22 is if it raises subscription prices to try to cover some of their spending, and the higher fees cost them the subscriber growth they need.