Stranger things have happened than a Netflix price increase

There's a countdown on the Netflix landing page designed to bludgeon home the fact that Friday marks the landing of season two of Stranger Things, its supernatural success story from the summer of 2016. The Californian on-demand giant has decided it fancies owning a piece of Halloween this year and here are nine new episodes of mildly terrifying nostalgia to prove it.

Stranger Things not to your taste? Never mind, there'll be a show that caters to it perfectly along in a minute. Sometimes it seems like barely an hour goes by without Netflix announcing a new original, then waiting for word of mouth, combined with an obscene marketing budget, to propel the best of them from niche concern into the super-leagues of mass cultural recognition.

Now with 109 million subscribers worldwide, Netflix does this with a regularity that suggests it is the most efficient hit-machine to date. The situation is a lot more nuanced than that.

For sure, Netflix has been doing extraordinary things for so long now, it makes them seem ordinary. Last week was both a big one and a routine one for the company – formulaic, you might say – as its third-quarter results revealed its subscriber base had swollen by another 5.3 million, its revenues were up 30 per cent year on year and its quarterly net profit had climbed from $52 million (€44 million) to $130 million (€111 million).

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Then it almost casually confirmed that it will spend $7-$8 billion (€5.9-€6.8 billion) on content in 2018, up from a previous target of a mere $7 billion. It’s like the shock twist that you saw coming, but still packs a punch.

At $6 billion (€5.1 billion) in 2017, Netflix was already spending more than any other media company on content with the exception of Disney-owned sports network ESPN. Amazon Prime, for instance, spends less than half this. Now Netflix could be bumping up its bumper outlay by anywhere between a sixth and a third, just like that. For single-nation broadcasters scraping around for coins down the back of the sofa, this is just too bad.

On-demand platforms

Netflix has been open about its strategy for some time. It doesn't want its catalogue to rely on costly licensing deals with rivals, especially as some of those rivals, such as Disney, have or plan to set up their own on-demand platforms. So the percentage of those billions that goes on making its own stuff, which currently stands at 25 per cent, is destined to hit 50 per cent.

With its plans for 2018 including the release of 80 films that it has helped finance, Netflix isn’t only targeting traditional broadcasters. Much of Hollywood now has the hump with Netflix for putting out films on its platform at the same time – or very swiftly after – they have debuted in cinemas. By doing so, Netflix is effectively dismantling the industry’s carefully constructed architecture of release “windows”. Worse, it seems to be disrespecting the Hollywood position that the silver screen possesses a magic and artistry of its own.

But just how is Netflix, which started out as a DVD mail-order company, managing to do all this? Good taste, better data and even stronger algorithms are only part of the answer. The much more prosaic one is that it has borrowed by the bucketload to do it and continues to do so. As this very paragraph was being written on Monday, Netflix confirmed plans to raise $1.6 billion (€1.3 billion) in debt to finance its 2018 content splurge and other “strategic transactions”.

The company already holds long-term debt of $4.9 billion (€4.1 billion) and says it has $17 billion (€14.4 billion) in content commitments “over the next several years”. In a reflection of just how much it must commit upfront to keep its subscriber growth going, its cash flow is consistently negative.

Murmurings

Market analysts look at these numbers, and many other metrics, and come to wildly different conclusions. The company is one of the elite FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) that have outperformed other S&P 500-listed stocks so far in 2017, but have long attracted murmurings that they're far too bubbly to invest in with any degree of comfort. And yet their share prices keep going up and up.

Some believe that Netflix, which has seen its stock rise about 55 per cent in 2017, is especially overvalued. The Netflix-sceptics argue with some conviction that debt is a monster lurking under the bed and it is only a matter of time before it reaches out and grabs the company by the ankles. Sooner or later, the law of the broken clock may come into play.

The bad news is that the simplest way for the company to recoup its investments is through continued upward “adjustments” to what started out as cheap subscriptions. Subscribers on everything other than the basic tier are about to see the cost of Netflix increase by €1-€2 a month. They should probably prepare for a sequel or two.