The 10 Billion Dollar Debt, starring… Netflix!
Netflix has debt issues, but it might be too soon to cancel. (image via wikimedia)
When I heard that Netflix was about to take on 2 billion dollars in new debt, I thought, “Wow! That’s a lot of money. I wonder how much debt Netflix already has.”
Then I saw the number: 8 billion dollars already?
If my math is correct, then Netflix is going to carry 10 billion dollars in debt!
And that’s just the beginning. Netflix has obligations to pay out a lot more money than that because of future content creation and other stuff. I’m not a numbers person, so I’m not going to get bogged down in all that. Supposedly, Netflix brings in hundreds of millions of dollars from subscribers every year. Even though hundreds of millions is a lot, it would still take decades to pay off $10,000,000,000 with a fraction of that hundreds of millions every year.
See? This is why I don’t do numbers. Numbers make things complicated, but you need to look at them. And maybe try to understand what they mean.
The problem with debt is that you usually have to pay it back, and sometimes you even have to add interest. I’ve dealt with debt. The interest is what gets you into trouble. Even though I can’t stand personal debt, it’s always been sustainable for the money that I bring in. That might be an issue for Netflix. Its strength (being a great deal for the consumer) might be its weakness (not bringing in enough revenue to sustain its content).
A couple weeks ago, I wrote about a publishing website that offers a monthly subscription for access to premium content for $19.95 a month. That’s more than my Netflix subscription. I wasn’t sure why a publishing website asks for $20 a month. I hope that publishing website doesn’t have $10 billion of debt.
Netflix (and Amazon) can take on a lot of debt because investors think there will be a payoff in the long run. If I were invested in Netflix, though, I’d be kind of concerned. $10,000,000,000 is a lot of money (from my perspective, but maybe not theirs), and I’m not sure Netflix’s future content will be worth that much. Netflix is popular now because you can get a lot of content for around $10 a month, and you can have a bunch of different people use the same account.
I’m guessing that the people running Netflix are smarter than I am, so maybe they have nothing to worry about. Then again, the people running Enron were smarter than me too. I know that because they kept telling me that 20 years ago. The people running the housing loan racket 10 years ago were smarter than me as well. I know that because none of them are in prison. If I had tried a stunt like that, some prosecutor would have made an example out of me. Netflix was smart enough to put Blockbuster out of business in humiliating fashion. I’ve never put anybody out of business, so I know they are smarter than me.
Netflix is counting on sustaining growth, but businesses usually don’t sustain huge growth. There are growth spurts and then everything slows down. If the business is financially prepared for the slowdown of growth, it can still thrive. If the business needs constant growth to sustain itself, then it often collapses. I’ve seen this happen before, but I’ve never tried to implement it myself.
Even though Netflix started the streaming binge, there’s a lot of competition now. Netflix will have to be better than Amazon or Disney or whoever else tries to get in. With so many other outlets creating new content, it’s going to be tough for Netflix to be $10,000,000,000 better than everybody else. Somebody in the streaming war is going to put a lot of money into it and lose or have to merge (which might be the end game, I don’t know). There’s a lot of money to make or lose on content.
I’m not trying to badmouth Netflix. I like Netflix. I want Netflix to stick around, even if streaming content cuts down on the time that people read.
$10,000,000,000. That’s a lot of money. That’s why I like being a writer. I’ll never need that much money to sustain my content creation. I don’t even need paid subscribers. Man, that $10,000,000,000 has to be stressful. I think I’ll go read a book now.
*****
I made the following video while writing this Netflix post, but the video is not about Netflix.
Dysfunctional Literacy 
You know I’m good with counting (to 10, normally, but it happens to be 10 billion, so…)
Here’s why you shouldn’t worry about Netflix owing 10 billion: they have 117 million subscribers, half of them in US. A US subscription is $11-14/month or more – a foreign one may be less, so let’s say an average is $9/month. That works out to $108/year, and times 117 million subscribers that is $12.6 billion a year. If they were a human family, it would be as if it was making $63K a year while paying off a $50K in loans, including mortgage, auto and student loans, and credit card debt – which is a pretty low debt level for an American family.
I think Netflix’s potential problem (using your analogy, which I like) is that you’d have to factor in an additional $50k in new content every year.
Netflix probably won’t keep subscribers without constant new content and will have to keep paying more every year. i’m not sure Netflix can keep up the pace of its subscriber growth. I could be wrong. It’s an interesting problem, but it involves numbers and future projections.
Ugh.