Netfix – The Economics Behind Your Sunday Night Binge

As another Netflix original comes rolling around in the form of American Vandal, it left me wondering – are any of these “Netflix Originals” actually generating enough subscribers to actually justify the cost of pumping out show after show at a furious rate? The answer is that Netflix is in more than $20 billion in debt according to the LA Times – but as bad as that sounds it isn’t the end of the world. As Disney steers away from Netflix, this accumulation of debt represents something very important, investment (also if you’ve reached this part of the article and you are like “whattttt are these words” I’ll break down the whole economic phrases and stuff like that later). Netflix is still a relatively young company that has exploded this decade, but understanding the finance that keeps your binges going is important as it can give us some direction to the future. In 2017, Netflix claimed that it would release over 1,000 hours of original content (which would cost $6 billion to produce), and with it this has brought some of the most popular shows of the year, with 13 Reasons Why being easily the most divisive and watched show on Netflix this year. The company doesn’t release streaming numbers, but it is easy to gauge from online traction which shows are popular and have likely contributed to membership increases. Each season (or, as most firms would call them, quarter) brings at least one heavy hit-hitter which is supposed to bring more subscribers to the service – this year started with 13 Reason Why, then we had the new season of House of Cards, season three of Narcos, The Defenders, and we now have American Vandal, which gained a lot of shares and views on its trailers online. Closing out the year we will have more Stranger Things, and The Punisher, which both serve to boost money coming in to Netflix through subscriptions. It isn’t till you look at it that you realise there is a constant onslaught of blockbuster content. But the question remains: why would Netflix spend so much on original content when it is leaving them with massive amounts of debt? The answer can be found by looking at Netflix’s Chief of Content, Ted Sarandos, and CEO, Reed Hastings, who have said in the past they want to reach a point in the service where 50% of the content available is original content. If Netflix can reach this point it makes the site a true necessity and a leader among rivals. As Disney pulls away from Netflix to make their own streaming service, we see the greatest challenge in Netflix’s future – as companies pull away with what is considered some of Netflix’s most popular content, it results in cancelled subscriptions. If half the content on the app is original content, firstly it can’t be taken off the service by an outside firm as Netflix own it, and secondly, if shows are removed as other companies set up alternative streaming services it will flood the market with very similar platforms. As Netflix are already market leaders due to an established subscriber base, they will continue to lead. That’s economics there, so I’ll break that down a bit further for anyone totally lost – Netflix was the first big streaming platform to exist: if you ask anyone if they have some access to Netflix, the response will most likely be a yes. This makes them what’s called a market leader, meaning that they have the largest number of users in the market (e.g. Netflix has more subscribers than Amazon Prime). When there is a market leader, other companies will try to compete with this as they are clearly making money out of it, so similar services are set up which takes some of the customers or potential customers that Netflix have. Over time, after many have set up a competing streaming site, the most successful in the market will be the ones who stand out due to their originality and quality. So, relating this back to Netflix, they are spending now on quality content (with reports of $15 million budgets on a single episode for some shows, which is more than the budget for some episodes of Game of Thrones) – in the future they will have the most content and what some people might consider the best. It’s long term thinking, spend now, gain later – it is a big, expensive move, one that is very likely to work. Once Netflix reaches its subscriber goals, that’s all that matters, and sometime in a few years, the tap that is currently flowing out cash will show a bit of restraint. They won’t be paying large fees for outside companies’ shows (e.g. having the likes of Suits is definitely quite expensive to have due to its popularity), and will mix not overly expensive content with some shows from outsiders. The hardest thing for a lot of people regardless of product or service, is stepping away from it and not paying for it anymore – and this is intentional, businesses throw the kitchen sink at you to stay by bombarding you with questions and obstacles when cancelling any monetary payment. The majority generally don’t leave, so once they are, they typically stay – this is what Netflix is hedging their bets on, and it’s a $20 billion bet, but a gamble likely to pay off.