Founder and CEO of Netflix Reed Hastings. Photo / AP
Founder and CEO of Netflix Reed Hastings. Photo / AP
COMMENT:
Netflix is one of the big tech companies it is still possible to feel good about.
Streaming old episodes of Friends is not going to trigger an existential crisis about privacy, misinformation and the dangers of the digital world. While governments wonder how to tackle the fraught issues thrownup by our online lives, Netflix has stayed under the radar.
That lack of political heat puts the company in a position to speak out on polarising issues.
This week, Netflix declared that it would rethink its investment in Georgia if the US state's anti-abortion law takes effect. "We have many women working on productions in Georgia, whose rights, along with millions of others, will be severely restricted by this law," said Ted Sarandos, chief content officer. As the first of only a handful of companies to take a stand, Netflix is due praise.
Such interventions only carry weight because, in the space of just two decades, Netflix has transformed from a start-up into a company with a US$150 billion ($229.5b) market capitalisation.
And yet, while Netflix has not been dragged into the debates over data and privacy, there are reasons for investors not be so forgiving of its business model.
The company is burning through colossal amounts of cash to amass the TV shows and movies needed to hook viewers. It is not unusual to see a new, fast-growing Silicon Valley company with costs exceeding the cash it generates — but Netflix has outgrown that camp.
Negative cash flow from large, established companies has re-emerged as a sensitive issue on the West Coast thanks to Uber's unhappy debut on the stock market. When the car-booking company tried to justify its cash burn by comparing itself to Amazon it was shouted down.
Netflix is burning through colossal amounts of cash to amass the TV shows and movies needed to hook viewers. Photo / Bloomberg
Amazon may have delivered years of losses but, unlike Uber, it was generating the cash to help maintain its giddy growth.
Netflix does not throw off the cash required to support a business model whose ambition has taken it from scrappy DVD rental business to the world's most successful streaming service.
Yet the unwelcome third act for Netflix has been the arrival of the likes of Disney, Amazon and Apple each intent on building rival streaming services with their own content.
What's more, Mediaset, the Italian broadcaster controlled by Silvio Berlusconi, this week announced a stake in ProSiebenSat.1, Germany's largest commercial broadcaster, in what was seen as the first step in an effort to create a pan-European competitor.
As threats grow, Netflix is paying billions of dollars to build a catalogue of original programmes such as The Crown, the hugely popular royal drama.
But big cheques do not guarantee pop culture hits: a new glossy, yet boring, neo-noir starring Renée Zellweger is proof of that. Helpfully for Netflix, the sheer volume of shows it makes mean that its fortunes do not rest on a single series.
Churning out content requires a supply of fresh funding from debt markets — bond investors coughed up $2bn in April — and deals with programme makers. Mention this to Netflix and you will hear that all entertainment companies are run in the same way.
Netflix is paying billions of dollars to build a catalogue of original programmes such as The Crown. Photo / Supplied
Disney, though, funds its own expansion. Netflix hopes to do so soon, but that will require subscribers to resist the temptation of rival streaming services.
Reed Hastings, Netflix's chief executive and co-founder, appears untroubled. Rivals such as Apple and Disney are "awesome companies," he says; Netflix's debt is an opportunity for investors who "better get in soon because there's not going to be that much more to go".
Rising subscriber numbers have equalled a rising share price. It is up more than 30 per cent this year.
Yet this cushion offers only an illusion of security. Market capitalisation is not an asset to draw on when times are tough. Netflix is old enough to stand on its own two feet. Cash flow, not further share price gains, would provide the real feelgood factor.
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