News and Analysis
“Netflix is on the hook for $20 billion. Can it keep spending its way to success?”

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That was the Los Angeles Times headline for its article published Saturday morning, July 29, which reported that Netflix had a debt of more than $20 billion, largely accumulated by spending freely on shows such as House of Cards, Orange Is the New Black and the Adam Sandler collection.

Yes, $20 billion. Even in today’s high-flying financial environment — even with a company as successful as Netflix which has more than 100 million subscribers worldwide — a report saying you owe more than $20 billion is guaranteed to send jaws dropping, and journalists reaching for their laptops.

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And so it did.

Within hours of the Times’ article, headlines such as these started popping up online:

“Could This Mean the Downfall of Netflix, or Mark the Golden Age of Streaming TV” — Refinery 29.

“Is a content bubble responsible for Netflix’s $20 billion debt?” — Consumerist.

“Netflix is reportedly bleeding cash to the tune of $20 billion.” — Uproxx.

“Netflix drowning in $20 billion in debt.” — Vibe.

Bubble. Drowning. Bleeding cash. Preparing for your downfall.

Not exactly the image you want to project when you are competing in an increasingly competitive streaming business which includes the omni-powerful and the well-heeled Hulu.

But the odd thing here is that Netflix did not immediately respond to the Times article to ‘set the record straight,’ or at least offer a counter explanation that would soothe fears. The company waited until late Monday to issue statements to journalists that, in its opinion, the Times’ article was inaccurate.

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Netflix said the real debt was just $4.8 billion (just!) and the Times came to the $20 billion number by adding the value of the company’s programming contracts with production houses and studios for future shows. In other words, if Netflix had agreed to pay a studio $1 billion to produce a certain number of shows, the Times was counting that as a debt.

The response was reasonable, and consistent with industry standards. All content companies commit to spending for future projects, but rarely is this seen as part of a company’s debt. Financial analysts know that the spending is likely to be offset by the revenue it eventually generates. In this case, if Netflix spending x amount on House of Cards, that money will come back in additional subscriptions from people who want to watch the Kevin Spacey drama.

But where Netflix failed here is the slow response to the Times story. The company should have corrected the article right after it was published on Saturday morning. And I mean, right after. By allowing the story to sit there on Saturday and Sunday without a proper response, the Netflix $20 billion debt became the talk of the Net over the weekend, spilling over to Monday.

This was a rare public relations fumble for Netflix which has shrewdly managed the press enroute to becoming the king of the home video industry. But the company better be careful that this doesn’t happen too often in the future. As noted, the streaming industry is overflowing with ruthless rivals now and they are poised to take advantage of any kind of bad news surrounding Netflix.

Even if the bad news isn’t real news.

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— Phillip Swann