Streaming video service Netflix has $15.7 billion worth of “streaming content obligations,” CNN reports. It plans to pay $6 billion toward those obligations this year.
The “streaming content obligations” figure is up more than $3 billion since quarter two 2016, according to CNBC.
Several analysts attribute the increase to an intensified focus by Netflix on the creation of original, proprietary content.
“The company is actually trying to manage down the amount of content that it’s licensing from other people,” Canaccord Genuity analyst Michael Graham told CNBC. “The plan there really is to draw subscribers to the service with content that Netflix builds and produces on its own, and that Netflix owns and doesn’t have to pay royalties on. So what that does is it enables margins to expand over time.”
In a report cited by CNN, John Janedis, an analyst with Jefferies, agreed that the company is “aggressively shifting to owned original content.”
The increased emphasis on original content comes as traditional media operations increasingly become competitors rather than allies.
As cable revenues continue to fall, companies like Disney are making their own inroads into the streaming market and cutting ties with Netflix.
When Disney announced plans to start its own streaming service by 2019, it also said it would pull Disney and Pixar films from Netflix by the end of 2019. The company was noncommittal as to whether it would continue to license Marvel and LucasFilm properties to Netflix.
Netflix said in a statement that, despite the termination of its partnership with Disney, “U.S. Netflix members will have access to Disney films on the service through the end of 2019, including all new films that are shown theatrically through the end of 2018.”
A previous agreement obligates Disney to allow Netflix to host Disney, Pixar, and Marvel films through the end of 2019.
The end of the Netflix-Disney partnership will not affect original Netflix shows based on Marvel characters, such as Daredevil, Jessica Jones, Luke Cage, Iron Fist, nor will Netflix halt its production efforts for the upcoming Marvel-based offerings The Defenders and The Punisher.
Following Disney’s announcement, Netflix struck back, poaching 15-year ABC veteran Shonda Rhimes, creator of such hits as Grey’s Anatomy and Scandal. Those shows will stay with Disney/ABC, but Rhimes will begin creating original content for Netflix.
Many suspect that much of Netflix’s near-$16 billion original content budget will contribute toward the streaming giant’s continued pursuit of talent employed by major traditional studios like Disney.
“We’re witnessing an all-out war,” Eric Schiffer, chief executive of Patriarch Organization, told The LA Times. “The studios are seeing Netflix and Amazon go out for their talent, and out for [their] scalps.”
“Studios haven’t felt this kind of hellfire in decades and it’s not going away,” he added.
Netflix is, however, fighting an expensive war. The terms of the deal with Rhimes were not disclosed, but it stands to reason that one of television’s top writers comes at a price. Last quarter, Netflix reported $3.4 billion in “non-current content liabilities” (read: long-term debt); that figure is up more than 15% from $2.9 billion at the end of 2016.
Despite its debt, though, Netflix continues to add subscribers and generate revenue. In quarter two, the company reported $2.8 billion in revenue—that’s a 35% jump year-over-year. Moreover, the service reported 4.3 million (over 9%) more domestic subscribers in quarter two 2017 than it did a year ago. In quarter three, CNN says, the company’s sales are expected to grow 25%, and earnings are expected to double.
In some markets, Netflix is raising its monthly subscription rates to fund its redoubled emphasis on original content. In late June, the streaming behemoth raised prices in Australia; just last week, it raised prices for Canadian users. Some anticipate that US users will see similar price increases in the coming months. According to CNN, Netflix said in its quarter two report that it “expect[s] that from time to time the prices of our membership plans in each country may change.”
Netflix stock has soared more than 40% this year, according to CNN. But, shares have dipped more than 6.5% since Disney announced intentions to pull Disney and Pixar movies last week.
Still, with a market cap in excess of $77 billion, Netflix is, according to CNN, worth more than Fox, CBS, and Viacom, and just slightly less valuable than Time Warner, which owns CNN, HBO, etc.
The streaming pioneer has proven its ability to compete with the giants of traditional media. As an increasing number of those giants make their own inroads into the streaming sector and deprive Netflix of licensing rights, the competition is bound to intensify.
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