The Cost of Being Netflix

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It’s expensive being Netflix Inc. (NASDAQ: NFLX). The company recently said that it spent $8.5 billion in the past 12 months on programming for its subscription video service. Those costs have doubled in the past two years.

To help meet those costs, the company said Monday morning that it plans to offer $1.6 billion in senior notes, subject to market conditions, etc., to institutional buyers with interest rate, redemption procedures, maturity date, and other terms to be determined by the company and the purchasers of the notes.

Netflix said it intends to use the net proceeds from this offering for general corporate purposes, which may include content acquisitions, production and development, capital expenditures, investments, working capital and potential acquisitions and strategic transactions.

In May Netflix sold $1.56 billion in 3.625% senior notes due in 2027, the lowest interest rate on its outstanding stable of six senior note issuances since 2013. All told, Netflix had $4.94 billion in outstanding long-term debt at the end of September.

The company expects the amortized cost of its programming to rise by 33% next year. That’s in line with a 33% increase in cash costs per customer for the first three quarters of this year. Revenue per customer has risen by 14% in the same three quarters, according to a report at Bloomberg News.

Borrowing money to produce new programming may be the preferred method to finance programming costs for now, but at some point Netflix will need to bring costs more in line with cash flow. That won’t be so easy with big-time competition from Disney and Apple. Disney already has scuttled its deal with Netflix beginning in 2019, although the Mouse House did leave open the question of licensing the Star Wars and Marvel franchises.

Netflix was the first-mover in distributing content through a streaming subscription service. That counts for a lot, but it is now beginning to cost a lot as more deep-pocketed players get into the distribution game. The company’s distribution costs will rise, its programming costs will rise, and, for consumers, subscription costs (and numbers) will have to rise to offset the impact of rising costs.