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SVOD Services Marked by Burgeoning Content Costs

13 Oct, 2014 By: Erik Gruenwedel

Nary a week passes without news of a content license agreement involving Netflix and/or Amazon Prime Instant Video. The No. 1 and 2 subscription streaming services continue to leverage their balance sheets to the precipice with calculated abandon, say some analysts.

Netflix, which reports third-quarter financial results Oct. 15, ended the most recent fiscal period (June 30) with $7.7 billion in content obligations to third-party content holders. That was $1.3 billion more than was owed during the previous-year period.

With content obligations skyrocketing $800 million higher in the third quarter last year, it’s reasonable to assume Netflix’s content accounts payable ledger topped $8 billion at the end September (the end of Q3).

“That’s one of the issues with them that everyone overlooks,” Wedbush Securities analyst Michael Pachter said in an email earlier this year.

Netflix spends about 10% of its budget on original programing, including much-hyped “House of Cards” and “Orange Is the New Black.” The majority of spending is on catalog fare (about 60,000 titles), including recent seasons of popular network, BBC and pay-TV serialized shows.

Meanwhile, Amazon Prime, which remains locked in a content-spending race with Netflix, is reportedly set to fork over almost $2 billion this year on licensed content, and about $2.5 billion in 2015, according to Wall Street firm Sanford Bernstein.

In a survey of 1,000 consumers, including 400 Prime members, 60% of respondents said they stream video, while 13% of newer members (less than a year) said streaming video was their primary reason for joining; not the free two-day shipping myriad Amazon.com purchases.

Another 6% of Prime members (longer than one year) said video was the main reason they signed up, as reported by The Wall Street Journal.

Bernstein estimates Prime would have to add from 10 million to 20 million members above current subscriber levels to break even on the content spend. Indeed, Amazon has projected a $800 million loss in Q3, due in part to Prime costs, which includes escalating shipping fees.

Netflix CFO David Wells, in print and on fiscal calls, contends that content spending remains within financial constraints. That’s because Netflix continues to add more than a million subscribers each quarter — topping 50 million subs at the end of Q2.

BTIG Research analyst Richard Greenfield, in an Oct. 13 blog post, said he expects Netflix to reach 100 million subscribers by 2017 — that’s about the number of current U.S. cable households.

As Netflix attempts to feed the masses ever-more relevant programing, content holders gladly oblige — albeit at escalating fiscal terms. This does not worry Greenfield, who, instead, frets should content holders pull back the reins licensing programing.

“While we have seen the entire industry turn into a willing content seller to Netflix, any change in content creators’ desire to license content to Netflix would be problematic, at least until Netflix has proved its ability to create a regular stream of successful original programming,” Greenfield wrote.


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