Netflix has to make money at some point

Here is the reality, when you go public you get an influx of cash but now you have shareholders that need to gain a return on their investment. So just by that standard the pressure to provide growth in revenue year over year is enormous. Customers should brace themselves for the realization that the $9.99 you pay now for the streaming service, will not last. That price will go up. It has to.

When Netflix was founded, the Internet was young, DVDs were popular and no one considered watching a movie streamed online.

Twenty years later, Netflix’s transformation from an underdog DVD-by-mail service to Hollywood powerhouse — one that has redefined how TV and movies are produced and consumed — has been remarkable.

The global streaming giant today boasts some impressive stats: 104 million subscribers worldwide, up 25% from last year and almost quadruple from five years ago. Its series and movies account for more than a third of all prime-time download Internet traffic in North America. Its more than 50 original shows garnered 91 Emmy Award nominations this year, second only to premium cable service HBO.

But there’s another set of numbers that could spell trouble for the company’s breakneck growth. Netflix has accumulated a hefty $20.54 billion in long-term debt and obligations in its effort to produce more original content. The Los Gatos, Calif.-based company hopes more new shows will capture more subscribers, its primary revenue driver. It’s also under pressure to keep spending on new shows as streaming rivals such as Amazon and Hulu expand their own slates of original programming.

The result is that Netflix is burning through cash at a growing clip. The company is pouring money into expensive prestige projects and expects to spend at least $6 billion in content this year. Its net cash outflow this year is forecast to grow to as much as $2.5 billion, up from $1.7 billion last year. Reflecting its growth, Netflix recently moved its Southern California headquarters into a 14-story building in Hollywood.

This isn’t an unrelated issue. The pressure to justify the stock price with revenue happens all the time. Facebook, Twitter, Snapchat are all good examples of companies that have to generate revenue to create growth. The sad part is that the revenue has to come from somewhere and that somewhere is the customer. Once that happens, then the customer will have a choice to make, how much do I NEED/WANT this service and am I willing to pay more for it.

So far, investors have expressed approval of Netflix’s spendthrift ways. They are betting that debt financing in the near term will create growth and yield big results down the road on the theory that you have to spend money to make money.

Netflix shares surged more than 10% this month after it reported better-than-expected subscriber growth. For the year, the stock is up nearly 50%. It closed Friday at $184.04, up $1.36 or 0.74%.

But some industry experts are warning of a Netflix bubble that may burst if the company fails to produce enough hit series to keep attracting new subscribers.

“Nobody is ever the dominant player forever,” said Mike Vorhaus, president of Magid Advisors, a media and digital video consultancy. “I think they’re going to need some luck in not drowning in debt in the ultimate slowdown of growth.”

Still, Netflix isn’t expected to dial down spending any time soon. The company’s strategy is to invest more and more on self-produced original series such as the ’80s-themed “Stranger Things” and the kid-centric “A Series of Unfortunate Events.”

The goal, executives say, is to increase the portion of self-produced originals to 50% of its slate in an effort to own more of the shows on its platform.

“That’s a lot of capital up front, and then you get a payout over many years,” Chief Executive Reed Hastings said in a recent investor call. “The irony is the faster that we grow and the faster we grow the owned originals, the more drawn on free cash flow that we’ll be.”

As a result, Netflix said it expects “to be free-cash-flow negative for many years,” meaning it will continue bleeding cash for the foreseeable future.

I think they’re going to need some luck in not drowning in debt in the ultimate slowdown of growth.