By Alanna Hutchings
Staying in and binge watching entire seasons of your favorite show with little contact to the outside world seems to have become America’s favorite past time. Everyone including adults, children, and especially high school and college students can be found watching shows and movies on their devices using Netflix over cable. This streaming service has taken the world by storm and has no plans to quit. With new shows and movies being added every month, Netflix is constantly expanding their audience. After several years, now binge watchers in 130 countries worldwide can subscribe to Netflix. By taking over the International market, Netflix is available virtually anywhere with the slight exception of Syria, Crimea, North Korea, and China.
Netflix took analysts by surprise last week as they soared past quarterly expectations causing investors to binge on shares while they could. Last Monday, the company disclosed that they received 3.57 million new subscribers which pulled their shares 19%, up to $110.70. Before the surge, Netflix’s stock had fallen 13% which marked a frighteningly low quarter. With an influx of new members and hype created around new series in the works, Netflix is expecting to receive more subscribers and keep current customers interested.
As Netflix CEO Reed Hastings sat down with CNN Tech to discuss these matters, he reveals his efforts to reach China in the upcoming years. Netflix hopes to request government permission and form important relationships to be granted entry into the market. Hastings smiles and states, “We really admire what Disney and Apple have done there and it’s taken them a long time, but now they have great businesses and many happy Chinese consumers.” Hastings also mentions that entering the Chinese market could account for a quarter of the world’s people joining the audience.
During his CNN discussion, Hastings shares details of Netflix’s business model which makes some stock observers wary. Hastings acknowledges that costs are substantial and that the company has been breaking even for years. He later states that “enough subscribers eventually pay for the content.” I’m no economist, but it seems that analysts don’t love the word, “eventually.”
As Hastings made clear, the advancements being made for new content must come with a hefty cost. Last May, Netflix began the price increase of its standard streaming plan from $8.99 to $9.99 monthly. The company agreed however to grandfather in existing subscribers at $7.99 a month for the HD plan. Those days are now in the past for early subscribers like me. Next month, grandfathered customers will be upped to $9.99 a month for the standard streaming plan while the others are raised to a $10 plan. These slight increases on subscriptions may not be breaking banks, but Netflix is losing it’s selling point of costs under $10 a month which attracted younger subscribers. Business Insider reported that only 3-4% of subscribers they surveyed will cancel their accounts due to increased prices.
However, despite the company’s fiscal success this quarter, the increased collection of debt leaves some analysts cynical. Netflix continues to shrink their cash flow and is massively investing in producing its own original content. Some experts are worried that the content being produced will not be enough to justify this amount of spending. Netflix’s tremendous spending has brought them $-506 million in debt. This rapid cash burn has humorously been compared to that of a “Narcos’ Kingpin” by MarketWatch. (Narcos evidently is one of the costly original series filmed in Colombia). With these numbers continuing to sink into negative territory, analysts like Michael Pachter, of Wedbush Securities, are labeling Netflix’s stock boost as overvalued. Pachter claims that investors are becoming overly focused on subscriber growth and overlooking the company’s severe cash burn. Due to the fierce competition of the market, Pachter believes that the amount being spent on exclusive content is “unacceptably high.” Pachter is remaining skeptical whether Netflix can create a library of original features that will justify its spending jolt.
Hastings and top management of Netflix confidently dismiss skeptics like Pachter. In a recent report, Hastings asserts that, “Over the long run we believe self-producing is less expensive than licensing a series or film..we work directly with the creative community and eliminate additional fees.” This ideology will prove true if quarterly success like that contributed from “Narcos” and “Stranger Things” carries on.
Netflix’s shares may be soaring, but uncertainty still remains on the future of this elaborate spending campaign. If Netflix continues to depend heavily upon creating content at the highest prices of the industry, sight may be lost on how to keep payment plans sustainable and affordable for current members.