As Netflix Adds More Debt to Get Even Bigger, the Streaming Wars Enter Turbo-Charge Mode

Consumers should prepare to open their pocket books wider, as the competition for streaming dollars is expected to really take off next year.
As Netflix Adds Debt To Get Even Bigger, The Streaming Wars Escalate
Shutterstock / Manuel Esteban

Netflix won round one of the streaming wars, and with very little competition. But as several new services prepare to launch next year, the end game is far from over. Audiences are about to face more choice — and may soon have to shell out more subscription fees depending on their interests, as content is splintered across more services.

Disney, Apple and WarnerMedia are expected to unveil their own over-the-top digital services next year, and there could be even more beyond that as conglomerates realize this may be their last chance to get their foot in the door.

This coming rush of competitors might explain Monday’s news that Netflix planned to raise another $2 billion in financing via new debt. That’s not a surprise: Netflix has publicly said in the past that it would raise additional debt to help fund its rapid growth — just as it has many times before.

There’s no time like now to do it. The company just reported a strong third quarter performance, adding nearly 7 million subscribers (almost 2 million more than anticipated), bringing its total to more than 130 million members. And although Netflix remains ahead of the pack at the moment, it’s unclear how the titan might be impacted by consumers reallocating their streaming dollars in the face of new competition.

Netflix is still betting on much more growth in the coming years, both domestically and internationally, to eventually make it a profitable operation. But to grow, Netflix also needs to make sure it’s still a top destination for consumers, particularly as studios reclaim their product for their own services. There’s no room for so-so programs if Netflix doesn’t own it, and has no control over the show’s destiny — hence the decision not to move forward with “Marvel’s Iron Fist” and “Marvel’s Luke Cage.”

To better control its pipeline, and make sure Netflix remains a must-have for audiences, the company wants to own most of its original programming. That’s why Netflix is planning to rely more on big-bucks in-house deals with TV titans such as Shonda Rhimes and Ryan Murphy — both of whom are expected to be quite prolific under those production pacts. And to produce all of its growing in-house content, the company also announced plans to open a new production hub in Albuquerque, N.M.

Of course, replacing other studios’ library and acquired fare with more must-see in-house content requires more investment. And spend it does. Netflix’s free cash flow in 2018 is expected to be around $3 billion, and the company now reports $8.34 billion in long-term debt. And then there are all the content commitments — currently at $18.6 billion. “These investments we see as very likely to help us to keep our revenue and operating profits growing for a very long time ahead,” Netflix said in its letter to investors.

Netflix is far from the only company with debt — most companies do, and as media conglomerates prepare for the future by launching their own streaming services, that will require even more investment.

Former Fox/The WB/NBC/Turner/BBC America exec Garth Ancier isn’t so sure another streaming service even makes sense for WarnerMedia, given that the company already has multiple offerings including HBO Now and DC Universe. As it aims at creating a new service, WarnerMedia is streamlining its existing offerings — including shutting down Korean-language service DramaFever and digital studio Super Deluxe.

“We have the 800-pound global gorilla Netflix, Amazon Prime finally finding its brand footing under Jen Salke (with Jeff Bezos’s endless checkbook to back her up), Hulu trying to figure out who they are (Catch-up service? Live vMPVD? Original programmer? Disney’s “R+” SVOD service? And what about foreign?), with ‘DisneyFlix’ (Disney’s family friendly streaming service built on Disney and Fox’s assets) readying for launch, and Apple spending billions on a new video service,” Ancier recently wrote on his LinkedIn page. “Is this really the time for WarnerMedia to ape the others? Launching these SVOD services takes a long time, and huge amounts of cash and skill. And the foundation of ‘WarnerFlix’ is HBO? Isn’t that what HBO Now is today?”

But at some point, viewers currently bingeing “Friends” on Netflix will have to do it on WarnerFlix (or whatever they end up calling it). Disney fans are already bracing for their favorite movies now moving to DisneyFlix (or whatever they call it). Comcast hasn’t yet figured out its streaming strategy, but many of its properties (“The Office”) are among the most popular TV shows on Netflix, and it’s only a matter of time until it wants those NBC Universal properties back on home turf.

“The more successful we get, the more anxious I get about the willingness of the networks to license their stuff to us,” Netflix’s Ted Sarandos told Variety last year. It’s probably even more true now.

What does that mean for consumers? Netflix’s primary source of revenue remains monthly membership fees, and those will likely continue to rise in order to cover costs.

Right now, Netflix costs either $7.99 (basic), $10.99 (standard), and $13.99 (premium) a month. Amazon Prime is $12.99 monthly (or $8.99 for video only). Hulu is either $7.99 or $11.99 (commercial free). YouTube Premium is $11.99. HBO Now is $15 a month, while Showtime’s standalone streamer is $11. Disney’s Bob Iger has said his Disney service will cost less than Netflix — but it’s unclear by how much, or by how long. Round two of the streaming wars is about to begin, and the buy-in will add up fast.

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