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Business expert says Netflix’s model leads to more debt or merger

Netflix’s Silicon Valley-style disruption of the entertainment industry worked so well it caused everyone to get in on the action. This was the big takeaway from The Guardian‘s business editor, Dan Milmo’s podcast “The Rise of Netflix: An empire built on debt.”

It began in 2013 with the creation of House of Cards — a remake of a BBC classic that Netflix also streamed. It was because of its data that Netflix was encouraged to create their first original show, which became a mega-hit series. This is the real revolution of Netflix: they are data-driven.

Shifting power

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Netflix’s biggest draw has been to take power away from TV executives and commissioners, placing that power in the hands of viewers. People vote for the content they want to see by watching. It’s so simple, and as Netflix’s 160 million subscribers prove, very effective.

The company has pushed streaming technology and content to unthinkable levels. They’re a phenomenon. To reach that status, though, they’ve put themselves in debt.

Spending to stay ahead

The offer of unlimited freedom isn’t enough for creators. The budgets to pick up the top-end talent, not just in front of the camera but behind the scenes has taken its toll on Netflix.

As an investment, Netflix remains an attractive offer, valued at $130 billion. However, they have an accumulated debt of $32 billion if you combine current and future investment promises. To put this into profit and loss, Netflix is spending $3 billion more than they earn yearly.

Herein lies the problem: in a normal Silicon Valley model, the disruptive force demolishes the competition and then picks up the pieces. That’s not happened here. Instead, Disney, NBC, WarnerMedia, Apple, and Amazon have all gotten into the market. There are no pieces to pick up cheaply, because everything is super-premium.

Netflix’s future spending

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This is why Netflix will continue to spend big. It’s their model. The problem is, they’re now against companies with bottomless pits of money, and with each year, debt will grow under the current model.

Milmo, in the podcast, suggests one of three options:

  • They’ll raise subscriber prices, which he says they won’t do.
  • The monthly subscription cost will be cut to encourage more subscribers, which he says is risky.
  • Finally, they’ll spend more on content to keep competitors at bay.

Netflix is spending $15 billion, while Apple TV+ and Amazon Prime Video are spending $6 billion. This is why Netflix is spending more than double its nearest competitor. It’s trying to keep everyone at bay.

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The last thing Milmo says is that despite Netflix’s debt, they’re too big to disappear. They could end up in part of a big merger, however, which is something we at SNIPdaily have said previously.

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