Cash-Flow Zombie Netflix Extracts Another $2 Billion from Befuddled Investors. Here’s How it Tricks Up its Earnings

Having burned cash for 22 years and counting.

“Don’t get me wrong: there is still lots of money out there chasing these companies,” I said in my podcast on Sunday, naming Netflix as one of the perennially cash-flow negative companies – the “cash-burn machines” – that have to borrow huge amounts of money every year to make ends meet, and that still find eager investors to lend them this money. I said this, not knowing what Monday would bring. And sure enough, Monday brought an announcement by Netflix that it would borrow another $2 billion via another bond sale – its second this year, after having already borrowed $2.2 billion in April.

These proposed senior unsecured notes, which will mature in 2030, will be sold in US dollars and euros to institutional investors, not the public. In other words, these bonds go into pension funds, insurance funds, bond funds, junk bond funds, and the like — and you may own a slice of them whether you want to or not.

Moody’s this morning rated the bonds Ba3, three notches into junk and left Netflix’s corporate credit rating at Ba3. S&P rates Netflix BB-, also three notches into junk (my cheat sheet on corporate credit ratings by Moody’s, S&P, and Fitch).

“Cash-flow breakeven” maybe, after 26 years in business.

In April 2018, Moody’s estimated that Netflix may reach “cash-flow breakeven” in 2023, and in today’s assessment it stuck to that estimate.

And here’s the thing: Netflix was founded in 1997. By 2023 the company will be 26 years old, and if all goes incredibly well, the company may finally reach cash-flow “breakeven” – not even cash-flow positive – 26 years after it was founded? I mean, give me a break.

Its balance sheet is a mess. After years of borrowing cash and then burning it, the company now has $12.1 billion in “content liabilities” and $12.4 billion in long-term debt, for a total of $25.5 billion that it owes.

That $2 billion in new debt to be issued will bring its long-term debt to $14.4 billion, and the total to $27.5 billion.

Those pesky “content liabilities.”

The “content liabilities” are incurred when Netflix enters into a contract to obtain future movie titles, and it puts the amount it owes for those titles on its balance sheet as a liability when the title becomes available to be streamed. It also records an equivalent asset on its balance sheet, which is added to “content assets” that, as of its third quarter SEC filing last week, amounted to $23 billion.

These $23 billion in content assets are future expenses that Netflix is very fast in acquiring and very slow in letting them trickle down via “amortization” to the income statement where they would hit its profit.

These “content liabilities” have to be paid in the future. Of them, the “current content liabilities,” which have to be paid over the next 12 months, amount to $4.86 billion. This explains the need to borrow $2 billion now by issuing the bonds, and to borrow another $2+ billion that way early next year.

The “content assets” are movie titles to be streamed and made money off in the future. But they’re not expensed on the income statement when they’re acquired; instead they’re parked on the balance sheet. And then, very slowly, they’re amortized over many years – meaning they’re bought in huge amounts and very quickly but expensed on the income statement in tiny drips.

So on a quarterly and annual basis, the amortization expense Netflix recognizes on its income statement, where it hits profits, is tiny compared to the amount Netflix pays over the same period for these titles.

There is some accounting justification for that method – in that these content assets will produce income in the future, hopefully. But clearly, Netflix is going way too far in pushing its interpretation of the accounting rules. And this wild interpretation of accounting rules is one of the reasons why Netflix shows a profit and a huge negative cash flow at the same time, year after year.

And this turns its income statement into garbage.

For the first nine months of 2019, the income statement showed a net income of $1.28 billion and a negative cash flow (or “free cash flow” as Netflix calls it) of -$1.6 billion, for a huge gap between net income and cash flow of $2.89 billion.

Netflix says in its filing that the huge $2.89 billion gap between net income and negative cash flow so far this year was “primarily due” to the fact that the “cash payments” it made for its “streaming content assets” exceeded the amortization expense of content assets over the same period “by $3.46 billion.”

In other words, the income statement that Netflix offers – though it likely conforms to a wild interpretation of GAAP – is garbage. In terms of Netflix, cash flow and the pileup of liabilities (content liabilities and debt) are the metrics that matter the most. But they’re too ugly to behold.

So Netflix and Wall Street analysts, whose sole purpose it is to pump up the shares, hammer home that the only metric that matters is subscriber growth because the rest is by now too ugly to behold.

Bondholders and those contemplating buying the new bonds have only one hope – and this hope is their strategy: That Netflix will continue to be able to extract money for its cash-burn machine from new investors year after year, so that it can go on burning this new cash in its operations, and thus keep its operations alive, and also pay existing investors the promised interest payments, and then the principal payments when the bonds come due – with the first set coming due in February 2021.

What happens if Netflix cannot raise new money every year from new investors to pay off existing investors and to keep its cash-flow negative operations funded? The next step would be a default.

The hope of Netflix being able to find new investors willing to play this game year-after-year is what keeps this scheme going. And for now, no problem.

In the current environment of financial repression practiced by central banks, where interest rates are below the rate of inflation and in many places below zero, these money managers are chasing any kind of yield they can find no matter what the fundamental risks, and they’re still eager to buy these bonds, hoping and praying that Netflix will be able to keep this game up long enough for these money managers to either get out from under those bonds or change jobs.

So how overvalued is Netflix? Even with its profits wildly inflated by the accounting practices described above, the shares trade at an astronomical price of 88 times these wildly inflated earnings, for a company that has been around for 22 years. I mean, yeah. Hard to believe in normal times. But these are not normal times.

I Get it: Stock-Market Shorts Sit on Sideline, Fearing Rally. Investors Deleverage, Fearing Sell-Off. VIX Falls Asleep, Fearing Nothing. Read...  There Are a Couple of Things Not Coming Together Here

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  154 comments for “Cash-Flow Zombie Netflix Extracts Another $2 Billion from Befuddled Investors. Here’s How it Tricks Up its Earnings

  1. 2banana
    Oct 21, 2019 at 7:17 pm

    Could we order a mug with “CBM” on it?

    Cash-burn machines…to infinity, and beyond!

    • IwasGnarth
      Oct 22, 2019 at 6:56 am

      Long ago, I had a Commodore PET with ‘CBM’ on it. Rather apt, considering it’s regular appointment in the repair shop.

      • Ethan in NoVA
        Oct 22, 2019 at 3:03 pm

        My friend brought one of those over a few weeks ago, pretty much new in the box. He lacks any sort of tape drive or disk drive. It still works 100%. He got it for free from a neighbor, and apparently they’re worth a few bucks now — so for him it was quite the opposite.

      • Geek
        Oct 23, 2019 at 11:03 am

        How the heck did you put a Commodore into a repair shop? Or, I guess I’m confused because back when I had and greatly enjoyed one of those, there were no such things as repair shops for them.

        • Oct 23, 2019 at 9:23 pm

          It blows my mind that a streaming company cannot be profitable. Its business is so simple. At least compared to businesses with complex processing and shipment chains, like the auto industry. It sells movie viewing rights. Why doesn’t Netflix just make sure the content available each quarter cost less than the revenue for that quarter?

        • IwasGnarth
          Oct 24, 2019 at 1:38 am

          It was a TV repair shop really because the built in monitor kept failing. So did the 500 (!) byte memory chips but I got used to replacing them myself.

    • LouisDeLaSmart
      Oct 22, 2019 at 3:32 pm

      \\\
      …*Spaceballs, the movie*…
      Prepare ship for light speed.
      No,no,no, light speed is too slow.
      Light speed too slow?
      Yes, we’re going to have to go right to…ludacris speed.

      What the hell was that?
      Netballs 1.
      They’ve gone to “Plaid”.

      \\\

  2. 2banana
    Oct 21, 2019 at 7:25 pm

    So why not just buy ATT or Altria or a plethora of other stocks who make oodles of cash and that can easily pay thier 5%+ dividend. Or their corporate bonds?

    Why take such insane risks? For a Netflix bond that pays about 4.75%?

    “these money managers are chasing any kind of yield they can find, and they’re still eager to buy these bonds, hoping and praying that Netflix will be able to keep this game up long enough for these money managers to either get out from under those bonds or change jobs”

    • Mickey
      Oct 22, 2019 at 4:08 pm

      AT&T has net tangible net worth.

      • Mickey
        Oct 22, 2019 at 4:09 pm

        Make that net NEGATIVE tangible net worth.

    • Jerry S
      Oct 23, 2019 at 11:10 am

      How to become a Billionaire. Start a cash burning company. Of course, you need rich banker friends to do this. An ordinary person who starts a company that burns cash will quickly find out all about bankruptcy proceedings. But hey, all you need is banker friends to give you a $500 million line of credit, and all is wonderful. Especially when they also finance the purchases of several mansions. Then, just light the bonfires and burn that cash. Burn baby burn. In the end, walk away from a company who’s value has just plummeted to about 10% of what it once was with a nice little golden parachute of $1.7 billion.

      This is what makes America Great!!! How can America ever fail or even decline with such a wonderful system allocating resources?

      Neumann! Curses, Neumann, Curses!

  3. Michael Gorback
    Oct 21, 2019 at 7:31 pm

    I’m not buying a mug until you have the balls to put hell instead of heck

    • TXRancher
      Oct 21, 2019 at 8:15 pm

      I believe it is because Wolf has class.

    • Crazy Chester
      Oct 21, 2019 at 9:01 pm

      Hell Yeah!

    • Oct 21, 2019 at 10:10 pm

      Kitten and I had a long discussion about this, because I was conflicted — and in the past I have used both. In the end, we decided “Heck” was funnier.

      • Erle
        Oct 22, 2019 at 2:16 am

        I bought a pair of mugs, but like Michael Gorback I would rather have the HE (double hockeysticks).
        “Pits of Zool” might have worked too.

      • TonyT
        Oct 22, 2019 at 11:55 am

        And “Heck” makes a nice reference to Phil, Prince of Insufficient Darkness and Ruler of Heck :)

  4. budaatum
    Oct 21, 2019 at 7:52 pm

    Did I miss “ponzi madoff” in any of this you wrote?

    How much would my mug cost to get it to Blighty please?

    • Wisoot
      Oct 22, 2019 at 9:55 am

      Budaatum My thoughts exactly, Bernie Madoff. Enron inspired.

    • Oct 22, 2019 at 5:22 pm

      Roughly $45.00

  5. Old Engineer
    Oct 21, 2019 at 7:54 pm

    Your description of Netflix’s scheme makes Ponzi look like an honest man.

    • Kiers
      Oct 21, 2019 at 9:12 pm

      @Old E. being an engineer, you must realize there is only ONE salvation for NETflix: artificial intelligence content creation. This may be their third degree of evolution (from DVD by mail, to video on demand, to AI content). With AI content they’d only need to license a mug shot of the actors/actresses to star in their next “movie”. Then the AI would bring the mug shot to life, mouthing the script, sitting on a moving body, enacting scenes etc. It is expected the licensing fees for mug shots would be less than the $2bn cash burn per year they currently fizzle.

      Cheers. (scary).

      • Orthodox Investor
        Oct 21, 2019 at 10:50 pm

        You don’t mean it would be its salvation, but its swan song. AI content creation instantly makes everything Netflix has acquired nearly worthless because a competitor could create better content so much cheaper.

        • Erle
          Oct 22, 2019 at 2:25 am

          Yes Mr. Orthodox, but NFLX could chirp about how environmentally friendly they are in not using actual barrels of gasoline in their stupid pyrotechnics that infest every movie.
          The best use of pyro was with “White Heat” (James Cagney/Virginia Mayo) but that was sixty some years ago. I suppose in those days they relied more upon acting.

        • Jerry S
          Oct 23, 2019 at 11:13 am

          If Hollywood switches to brain-dead AI’s to create content instead of brain-dead Human’s, will anyone be able to tell?

      • stan6565
        Oct 22, 2019 at 6:26 am

        Artificial Intelligence to automate production of crap content.

        Devoid-of-Intelligence humaniods to consume it.

        Life is exciting.

      • lisa
        Oct 22, 2019 at 7:40 am

        You sure got that future projection pretty straight, loud and clear. There is hope, as a lot of black holes should be able to consume a lot of the AI content. Remember emails are now disappearing after time intervals, some before, during, and after a one time only read. Holding onto any real content is gonna present some battles in the near future. Right now though, the real barriers are based in ACCESS, and control of distribution, (if original creators of content get any distribution at all,)for any real content creators that are creating outside of the major platform distribution networks.

    • Mary White
      Oct 24, 2019 at 9:00 am

      Beware of tips from friends of friends of friends of friends…

  6. David Hall
    Oct 21, 2019 at 8:01 pm

    Netflix (NFLX) has positive earnings (ttm), cash on its balance sheet (recent quarter), double digit earnings growth and produced positive free cash flow.

    Disney announced plans for its own streaming service some time ago. Sling offered bundles and skinny bundles. Roku offered access to free channels. Netflix has a large and growing following. Am not sure what Apple TV is.

    • David Hall
      Oct 21, 2019 at 11:15 pm

      That is positive levered free cash flow per Yahoo! Finance. So far it can cover its interest payments as noted in its positive earnings.

      • Dale
        Oct 21, 2019 at 11:34 pm

        Yahoo Finance shows NFLX with -$2.9B in free cash flow in the last 12 months. Go to the Financials-Cash Flow tab, not the Statistics tab.

        But at least NFLX has a positive book value, unlike BA.

      • Mike
        Oct 22, 2019 at 2:08 am

        I take it you’re invested in Netflix? Good luck with that.

    • Oct 21, 2019 at 11:33 pm

      David Hall,

      Why don’t you actually look at the balance sheet and cash flow statement instead of citing Wall Street promos. The balance sheet, along with all the rest of the 10-Q is linked in the text. So it’s right at your fingertips. Open your eyes, dude. I just went through a whole section about how Netflix inflates its earnings while it has this huge negative cash flow, and then you post this comment showing that you didn’t even read it, that you have no idea, and that you don’t want ot have any idea, and that instead you have total faith in Wall Street promos. Fine with me. But it just looks kinda silly here.

      • Jerry S
        Oct 23, 2019 at 11:19 am

        NettyFlix also had a massive miss in subscriber numbers in it main market. Covered up in the Wall St fake financial news by emphasizing international subscribers. That only tells me that the people who produce the fake financial news want to pump up the stock price, and that its highly likely that those people want to dump their Netflix soon before everyone else comes online as competitors.

        Having a press release about coming services as competitors is not the same thing as having active competition at the time. And of course the ‘domestic market’ where Nettyflix had its big subscriber miss is also the market where people are likely to be most aware of the coming competition.

    • DV
      Oct 22, 2019 at 8:56 am

      It does look more like entertainment Ponzi scheme, though.

  7. fred flintstone
    Oct 21, 2019 at 8:06 pm

    Unfortunately this accounting baloney is not unique. Take out good will from most of these new miracles and they are a bad joke. Look what is happening to GE…..after so many years of great earnings and growth……paying huge bonuses to the executives…..all the while they were ignoring the pension costs that were accruing.
    Funny accounting is not new….what is new is the number of large leading companies on the NYSE that are floating on air.
    When all this comes to an end the folks holding the bag (us) are going to have one big headache…….bigger than the fed will be able to handle.
    When the fed cuts rates the market will not rally….it will drop…..and drop…..and drop…..until our national wealth is a fraction of the fake number.
    Trying to float treasuries will be next to impossible so the fed will monetize…….and monetize……and monetize.
    ……and you already know the next statement…..its yellow and shines.

    • Erle
      Oct 22, 2019 at 2:38 am

      fred flintstone, You make a good point about Good Will accounting tricks.
      My little manufacturing company relies completely on reputation. The customer buys our molds and puts them directly into production without costly inspection. They have an idea what their cost savings are in not having to do incoming inspection and test runs to gage the ability to make good parts. One guy, an engineer, that was responsible for profitability reported to his bosses that our molds had a negative cost to his company when compared to our competitors.
      I suppose that I could jack the Good Will value of my company but there is no point as I own all of the shares and haven’t had a loan in twenty years.

      • RD Blakeslee
        Oct 22, 2019 at 4:39 am

        What the heck/hell! A genuine company!

        Surely you could find a way to trick it up , heavy borrowing P.R. dept …

      • Bob Johnson
        Oct 22, 2019 at 9:03 am

        Mr. Erle,
        The first thing you have to lose is your integrity, then all things, like Netflix are possible. I’ll bet the executives at Netflix make a whole lot of money regardless of Netflix balance sheet – so can you if you’ll just be dishonest.

        My partner and I had a medical electronics manufacturing company just like yours – unfortunately like you we neglected those lessons. BUT, I can still look myself in the mirror and so can you.

        Do not change – stand for honesty in this world when virtually no one else does. Congratulations.

        • Sherriff Bob
          Oct 23, 2019 at 11:26 am

          Actually, the first thing you had to lose was having a cop on the beat to enforce accounting rules. That went out after being described as ‘needless regulation’ that ‘ inhibited entrepreneurs’.

          Put in a serious oversight agency with prison terms of 5 to 10 years for accountants who play such tricks, and the problem is likely to be solved.

      • Keith
        Oct 22, 2019 at 11:24 am

        Erle,

        You’re my hero. You and Wolf. The only way Wolf’s stuff could be better is if he had to f’s. Wolff Richter – that would be awesome.

        22 years. That is phenomenal. Right through the GFC. The power of their narrative! Like the true believer above. What is the market value of that? What’s the price of the S&P 500 relative to cash flow? Is that cyclical?

    • Wisoot
      Oct 22, 2019 at 10:03 am

      Fred Flintstone on point. Goodwill vastly overstated and went unchallenged – was cited as one of the areas EY auditors were criticised in the post fall analysis of Thomas Cook.

  8. Kiers
    Oct 21, 2019 at 9:00 pm

    My explanation for the market tolerance of Netflix is as loss leader that “builds the internet”. I.E. not as a free standing capitalist entity, but rather as a planned economy dot com SOE. The other dot coms need Netflix to help roll out broadband…….per their five year plans (or ten year plans). Parts of Hollywood are happy too.

    • Old Engineer
      Oct 21, 2019 at 10:36 pm

      I think anyone counting on 5G is in for a long wait. With the frequencies they are using it is going to be extremely challenging and very extremely expensive to get 5G to reliably deliver the promised data rates in the “real world”. In fact broadband, ie very high data rate, costs are actually rising in many markets. Partly because with net neutrality gone the carriers are going to milk Netflix to get their streams through. If Netflix is counting on cheap broadband in the next 10 years or so they are probably screwed.

      • Roddy Pfeiffer
        Oct 22, 2019 at 2:47 am

        China Mobile has built a 5G tower in my neighborhood in Qingdao.

        • RD Blakeslee
          Oct 22, 2019 at 4:49 am

          Yeh, I tried to tune you in – thought maybe the Kennelly-Heaviside layer (or the Chinese Information apparatus) would bounce you here…

      • Kent
        Oct 22, 2019 at 5:52 am

        ATT and the rest are relying on lobbying state lawmakers to pass legislation that will force local governments to turn over their citizens assets in the form of utility polls or anything else they can attach their 5G equipment to at nominal cost.

        Unfortunately, most cities don’t own their own power utilities. So 5G just isn’t going to happen at scale in the good ole USA unless the DOD turns over the sweet spectrum.

        • lisa
          Oct 22, 2019 at 7:49 am

          You sure touched on a real basic local community problem. Communities are losing control on even having the ability to deny the spectrum conveyors trashing up their public streets, with eyesores that they can willy-nilly hang up anywhere and everywhere, as the short term solution for quick money. The communities usually don’t own the poles etc. Not only are street still decorated with the decaying 30ft timbers and electric lines that don’t like French lace, the 21st century local urban centers can hit with crummy decorations on bare poles, that don’t substitute trees, and don’t create shade, just shady acts, and more cacophonous static.

      • char
        Oct 22, 2019 at 2:37 pm

        America is not the World and in a few years the US won’t even be the largest market for Netflix. The market is also cutting the connection between broadband and “cable” so i doubt that the cable companies can really milk Netflix. But i don’t doubt that they could extract some single digit percentage of Netflix American income

        With 5G there are the new frequencies on 20mm and the reused (1-4)G frequencies. 5G on the old frequencies is good enough for Netflix outside of really congested places but there 20mm is a workable solution.

      • fajensen
        Oct 23, 2019 at 3:20 am

        They are going to use ‘re-purposed’ UHF frequencies and 1-3 GHz (normal telecom) as well for 5G. It is only some cases (femtocell) that they are they going all the way up to 30 GHz.

        ‘The deal’ with 5G is that the RF signal structure and the radio baseband processing system is radically simpler because 5G is designed to be ‘data only’ and that a 5G device can connect to several cells simultaneously.

        This all means that the network becomes much cheaper to provision and run for the telecoms, so ‘consumers will want 5G’, whether they need it or not! Like has happened with every xG transition so far.


        The coolest thing about 5G is that, because the radio signals are better structured, one can also use the new 5G networks as the transmitter part of a bi-static RADAR system and crack stealth!

        GEC-Marconi did a lot of work on this tech already back in the naughties and today we are down from a full lorry trailer to a bunch of DSP-cards and a 19″ half-rack for the data processing. Stuff that will easily fit inside of a van (or an APC)! Gnu-radio ‘civilian version’ in perhaps 5 years or so :)

        Maybe that is one of the reasons that the USA gots its panties twisted over Huawei and 5G, the other one being that the USA is now about 10 years behind on mobile tech and is playing catsup!

  9. DR DOOM
    Oct 21, 2019 at 9:03 pm

    I have always thought of the dollars that flow into these CBM’s (via the fed)’as government subsidies “of a sort”.

    • Sherriff Bob
      Oct 23, 2019 at 11:30 am

      Fascinating. A problem exists due to a lack of government regulation and oversight, and yet people find a way to blame the neutered government for the problem.

  10. Stan Sexton
    Oct 21, 2019 at 9:40 pm

    Some Studios do not cooperate with Netflix. I have a hundred movies in my Queue which Netflix will never carry, but are offered by Amazon Prime and others.

  11. Off-topic
    Oct 21, 2019 at 9:44 pm

    My apologies for the off-topic comment, but what resources/books/blogs would you recommend to someone trying to understand what’s going on with finance, the state of the economy and attempt to figure out where we are heading? Bonds, T-Bills, cashflow, future… I am a bit lost to say they least… Sucks that they don’t teach any those in HS.

    • Oct 22, 2019 at 12:15 am

      Here is good. Just keep reading :-]

      • Off-topic
        Oct 23, 2019 at 1:04 am

        ah ah, definitely! But a bit out of my league right now.

    • normansdog
      Oct 22, 2019 at 2:17 am

      Many years ago the Motley Fool used to have quite a few “tutorial” type documents on cash flow, Bonds and analysing financial stuff like 10Q filings, i haven’t looked for a while but maybe they are still there somewhere.

      • Off-topic
        Oct 23, 2019 at 1:04 am

        I will definitely check those out. Thank you normansdog!

    • Iamafan
      Oct 22, 2019 at 3:05 am

      They don’t teach this in grad school, too.
      Maybe Wolf can put a section called “start here” so people can have the basics.

      Yesterday I was listening to Jeff Snider and the same thought occurred. Without a good background, most of what he was saying wasn’t understandable.

      I have lost my wife in many conversations in the dinner table and she has also an MBA. You are not alone.

      • Off-topic
        Oct 23, 2019 at 1:06 am

        “You are not alone” – Is this supposed to make me feel better or to scare me even more? :)

    • JZ
      Oct 22, 2019 at 7:51 am

      Go to Coursera. Yale has financial market, U penn has accounting and finance, Columbia has central banking. All these classes are there to give you the definition of these terms. I would NOT want to spend time and do the analysis myself since I have W2 job making me busy. But to understand what Wolf writes, you need to understand all the concepts and definitions. To be honest, even after that, you only get to the aspects of how business run, which is wealth creation process. The “market” on the other hand has both wealth creation function to provide capital to businesses AND wealth transfer aspects. Nowadays, it is largely wealth transfer. For that you need to study poker games, game theory, and if you are NOT the best 5%, you get your wealth transferred out of. That’s how I see it.

      • Off-topic
        Oct 23, 2019 at 1:07 am

        Great starting points! I’ll checkout those courses JZ. Thank you!

      • roddy6667
        Oct 23, 2019 at 2:26 am

        Most of the moves in the market are not caused by profits, losses, good business models, or any of that. A better course would to study the behavior of large masses of stupid people.

    • lisa
      Oct 22, 2019 at 8:02 am

      I’d like to throw out a suggestion- George Gilder’s -Wealth and Poverty. It’s an oldie. I, of course think there is a lot of biased political positioning in the text, HOWEVER, it is a very good book. Especially, from chapters 16 to the end of the book. He presents in-depth considerations of inflation, taxation and basic dynamics of capitalism, economies, and monies. There is a lot of name dropping throughout the text that are excellent first-level references for further study. There’s a good bibliography at the end too. His examination of process and dynamics of economy has not been effectively focused into significant bottom-line changes for many governmental policies, in many nations, including and especially in the US.

      • Off-topic
        Oct 23, 2019 at 1:08 am

        Thank you very much Lisa! I’ll see if I can find a copy of this book for cheap or at the library

    • flashlight joe
      Oct 22, 2019 at 11:58 am

      Be glad they don’t teach it in (government run) high school. All they would tell you is to believe the hype, trust the government, and keep putting your money into government/corporate controlled investment products, especially those you cannot access until they let you.

      • Off-topic
        Oct 23, 2019 at 1:10 am

        Thanks for the enlightenment , flashlight Joe ;)

    • Petunia
      Oct 22, 2019 at 12:09 pm

      Off-Topic,

      Try to find books or articles that tell a story about a financial issue through a person or situation. Context helps with really understanding an issue. Pick a topic or person that interest you and read up on it. Once you feel you have a good understanding move on to the next person or topic. The topic of money spans the ages, you will never run out of something to read.

      I am currently reading “The Day The Bubble Burst” by Thomas Gordon and Max Morgan-Witts. It is a collection of stories leading up to the Great Crash of 1929. Even though I know the topic well, I am still learning about the crash through the eyes of new people. It is amazing how little some things have changed since 1929.

      • Off-topic
        Oct 23, 2019 at 1:11 am

        Thank you Petunia! I’ll remember this piece of advice.

    • Anon1970
      Oct 22, 2019 at 3:32 pm

      I would start with your public library. Many of its recent acquisitions may even be available online as well if you have an e-reader such as a Kindle. While you are there, see if they have a DVD collection and are a member of Kanopy.com. My county library system is a member and I get to watch up to 8 movies/documentaries free of charge on Kanopy. Kanopy is an excellent source for foreign movies most of which never get to your local cineplex.

      • Off-topic
        Oct 23, 2019 at 1:13 am

        Thank you! Big fan of the library around here. My concern is always trying to pick the best material and ignore 95% of the rest that’s average at best or terrible most of the time.

  12. Daz
    Oct 21, 2019 at 10:01 pm

    Sounds like the plot from The Producers.

    • alex in San Jose AKA Digital Detroit
      Oct 22, 2019 at 3:56 am

      I remember when Netflix started and it was all about mailing DVDs, and I never wanted to get involved in any way with it, because I remember the old Columbia Record Club where you’d sign up and end up in debt for a bunch of records you never wanted. I always figured Netflix was a similar scam and I’m still convinced it’s a scam of some type.

      • Ethan in NoVA
        Oct 22, 2019 at 3:25 pm

        Columbia House worked GREAT for me. All you had to do was reply to the monthly card in a timely fashion and you wouldn’t get sent stuff you didn’t want. It was a totally fair and great deal. Note, I think a lot of the CDs were manufactured by Columbia House under license.

        I knew people who would cycle through Netflix DVDs as fast as possible, ripping the content to large fileservers at home for later viewing. Now that content will require subscriptions to many services, I believe piracy will increase. Way easier to automate capturing of content from streaming services versus DVD mailing.

        • roddy6667
          Oct 23, 2019 at 7:09 am

          If you know how to use a VPN to mask your IP, sites like Thepiratebay and https://yts.gs have almost any movie, book, or music ever made for free. I have been downloading this way for over ten years. I have three terabyte hard drives of movies on hand, over 300 zombie movies. I love science fiction and the old black-and-white film noir genres. Piracy is fun.

      • Anon1970
        Oct 22, 2019 at 8:25 pm

        I did sign up for Netflix’s DVD mailings about 20 years ago and then noticed that they were sending me DVD’s from their Philadelphia warehouse instead of from Los Gatos, which is about 50 miles from where I live. When I called them on it, they freely admitted that they were trying to reduce the number of DVDs I could watch in a month, so I cancelled my subscription.

  13. Jack
    Oct 21, 2019 at 10:14 pm

    “So Netflix and Wall Street analysts, whose sole purpose it is to pump up the shares, hammer home that the only metric that matters is subscriber growth because the rest is by now too ugly to behold.”

    Wolf, I have a question here, isn’t the market actually now near saturated with these streaming services ?

    Is there any set of data in relation to this?

    If the market is well saturated, how can any analyst worth their salt justify the existence of a ( growth market)?

    From memory, the ( great we company)!!
    Has a potential growth market of $6Trillion !!

    are we looking at another big pie in the sky?!
    A land where cows fly :)

    • Kent
      Oct 22, 2019 at 5:55 am

      On Wall Street “analyst” is a euphemism for “used car salesman”.

    • char
      Oct 22, 2019 at 2:58 pm

      There is demand side saturation and supply side saturation. With streaming services i think there is a big problem on the supply side but on the demand side there is still plenty of growth even in the oldest markets like the US

  14. nick kelly
    Oct 21, 2019 at 11:32 pm

    I thought some pension funds (CPP?) weren’t allowed to have junk in the portfolio.

    • Oct 21, 2019 at 11:43 pm

      nick kelly,

      Some pension funds may have that rule. But there is no regulation in the US, and by now probably most pension funds have junk bonds due to the chase for yield. For example, CalPERS (California), the largest public pension fund in the US, allocates 3% of its portfolio to junk bonds. In addition, it may own junk-rated credits indirectly for example via its 8% allocation to private equity.

      • Erle
        Oct 22, 2019 at 2:55 am

        Wolf, wouldn’t you think that with all of the genius base in CALPERS that they could enlist an advisory investment committee from their uses to vet the worthiness of the 8% PE and 3% junk? After all the proceeds are going to the subscribers of CALPERS.
        Perhaps a limited size investor gang could be useful in overseeing the PE guys especially, even if the PE is CALPERS itself.
        Nah, that’s what you have taxcows for if they lose.

  15. IslandTeal
    Oct 22, 2019 at 12:07 am

    Wolf.. Good analysis. The Netflakes accounting script was crafted 2 CFOs ago. Have you ever taken a look at Spotify and how they “handle” the same type of issues?

    • Paulo Zoio
      Oct 22, 2019 at 3:06 am

      With all ‘this is not QE’s’ filling all those vaults ‘Walking dead’ companies is the new real…With all monetization of debt, the only silver bullit could be Inflation…

    • char
      Oct 22, 2019 at 3:08 pm

      Does Spotify own significant copyrights? I thought those two companies are totally different in how they operate.

      • Ethan in NoVA
        Oct 22, 2019 at 3:29 pm

        No, but Spotify is owned in part by record labels. They have some direct deals negotiated regarding licensing.

        • char
          Oct 22, 2019 at 6:54 pm

          Do the record labels want the profits to show up at Spotify or the labels?

  16. LeClerc
    Oct 22, 2019 at 2:32 am

    Netflix _is_ in the movie (fantasy) business.

    Props here for living it right through the CFO’s office.

  17. R2D2
    Oct 22, 2019 at 2:59 am

    Far from slating Netflix, America should be pleased that its investors and lenders still have appetite for big, longterm investments.

    Contrast NFLX in the US with Sirius (SXX) in the UK… SXX is sitting on one of the world’s biggest potash (fertilizer for food) mines, with potential for 100 years of output plus juicy dividends. But SXX is struggling to find a modest $5 billion, to dig a 23-mile tunnel to transport the potash to the sea-coast for shipping. Its time-to-profit is 5 to 10 years — but no British banks or investors want to lend beyond 2 to 3 years! As a result, SXX is on the verge of bankruptcy and 1000s of jobs in Northern UK are set to be lost.

    So, you Americans really should be thankful that America can (still) afford to throw a tsunami of cash at 3-decade investments… Be thankful you do not live in the UK, where even 3-year investments are laughed at :-(

    • Saltcreep
      Oct 22, 2019 at 6:12 am

      Hey, R2D2, I guess Sirius should have jumped on the bandwagon a couple of years ago, purchased a patch of land ostensibly for applying their product to cannabis cultivation, and rebranded themselves Cannabis Minerals or something. That would presumably have secured them any desired amount of cheap funding…

      Re Netflix, I like it a lot from a customer point of view, and I would prefer that the entertainment value I derive continue to be sponsored by financiers, so I’d appreciate less attention on cash flow and balance sheets and more unquestioning focus on some pie in the sky subscriber growth estimates!

    • Harrold
      Oct 22, 2019 at 10:41 am

      Sirius should make an app, maybe called POTSH, that would disrupt the potash market and allows consumers to directly order heirloom, hand collected potash direct from artisan potash miners.

    • MC01
      Oct 22, 2019 at 10:51 am

      If I may… I was trained as a chemist and my second choice were agricultural sciences, so this is basically the backyard of my youth.

      Potash (technically muriate of potash, the benchmark) prices peaked like so many other commodities in 2009 at almost $900/tonne. Like everything else they cratered to a low of $310/tonne in 2010 and then recovered all the way to $400/tonne in 2013. But since then prices have been slowly and steadily declining and this year price is a comatose $265/tonne, less than a third than a decade ago, and that’s not inflation adjusted.
      The US have huge potash reserves (chiefly in or around the Permian Basin) but with Canada next door having such huge production it makes no economic sense to tap into them.
      The same applies to Sirius: Belarus and that neighboring country that triggers moderation alerts together produce even more potash than Canada. On top of this Germany, Israel and Spain are all big potash producers, all aiming squarely at the same market as Sirius.

      Sirius probably aims at getting a slice of the Brazilian market: Brazil is a huge agri producer but domestic potash production only covers 10% of their needs. Brazil needs to import over 3 million tons of potash every year, chiefly from Canada, to meet present demand. While demand is expected to grow, one needs to consider that fertilizer consumption worldwide has actually failed to keep up with increased agri production over the past decade due to several factors such as new fertilization tecniques.
      Canada alone has enough spare potash capacity to last for a while and one also needs to take into account that countries with much lower costs than the UK such as Ethiopia have massive untapped potash deposits.

      Finally there’s the 1200lbs bull in the room: the US. Everybody laughed at US shale producers 15 years ago, starting from Saudi Arabia. They aren’t laughing so much right now.
      Potash is nowhere near as economically glamorous as oil, but with those big US deposits located next to the extensive infrastructures built to tap into the Permian Basin somebody may be tempted to have a go at it to get a slice of the South American and domestic market. Where would potash prices go if US producers started throwing 2 million tonnes a year on the market, with more coming into line? Precisely.

      In short people aren’t investing into Sirius because they are blinded by short-term profit. People are not investing into Sirius because it faces extremely strong headwinds.

    • Gandalf
      Oct 22, 2019 at 1:32 pm

      R2D2,
      Interesting topic, Sirius and the economics of potash mining.
      I think the key here is that potash prices skyrocketed in 2008 reaching a high of $875 a ton in 2009. Since then it’s price has steadily dropped back to around $200 a ton.
      Sirius’s plans were to drill mine shafts a mile deep to extract the polyhalite deposits, and its main export market would have been to nearby Europe.
      But, of course, with Brexit hanging over any trade between the UK and Europe, the high cost of extracting anything a mile deep, and the current low price of potash, I think it’s clear the economics didn’t make sense.
      Mining for minerals is an Olde World business, the numbers are hard and easy to crunch, it’s not a sexy paradigm shifting startup that could grow 10,000 fold in value

  18. raxadian
    Oct 22, 2019 at 3:08 am

    Netflix will lose Marvel because Disney, and in fact is already doing so.

    Apple TV will be bought by Apple fan boys.

    Disney… well Disney has made a lot of movies and TV series and owns Marvel.

    I think Disney will be Netflix heaviest competitor, more so if they include all those old disney series people wants to watch again.

    Since is a streaming service there is no conflict about airtimes.

    I mean if I had the money I definitely would watch Disney Dinosaurs again. Or any of old those old TV series by Disney I wasn’t able to see all episodes off.

    • MC01
      Oct 22, 2019 at 6:38 am

      If I remember correctly Netflix’s most streamed series is Friends: only The Office is streamed more widely worldwide, but it’s also highly localized (a British version, a German version, a Swedish version etc. each with a different cast, screenwriters, producers and so on).
      Friends was instrumental in Netflix’s expansion over the past 4-5 years but it’s also about to leave that streaming service: next year it will migrate to HBO Max.
      To counter this heavy blow, Netflix recently secured exclusive rights to Seinfeld for an undisclosed sum (rumored to be between $400 and 500 million), starting in 2021 when Hulu and Amazon present contracts will run out.
      But there’s a big problem: ask somebody in India or Germany what Friends is and they will instantly reply to you. Ask what Seinfeld is and you will get a black look. Seinfeld may be incredibly funny, but it’s also a very US-centric show: in my opinion it’s nowhere near enough to counter the loss of Friends to a very aggressive and very well-funded competitor.

      Disney is very likely to start pulling everything they control from the competition as soon as contracts run out: Mr Mouse has already warned shareholders the streaming service will lose money, and lots of it, for the first 3-5 years of existence, presumably the time it takes for contracts to the likes of Hulu and Netflix to run out. Once they get full control over money-making franchises such as Star Wars and at least part of their enormous catalog of series they can just sit back, hike prices and watch the dollars come in by themselves.
      I mean… I recently walked into a Disney Store to look for a present for an acquaintance’s children and was literally blown away: the cheapest, tackiest looking stuff sold for more than its weight in gold.
      That Mr Mouse is surely a genius.

      • Xabier
        Oct 22, 2019 at 10:09 am

        It wasn’t over-priced: you’ve just turned into Scrooge Mc Duck. :)

        • MC01
          Oct 22, 2019 at 12:53 pm

          Have you have ever tried diving in a swimming pool full of coins? It hurts real bad. :-(

      • Unamused
        Oct 22, 2019 at 12:44 pm

        That Mr Mouse is surely a genius.

        Only compared to his customers. He’s known in marketing circles as the rat who wrote the book on preying on children.

        • MC01
          Oct 22, 2019 at 12:50 pm

          Somebody here has never watched South Park. ;-)

        • Unamused
          Oct 22, 2019 at 1:27 pm

          One of hundreds of shows I will never miss because one should avoid wasting one’s life away on cheesy entertainments.

          If I remember correctly Netflix’s most streamed series is Friends

          Investors who are counting on reruns of a quarter-century-old sitcom for eventual profitability are candidates for terminal schadenfraude.

  19. CRV
    Oct 22, 2019 at 3:17 am

    Translating the ways of Netflix to a ‘normal’ manufacturer of some immaginary good, it would be something like this:
    “The factory produces goods and stores them in a large storehouse. Instead of selling the goods for the manufacturing price plus a deacent profit, they are sold on a payment scheme. The money trickles in, while manufacturing and storage costs amount. To pay for the latter the manufacturer has to borrow, because he can’t pay for it from its sales.”
    And that for 26 years? You could call it a wonder.

  20. Old-school
    Oct 22, 2019 at 4:38 am

    I might be wrong but I think Netflix is a symptom of the disease. It seems all our economist masters are concerned about is expanding economic activity (doesn’t have to be productive) with capital pulled from thin air instead of old school thinking that capital was precious and must return an acceptable return every year.

    • Xabier
      Oct 22, 2019 at 10:14 am

      I think that is quite true: for most of history capital was precious and rare, and when you had made money from commercial activity, services such as law, or even plunder in war, you put it into land, which produced annual crops, rents, and was going to be there for your heirs.

      But then the wonderfully elastic concept of GDP hadn’t yet been formulated….

  21. Rat Fink
    Oct 22, 2019 at 5:10 am

    We have Netflix in two rental properties only because people want something to watch.

    We never logon ourselves as Pirate Bay is free and has FAR more content (as in exponentially more). I have looked at Netflix and most of the programming is rubbish.

    Netflix just raised the price so guess what – we are dumping them and changing to Prime for about 1/3 the price.

    I would imagine most people will be following suit if prices go up – or they will just get smart and use Pirate Bay.

    • Zantetsu
      Oct 22, 2019 at 6:36 pm

      What a lame argument. You don’t need to buy from Amazon either if you’re willing to just walk into Target and steal stuff.

  22. Max Power
    Oct 22, 2019 at 5:34 am

    Basically Netflix is just another investor-provided subsidy scheme to end-users. Just like Tesla, Uber, wework, shale oil, food delivery apps, etc.

    Someone’s gotta’ help the poor millennials with all their student debt and everything. Glad investors are stepping up!

    :-)

    • RD Blakeslee
      Oct 22, 2019 at 8:06 am

      The stability of much of the oil-producing world is fragile.

      When and if there’s a production interruption there, our shale oil industry will have proven to be an accidental economic lifesaver.

  23. martin virosteck
    Oct 22, 2019 at 5:54 am

    accounting is simply matching cost to revenue

    modern accounting is so complex that it obscures that relationship, by design

  24. timbers
    Oct 22, 2019 at 6:41 am

    I ain’t seen nuth’in some more QE and NIRP can’t fix.

    As Joe Pantoliano playing Caesar in the movie Bound says:

    “It’s aaaaalllllllll part of the business”

  25. lisa
    Oct 22, 2019 at 7:30 am

    RE: “and thus keep its operations alive, and also pay existing investors the promised interest payments, and then the principal payments when the bonds come due – with the first set coming due in February 2021.”

    You sure note the crux of the immediate problem.

    Your mug is probably a better, strategized product, and integrity based business model than the breakdown of individual products from Netflix- a lot less headaches, except for any from too much guzzling. Of course, that’s only due to the fact of miscalculation by the consumer consuming.

    Great article, and great mug.

  26. Michael Engel
    Oct 22, 2019 at 8:06 am

    1) Protest in Barcelona for politicians in jail.
    2) Protest in HK for freedom.
    3) Protest in Lebanon against gov extraction & politicians looting.
    4) Protest against NFLX for extracting money from zombie investors.

    • Wisoot
      Oct 22, 2019 at 10:37 am

      5) Protest in Santiago, Chile for Increases to transport
      6) Protest in France (Yellow Vest) for economic justice
      7) Protest in Venezuela for hyperinflation – buying gas with cigarettes
      8) Protest in London for being made extinct by ecological collapse
      9) Protest in Sudan for disbanding ex-ruling party
      10) Protest in Haiti for resignation of President
      11) Protest in Algeria for Hydrocarbon bill
      12) Protest in Mali for anti-France
      13) Protest against accountants for Generally Unacceptable Principles

  27. Iamafan
    Oct 22, 2019 at 8:23 am

    ** OFF TOPIC **

    Did you see the Fed repo this morning?

    The 14 day Term Repo rate was lower than the overnight rate.
    Stop out was only 1.76% Weighted Average 1.772% and Low of 1.75%.

    All of those rates are below the current overnight stop out rate of 1.8%
    This suggests that the Fed will lower rates at their next meeting.

    • Oct 22, 2019 at 11:01 am

      LIBOR is 1.82, (so you want them to go lower than that?) Other than stealth QE there is reason to believe rates would rise because of dollar issues and implied asset impairment in T bonds. The battle royal is to see who can blow up the other guys credit market. Or downgrade their sovereign debt. The era of global monetary cooperation is probably over.

  28. Ron
    Oct 22, 2019 at 8:33 am

    Would love to see from Netflix the number of subscribers to watch an entire movie in one sitting. It’s fine to say that critical reviews don’t matter (see today’s WSJ). But if your incremental content is free, viewership means nothing.
    Have a Prime subscription and am watching numerous Russian and Byelorussian movies with awkward subtitles. They are a lot of fun, but if I had to pay $1 for them I would pass.

  29. Augusto
    Oct 22, 2019 at 8:35 am

    Gone are the days when accountants embraced “Representational Faithfulness”- the idea that reported financial results represent something approaching reality. The Accounting professional has been bought off by the Wall Street snake oil salesmen. In return for fat fees and legal liability protections, the Accountants allow companies to do whatever they want. Instead of ensuring financial information “fairly represents”, they have allowed corporate and brokerage firms to effectively re-write financial results with Earning Estimates replacing profit and loss, selective metrics emphasized over standard measures, and the endless creation of oxymoronic “extraordinary” items designed to paper over losses and management failures. The accountants have embraced Fake, and been well paid for it.

  30. CreditGB
    Oct 22, 2019 at 9:20 am

    I guess I am an old fuddy duddy. Putting money into a known loser with no prospects for return in sight just never passed the smell test. Add to that the questionable accounting antics and it just smells bad.

    Hey wait a minute, isn’t this the same story over at WeWork? Running up revenue at multiples of cost, with endless borrowing of investor cash to throw into the furnace? I wonder if Mr. Son recognizes this story.

    If their attempts to raise more cash doesn’t go too well, maybe they can engineer some kind of sale and lease back of their various offices and HQs. Maybe even to WeWork?

    • roddy6667
      Oct 23, 2019 at 7:18 am

      WeWork or Tesla?

  31. HR01
    Oct 22, 2019 at 10:24 am

    Getting worse here for NFLX. Disney+ launches in three weeks for $6.99. Verizon offering it for free for 12 months to its mobile subscribers.

    NFLX may not even make it to its first bond maturity date.

  32. Wendy
    Oct 22, 2019 at 10:25 am

    I bought some Netflix stock several years age when Reed Hastings was taken to the woodshed years ago for unbundling the DVDs by mail from the streaming option. Netflix tanked, so I bought some. It recovered, so I sold enough to cash out of my investment, but still have “house money” invested. This turned out to be a twenty bagger, but the ride was anything but smooth. It was really just dumb luck on my part. I admire Wolf’s thoughtful analysis, but every time I look at my NFLX balance, I am reminded of that old Wall Street saying “ would you rather be right, or make money”. I’ll take the money, especially if it is house money. Just sayin’.

    • Petunia
      Oct 22, 2019 at 11:58 am

      I’m a subscriber and find I watch less and less, but the movie theaters are not inviting and more expensive, so I would rather watch foreign crap on NF than go out. Cocooning is the biggest reason Netflix is attractive. In some parts of the world it’s the only game in town.

      • sierra7
        Oct 23, 2019 at 9:48 am

        Holy Moley!
        I must really be “regressive”.
        In my opinion and taste so much of the “modern” movie experience is horrible so I’ve “regressed” to watching old movies/documentaries on utube on my computer with a screen that is just about the same size that we had way back in the late 1940’s!!
        I have “gifted” from children Apple TV and Netflix and after scanning content over the past several years except for once in a while a foreign flick I hardly use the service.
        As far as the financing of these enterprises I have lost all understanding over the years. Nothing makes any sense to me anymore. If I kept my personal books like many of these money burning furnaces I would have out in the streets years ago.
        LOL!

  33. Oct 22, 2019 at 10:33 am

    Can I pitch them an idea? Create my own IPO, WeProducers? (shout out to Mel Brooks) Can I sell 200% of my show to them and hope it bombs? I will need someone to “market” the rich widows. And a handy accountant. Springtime for content and telemetry?

  34. Bobber
    Oct 22, 2019 at 10:49 am

    Two years ago, I couldn’t imagine cancelling my Netflix subscription because it was so cheap relative to the content offered. With all the cheap options out there now – Roku, HBO, Amazon, Hulu, Disney, etc. – I have reached the saturation point where I should cancel some of these services. Will I cancel Netflix? I don’t know. But it they continue raising prices the decision will be easy. I believe this limits Neflix’s profit potential going forward.

    • Oct 22, 2019 at 11:17 am

      So what is your demographic? Someone asked me, don’t you watch any new shows? I say ‘heck’ no, I wait for them to come out in syndication, that separates weak shows and weak episodes of good shows. Sitcoms on antenna work for me. Content is content. I love the production values (color) in Gomer Pyle. Must have been shot in 35MM. There will a bidding war for old content ( like the rich chasing impressionist art art at Sothebys). New content is a mistake. The new Magnum PI? Please.

      • Paulo
        Oct 22, 2019 at 11:34 am

        How about the new Hawaii five O? Brutally bad. Terrible.

    • Paulo
      Oct 22, 2019 at 11:32 am

      My son has an Net account we use, but only because he works in a remote location and it streams okay there. If I had to pay for it? Never. By the way, the Cdn version is a waste of time and money, the documentaries aren’t bad, but once you’ve gone through the Brit detective stuff might as well turn it off. PBS has many of the BBC productions, anyway.

      As for all the other streaming services, too much hassle, imho. I’d rather read and listen to music. It just seems like most new movies rely on computer graphics and animation, and actors have forgotten their craft.

  35. joe
    Oct 22, 2019 at 11:56 am

    What are “senior unsecured notes”?
    They get nothing first before junior unsecured notes get nothing? From zero after all the secured notes are paid off from whatever assets are left?

    I think what is going on is the pension fund investors are expecting the Fed to buy them out so they don’t fail.

    • MC01
      Oct 23, 2019 at 3:22 am

      They were invented by French banks (whose major shareholder is the government) around 2016 and have been picked up with enthusiasm by European banks in just three years.

      If US companies issue these bonds through their European subsidiaries and/or domestic legislation is similar to the French one they go somewhat like this.
      In case of a bankruptcy there’s a very precise hierarchy for creditors to get a dib at the company’s assets or receiving the proceeding from a liquidation procedure.
      Senior secured creditors get first dib: they usually include holders of secured bonds, structured notes (a kind of financial derivative with higher security than usual) and other derivatives in that order.
      Usually junior creditors, who include everybody from holders of unsecured bonds to the “poor bloody infantry” (vendors) pick up from here, but senior unsecured note holders have effectively been inserted as an extra layer in the hierarchy of creditors.

      Please note that bankruptcy codes throughout Europe have only been partially amended to include this stuff: I expect shenanigans galore to surface.
      The French supermarket giant Groupe Casino has entered bankruptcy protection in June this year and as the court-appointed accountants and administrators go through the group’s books with a fine comb they are finding a lot of surprises in the group’s financial structure. The word “opacité” has been used a lot in the media over the Summer, and it’s well possible senior unsecured notes issued by one of the group’s many shady subsidiaries will end up under the magnifying glass and we’ll see how they fit in the existing legislature.

  36. c1ue
    Oct 22, 2019 at 12:15 pm

    Wolf,
    The picture you are painting is perhaps incomplete.
    Disney, for example, had $52b in content liabilities in 2017 due to its sports contracts – and generated $7.8b in revenue that year due to the sports content.
    Thus the level of content liability is less an issue than the cash flow generated from it.
    Netflix is cash flow negative overall, but again – how much is due to normal operations vs the amount of original programming they have been paying for?
    Any non-content mass broadcasting owner is going to get killed by costs of content – Pandora is one example.
    Again, not saying your view on Netflix is wrong, but it isn’t obviously right either without a somewhat deeper analysis.
    As an example: I saw an article that said Netflix original content spend was $8b in 2018. If true, then the main reason they’re cash flow negative is because of this original content spend, not content liability. The original content spend is likely also content liability, but with a very different profile than liability from others content (I.e. fixed and reducing over time).

  37. Endeavor
    Oct 22, 2019 at 12:43 pm

    Wolf,
    When this “gas bag’ stock market and economy finally reach a blow off stage, will Mutual fund companies have to freeze redemptions forcing investors to ride losses all the way down? I have heard something to this effect and wonder if it is possible due to super high valuations.

    • Oct 22, 2019 at 2:37 pm

      Endeavor,

      I want to distinguish here between stock funds and bond funds.

      Stock funds: I doubt that most stock mutual funds will ever need to freeze redemptions. Generally, most stocks of active legit companies (frauds and scams excluded) are fairly liquid, meaning you can always sell them though it maybe at a low price. So the fund would be able to unload those stocks to meet redemptions.

      Bond mutual funds and loan mutual funds are an entirely different story because they hold assets that are not liquid, and some of those assets may take weeks to sell, if they can be sold at all. There are real risks of a “run on the fund” in these funds and all the problems associated with it, including “gating” and an outright collapse of the fund.

      • Endeavor
        Oct 22, 2019 at 3:12 pm

        Thanks Wolf!

  38. Lune
    Oct 22, 2019 at 12:47 pm

    I wanted to add some more detail, because I’m a little familiar with the Hollywood business.

    When Hollywood makes a movie, it incurs the cost immediately, but expects revenue for several years. Obviously, the biggest revenue is the first year, from first-run ticket sales. But there’s significant revenue in later years from licensing to PPV/VOD, then cable networks, then network tv, etc. plus long-tail DVD sales, etc.

    This is why movie expenses are accounted for the way Wolf describes: the initial payment is listed as purchasing an “asset”, and that “asset” slowly depreciates over several years, as you extract more revenue from it. The general accounting principle is that the depreciation schedule should roughly match the economic life of that asset. Once zero revenue can be extracted from it, the value of the asset should naturally be $0.

    In reality, even though successful movies can have value for decades (think of “It’s a Wonderful Life” being played every Christmas for the past >50years), the standard movie gets fully depreciated (i.e. all of its expense is fully deducted against income) by most film studios within 3-5 years.

    Netflix’s key shady accounting trick is that they depreciate their film assets on a much longer scale than most Hollywood studios do. Their argument is that their online distribution model means people watch more older shows than in the traditional distribution models (since everything is availabe anytime, whereas on network TV, you have to wait for reruns to air at a specific time). This allows them to spread out the expense of creating / acquiring their shows over a longer period of time.

    The key question is whether they’re right: if indeed Netflix’s distribution model allows for profits to be made for longer periods of time, then their accounting model is fine, and that advantage will allow them to outbid and eventually kill off the traditional studios. OTOH, if it’s not correct, then they’ll be forced to do a massive writedown of their asset values and recognize massive losses in the future. Of course, since no one has access to Netflix’s viewership stats (the only thing we can count is number of subscribers, not how many and which shows people are watching), no one really knows if Netflix’s accounting model is accurate or not. My own suspicion is that it’s not, and Netflix will be forced to recognize those losses, probably exactly when they can’t borrow any more and are forced to reveal the true value of their assets in bankruptcy proceedings…

    The second coming asteroid strike is residuals. Thanks to strong union representation, actors, writers, and all the other creative talent that make a film are entitled to a large share of residual profits. Everytime you watch It’s a Wonderful life, I don’t know if an angel gets its wings, but I do know that Jimmy Stewart’s heirs get a few bucks in their bank account. These residual payment schedules are set in collective bargaining agreements that the various guilds sign with the Producers’ association, and they comprise a big chunk of any revenue that studios get from their older content.

    Because Netflix is so new, they’re generally not required to pay residuals on the stuff they create, because their distribution model doesn’t fit the usual defined model of theatrical release -> PPV -> cable -> network TV, syndication, DVD sales, etc. And because no one knows Netflix’s viewership numbers (as opposed to say, Neilsen numbers on how many people watch each TV show), there has been no way to calculate how residuals should be paid. Instead, Netflix generally just pays one lump sum at the time they acquire or produce a show.

    When the previous CBAs were negotiated, online distribution was such a small niche that no one cared. Expect that to change with the new CBAs. You might recall the writers’ strike in 2007. That one was over already produced content being sold on Apple iTunes, or streamed online. But it’s easy to say that for every show Apple sells on iTunes for $1.99 they need to pay the talent $0.50. How do you calculate residuals when Netflix just has one giant pot of money (its subscription revenue each month) and one giant of content (all of the stuff available to watch), and absolutely no way to connect both pots to each other?

    Expect this to become a huge issue when the next CBAs are negotiated, and it will probably force Netflix (and other streaming services) to allow public audits of its viewership and create an accurate way to tie their subscriber revenue to individual shows and likely down to individual viewership of each show, for the purposes of calculating appropriate residuals. This will be a double whammy: First, those residuals will take a big chunk of their revenue. Second, the accounting process will open up their closely guarded viewership data to public scrutiny, at which time everyone will be able to see just how financially (un)sound they are.

    Imagine if you were CBS, NBC, ABC, and FOX, and you could simultaneously tell your investors that you’re the biggest network in the world and everyone watches your shows 24/7, then turn around and tell the actors on that show that you don’t owe them any residuals because no one watches your show and it’s a total dud. That’s what Netflix / Amazon Prime / Hulu are doing right now. And then along came AC Nielsen with their public audits of viewership, and now everyone knows just how many people are watching each show, and know exactly when CBS is sinking because its shows are cratering, and just how much money Seinfeld is owed everytime his show airs. There is no AC Nielsen for online streaming, but there will be (actually Nielsen itself announced such an initiative 1-2 years ago).

    Anyway, that’s my view of where Netflix is headed. I’m not a hollywood expert by any means, so I probably have some details wrong. But these two factors are undoubtedly going to play a big role in determining whether Netflix is ultimately successful.

    • c1ue
      Oct 22, 2019 at 1:00 pm

      Thanks for the detailed info.
      What are typical residuals like? The amount is rather important.
      For music, the residuals can be large absolute value, but the per-usage is tiny – as far as I understand it.
      Are movies and TV different? Also, are these enshrined as law or are “union” type agreements?
      It doesn’t seem likely that residuals are $0.50 for a $1.99 streamed movie.

      • Lune
        Oct 22, 2019 at 1:49 pm

        You’re right. It’s not that high. For a detailed example for actors, check out this link https://www.backstage.com/magazine/article/calculating-sag-residuals-17706/

        Given that all the actors together get approx. 5%, probably another 5% for the other creators e.g. writers, directors, the etc. So 10% of gross maybe?

        But residuals are calculated on gross, so once expenses are removed, the percentage of net profit that it represents will be bigger.

        These aren’t laws but are union contracts negotiated with the producers allliance. The way they’re enforced is easy: every major actor is part of SAG, so if you want to hire Tom Cruise for your movie you must agree to use SAG actors and follow SAG rules for *all* your roles, down to the extras. If you want to make a film outside SAG rules, that’s perfectly legal. But you’re actors will all be newbies, or part timers, etc because every serious actor is part of SAG.

        In reality, aside from some commercials (which don’t usually use name actors) very little gets done outside union rules. And even those still prefer to work with professional actors even if they’re not big stars, so they’ll follow SAG rules.

        • c1ue
          Oct 22, 2019 at 3:46 pm

          Thanks for the info.
          Residuals if 10%, for example, would then impact revenue in a given year – not the content liability value.
          Again using Disney’s sports example: $25b of Netflix content liability might translate into $1b to $2b of annual revenue, of which the residuals would be 10%. Not nothing but not a major factor especially if residuals apply after expenses (like streaming operational costs).
          It still seems like the major issue is whether Netflix’s cote operations are cash flow generating or not (vs content generation which is a totally different play).

        • Lune
          Oct 22, 2019 at 7:09 pm

          Sure, but remember that most residuals are calculated on gross. Mainly because unions are well aware of “Hollywood accounting” that can show a billion dollar blockbuster as having “lost money” for the studio. So to avoid those shenanigans and having to spend a ton of time auditing studios’ books, the residuals are calculated on gross.

          That means that, assuming Netflix would be subject to similar terms as hollywood studios, it would have to take its entire gross revenue, and pay residuals on that, since all of its subscription revenue is ostensibly payments by viewers to watch content. It’s not that simple (a lot of their content is purchased from studios that already pay residuals from whatever Netflix pays e.g. Friends and other popular sitcoms), but it’s a useful approximation.

          Netflix had gross subscription revenue of $16bil last year. Paying 10% of that as residuals would be a cost of $1.6bil. Incidentally, their GAAP profit last year, after all their financial engineering, was $1.6bil. IOW, even their bogus profit numbers would be wiped out if they had to pay residuals like everyone else.

          Now Netflix isn’t going to part with $1.6bil every year without a fight, so this will come down to what the unions can negotiate. But I suspect they’ll hold firm, going on strike if necessary, because if they give Netflix a break, then every hollywood studio will ask for the same break. And for once, Hollywood studios and the unions will be on the same side, because both of them see Netflix as an existential threat. And truth be told, Netflix is in the weaker spot, because without a steady flow of content, their service will die, whereas Hollywood still has theaters, cable, etc.

          Either way, it’ll be an interesting battle when it gets going in earnest :-)

        • c1ue
          Oct 23, 2019 at 3:25 pm

          Fair enough. The $1.6B you speak of, however, is still a lot less than the $8B Netflix spent on original content.
          As I said in a different message – it isn’t entirely clear of Netflix’s core operations are truly loss-making given the original content spend and the differences between renting other people’s content vs. depreciating spend on Netflix’s own generated content – plus theoretically revenue earned for renting out Netflix original content.

    • Just Some Random Guy
      Oct 22, 2019 at 2:25 pm

      Very insightful, thanks for sharing.

      Coming to this from just a casual observer and Netflix consumer, the longer depreciation models makes sense. I just started watching The Wire recently on Amazon, which is 16 or 17 years old. And I’ll watch some Sopranos episodes every now and then too. That show’s first season is 20 years old. Top shows like that will be around for decades and people will watch them. There’s an entire generation that wasn’t even alive when The Sopranos came out that will discover and watch the show.

  39. Unamused
    Oct 22, 2019 at 12:59 pm

    We do OTA and borrow DVD/BDs from the public library system, no charge. They have tens of thousands, and interesting rarities we acquire elsewhere. We have no use for cable, satellite, or streaming services.

  40. Just Some Random Guy
    Oct 22, 2019 at 2:08 pm

    Not sure if it’s still the case now, but at some point Netflix had the highest median salary for developers in Silicon Valley. More than Goolag or Hatebook.

    So at least the worker beers got a taste of the billions of investment dollars.

    • Zantetsu
      Oct 22, 2019 at 6:55 pm

      You don’t understand Netflix’ compensation strategy. Netflix is also famous for offering candidates a single salary number and expecting the candidate to pay for any of the ‘normal’ benefits themselves. Do you want healthcare and disability insurance? Then pay for it yourself.

      It is my understanding that if you have someone else to provide your healthcare (i.e. spouse) then it is a very nice deal; and if not, then depending upon what benefits you expect, it is not as good of a deal, possibly not much better than more traditional compensation packages.

      I have also heard from several people that Netflix has a very cut throat and almost abusive manager-employee relationship. I do not know if this is true though, I have only heard about it second hand.

      • char
        Oct 22, 2019 at 8:16 pm

        Writing software to run on TVs etc. has a reputation to not be fun. That may also be a reason.

  41. Scott Nash
    Oct 22, 2019 at 3:42 pm

    Has anyone looked at taking the current annual content payments and calculating them as a percent of revenue? I’m making the assumption that even for situations where they are purchasing future rights, the cash out the door mostly happens during the period the content is actually available. That effectively would be a COGS for current subscriptions, and you could look at the percentage change over time.

  42. char
    Oct 22, 2019 at 6:05 pm

    Were they not cash flow positive and profitable around 2008?

    Netflix has had three era’s
    1997/2009 they were DVDflix as in renting out DVD’s which according to their accountants was profitable.
    2009/2013 Streaming third party content. To short to say if they were profitable as customer acquisition cost are to big a part of cost in this era
    2013/now Streaming own content because buying third party content is to expensive because everybody sees the future in streaming services.

    How i think investors see Netflix in 2029
    Only a few mainstream streaming services survived. Third party content is much cheaper and stars etc are paid less because there is less competition an a monthly subscription of $20 (in 2019 $). Netflix is highly profitable.

  43. Harvey Cotton
    Oct 22, 2019 at 11:30 pm

    I never understood how you can price the value-add of any particular bit of programming for Netflix. Netflix sells subscriptions to a bevy of shows, specials, and movies. Even if a given show, like Stranger Things, is popular – how does anybody know whether the presence of this show on this platform will affect the “stickiness” of the subscriptions? How do you value any bit of content when you make money on the offerings of all of your content?

  44. IslandTeal
    Oct 23, 2019 at 12:20 am

    Evening…. All these comments and there is still a debate if NFLX is profitable. Ask RH, the executives and the VCs. That is the definition of Netflakes “profitability”.

  45. Paid Four
    Oct 23, 2019 at 11:33 am

    OK, for fun, count the number of ‘online opinion shapers’ working both for Netflix and other competing streaming video companies who have commented on this thread.

    Wolf should do something like require the online opinion shapers to buy a mug to get a “Wolfmark of Authenticity” next to their name.

  46. Hans Bartlin Grether
    Oct 23, 2019 at 2:53 pm

    As I understand it junk bonds are not allowed by pension funds , they are required to sell bonds once they are downgraded below investment grade . This in turn triggers an increase in interest rates as more and more junk bonds struggle to get rolled over .
    This dynamic is already in place .

    The same is probably true for good part of the other institutional investors you mentioned like insurance funds and bond funds . And for those holding junk bonds in their portfolio its up to the investor to look more carefully into what it is in his /her investment package .
    Or I am missing something ?

    • Oct 23, 2019 at 4:45 pm

      As I pointed out somewhere above, pension funds are NOT required by law to unload junk bonds. Some pension funds may have internal investment rules about this. But many pension funds allocate some of their funds specifically to junk bonds. For example, CalPERS, the largest public pension fund in the US, allocates 3% of its assets to junk bonds and 8% to private equity, which is an indirect exposure to junk bonds.

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