Will Netflix star in “The Easter Island Effect”?
By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Will Netflix have a starring role in âThe Easter Island Effectâ? The Internet video service seems to be using up resources faster than it can produce them. New series like âHouse of Cardsâ lure customers, at a cost. Netflix cash flow remains negative and obligations are rising. Itâs starting to evoke the centuries-old Polynesian society that eventually exhausted its means of sustenance.
After some strategic missteps, Netflix has pleased the investment gods again. An 18 percent rise in revenue in the first quarter from a year ago helped the companyâs shares to surge by nearly a quarter, adding $3 billion of market value. The heavily shorted stock has quadrupled from a recent low last July.
The companyâs disruption of the entertainment ecosystem also is expanding. Adding another 2.4 million paying U.S. streaming customers â bringing the total to almost 28 million â will be a further catalyst for more services that donât require a cable or satellite subscription. Whatâs more, the success of new series like the 13-episode thriller âHouse of Cardsâ and the highly anticipated âArrested Development,â made available all at once, are altering behavior with a binge-viewing option and forcing broadcasters to confront TVâs long-standing linear model. Both trends could threaten carriage and advertising revenue.
The durability of Netflixâs growth, however, is questionable. Free cash flow drained away again, with a $42 million shortfall in the latest quarter. Its balance sheet is also looking increasingly depleted. Include $3.3 billion of off-balance-sheet items, and programming obligations grew from under $5 billion last year to $5.7 billion.
Moreover, content resources could become more precious. Netflix Chief Executive Reed Hastings said Amazon and Hulu are bidding more aggressively for the same films and programs. Netflix reckons its capital position is just fine, with $1 billion in cash and short-term investments on the balance sheet.
Even so, the inhabitants of Easter Island discovered the hard way the perils of underestimating the shorter-term price of growth. Netflix will need to husband capital or find a way to generate more of it to avoid becoming just a curiosity of financial anthropology.