Netflix Plans to Raise $1 Billion in Debt to Fund Original Programming

     February 2, 2015

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Netflix’s announcement today that it plans to incur a major about of long-term debt ($1 billion dollars … $1 billion dollars!) to fund its original content is fascinating news.  For one, it shows a lot of confidence on Netflix’s part when it comes not only to the expansion of their programming, but in having the subscribers now and in the future to sustain it.

Netflix’s viewership data is shrouded in mystery.  Like other subscriber services, Netflix doesn’t rely on advertisers for its revenue, therefore, they’re under no obligation to reveal their viewing numbers (but still they are revealed — more on that in a bit).  How successful a particular show is or isn’t is shared only at their discretion.

house-of-cards-season-2-kevin-spacey-robin-wrightThis has reportedly made some investors a little nervous, and in November, it was announced that Nielsen is going to start tracking Netflix (as well as Amazon Prime; Hulu already allows data tracking from their desktop site), whether they like it or not.  But unlike the Nielsen ratings for HBO, Showtime and Starz, the numbers for Netflix won’t be comprehensive.  Further, there’s not yet an industry standard to make sense of what those numbers actually mean in a streaming context.

As for the specifics of the debt plan, according to Variety, Netflix CEO Reed Hastings and CFO David Wells wrote in a letter that,

 “Over the next few years we expect to continue financing our original content expansion with long-term debt.  As long as the maturities are spread out, and the interest cost is built into our content budgets, we think long-term debt is the best way for Netflix to finance the production of content.”

orange-is-the-new-black-laura-prepon-taylor-schillingThat content production is no joke, either — the company is planning to launch 320 hours of original programming for both new and returning series (like the third season of House of Cards on February 27th), as well as films, comedy specials, and documentaries.  It adds up to three times the content they released in 2014.  While much of that content has been met with critical praise (like Orange is the New Black), others have, well, not (Marco Polo).  Yet, no one knows exactly how popular those shows actually are regardless of hype (positive or negative).

In light of the debt news, Standard & Poor downgraded Netflix’s credit rating from BB-minus to B-plus, meaning that its debt now carries more risk.  Netflix already carries $900 million in long-term debt, but have $400 million in 10-year notes after raising $500 million in 2013.

For the average subscriber, though, does this mean a pay hike is coming?  And how will this affect Netflix’s ability to invest in other content that also garners a lot of hype (like well-known full TV series available for binge-watching) and brings in subscribers?  When dealing with these kinds of figures, though, it seems like no matter what, Netflix’s financial boldness is setting it up for either huge success, or a gargantuan fall.

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