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Netflix spends big on content; raises US prices

Rates for its 58 million subscribers in the United States will go up by 13-18 per cent

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Netflix's appetite for content means that it has to spend big, resulting in what is known as negative free cash flow where more money is going out the door than coming in.

New York

NETFLIX is raising its rates for its 58 million subscribers in the United States by 13-18 per cent.

Given how much it has been spending on content, the move is not surprising, but the latest jump - the size of which depends on the subscription plan - is the biggest increase since Netflix started its streaming service a dozen years ago. That is going to hurt some consumers.

Many of its users pay for the service even if they do not consistently watch its content, partly because of its attractive pricing. A bare-bones subscription, for instance, had cost US$8 a month. But fee increases at Netflix are inevitable. One of the reasons: Netflix burns a lot of cash.

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The company's appetite for content means that it has to spend big, resulting in what is known as negative free cash flow. More money is going out the door than coming in, a difference that Netflix covers by borrowing even more.

"We change pricing from time to time as we continue investing in great entertainment and improving the overall Netflix experience," the company said in a statement announcing the changes, which apply just to US customers.

Netflix's most popular plan, which gives a customer two simultaneous streams, will get the largest increase, to US$13 a month from US$11. Still, it is cheaper than HBO, whose streaming service costs about US$15 a month. The US$8 a month plan will now cost US$9, and the high-end version, which allows for four simultaneous streams, jumps to US$16 from US$14. The new prices took effect on Tuesday for new subscribers. For existing customers, the increases will start in about three months.

Netflix, which will report quarterly earnings on Thursday, has committed to spending more than US$18.6 billion on content. That is for shows and films that will not appear on the service for months, whether it is the next season of Stranger Things or the forthcoming lineup from super producer Shonda Rhimes. It also includes content that is currently playing, such as Friends, which ran on NBC from 1994 till 2004 and is owned by AT&T's WarnerMedia. The show is wildly popular on the service. Worries that it would leave Netflix prompted an outcry on social media. "The only reason I have an account with Netflix is to re-watch Friends," one customer said.

That helps to explain why Netflix agreed to pay AT&T approximately US$100 million to keep the show till this year, a threefold increase from what it had been paying on average.

Original shows owned by Netflix are also expensive. Stranger Things, whose new season will become available this summer, costs as much as US$8 million per episode. Netflix has to pay for all of that up front.

Multiply that by the hundreds of hours of original content that Netflix produces every year, and the cash starts to bleed out. The company had negative free cash flow of US$2 billion last year. It expects that figure to rise to about US$3 billion this year and about the same next year. That has added to the company's debt: up to US$12 billion before it proposed borrowing another US$2 billion in October through a bond offering.

Spending big on content while keeping prices modest has helped Netflix expand its customer base - about 58 million in the United States and 130 million worldwide. Those figures will be updated on Thursday as part of its earnings report.

But Netflix technically is not losing any money. In fact, it claims a profit every quarter since accounting rules allow entertainment companies to record most of their production or licensing costs later on.

The stakes for owning content have risen. Big-pocketed players such as the Walt Disney Co, AT&T and NBCUniversal plan to compete with Netflix with streaming services of their own. Disney and AT&T's WarnerMedia plan to unveil their products by the end of the year, and NBCUniversal, owned by Comcast, is working on an ad-supported model streaming service that it plans to make available in early 2020.

Not to be left out, Amazon offers a streaming service as part of its Prime shipping programme for US$13 a month, or US$120 a year. Hulu sells an ad-free service for US$12 per month. (Disney will take control of Hulu once it completes its acquisition of the bulk of Rupert Murdoch's Fox business, sometime around the middle of the year.) There is also Apple, which has spent well more than US$1 billion to create original TV shows. The boom in streaming has increased costs throughout Hollywood, where competition for talent and property has intensified.

As Netflix's chief executive, Reed Hastings, said in October: "There's never been so much TV and movies being created around the world. So the game is on." NYTIMES