Netflix Does Have Spending Limits

CFO David Wells hints at the company putting a bit more emphasis on increasing profit over simply boosting spending over and over.

Author:: Leon Lazaroff
Publish date:: Sep 12, 2017 1:28 PM EDT

Netflix Inc. (NFLX) - Get Report is thinking more and more about ways to control its own spending on original programming even as the company views owning original content as integral to its global expansion, finance chief David Wells said on Tuesday, Sept. 12, at an investor conference in New York.

While insisting that Netflix originals led by "House of Cards" and "Stranger Things" have fueled the company's worldwide expansion to more than 104 million subscribers, Wells said that at a certain point there are "diminishing marginal returns" from programming spending. Even Netflix, he said, realizes a programmer risks cannabalizing its own content if it's producing too much.

"You could decide to invest everything and more in the content, but we have some discipline reserved for growing operating margin at this point," Wells said at the annual Goldman Sachs Communacopia Conference in downtown Manhattan. "And that's to preserve some of the efficiencies, some of the scarcity benefits, of the content dollar."

Even as Netflix's business has grown and its stock price has soared, the company has been criticized by investors for spending too much on original programming. Estimates have placed its 2017 investment in new content -- both producing and acquiring television serials and films -- to be over $6 billion.

Nonetheless, Wells cited CEO Reed Hastings' recent comments that an hour of programing on Netflix could be costing the company $20 million. Scale has allowed Netflix to maintain a high level of spending, he said.

Netflix taking a more judicious position on spending would mark a change of course, however slight, in what has been a longstanding willingness to invest its operating income in programming, where it has outdistanced chief rivals Time Warner Inc. (TWX) and Walt Disney Co. (DIS) - Get Report . Amazon.com Inc. (AMZN) - Get Report , Facebook Inc. (FB) - Get Report and Apple Inc. (AAPL) - Get Report are among the others said to be spending billions on content now or in the near future.

While Netflix has yet to become cash flow positive, an indicator of profit, Wells said Netflix's U.S. business was nearing that point.

"We don't look at the business in that way, but it would be much closer to, if not, that," he said, adding that because Netflix airs its programming worldwide, it monetizes its costs over the whole of its subscriber base.

Integral to Netflix growth, of course, is adding more subscribers. Its U.S. subscriber base is at the bottom end of what the company has long viewed as a range of 60 million to 90 million potential customers, Wells said.

"For a while we were not budget constrained, we were project constrained," he said. "Going forward into the future, you might see a point where we see more of a budget constraint, and that has benefits in terms of driving [financial] discipline."

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