You can't tell a company like Netflix (NFLX) that has grown from nothing to an incredible content powerhouse that it cannot manage its business.
But you can certainly ask why a company with nearly $20 billion in content costs on the books and that's committed to debt financing in an era of rising rates, doesn't explore all its options for making money off that enormous expense.
Case in point, Netflix has avoided offering an advertising-supported plan even though it might be another way to cover the cost of acquiring or creating content, costs that for Netflix and all companies in the streaming market are already very high and probably going higher.
That spending has led to $3 billion in annual cash flow burn, a trend the company said it expects to continue for several years. Netflix has $10.4 billion in off-balance-sheet obligations for content, and another roughly $8 billion in current and non-current liabilities for content on the balance sheet, according to the most recent quarterly numbers.
All of this has been funded by cheap debt, and all of it is supposed to be made back solely by charging monthly subscriptions. Outgoing CFO David Wells said last quarter that Netflix sees a time when its efficiency in programming content leads to operating profit that exceeds its cash burn, though he left the time frame of that unspecified.
What's funny is that the question of why there is no advertising-supported offering doesn't get asked that much.
On the rare occasion that it is, the answers vary quite a bit, but they reveal a little bit here and there.
For example, last May, when the company's head of content, Ted Sarandos, was asked why Netflix doesn't have a free, ad-supported offering, he told analyst Michael Nathanson of MoffettNathanson that it's the company's "brand proposition" to avoid ads. People hate ads, Sarandos noted, and they're "fleeing" traditional ad-supported television, giving Netflix its opportunity to be the ad-free offering.
In the same conversation, Sarandos pointed out ads don't work as well in online video as people think. The internet has been much less successful than he originally expected in boosting ad rates for video. In fact, Sarandos told Moffett that his biggest worry a decade ago when the company started its streaming business was that "the internet would bring such efficiency to advertising that advertising [rates] could get so big that a single ad would pay for a movie...and that [ad rates] would get high and really challenge the subscription model."
Fortunately, that didn't happen. Instead, the internet seemed to have done the reverse, suppressing ad rates, because it's difficult for online content to get "reach" to bring together audiences, which is what is needed to drive higher ad rates. Meanwhile, subscriptions to its ad-free service have boosted Netflix to 137 million subscribers and nearly $15 billion in annual revenue.
In another instance, in December, Sarandos implied that advertising only really works with traditional broadcast events. Asked by UBS analyst Eric Sheridan why Netflix doesn't buy sports content, Sarandos said that sports events are the kind of content that only have value by bringing a ton of people together at the same moment in time, thereby creating a special advertising proposition.
"The best way to monetize that viewing is probably through advertising because you've gotten... all these people to do the same thing in one hour," he said.
Perhaps the main reason that people don't ask the ad question more often is that founder and CEO Reed Hastings has a charming way of chiding Wall Street for even asking about the cash burn. During the company's conference call in October, when only one Wall Street analyst is allowed to ask management a question -- it's Netflix's best scripted show -- the analyst in this case, UBS's Sheridan, had the temerity to ask the company how investors should think about the ongoing losses.
"Eric, you're using the word 'loss' and I think you mean the 'investment,'" Hastings shot back. "We definitely hope that they're not turning into losses. Our track record would show that those investments have turned out to be very successful for us."
Not in terms of profit, those investments haven't, though in Netflix's stock price for sure.
Perhaps the question is being asked the wrong way. Netflix tends to maintain that the right way to bring in subscribers is to play with the price of its subscriptions. The question no one has asked is why, with all of its focus on experimentation, Netflix doesn't simply experiment with how to create a lower-priced tier of service containing ads?
It should be a great challenge for such an innovative technology company, the thing no one has figured out how to do, to Sarandos' point about Internet ads.
So, tell us again, one more time, Netflix: Why don't you have an ad-supported offering?